Insurers discover the LatAm low-income market

Most of the population in Latin America is still uninsured. Insurance accounts for less than 3 percent of gross domestic product (GDP) in countries such as Mexico and Colombia and it is only moderately higher in Brazil and Chile, according to consultancy firm EY.

Among the reasons for the low insurance penetration is that most of the population is low-income and unbanked and therefore not yet viable consumers of insurance products, according to the EY 2017 Latin American Insurance Outlook.

But the interest in serving the low-income market is growing among insurers. Almost half of insurers not currently serving the low-income market are planning to offer mass-market products in Latin America, while 33 percent plan to offer microinsurance, according to the Microinsurance Network, an industry group.

Microinsurance is the keyword

Microinsurance is the term used to describe protection of low-income individuals against specific perils in exchange for regular premium payment proportionate to the likelihood and cost of the risks involved. The target population typically consists of persons ignored by mainstream commercial and social insurance schemes, as well as persons who have not previously had access to appropriate insurance products.

Microinsurance is often distributed to groups and sometimes requires significant consumer education. Screening requirements are often kept low to keep costs down. Premium payments are often irregular and group pricing may include links to other services.

“It is frustrating how little we know about microinsurance,” said Pilar González de Frutos, president of the inter-American insurance association FIDES during the organisation’s 2017 gathering in San Salvador. She underlined the importance of microinsurance to take protection to social layers that need it most and often fall below the radar of insurers.

In order to service the low-income market, insurers may need to develop a new distribution model as traditional distribution systems such as through agents and brokers are deemed as unsuitable. Incentives for agents focus on larger polices or sales instead of servicing.  At the same time, restrictive remuneration can be prohibitive for example due to commission caps.

Furthermore, banks or monetary financial institutions are not always allowed to distribute microinsurance.

More adequate solutions may be available through innovative delivery channels that can reduce transaction costs. These may be found through financial intermediaries close to the potential clients, non-financial intermediaries such as retail or electricity companies for example in Colombia where microinsurance is attached to the bill. In addition, more viable solutions may become available as internet access and smart phones become ubiquitous.

Bancassurance is currently providing the greatest access to microinsurance to date in Latin America, but firms are developing third-party distribution models to connect with individuals who are neither financially connected to the banking system nor digitally connected. These include small brokers and banking correspondents.

“We have work to do,” González de Frutos noted, and alluded to the social role of the insurance industry in Latin America. To address this issue, González de Frutos suggested that the industry should work on simplifying the language it uses. “Microinsurance can’t use large and complicated terms,” she said.

“We want to become better. Only then we can grow,” González de Frutos said.

“I have no doubt that we will do it and that we will do it well,” she added.

The preliminary findings of a study published by the Microinsurance Network and the Munich Re Foundation highlights the potential for microinsurance as a source of cover for the population in Latin America.

More than 8.2 percent of the population in Latin America and the Caribbean (LAC) had at least one microinsurance policy as of December 2016, with 52.1 million people insured corresponding to $420 million in gross written premiums, according to estimates included in the study titled The Landscape of Microinsurance in Latin America and the Caribbean (LAC) 2017.

Protection gap offers growth potential

“The LAC region has shown substantial growth in microinsurance outreach,” said Dirk Reinhard, vice chairman of the Munich Re Foundation.

“However, recent events such as the floods in Peru, as well as the earthquakes and hurricanes across the region, have demonstrated that there is still not enough protection for people in the low-income market,” Reinhard noted.

“Increasing governmental support and implementation of mobile technologies are important steps to develop the market, facilitating fast pay-outs when disaster strikes.”

Eduardo Morón, executive president of the Peruvian Association of Insurance Companies (APESEG) added: “Governments across the region are recognising the important role that microinsurance can and does fulfil in helping people to cope with catastrophic and daily risks. Many governments have started improving their regulatory frameworks for microinsurance, with studies on the needs and potential demand for microinsurance underway in several countries.”

Regulators within the LAC region reported significant increases in premiums between 2013 and 2016 with a 1,799 percent premium increase reported for Brazil, 284 percent for Nicaragua, and 95 percent for Peru, according to the study.

In Mexico, the regulator reported that premiums have increased by 36 percent per year on average between 2007 and 2017. At the same time, preliminary results indicate that commissions have been declining since 2014, with the average commission falling from 20 percent to 12 percent, and loss ratios have remained relatively low at an average of 46 percent, with 69 percent of products at loss ratios below 41 percent.

Furthermore, the study found strong growth in agricultural insurance with the number of clients increasing from 35,000 in 2014 to 80,000 in 2016, based on comparable data. In terms of distribution, monetary financial institutions and other financial institutions appear to have acted as the distribution channels for 77 percent of the 2016 lives covered identified.

Earthquakes in Mexico and hurricanes in the Caribbean that occurred in the third quarter of 2017 highlighted the protection gap in Latin America.

“The recent disasters that have struck the LAC region serve as a reminder of the need to leverage insurance that is both effective and inclusive, and to develop risk mitigation strategies to help people – particularly the poor –become more resilient and less vulnerable,” said Katharine Pulvermacher, executive director of the Microinsurance Network.

“Our intent is to help develop their capacity to recover and rebuild, and avoid falling back into the spiral of poverty.”