Low demand of microinsurance is often attributed to a lack of
understanding of microinsurance concepts and products. Poor understanding,
however, is only part of the problem. Many other factors influence a
household’s decision to buy microinsurance.
New evidence from a review of more than 30 quantitative and
qualitative studies reveals trust, liquidity constraints, the client value
proposition and behavioral constraints to be the most important determinants of
demand.
The new evidence debunks some of the most common myths about
the determinants of demand. For instance, it is believed the demand is low
because people can’t afford microinsurance.
The evidence shows that liquidity constraints are one of the biggest
determinants of demand, but not because the poor have no money; rather, they
have insufficient funds at the time of enrollment.
Insurers can mitigate liquidity constraints by scheduling
premium payments when money is readily available, for instance after a harvest.
Researchers evaluated the effect of deferred premium payments in a pig
insurance scheme in China. They offered credit vouchers that allowed farmers to
take up insurance while delaying the premium payment until the end of the
insured period, coinciding with when pigs are sold and liquidity constraints
are relieved. Deferred premium payments increased the purchase of the insurance
by 11 percentage points (from 5%, observed for those farmers not receiving
vouchers).
Barriers to action greatly influence demand. Even people who
are convinced about insurance do not buy it because of a failure to convert
intentions into action. People are influenced, sometimes disproportionately, by
seemingly inconsequential behavioural constraints that prevent enrollment.
These constraints can be situational, such as requiring clients to submit the
enrollment form at the insurer’s office, without knowing the location of the
office. Researchers in Nicaragua found when they allowed market vendors to
enrol directly at their market stall rather than the insurer’s office, uptake
was 30 percentage points higher.
In a study in China renewals were higher when clients had to
opt-out, rather than stay-in insurance. Such a default option needs, however,
to be clearly communicated to clients as an undesired renewal can easily lead
to distrust in the scheme.
The evidence (though limited) also shows that client value
and demand are interlinked and products that deliver (or are perceived to
deliver) higher client value are likely to produce greater returns for the
insurer in the long term. Practitioners need to think about client value
holistically; they should abandon the simplistic approach of crafting the value
proposition only on cost and benefits, but also focus on how clients access and
experience the product and related services. For instance, in the case of
health microinsurance, the quality equation extends beyond the cost and benefit
levels of the product itself. It is difficult to separate the related service
from the product, and the ability and ease of access to the health-care service
is, in fact, considered an insurance product feature. Lack of quality of health
centres is often identified as one of the strongest impediments to take-up of
health microinsurance.
The importance of the quality of the client value proposition
is even more noticeable in the context of renewals. Researchers reported that
the (negative) perception of the value was one of the three most important
determinants of renewal for the Swayam Shikshan Prayog (SSP) health scheme in
India. SSP observed that clients who had accessed discounted consultations and
medicines, offered as a value-added service, were three times more likely to
renew.
Microinsurance should be developed in relation to other risk
management practices.
Bundling insurance with other financial products could
increase the demand for both products if they are seen as complementary
solutions. Evidence from MicroEnsure in Ghana shows that bundling savings and
insurance can increase insurance penetration and stimulate savings. Depositors who held a minimum balance of $60
each month were entitled to free life insurance with benefits of up to
$180. Five months after the launch,
deposits in the bank increased by 19%. Deposits from clients with balances
below $60 increased by 207%. This increase along with anecdotal evidence from
interviews with depositors suggests that many customers changed their savings
behaviour as a result of the free insurance cover.
Demand is a complex issue, with trust, liquidity constraints,
the quality of the client value proposition and behavioural constraints
emerging as the most important determinants of demand. Practitioners need to understand the demand
puzzle in their context, identify the most important determinants and design
specific product design, pricing, promotion and distribution strategies.
By
---- Michal Matul heads the Knowledge Team of the ILO’s
Microinsurance Innovation Facility, a program funded by the Bill and Melinda
Gates Foundation, Z Zurich Foundation and AusAid to stimulate innovation in
microinsurance
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