Last week WillisWire blogger George Haitsch asserted that one of the greatest risks of 2013 for businesses of all kinds is missing out on emerging markets. That applies to the insurance industry itself, and includes the potential represented by the burgeoning microinsurance market in the BRIC bloc and elsewhere. A couple of recent announcements suggest that the opportunity continues to mature.
Yesterday the Luxembourg-based Microinsurance Network's chairman Craig Churchill asserted that microinsurance currently provides coverage to 500 million people and that as many as 1 billion may be covered by 2020. The previous day, Jan. 29, the International Finance Corporation (IFC), a member of the World Bank Group focused on private sector development, issued a joint release with MiCRO (Microinsurance Catastrophe Risk Organisation, Barbados) announcing that the two organizations had embarked on a $1.96 million project to help thousands of low-income micro entrepreneurs in Haiti protect their livelihoods against weather-related risks and natural disasters.
“The expansion of the sector is being facilitated by the emergence of alternative distribution channels and public-private partnerships, the adoption of technological innovations as well as an increased awareness amongst insurance companies of the business case for microinsurance,” comments Eugenio Velasques of Brazilian insurer Bradesco Seguros e PrevidÍncia, quoted in the Microinsurance Network's statement.
If the Microinsurance Network's Churchill is right about 500 current insureds and 1 billion within the decade, then this could represent a significant opportunity not only for insurers seeking emerging markets, but for the industry to foster virtuous economic cycle that fosters increasing wealth through securing property. Much will depend on whether those covered are genuine policyholders or beneficiaries of some kind of charity or subsidy.
Everybody laments poverty but microinsurance is one of the few things prosperous people may be able to do to effectively combat it. Charity, which flows in after incidents such as Haiti's 2010 earthquake, speaks well of intentions but rarely produces enduring improvements. Investment, on the other hand, has far greater potential to have long-term results. In poor countries, industrious people are hampered from accumulating wealth because they lack the means to protect their assets against risk. Micro lending and microinsurance could, at least theoretically, provide both a risk-spreading mechanism to address common hazards, such as weather events, as well as financial institutions to protect their accumulated capital.
The challenge is to make microinsurance, and microfinance in general, a profitable enterprise. Some Third-World observers have decried the very idea as exploitation, but their position is wrong, both morally and practically. Ultimately the question is a practical one: can investment capital help to make poor people become more prosperous. That's the only question worth asking. Otherwise we risk keeping some people impoverished in order to avoid others growing more prosperous. But opponents are morally wrong too. Charity creates a benefactor/dependent relationship; trade enables autonomous moral equals to act for mutual benefit.
[To read about how MiCRO operates in Haiti, see MiCRO Demonstrates Viability of Parametric Underwriting for Microinsurance Coverage.]
If microinsurance can be made profitable, it will draw more capital to places that previously couldn't expect such investment. People able to secure small amounts of wealth can build more wealth. Small enterprises that are not knocked back by small shocks can become larger enterprises, and accumulated local capital can also be invested with less risk. Greater wealth can also help to further diminish risk through measures such as building codes and civil engineering projects. It was risk mitigation mechanisms — such as insurance and limited liability incorporation — enabled the First World in the first place; they have the potential do the same for the Third World.
The concern that remains in some markets is how much microinsurance represents a profitable business and how much it represents a charitable enterprise. In Haiti, it still seems to be more the latter than the former: IFC’s $1.96 million project with MiCRO includes a $1.7 million performance-based grant and $260,000 in technical assistance from the Global Index Insurance Facility (GIIF, another World Bank entity).
Sometimes one has to invest in the possibility of investment, and maybe that's the case in Haiti and other emerging markets. But a virtuous economic cycle capable of transforming poor communities into prosperous ones will require the kinds of capital osmosis created by profitable investment.