Whether it is health issues, climate change or a global socio-economic crisis such as that caused by Covid-19, the lack of access to formal risk management can trap low-income communities, and pull people who have managed to escape the cycle of poverty back into it.
There are four billion people living on less than $10 a day across the globe who could benefit from risk-mitigation mechanisms but have the least access to them.
Inclusive insurance offers a solution
“Inclusive insurance is essentially about how you can provide insurance cover to communities that are out of reach of traditional tools,” says Jan Kellett, from the United Nations Development Programme’s Insurance and Risk Finance Facility. This form of insurance brings into the fold those who have not been part of traditional financial systems or who have been excluded from accessing insurance products, and by doing so helps them recover quickly from financial shocks.
But it goes beyond being just an instant safety net for the very poor; inclusive insurance allows those who have moved out of poverty a certain of peace of mind knowing that part of their lives, livelihoods and assets are covered, and can even act as a catalyst for entrepreneurism – allowing families to make decisions that improve their quality of life. These can range from investing in another crop, buying land, sending a second child to school or purchasing a vehicle, says Kellett.
Despite building resilience and promoting entrepreneurism, inclusive insurance remains a widely untapped form as a means to sustainable development. “Without effective insurance, it is unlikely that sustainable development is truly achievable,” says a recent study on behalf of the German government.
For the private sector, reaching this untapped market makes for a good business case while contributing to the resilience of societies at large.
In 2013, total insurance premiums amounted to about US $4.65tn (£3.53tn), equal to 6.3% of global GDP – yet the lion’s share was seen in developed countries. Emerging economies remain a potentially untapped market of over two billion people worldwide, according to the Microinsurance Network.
Reaching the mass market
Traditional insurers have been working for decades in emerging markets – and yet millions of people have no insurance, says Richard Leftley, the CEO of MicroEnsure, a microinsurance company operating in 20 developing countries where it has more than 50 million customers, and which largely provides health, accident and life insurance.
“People don’t wake up wanting to buy insurance, but they do wake up worrying about the risks they face,” says Leftley. And this is what many microinsurance companies do – they design innovative, cost-effective solutions to people’s problems through inclusive models.
From Leftley’s perspective, the mass market – or those living at the base of the economic pyramid – are apathetic to traditional insurance because it’s complex, costly and too often not catering for the needs of vulnerable communities.
Understanding this is where MicroEnsure has seen success in emerging markets. “We create simple products that work with frictionless digital customer journeys, leveraging technology to deliver these products,” says Leftley. “Over 80% of our clients purchase a mix of health, life or accident products that cost from three cents to one dollar a month.” Having designed the products, MicroEnsure then takes responsibility for selling products, collecting premiums, educating the customers and helping them get the claims paid quickly.
Financial literacy and building trust
Affordability and limited financial literacy are some of the many reasons for underinsurance, points out a report by the Geneva Association.
Focusing on these two aspects to deliver agriculture insurance is where Agriculture & Climate Risk Enterprise (ACRE Africa) has seen success, as it works closely with smallholder farmers on the ground to gain trust. The company, like MicroEnsure, is a member of UNDP’s Business Call to Action, a global platform advocating for private sector contributions to development as part of commercially viable business models.
ACRE Africa, which works with smallholder farmers in Kenya, Rwanda and Tanzania, and has projects in several other African countries, has committed to reaching one million low-income farmers on the continent through its products. Although small farms produce 80% of the food consumed in Asia and sub-Saharan Africa, smallholders are extremely vulnerable due to poor weather and climate change, which can lead to crop losses that set farmers back for months, keeping them in a cycle of poverty.
Yet, the market for agricultural insurance targeting smallholder farmers is untapped, and the challenges of getting into the market are great – often due to low trust among the community and a low understanding of insurance.
To address these challenges, ACRE Africa takes a hybridised approach through high-touch (in-person) approaches and low-touch (digital) means, says ACRE Africa’s partnerships and program manager, Muthithi Kinyanjui.
By working with farmers via a peer-to-peer network of trusted locals to better understand the needs of farming communities and to educate farmers on insurance, ACRE Africa is able to offer tailored microinsurance products. The company then works with local partners to help distribute these insurance products – which are accessible and affordable. This approach leads to “an increased trust factor and improved perception of agriculture insurance, leading to increased demand”, says Muthithi. “The trust factor is essential to sell insurance in African communities.”
By having an understanding of the on-the-ground reality of the needs of communities, and also working closely with local partners, ACRE Africa was able to continue operating during Covid-19. Despite the pandemic halting travel, and hence in-person approaches to accessing customers, ACRE Africa was still able to onboard 34,000 clients – more than 50% of whom were women. This was done through mobile phone technology, by connecting with the company’s peer-to-peer network remotely and by allowing new clients to connect directly by phone to ACRE Africa’s village-based champions as a means of local support.
Insurance for all
While companies such as ACRE Africa and MicroEnsure are seeing successes in penetrating previously difficult markets through cost-effective, digital and innovative models, there is a long way to go in the creation of sustained market demand for insurance. Inadequate legislation and policy hurdles, and lack of regulations allowing for insurance markets to open-up, are among the reasons, says Kellett. While on the supply side, the difficulties ACRE Africa and MicroEnsure face include access, affordability and understanding of insurance.
Ultimately though, Kellett says, the inclusive insurance market has to develop into one that has a stronger focus on preventative issues rather than just waiting for something to happen for insurance to kick in; a model focused on risk reduction and sustained and effective knowledge-transfer mechanisms are among the other aspects of providing safety nets to vulnerable communities.