Microcredit can help the poor rise above poverty. Microinsurance can help them stay there. By providing protection against certain perils, microinsurance complements other financial and social services. Still, its development relies on significantly reducing operating expenses relative to premiums. A new ILO co-publication entitled "Protecting the poor: A microinsurance compendium" (Note 1) says new technologies may hold the key to boosting microinsurance as an effective poverty-reduction strategy.
GENEVA (ILO Online) – Because they often live in risky environments – in urban shanty towns with unsanitary conditions, in rural areas prone to droughts or floods – the poor are more vulnerable than the rest of the population to perils such as illness, accidental death and disability, theft or fire, agricultural losses, natural or manmade disasters. They are also the least able to cope with crisis when it occurs.
Although poor households often have informal ways of managing risks, these strategies generally provide insufficient protection. Before the household has a chance to recover from one crisis, they are often struck by another. Microinsurance builds on informal coping mechanisms while providing better benefits to a greater number of poor households.
To fulfil the potential of microinsurance in protecting the poor, it is necessary to develop an insurance culture among the low-income market and introduce products that meet their primary needs. Information technologies, including smart cards, barcode systems and the Internet could contribute significantly to expanded outreach, better products, cost cutting, and the sustainability of providers.
There are examples of automation improving the efficiency of microinsurance, not to mention enhancing customer service, strengthening management and training staff.
- In Uganda and Malawi, some insurance providers issue smartcards to poor policyholders to confirm that they are who they say they are, and can instantly provide information on their level of coverage and whether the premium has been paid;
- In the Philippines, insurers have minimized the transaction costs of collecting many small premiums by allowing people to pay via their mobile phones; and
- In India, a barcode system is being tested as a way of managing client information. The barcode stickers are especially useful for illiterate clients who can attach them onto pre-addressed envelopes to identify themselves.
IT works in the microinsurance business because of the information-processing nature of the sector. Even before the birth of the computer, large insurance companies drove the development of sorting, tabulating and calculating machines to improve efficiency. Today, these capabilities are available to small insurers as well. Microinsurers big and small must take advantage of ways of improving efficiency if they are to be honest stewards of microinsurance premiums.
There has been some concern among microinsurers over the cost of moving from manual processes to automated ones. But a manual approach doesn't establish a sustainable and scalable foundation for expansion as it doesn't provide the ability to optimize processes and build economies of scale. And an insurer unable to reach large numbers of policyholders places itself in a precarious position.
New technology architectures based on Internet and wireless communications can be a good growth catalyst for microinsurance. What's more, using open-source software would be an inexpensive way for microinsurers and grassroots organizations to benefit from technology. The ILO even provides free software that enables health microinsurance schemes to manage enrolment, memberships, premiums and claims, and to monitor the progress of 13 performance indicators on a monthly basis (Note 2).
Technology cannot overcome every obstacle that microinsurance operations face. However, it can help optimize the return on investment and bridge operational gaps by enabling the communications and cooperation of stakeholders around the world.
"Technology is not just the privilege of the insurers; today, customers too want to benefit from its use in product delivery. Even the low-income market has increasing access to technology, such as cell phones and the Internet. NT's not only enhance microfinance efficiency, reduce costs and lower premiums, but they also provide a way of extending outreach to the poor and introducing affordable products to meet their primary needs" concludes Craig Churchill, ILO expert on microinsurance.