Delivering sustainable and reliable inclusive index-based insurance solutions: A few lessons learned
Inclusive index-based products must be simple to understand, should be offered with tangible value adding services, and needs to be designed broad enough to facilitate reaching scale. These basic elements enable “replicability”, whilst ensuring that the product responds to relevant needs of the target clients.
MiCRO’s approach includes two major components, an index-based microinsurance product that operates with a proprietary technology platform to detect triggering events, and a value-added program that includes financial education, among others.
MiCRO’s current products in Guatemala and El Salvador are index-based insurance products that protect insureds against the interruption of their productive activity by triggering payouts after the occurrence of selected natural hazards such as excessive rainfall, drought, and earthquake. Payouts are gradual depending on the severity of the event. In Guatemala, El Salvador, and very soon in Colombia, smallholder farmers and other micro-entrepreneurs can purchase the insurance at the time they apply for and are granted a loan for a productive activity with one of MiCRO’s local partners.
The products are designed to serve both, agricultural producers and micro entrepreneurs pursuing other (non-agro) productive activities and, as such, they offer adequate protection to a very broad public, a critical feature to reach scale.
As we all know, the so called “protection gap” is enormous and the reasons for that are plenty, which is actually an opportunity for players like MiCRO, to take these obstacles as working agenda in order to make inclusive insurance a reality.
Some obstacles are related to the need to introduce innovative solutions to a rather conservative activity and, although we all are for innovation, it demands willingness to step out of our comfort zone, which is easier said than done. Innovative products and approaches are nevertheless unavoidable, since traditional products have shown that they do not adequately address the needs, and are often not affordable for the target population.
The good news is that, as we progress with the introduction of innovative solutions, replicating them with additional channels and in other countries becomes easier and easier, thanks to a better understanding and increased trust in the solutions provided by successful reference cases.
Although interested in innovation, index-based inclusive insurance is challenging for risk takers, since they need to deal with a higher level of uncertainty, on one hand, given the lack of experience or data to price products with the usual level of confidence, a problem exacerbated by climate change, and on the other hand, designing reliable indices that best possible capture hazards covered and minimize basis risk. Difficulties dealing with innovation are also present at the regulatory front, as often there is a need to have products approved that might be aligned with the “essence” and purpose of the insurance regulation, but are not explicitly mentioned in the regulation, given the innovative nature of products applying new technologies to expand traditional boundaries of insurability. And finally, all involved parties carrying and funding the design and implementation of such solutions need to be aware and fully aligned with the time required to implement and scale up solutions until sustainability can be reached, which will usually require more patience and perseverance than introducing new but “traditional” products.
On the regulatory front, the roll out of index insurance products in certain jurisdictions requires that the respective supervisory authorities approve the products before they are offered in the market. The approval process for an innovative insurance product, such as index-based insurance, can be challenging as very few countries have developed regulatory frameworks explicitly for index-based insurance. To overcome regulatory challenges, MiCRO has made very good experiences by early approaching the authorities and establishing an open and transparent dialogue, enabling a good understanding of the solution and of the limitations and opportunities offered by the local regulatory frameworks.
On the pricing side, having sufficient and good quality data is an issue, but needs to and can be overcome with sophisticated statistical methodologies, and by joining efforts with partners with a higher risk tolerance, at least until more reliable data is available. As to the product design, there is no such thing as a perfect model, but rather well designed products with indices that closest possible reflect adverse events. MiCRO counts on a team of experts and also makes significant investments into working with external specialists to bring to market products with an adequate reliability, i.e. that trigger when they should, and closely monitors performance once the products are launched, to allow for iterative improvements.
Finally, MiCRO has been very fortunate in finding partners from the private and public sectors providing the support and guidance necessary to design and implement two initial solutions that have been confirmed to offer value to end clients, and to start an expansion phase that will secure the sustainability through scale. Therefore, smart partnerships are key to successful and sustainable inclusive insurance schemes.
Contribution by By Carlos Boelsterli (CEO – Microinsurance Catastrophe Risk Organisation (MiCRO))
About the author:
Carlos Boelsterli was appointed CEO of MiCRO on September 2014. Prior to joining MiCRO, Carlos worked for more than 20 years with Swiss Re in a variety of key leadership roles throughout the company. Founded in the wake of the 2010 Haiti earthquake, the Microinsurance Catastrophe Risk Organisation (MiCRO) is a reinsurance company focused on designing holistic, innovative, appealing and financially sustainable risk management solutions that strengthen the resilience of the vulnerable and low-income population against natural disasters.