By Matías Cabrejas, Regional Manager, Residential Personal Lines, Chubb Latin America
The microinsurance market has undergone sustained growth in recent times and that expansion does not look to be coming to an end. According to the Microinsurance Network report entitled The microinsurance landscape in Latin America and the Caribbean 2017, at the end of 2016 around 8.2% of the Latin American population had at least one microinsurance policy, which represents a total of 52.1mn insurees and a premium volume of US$420mn.
The microinsurance market is mainly comprised by life insurance, particularly insurance that covers debt balances. Financial institutions are currently the main distribution channel for microinsurance. Banking entities focused on micro-enterprise activities – whether they are services, manufacturing or agricultural companies, microfinance institutions and cooperatives or mutuals – account for a large part of this market.
However, the development of these new products requires the combined efforts of insurance and reinsurance companies and international entities. For example, in Guatemala a parametric product was launched in early 2017 aimed at protecting loans granted to develop the productive activities of a financial institution with the support of the Inter-American Development Bank (IDB), the Swiss Agency for Cooperation and the reinsurer Swiss Re.
The efforts to create appropriate products that provide solutions to this segment of the population also require support from insurance regulators in each country. These are sometimes disruptive products, which require a great deal of understanding with these entities so they can be approved. Various countries are already working in this direction, such as Guatemala, El Salvador, Peru or Argentina.
A major challenge is to increase the proportion of property insurance within the microinsurance market. To achieve this, it is essential to develop products that are accessible to the lowest-income segments of the population. Traditional insurance is very expensive for this; it requires a registration process to provide a quotation for each individual insurance product and, in the event of a loss, adjustment expenses are incurred that make the product even more expensive, thus making it unfeasible.
An alternative to solve this challenge is parametric or index-based insurance. This type of insurance is underwritten on the basis of modeling historical series of natural catastrophes, such as earthquakes, hurricanes, droughts and/or excess rainfall. Therefore, according to pre-established scales of magnitude of the events covered, a correlation with the damage caused to the insuree is estimated and payment of the corresponding compensation is determined. A parametric microinsurance product could establish that, in the event of an earthquake measuring 7.0 on the Richter scale, payment of 20% of the sum insured would apply, which is the estimate of the damage that it would have caused. Or, in the case of rainfall reaching a certain number of millimeters, for example 150mm, 25% of the insured sum would be paid.
These parametric insurance products also incorporate technology for the adjustment of claims. Generally, these programs designate an agency whose objective is to calculate the magnitudes of the events covered and determine the corresponding compensation. These agencies use internationally recognized data sources such as the USGS in the US in the case of earthquakes, or satellites operated by NASA to determine rainfall, hurricane intensity or drought. These data sources are defined previously during the definition of the product, as well as the scales of compensation.
The characteristics of these microinsurance products help solve the problems of registration costs and adjustment of claims, but other issues remain to be resolved. The definition of the insurable interest is a subject that requires more profound analysis, since it can be the case that, before a covered event, the agency that managers the settlement of the claims determines that a certain insuree must be compensated, but in reality it is not verified whether or not there was physical damage to the insured risk.
In the event that a catastrophic event takes place, all of the inhabitants of that region will suffer unexpected expenses, such as journeys to other safer areas, accommodation expenses, home repairs, etc. These insurance policies must cover those extra expenses incurred by the insuree in case of losses, without taking into account whether or not there was physical damage to their home.
Although the road ahead is long, in recent years much progress has been made in the creation of new property products which, through the incorporation of new technologies, have overcome barriers that previously seemed insurmountable.
The great challenge that remains is to find the appropriate distribution channels that allow insurance companies to scale up and serve this important market. I believe that the digital revolution will play a fundamental role in this process and it will not take a long time to occur.
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