Challenges for Technology in the Microinsurance Sector
The use of new technology is critical for the microinsurance sector, but without reliable data or actuarial capacity, it will be a struggle to design sustainable products.
We live in a world dependent upon technology, we use it every day, at home, in our jobs, it touches everything we do, but rarely do we consider the process and decisions that have gone on behind the scenes to deliver that technology into our lives.
When implemented well, technology can be a powerful enabler. It can lower the cost and broaden the audience of almost anything it is applied to, however when implemented poorly, it can appear to hinder even the simplest of processes.
Both these scenarios are very familiar in the insurance sector, I’m sure anyone who has worked in the industry will have experienced both and be able to share examples of technology that benefits them in the workplace, and technology that makes their life really hard work!
There are many reasons why technology may perform poorly, but the established insurance markets have the resources, both in people power and in finances, to absorb the cost when things don’t work as effectively as perhaps they should. However, in emerging markets these luxuries don’t exist, so if technology is implemented that isn’t effective in delivering the benefits it is intended to, the negative impact can be devastating for an organisation.
Microinsurance is particularly sensitive to these kinds of pressures. Because its purpose is to provide a financial safety net to the poorest communities around the world, premiums have to be priced at an extremely low, affordable level. Priced a fraction too high and it becomes unaffordable, a fraction too low and you compromise the integrity of your loss reserves. To complicate matters further, you need high volume take up so the very small margins being made on each policy can lead to profit for the insurer.
For any organisation selling microinsurance products there is a really fine line between success and failure. Technology is a vital tool in helping achieve the right balance, but there are many challenges that need to be considered.
In established insurance markets, reliable networks to help distribute policies and communicate with clients, agents and partners are a given, with high speed internet connectivity being widely available in both wired and wireless forms.
In emerging markets network infrastructures for the internet are simply not well enough established to be either reliable or widely available, and whilst most organisations have websites and email, their IT systems are rarely web enabled.
The challenge is to find alternative routes to reach the customer, and technology can offer answers. For example mobile phone adoption is high throughout Africa, even in the poorest communities, so mobile networks have provided a really effective way to access a large microinsurance audience.
For most organisations the budgets for implementing technological solutions are a reflection of the volume of business they transact. In emerging economies this is much smaller than in established markets; the sorts of licence fees and consultancy fees that the major technology companies charge are simple out of reach of most organisations.
This does however lead to opportunity, the challenge of finding alternative models for effective technology and software development and adoption has led to interesting alternatives. Open source and community driven projects are a good example of this, where groups of insurers can take ownership of software and control its future roadmap. At OpenUnderwriter we have used collaborative open source models with great success, recently working with the Ghana Insurers Association (GIA) to set up a national actuarial system.
Data, Analytics & Resources
In new and emerging markets not only is there a lack of historic risk data to help in the development of pricing models, but the actuarial resources (both tools and experts) required to model and analyse the data are not in place either.
This is a prime example where technology on its own, however good, is not enough. Good data, good technology, good users – these are all part of the same package, without one element, the results are going to be seriously compromised. Without data or actuarial capacity, it will be a real struggle to design sustainable microinsurance products. The industry not only needs to utilise new technology, they also need to develop new skillsets.
Often decisions on technology are taken with very little detailed consideration for either the issue being tackled, or the users involved. For example, senior members of an organisation sometimes choose a solution because there is pressure to make a decision quickly, or because there is a business relationship in place already. Sometimes the decision is made to utilise software that is already in place, even if it is not a perfect fit.
Whilst there may be some very compelling arguments in favour of these kinds of business decision, they can often end up costing the organisation more in the long term, not only financially, but also in time and resources. For microinsurance where optimum performance of a product is so important, politically motivated decisions, rather than product focused decisions can be the difference between success and failure.
Industry collaboration is key to the viability of some technologies, sometimes for financing, but often for the collective intellect. From managing and contributing to national risk data repositories, through to harnessing global technology innovations such as satellite imaging (monitoring weather, livestock etc.), collaborative technologies can bring many benefits. However, effective collaboration does require a level of coordination and industry leadership that many emerging markets are only just beginning to develop.
With all the different technological possibilities, it is important to remember that the basics must be in place first. Areas such as actuarial developed pricing models and efficient policy and claims management are so important to get right, ultimately the success of any microinsurance product is driven by a combination of technology, people and process. Finding the right balance is vital because technology provides little benefit on its own.
About the Author
Matthew is a founder of OpenUnderwriter and has over 20 years’ experience working in the Insurance sector. He has extensive experience in delivering complex solutions in both general and commercial lines for Lloyds and London markets working with companies such as Talbot Underwriter, Brit and Catlin. Matthew has been at the forefront of the design and overall direction of the OpenUnderwriter suite of products. Matthew is also an active member of the microinsurance community and has been involved in a number of major projects in developing countries across the world.