PREPARED

By
Clifford, C, Adebe, S

5/22/2024 1
 Objectives:
◦ Understand the microinsurance product
development cycle.
◦ Appreciate the value of following a systematic
product development cycle
◦ Pricing meaning
◦ Pricing requirements for MI
◦ Case studies for self study

Clifford, C 5/22/2024 2
Clifford, C 5/22/2024 3
Microinsurance
Understan
d the
product market
Prototype
development Product e developm
ent and
valuation
process is testing

continuous and
Consumers
designed to ensure
Competition
that resulting Partner
selection
products provide
Product Organisational and
rollout Assessment preparatio
value to the clients n

Product
Pilot finalizatio
testing n and
and process
Analysis design
 Product development is a complex and sometimes a
resource consuming activity.
 Most commercial insurers often skip steps in this
process.
 Insurers often think they understand traditional
markets and can apply the similar principles in their
product development process.
 Sometimes there is also a rush for achieving large risk
pools or business opportunity as opposed to following
a structured product development process.
 Motivation-Developing a MI product that responds to needs
of the market
 Commitment –Is the institution ready to fully commit to serve
the low-income segment (staff, management and board)
 Capacity- ability to develop MI product (time and h/resource)
 Cost –effectiveness- Innovation in terms of marketing,
service delivery and management -> reduced cost of
operations
 Simplicity –ability to develop simple products/solutions
 Funding – Is there a budget to effectively implement product
development process?
 Demand: what are the needs of the target customers?
 Supply: Who are your competitors or insurers planning to
invest in microinsurance? What kind of products are they
providing?
 Delivery mechanism: What delivery channel are
available? Which channel has experience in delivering MI
products?
 Regulations: How might the regulatory, supervision and
policy environment affect the provision of
microinsurance?
 Content Tools
 Risks
 Financial diaries
 Prioritized risks
 Frequency and Severity  Financial services access data
 Coping mechanisms  Focus group discussions
 Pros and cons of the coping  Individual interviews
mechanisms
 Knowledge of insurance  Prototype tests
 Experience with insurance  Product pilots
 Willingness to pay
 Client satisfaction surveys
 Trust in insurance companies
 Cultural and behavioural factors
 Prototype testing is a step after a market
research
 The key inquiry is: “Did we get this right?”
 Specific questions in a prototype testing:
◦ Are potential clients receptive(interested) to
the product?
◦ Do they like the product?
◦ Does the product really address the
prioritized risk management needs of
potential clients?
 ◦ Will it be easy for them to access the
product?
◦ What do they think about the benefit design
in relation to the premium?
◦ Will the product offer value above the
coping mechanisms they currently using?
 While initial market research mainly uses
qualitative data, prototype testing mainly
uses quantitative data
 Getting the right product is good but success of the
product also depends on the getting the distribution model
right.
 Decisions on which distribution channel involve a selection
process which includes suitability, functionality and
partnership risk assessment.
 Distribution partners are critical for access and product
servicing.
 Distribution partners must be involved in the product
development process
 Once the partner has been decided, process from
enrolment to payout are clearly outlined.
 Finalize the product design and formalize the delivery
process.
 Coverage- benefit package and control mechanism
(adverse selection, moral hazard & Fraud)
 Type of cover
❖Compulsory vs voluntary
❖Group vs individual
 Terms/ eligibility criteria
 Prepare Policy document (simple to use and understand)
 Preparation of procedure documents (eg. claims)
 Pricing – done with appropriate actuarial tables and
professional actuaries.
 Development and testing (mathematically) staff incentives –
impact that the incentive might generate.

Case study – Delta Life Insurance (Bangladesh)

❖ process problem- too many signature to approve
claim
 Pilot testing is often overlooked.
 Pilot testing is a critical step in the product development cycle.
 Objectives of pilot tests:

Gauge the
Gauge product Evaluate the value appropriateness and
acceptance levels proposition of the efficiency of systems
product and processes
(front and back offices)
 Example 1: The Demonstration Effect in
Nepal
The timeline for the In the Kalaiya area of Nepal, after providing
pilot should ideally benefits to the families of two deceased
sufficient time for: persons within a short time, there was a
rapid increase in the number of clients
◦ Claims experience showing interest in purchasing the
◦ renewals. microinsurance product. (CMF Nepal, Pilot
Testing of a Micro Life Insurance Product,
Results and Lessons Learned)
Source: USAID Microinsurance Note 4

It is costly to roll out a wrong product or right product with

wrong systems and processes
 SEWA did not have
Example 2:
a formal structured
VimoSEWA,
pilot test.
India
Transition from
Mandatory to
Voluntary yielded
good lessons
  If the pilot yield good results, the natural step is rollout
 Depending on the results, sometimes product
refinements may be required before rollout
 Training, systems and Marketing

It is costly to roll out a wrong product or right product with

wrong systems and processes
 Products must be evaluated periodically to assess both
client value and business viability.
 PACE developed by ILO’s Impact Insurance Facility is
good tool for client value assessment.
 Business viability is often assessed using standard Key
Performance Indicators.
 After product evaluation, strategic decisions have to be
made on whether the product must be refined,
enhanced, redesigned or withdrawn from the market.
 Appropriateness -by reviewing coverage, benefit level,
Product
eligibility criteria and availability of value-added services
Focuses on accessibility and simplicity by investigating
Access choice, enrolment, information, education, premium payment
method and proximity
It measures both affordability and value for money, while also
Cost looking at additional costs and efforts to keep down overall
costs of delivery

Assesses responsiveness and simplicity-claims procedures

Experienc
e
and processing time, policy administration, product tangibility
and customer care
◦ Faster product acceptance by potential clients
◦ Products is designed to meet the real needs of
potential policyholders
◦ Determining appropriate product education and
marketing strategies
◦ Getting the right sales teams and incentive
structures
◦ Getting the right distribution models
◦ Influence better renewal rates
◦ Finding the right systems or processes
◦ Increased trust and client loyalty to the institution
 This is a system of determining uniform insurance premium
rate for all individuals in a community, based on the cost of
providing services to all people in the community, without
adjusting for individual risks and medical history.
 Community rating is normally used in Group Insurance
 Risk premium is calculated on the basis of the class or
“community” the insured unit belongs to, rather than on the
basis of each individual insured.
 This is a system of determining insurance
premium for each individual based on the risk
perceived by the insurer, and involves
consideration of the individual’s medical
history, occupation, lifestyle and other
individual characteristics in the determination
of his or her premium.
 For example;
 Life, health and disability- age, health
status and smoking habit
 Agricultural insurance: microclimate,
irrigation and soil quality
 Group insurance is more favorable in microinsurance because;
• It reduces administration costs –collecting and encoding enrolment
data
• Easy to achieve desired scale
• Low distribution cost – majority are tied to employers and
professional association
• Low claims costs
• Easy to control adverse selection
 Claims frequency = # of insured claims / risk exposure
 Expected claims amount = frequency of insurance claim *
sum insured
 Net premium = RP* (1+security loading + Margin of error)
A security loading is usually added to address random
fluctuations of the risk premium around the true mean of the
underlying probability density or probability distribution of
aggregate claims. It should be high enough to cover
❖High volatility in the expected claims
❖Higher uncertainty around the quantity and quality of the data
used to set pricing assumptions
❖Smaller amount of experience data
Margin of error is often added to compensate for the
uncertainty of the assumptions made in the risk premium
calculation (call it margin for error).
  Credit life
Degree of Difficulty

 Term life/Personal accident

Property insurance

Degree of Success

 Endowment life
 Health insurance
 Agriculture

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 1. Animal Insurance:
It’s a livestock insurance covering individual animal or a
herd. It can cover losses resulting from death, disease and
accidental injury to livestock.
 2. Crop insurance:
Cover the loss of crops due to one or more perils and can
be covered in different ways:
oYield cost (A lower – than anticipated yield)
oQuality loss (Crops of lower quality than anticipated)
oRevenue loss (Due to price fluctuations) or
oA combination of the above

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 3. Index –Based Insurance (IBI);
A way of providing protection against correlated risk such
as extreme weather events.

It’s not strictly insurance, as individual losses are not

assessed, instead it pays out to all policy holders in a
geographic area when certain conditions are reached in the
proxy, or index.

Index insurance solves three of the most difficult challenges

of agricultural insurance and greatly reduces the prospect
of fraud.

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 Index based insurance should consider the following
weather parameters:
oRainfall deficit
oRainfall excess
oHigh temperature
oLow temperature
oHigh wind speed, wind direction
oSunshine hours –some vegetable crops require
combination of sunshine and high temperature to
mature, low sunshine hours may lead to lack of maturity.

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 Advantages of IBI:
oMoral Hazard: The farmer cannot influence an index that
is based on weather.
oAdverse selection: Whether farmers opt in or out, this
will have no impact on the risk because the risk would be
based on the index i.e level of rainfall.
oCost of loss Adjustment: It’s not necessary for a loss
adjustor to visit the firm and calculate losses, as once
the index trigger is exceeded, the payment is sent
regardless of loss.
oReduces the prospects for fraud.

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 Challenges facing agriculture insurance:

oUncontrollable: Ideally the occurrence of an insured

event shouldn’t be under the direct control of the
insured person. However, this is not always the case with
many kinds of agriculture insurance.
oUnequivocal: Assessing agricultural loss can be very
difficult and costly, as the loss could be caused by a
combination of the insured–against events.
oFraud: Farms are often physically remote, which creates
opportunities for fraud.

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oMoral Hazard: Physical remoteness makes it hard for an
insurer to check whether insured
farmers are diligently taking care of their crops or
livestock.
oAdverse selection: Can have a destabilizing effect on an
insurance system. Because the principle of risk –pooling
will not work if only those negatively affected buy
insurance.
oCovariant risk: In agriculture, covariant risk is frequently
an issue because droughts, pets and animal or crop
epidemics are likely to affect many farmers at the same
time.

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 Impact of the above challenges:
oAgricultural indemnity insurance becomes a very costly
business, difficult to make profit or indeed to break
even.
oIn fact hardly any agricultural insurance programs cover
their costs (claims payment and administrative costs)
from premiums.
oAlmost all are subsidized, as agriculture is much
politicized sector.

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Initiatives for Micro-insurance distribution:
➢ Introduce the concept of “micro insurance product” and
“micro insurance agent
➢ Recognition of wide network of intermediaries in rural and
social sectors
➢ Offer alternative strategic entry points for intermediaries
◦ Recognition that procedures and services should be set by
the insurers and regulator
◦ Review of existing definition of rural area

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Clients are rural and Insurance companies are
remote (60-70%) unfamiliar with clients

Low margins make direct sales Not so easy to find appropriate

expensive and value proposition incentives for distributors and agents
unattractive to brokers

Viable non-traditional distribution

channels can undertake several Clients are unfamiliar with
functions in the value chain insurance

Insurers normally have a reputation

Most of viable distribution channels
tag of delayed payouts or
lack insurance experience
misinformation

Source: FinScope 2009

 Reputational
Scale Trust
risk

Cost of
Comparative Proximity to
distribution and
advantage target clients
administration

Provision of
Client Technology
value added
education consideration
services
 Financial Community- retailers Agent MNOs Employers Direct sales
institutions based networks

Client education -
☺    ☺ ☺
Product diversity
☺ ☺    ☺ ☺
Scale - -
☺ ☺ ☺ ☺ 
Brand and trust - -
☺ ☺ ☺ ☺ ☺
Priority - -
 ☺   ☺
Cost - -
☺ ☺ ☺ ☺ 
Partnership risk - -
   ☺ ☺ 53
 • You and your partner’s goals might not
Strategic risk be aligned

• A partner might “steal” your knowledge,

Competition risk staff or customers for competitive gain

• A partner might fail to perform in some

Counterparty risk way that harms you

Source: ILO’s Impact Insurance Facility

 Objectives:
1. Identify and understand the drivers of microinsurance
viability.
2. Identify and understand the drivers of client value.
3. Understand the relationship between client value and
viability.

Clifford, C 5/22/2024 57
Viability
Containing claims
and administration costs

Expenses
Benefits
Revenues

= >
Commissions
Premiums
Sales expense
Viability Fees
Administrative expenses
Investment income
Cost of capital
Subsidies
Taxes

Achieving
and maintaining
scale
Viability is driven by three success factors

Containing
Containing
Scale administration
claims costs
costs
Microinsurance Market Development Focus

Balance Scale +
Business case Scale Client value
Client value

1990+ 2000+ 2010+

 = Business +
Viability Client Value
Case
  Client value = The relative utility or worth that
customers derive from a product or service
◦ Product benefits are considered in relation to costs

CV=B/C
◦ They are also considered in relation to customers’ priority
needs and goals
◦ Product costs and benefits are compared with other
available options

 Client value proposition = a promise of

client value to be delivered and a belief from the
customer of value that will be experienced
 Experience

Services

Goods

Commodities
Reflective discussion
 Achieving viability and client value is possible but certainly requires
coherent business strategies and these include:
◦ Customer centricity
◦ Win-win-win distribution partnerships
◦ Cost efficiency
◦ Product and systems evaluations
◦ Leveraging technology
◦ Leveraging trusted partners
◦ Managing reputational and other business risks
◦ Long-term investment perspective
 Microinsurance sector is in evolving phase
 Innovations are required at all stages for products, in pricing
policy and in delivery channels
 Success of marketing micro insurance depends on
understanding the social and cultural needs of the target
population
 Clients should also receive price differentials for using
different channels
 Groups & their promoters can provide ideal platform to kick
start the micro insurance

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