The Business Case
The Allianz Group has been active in the microinsurance industry since 2005, when the South-East Asian tsunami devastated communities and left many families homeless. The company realized that the risks faced by the poor are much the same as those for others, but without insurance, the financial impact of disasters such as the tsunami is obviously greater. From a business point of view, this is a significant opportunity: microinsurance in emerging economies represents a market of great potential growth and profitability, as insurance markets in many rich countries become saturated and growth prospects limited. On a global scale, Allianz aims to reach 3 million clients with microinsurance products by the end of 2009.
The Allianz Group‘s work on microinsurance began in early 2005, as the Management Board of Allianz in Munich , Germany realized that the South-East Asian Tsunami of December 2004 did not leave much of an impact on the balance sheet of the company, despite being one of the worst natural catastrophes in the last 100 years. As Heinz Dollberg, head of the Asia-Pacific division of Allianz, explains, “The risks faced by the poor are much the same as those for most individuals, but research has shown that they experience those risks with greater frequency and with a relatively greater financial impact.” Despite this great need for insurance services, less than 80 million people in the 100 poorest countries have access to insurance (3% of the population).
The Allianz Group (Allianz) is a leading global provider of insurance, banking and asset management. With nearly 155,000 employees worldwide, the Allianz Group serves approximately 75 million customers in about 70 countries. In fiscal 2008 the company achieved total revenues of over € 92.5 billion.
Understanding the insurance needs
From a business point of view, the number of people lacking access to insurance tells a different story: a story not of risk, but of opportunity. Microinsurance in emerging economies represents a market of great potential growth and profitability. As insurance markets in many rich countries become saturated and growth prospects limited, insurance companies are looking to new opportunities in emerging markets. In India alone, more than 250 million people are in need of microinsurance. And worldwide, Allianz predicts that by 2011 the microinsurance market will double the size it was in 2008. Through innovative products and distribution methods, Allianz believes that the hundreds of millions of people living on less than US$ 2 per day can become viable clients for insurers.
Dollberg argues that while in the short-term, the scale of microinsurance will not translate directly into profits, adapting product and service offerings to the needs of the poor will help unlock the potential of this market for the future and solidify the company’s presence in new markets in the medium to long term. Moreover, offeringmicroinsurance in new markets also provides critical learnings about emerging markets and builds relationships with customers whose wealth may grow in the coming decades.
It is one thing to identify a potential market; but it is another to penetrate it. How does a multinational insurer likeAllianz access clients in remote villages across Asia and Africa ? A lack of local experience, the high administrative costs associated with servicing thousands of small-premium insurance policies, and local distrust have kept insurers from reaching low-income populations in the developing world. However, Allianz found a way to break through these barriers. By working in partnership with local organizations, such as non-governmental organizations (NGOs), trade unions and microfinance institutions, the German insurer is reaching out to clusters of villages across southern India , Indonesia , Egypt and soon West Africa.
Knowledge is crucial in order to understand the needs of low-income clients. In 2006 the United Nations Development Program approached Allianz to work together on a market potential study to analyze the demand, acceptability and affordability of microinsurance products. This public-private partnership was strengthened when the German Agency for Technical Cooperation (GTZ), who has considerable experience in the area of social protection and microinsurance, joined the project.
The result was a three-country study covering the demand and market prospects of microinsurance in India, Indonesia and the Lao People’s Democratic Republic. This study allowed Allianz to understand the challenges and how to overcome them to establish the company’s first microinsurance projects.
Partnership for implementation
In July 2006, drawing from the lessons of the Allianz-UNDP-GTZ study, Allianz‘ Indian subsidiary Bajaj Allianzjoined forces with CARE International to launch a three-year partnership aimed at providing microinsurance to over 100,000 people in the southern Indian state of Tamil Nadu, one of the areas hardest hit by the 2004 tsunami. Allianz believes that the on-going reconstruction efforts can be bolstered by an efficient insurance program to protect the poor.
The project was designed to deliver affordable life and non-life insurance products catered specifically to farm workers and fishermen in the coastal communities of Tamil Nadu. The company sells micro-life insurance policies that cover the risks of accident, death, loss of household assets, natural disaster and fire. Currently, this covers around 100,000 people. The product also offers an education allowance for a child and provides funeral expenses in case of fatal accidents, as well as hospital cash. The premium is 87 cents per year, which provides families with € 370 of coverage in the event of a natural or accidental death.
Shreeraj Deshpande, from Bajaj Allianz in Pune, India explains that there are two key challenges to implementingmicroinsurance programs. “The first is finding a distribution model that works at low costs,” she says. The second is to establish a process that allows the company to insure a large number of people with very low premiums. In response, the company has opted for insurance schemes run and controlled by local community organizations to help reduce risk.
As an example, the company started a community-based micro health insurance program whereby a community fund known as “Mutual” was set up with the help of Bajaj Allianz and CARE to share the risks collectively. Villagers pay a monthly insurance premium into the Mutual, which retains 65% of that income while the rest is passed on to Bajaj Allianz to cover an eventual excess. If a villager becomes ill, the company and CARE appoint a doctor to treat the patient or, if necessary, send him/her to a partner hospital. Although the program is helping reduce the vulnerability of the poor in the case of illness, the lack of skilled medical professionals and affordable medicine makes it challenging to support access to quality health care.
The roll-out costs for those Indian projects amounted to € 300,000.
In India , Allianz also offers a savings insurance through partnerships with rural banks and microfinanceinstitutions, particularly in Andra Pradesh and Maharastra. In the first year, one million people purchased the product, which is being sold by local microfinance institutions through women self-help groups.
Putting microinsurance to the test
At the end of November 2008, cyclone Nisha struck the coast of Tamil Nadu killing 86 people and leaving thousands homeless. Shortly after the rains ended, a team of five Bajaj Allianz insurance specialists went to the devastated region to settle claims and help villagers begin to rebuild their lives. The impact of Nisha was of a much greater scale than any disaster the microinsurance partnership had experienced, with more than 16,000 claims in a matter of days dispersed over 44 villages. The team quickly realized that assessing every single claim would be impossible and put a process in place whereby the local NGO partners documented the damages and reported them to the insurer that undertook sample checks.
While the payout to customers amounted to hundreds of thousands of euros and equal to five times more than the premiums collected, which are as low as one dollar annually, the company earned “credit” in the community and has seen a 20% increase in the number of people buying the company’s microinsurance policies. The experience showed the limits of what an insurance company can do and the company is now looking for additional partners and measures such as re-insurance, natural catastrophe bonds and infrastructure investments to help meet the needs of the future.
Scaling up and reaching out to more countries
Across the Bay of Bengal , Indonesia is another country that has experienced a series of natural disasters, from earthquakes, volcanic eruptions and floods to the devastating 2004 tsunami. With over half of the 240 million people living in Indonesia surviving on less than two dollars a day, it is not surprising that less than 2% of the population is insured.
Microinsurance could change this – a development that Allianz Life Indonesia believes could benefit the company in the long term. In the last three years alone, Indonesia’s economic strength has almost tripled, and annual growth of up to 10% is expected in the coming years and decades. So the large numbers of poor could soon evolve into a sizeable middle class that can afford more expensive insurance.
Having started operations in Indonesia in 2006, Allianz has already acquired around 200,000 new customers viamicroinsurance contracts, but that is just a fraction of the market. A study predicts that in ten years’ time there could be up to 12 million potential customers.
In Africa today, only 3.5 million people are covered by microinsurance: amounting to 4% of all people covered bymicroinsurance in the 100 poorest countries. Recognizing an opportunity to contribute to local development and tap into new markets, Allianz and its local operator, Assurances Générales de France (AGF), reached an agreement with PlaNet Finance to provide microinsurance in a number of African countries. Despite greater wealth, there is a noticeable lack of microinsurance in North Africa . Thus, the partnership chose to begin the first project in Egypt where it is offering death and disability insurance to over 30,000 low-income customers followed by market entry in Senegal and Cameroon.
On a global scale, Allianz aims to reach 3 million clients by the end of 2009. However, despite past successes and future ambitions, there are still a number of obstacles that hinder the growth, reach and impact of microinsurance.
The greatest obstacle is public awareness of the benefits of insurance among the hundreds of millions of people who have never had access to financial services. As Michael Anthony, coordinator of Allianz microinsuranceprograms worldwide, explains: “Taking out a microloan means receiving cash; taking out insurance is buying a promise. Creating awareness about the idea and value of insurance is therefore quite a challenge.” In addition to greater education around the benefits of microinsurance among the poor, there is also a need to explore innovative solutions around technology to improve efficiency and reach that will help make microinsurance a more viable business. “Allianz has therefore set out to explore the sale of simple microinsurance products through mobile phone operators. Reducing the administrative costs in insurance policy issuing and claims handling is the key to success,” Anthony explains. “Microinsurance is a low-margin, high-volume business.”
- Watch a brief video on the work of Allianz in the domain of microinsurance in Indonesia at www.youtube.com/watch?v=gEHfX4JNo8o
- Read about the Allianz-UNDP-GTZ three-country study at knowledge.allianz.com/en/studies/microfinance/microinsurance_asia.html
- Visit the Allianz Knowledge website for more information about microinsurance and microfinance at knowledge.allianz.com/en/globalissues/microfinance/microinsurance