While launching the Insurance Regulatory Authority (IRA) recently, Kenya's Finance minister, Amos Kimunya advised the regulator to enforce good corporate governance, early warning systems and protection of policyholders. Granted this is fundamental, the regulator still has a major role and responsibility to not only break barriers of insurance access but also deepen its breadth and depth of outreach in the country. The penetration of insurance in Kenya according to Association of Kenya Insurers (AKI) 2006 report stands a paltry 2.54 per cent compared to South Africa's 16 per cent.
The importance of access to financial services such as credit, savings, insurance and many others in any country cannot be gainsaid. Financial services oil the national and international economic systems. While the myth on banking and credit access to the low income who are economically active has been debunked, demystified and incorporated into the common man’s mindset, the insurance industry is yet to innovatively unpack its services to the low income.
The next fontier in the battle for financial services is the insurance industry. This is where the future of the industry is: working with the low income by providing innovative, affordable, efficient and effective insurance services with (very) few exclusions.
Microinsurance is the provision of insurance to low-income households with no capacity to make the single annual premiums. This target group is vulnerable to risks that are insurable, such as illnesses, death and property loss. The group needs to secure their business and loved ones with affordable premiums. Microinsurance therefore breaks the premium payments to manageable levels with frequency of payments commensurate to insured’s ability and willingness to pay.
Yet to serve this market with insurance is expensive. Effective delivery of microinsurance is therefore conditional on innovations aimed at reducing costs and risks. As the microfinance sector has shown, serving the low end market is feasible and profitable, but with a caveat – only when rolled out to serve a large client base. It is a volume business. Volumes have made it work for microfinance, likewise larger pooling will do for microinsurance.
Further, microinsurance success will be hinged on active participation. Low acceptance rate will increase transaction costs, make the premiums expensive and out of reach for the low income client targeted by the service. Poor participation will mean high premiums, ideally defeating the micro insurance business rationale.
Many factors will initially inhibit microinsurance access. They include: ensuring timely and efficient payment of small but frequent premiums, developing business models and partnerships that are cheap, development of effective information systems, balancing population perception with exclusions, high costs of population education, control of adverse selection, moral hazard and fraud – and yet making microinsurance a profitable proposition. It must be profitable to attract many providers and ensure continuity and permanence.
The post election violence in Kenya and the xenophobic attacks in South Africa is a telling story on the need for insurance. No one is safe: we live in a risky environment and we are vulnerable. It’s these risk effects and fears that micro-insurance, innovatively delivered should find ways of easing for the majority who are low income.
The insurance industry and the regulator should know from the outset that working with the low income will not be easy. It calls for hard work and innovative adventure. The insurance companies have an obligation to calm investors and shareholders with good bottom lines, yet break barriers of access by working with the economically active poor, make money with them and from them. Indeed a difficult balancing act.
To entrench microinsurance, the regulatory authority should provide effective leadership by quickly developing a legal regulatory framework to anchor this nascent but important initiative. On regulation, IRA should not re-invent the wheel. It should get out and learn from those countries where regulations have been adopted to microinsurance, India is a good example.