Must Micro-insurance products be short-term?
‘The mouth must not suffer because it wants to process food to be transported to the stomach’- Author
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At a recent business conversation with some MBA students, a discussion on making micro-insurance very attractive by offering short-term products was triggered. While a section of the students were abreast of the fact that life micro-insurance, especially, is supposed to be long-term, some of them argued that if insurance is practised the way it is supposed to be practised, i.e. offering it on long-term basis, then the dream of making micro-insurance the next big thing to push the insurance penetration rate up may be a mirage.
Each one of them had a point at the rendezvous; however, not many were able to draw a line between operating a business to make profit and operating a business on the module of a non-governmental organisation (NGO).
The reasons given across the board pointed to the fact that a typical informal sector worker who needs a micro-insurance product should be able to access proceeds / benefits at short notices without recourse to the fact that premiums received from policyholders are invested over a period and the longer the duration, the better it is for the policyholder, as well as the insurance company.
Why the argument
There is no doubt the mention of the word ‘micro’ quickly brings to mind ‘micro finance.’ Though a welcoming name due to the loans they offer, there is also an emerging sector which infuses micro savings with insurance also referred to as micro insurance and this is a sector many stakeholders such as the National Insurance Commission (NIC), the Ghana Insurers Association (GIA), the German Development Corporation (GIZ) are pushing in order to help in increasing the penetration rate.
Talking about micro-insurance almost on daily basis makes it an easy target to consider in the financial inclusion plan.
Though the informal sector controls about 80 per cent of the working populace and, therefore, requires access to insurance, the few insurers offering micro insurance products have their own challenges inasmuch as they concede to the fact that it is a viable venture that provides a lot of financial liquidity albeit in the short term.
Similarly, some policyholders have also been tasked with the headache of knowing the difference between micro insurance and pure savings – susu.
The susu model which is hugely used by some savings and loans as well as micro finance institutions are often mistaken with micro insurance which is supposed to provide long-term policies for their clients.
Micro-Insurance
It is important to note that micro-insurance is insurance for the informal sector, made accessible and affordable for micro, small and medium enterprises with simplified underwriting.
It targets mostly market women, commercial drivers, small scale business owners, artisans, etc.
Why Insurers May Have a Concern
Often times, insurers place much premium on investment activities that are appropriate to the nature of their obligations; hence, they take steps to actively manage the relationship between assets and liabilities on an on-going basis. The objective of asset and liability management (ALM) is to reduce the risk exposure that exists in the investment market to the insurer, particularly if the assets and liabilities are mismatched (e.g. where market conditions cause an increase in the value of liabilities and a decrease in the value of assets).
On a more positive note, asset and liability management can help an insurer to invest its assets more effectively and generate higher profits to ameliorate any future exposures. Most insurers that practise ALM have established committees to oversee this activity and actuaries participate in the ALM committee together with investment managers, product line managers and financial officers.
Role of the actuary in measuring insurance risk
Suffice it to say that insurance thrives on probabilities; hence, most insurance policies provide protection against undesirable events such as death, fire, accidents, deepening personal financial crisis, etc. Individuals with similar risk profiles may, therefore, be grouped and certain outcomes for them as a group may be predicted with some certainty.
This predictability, therefore, enables insurers to take on risks that are individually unpredictable and spread the financial consequences across many policyholders with similar risk profile through the premiums charged. Thus, actuaries would measure the risks that are insured against (i.e., by individuals and groups) to determine their probabilities (or frequency) of occurrence in order to apply them (i.e., the probabilities) in varying calculations. For example, the probabilities of persons dying at particular ages can be detailed in a mortality table, which may then be used in calculating life insurance premiums and liabilities to policyholders.
The way forward
It has become increasingly necessary to have stronger actuarial considerations in the design of micro-insurance products having in mind the strict principles of conventional insurance.
The role of the actuary in the design of micro-insurance products based on such actuarial considerations as lifestyle, occupation, age, gender and health conditions, is becoming more relevant to the micro insurance sector.
We must bear in mind that the insurer underwrites policies in line with the actuarial parameters and with the complement of a sound marketing and financial effort so as to make a profit. That is the more reason to strike a fair balance in offering micro-insurance products on short-term basis while at the same time making profit.
As a professional who deals with the measurement and management of risks and uncertainties, given today’s complex financial environment, the role of actuaries in the micro-insurance campaign cannot be overestimated, as they provide businesses with financial security systems evaluation, with a focus on their complexities and financial opportunities. Thus, they typically apply mathematics to financial problems and evaluate their impact on businesses, both within the short and long terms.
With the above background, therefore, I believe the time has come for all the above-listed stakeholders to engage in discussions that would help bring some understanding on how to either maintain the status quo or advance an advocacy for short-term life micro-insurance products having in mind some of the challenges such as inconsistent premium payments due to fluctuating incomes from clients, break-out of epidemics (e.g cholera, meningitis, etc), unreliable climatic patterns and frequent road traffic accidents.
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