Insurance: from Micro to Macro

"Easy to understand, valuable for the price, and straightforward to claim." Inclusive insurance in sub-Saharan Africa should be an inspiration for authors of byzantine insurance policies in the developed world.

In my wallet, I have three bank cards. When I opened the accounts, I remembered reading a vague reference to insurance, but until today, I had no idea what the insurance actually covered, how to use it, or what I’m paying for the privilege.

I have now learned I have 26 kinds of insurance coverage on those three cards. However, in spite of several dozen clicks, 90 minutes of reading, and two aborted phone calls, I still don’t understand many of the basics of when and how I can use the coverage. None of the card companies could tell me the fees I’m paying them. Some of the click paths online were circular. And every long list of claim requirements included an escape clause, allowing the insurer nearly unlimited power to deny the inexplicable benefits for which I’m unknowingly paying.

In the religion of the Internet, user experience is gospel; if there were an inquisition into my experience today, insurance would be excommunicated.

*****

Nearly nine years ago, I joined MicroEnsure, a pioneer in the field of inclusive insurance. Low-income customers in emerging markets experience risk as a fundamental fact of life. Opportunity – the focus of many a financial “inclusioneer” – is about something that doesn’t yet exist; meanwhile, risk is a present reality every day. If you’re a low-income mother in sub-Saharan Africa, risk is your breakfast, lunch, and dinner; you wake up in the morning worried if the bus driver will be drunk again, and you go to sleep hoping your rural uncle’s illness doesn’t get any worse.

The problem MicroEnsure wanted to tackle was how to protect these “emerging customers” – people in emerging markets who earn $2 to $20 per day – with sustainable solutions, since traditional insurance companies had no model to serve them. Traditional insurers have depended for decades on mandatory distribution channels: car owners must insure their vehicles, businesses their properties, and so forth. I like to call this, “making money in the dark,” where the product (like my credit card insurance) is largely hidden from view. In such an approach, customer preferences became less important to insurers. If a customer ever did really want insurance, that individual was likely to be either high-risk or a fraudster. Over time, this led to customers knowing little about their coverage, and being pushed away if they did try to access benefits. In the end, insurance became an industry that sees customers as the enemy. If you disagree, just consider that the industry calls claims “losses.” Let that sink in: when customers receive the service they paid for, insurers see a failure, not a success.

MicroEnsure, then, was clearly facing an uphill battle: we had no mandatory channels to leverage, and we had customers who faced significant risk. How could we protect customers who faced more risk than the average insured person, with less money to pay premiums, and no easy way to reach them?

The resolution we found, paradoxically, was to use these two problems to solve each other. If emerging customers faced more risk, then they would be more likely to buy products that help them, which meant that it should be easier to create channels to reach them.

The key to making the formula work was to upend the traditional insurance model. Instead of making money in the dark, we needed to make our value as clear as possible: to offer products that were easy to understand, valuable for the price, and straightforward to claim. We needed to respond to customer needs and requests quickly. We needed to be dissatisfied with low usage rates and nervous about unsustainably high profit margins. And we needed to think about our customers not only from a financial perspective, but also from social and emotional ones as well. In short, we needed to act like a company in any other industry, where customers are seen as an asset rather than a liability.

Instead of making money in the dark, we needed to make our value as clear as possible: to offer products that were easy to understand, valuable for the price, and straightforward to claim.

To be sure, there were tradeoffs to be made. Instead of paying the full cost of a customer’s loss, in most cases we paid a fixed part of it. Instead of covering many different customer needs, we limited our service to a few major ones. But by making our product and back office simpler, we also enabled scale much more quickly than traditional insurance. As a result, MicroEnsure reached more than 50 million low-income customers with their first insurance policies in less than a decade.

*****

I recently had the privilege to speak at the CFI 10th Anniversary Symposium, which marked an important career transition for me. Having helped MicroEnsure to build its model, I attended the Symposium on my first day as part of AXA, the world’s 2nd-largest insurance group. AXA sees that the old insurance model is limited: there are only so many mandatory insurance policies that can be sold in existing markets. And while it looks to emerging customers for growth, at the same time it recognizes that the business model for emerging customers holds some of the keys for renewing the insurance industry overall.

Which brings me to my credit card experiment.

Emerging customers who now have insurance – more than 500 million of them, at last count – don’t often feel the way that I did today as an insurance customer. They don’t have to slog through endless jargon when the policy wording is contained in 3 SMS messages. They don’t have to struggle for six weeks to get a small travel insurance claim paid, as I did last year, but can receive a claim payment in West Africa in two hours. They are provided with clear, simple products, not sold with traditional ads that – almost unbelievably – show activities that aren’t covered by their policy. Instead of seeing insurance as an annoyance, emerging customers tend to see it as a blessing.

The reason emerging customers feel this way isn’t because they are fundamentally different from traditional customers; it’s because the industry changed to reach them in the first place. And if the changes have succeeded in reaching this new market, then – at least for me – the lessons learned are relevant for existing markets as well. Insurers will become consumer-centric, lest Amazon and Google do it for them. They will find ways to make money in the light – where customers who have 26 covers actually know that they are covered in the first place. User experience will eventually drive the insurance industry, just as it does everywhere else.

For me this is why, while the last decade has seen an explosion of micro insurance, the next decade may be when “micro” insurance becomes “macro.” On the one hand, emerging customers will continue becoming insured, as more and more commercial insurers see the size and potential of the market. On the other hand, though, I’m making a bolder bet: that the emerging customer model will go mainstream.

It should be an exciting few years.

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