Taking a macro view of microinsurance

The earthquake in Haiti has called attention to the role that micro-finance can play in developing countries, especially following a catastrophe. The largest microinsurer in Haiti was in a position to respond more quickly than many traditional financial entities, a story reported in Newsweek last month:

Hollywood couldn’t have done it better. Late in the afternoon on Jan. 22, an armored car packed with $2 million in cash rolled out of J.P. Morgan Chase headquarters in downtown Miami, headed to the Homestead Air Force Base. Thirty-four bricks of bank notes packed into ordinary office supply boxes were loaded onto a C-17 transport plane redeployed from Langley, Va., and dispatched to Haiti, lighting up switchboards at the United Nations, the U.S. State Department, the Federal Reserve, and military rescue bases in Port-au-Prince.

Before dawn the next day, the stash was on a helicopter bound for 34 branches of microlender Fonkoze. While Port-au-Prince’s nine commercial banks were in a shambles and Western Union was paralyzed, half of Fonkoze’s 42 agencies were up and running in four days, and all but two of the rest within a week. The amounts were trifling: no more than a few dollars per client. But for tens of thousands of desperate Haitians, the nimble infusion of cash amid the chaos and ruin literally meant survival. For the legions of aid bureaucrats, charities, civic groups, and emergency organizations struggling to get a grip on the Western hemisphere’s worst natural disaster in memory, Fonkoze’s nationwide client base of 200,000 depositors (50,000 of whom are also borrowers) was a ready-made lifeline. Could microcredit be the new Red Cross?

As the Newsweek coverage indicates, this is not the first time microinsurance has played a role in responding to a catastrophe:

In 1998, when Hurricane Mitch ravaged Nicaragua and Honduras, shuttering banks and destroying roads and bridges, microlender Fundación León 2000 stepped into the breach, putting its experience and vast rural customer network at the service of relief agencies. “Microfinance institutions were the only ones able to communicate,” says Alberto Solano, the Grameen Foundation’s regional CEO for the Americas.

MFIs swung into action again after the Asian tsunami in late 2004. Even as they buried the 200,000 dead and cared for the injured, rescue crews were faced with tens of thousands left homeless and desolate across Indonesia, India, Sri Lanka, and Thailand. For that, they needed not just cash but an organization structured to parse the needs at ground level and get money to scattered clients. Enter microcredit experts like Grameen, which helped raise disaster loans and channel the credit to stricken families through local microlenders.

While disaster-relief efforts are most likely to garner headlines, microinsurance is unique for its adaptivity. Consider these developments, as described in the Economist:

Some developing countries, whose systems are too young to have developed bad institutional habits, are jumping ahead. Hospital chains like India’s Apollo Group, which lures many Western medical tourists with cheap yet modern treatment, offers its own insurance schemes. Some African firms are miles ahead in the use of text messaging, financial incentives and other clever tools, for instance, to encourage patients to take AIDS drugs properly.

The growth of private health insurance in Kenya began to force hospitals to improve; neighbouring countries without private insurers were less lucky. In Rwanda a novel hybrid of non-profit insurance co-operatives and government reinsurance has greatly expanded health cover for the poor. Leapfrog Investments, a for-profit financial group, sees such potential in micro-insurance for the poor that it is creating a $100m fund to invest in private insurers.

There are also ways microinsurance can help fund expensive pharmaceutical treatments, as reported in Business Insurance:

But Roche is quietly working on a project with insurers and reinsurers to use microinsurance to expand access to expensive cancer treatments in emerging nations, said Catherine Steele, head of international communications and public policy at Roche. “We saw an opportunity for insurers to provide affordable cover for the reimbursement of the costs of cancer treatment,” she said.

Call it insurance in small doses.

Cynics will say it is natural that Roche would back an insurance program that encourages sales of its product, but Ms. Steele said the plan being discussed would “provide access to all cancer medicines,” not just Roche products.

A January report, “Insurance in Developing Countries: Exploring Opportunities in Microinsurance,” by Lloyd’s of London said commercial insurers would be wise to participate in the microinsurance market.

Besides profits, the report said microinsurance can provide insurers with larger, more diversified risk pools, “benefits to reputation, and market intelligence and innovation that can be applied to other business activities.”

Zurich Financial Services Ltd. is one insurer that has seen the upside of writing small policies. Its Z Zurich Foundation this year contributed 3 million Swiss francs ($2.8 million) to the International Labor Organization’s Microinsurance Innovation Facility founded in 2008 with a grant from the Bill & Melinda Gates Foundation. It works with private-sector companies to implement microinsurance projects to serve low-income populations.

Zurich CEO Martin Senn said not only is such an approach good for the bottom line, “it is important to underpin our commitment to corporate responsibility and actively support the development of better insurance services for the less fortunate.”

The diversity in how microinsurance is used–from expanding access to healthcare to insuring African farmers–also calls attention to a central question: What’s required to make effective micro-finance products more prevalent?

This paper by Lisa Morgan and John Meerschaert, which was prepared for this week’s meeting of the International Congress of Actuaries, attempts to knock down one barrier to entry by establishing a template for setting up effective pricing for healthcare microinsurance in situations where data is not readily availabile–which is so often the case in developing countries.