Demand is determined by many things: personal characteristics, understanding of insurance, trust, value proposition and perception of the product, ability to pay, use of other risk-coping mechanisms, and behavioural factors. A review of studies revealed trust, liquidity constraints, quality of the client value proposition and behavioural constraints as the most important determinants of demand for first sales (see Table 1). Similarly, the data on renewals, though limited, suggests that increasing understanding, improving the client value proposition and overcoming behavioural constraints could significantly boost renewals and lower client acquisition costs.
So how can a financial institution stimulate demand and increase uptake on its insurance product? Based on studies[1] and the experiences of over 60 innovation partners of the ILO’s Impact Insurance Facility, we offer five suggestions.
1. Leverage savings to increase uptake
Faced with the tough balance between ensuring day-to-day liquidity and investing in the future, there is a preference for low-income people to save for investment and rely heavily on informal borrowing for liquidity and emergencies. By taking small loans from friends and family or taking goods on credit from local shops, people navigate through some small-scale risks. A better balance between investment and risk-management would benefit low-income households, and would allow insurers to tap into part of the savings to collect premiums. Money can be saved throughout the year when it is available, and then used to pay an insurance premium when it is due. In Kenya, Safaricom, Britam and Changamka have eased clients’ liquidity constraints by offering a savings-linked composite health product using mobile technology to facilitate premium collection. When clients save half of the premium, the insurance kicks in with half of the benefits. 40% of clients used this option successfully.
2. Start simple but consider covering multiple risks
Low-income households often face a very large range of risks (Figure 1 outlines the many moderate probability and moderate severity risks faced by households in Kenya, Zollman 2015).
An insurance product that covers a single risk (e.g. fire) may not be suitable or attractive. Low-income clients need more flexible risk-management solutions. Composite products that cover several critical risks have the potential to improve the ability of low-income households to manage risk. However, this approach must only be pursued when the insurance market is developed enough for clients to understand benefits and insurers have the experience and capacity to deliver quality. For instance, after offering single-risk products for almost a decade, in 2001 VimoSEWA started to offer a composite health, life, accident and asset product. This composite product was unbundled in 2010 because of difficulties in managing the mix of claims from different types of cover. Five other Facility partners discontinued their composite products in India, Kenya and Brazil because they struggled to explain products to the clients, achieve scale and administer the product, as well as faced partnership challenges between life and non-life sister companies[1].
3. Tread carefully with product bundling
Bundling insurance with other financial products could increase the demand for both products if they are seen as complementary solutions. Evidence from MicroEnsure in Ghana shows that bundling savings and insurance can increase insurance penetration and stimulate savings. Depositors with a minimum balance of USD 60 each month were entitled to free life insurance with benefits of up to USD 180. Five months after the launch, deposits in the bank increased by 19% and deposits from clients with balances below USD 60 increased by 207%. This suggests that a change in savings behaviour as a result of the free insurance cover.
Nevertheless, making products mandatory through product bundling does not ensure scale. SKS, India’s largest MFI, found that clients who were offered a loan product bundled with health insurance were 23% less likely to renew their loan within one year. Despite good benefits, a new study by Harvard and MIT researchers found that many clients prefer to give up loans rather than pay higher interest rates for insurance. Though the studied households faced frequent, serious health shocks, demand was low as very few people were able to claim the insurance benefit, largely because clients were never provided with the documents and cards needed to do so, underscoring yet again, the significance of consumer education[2].
4. Focus on user experience
A positive experience of claims drives satisfaction and renewals. This is evident in the experiences of Fonkoze (Haiti)[3] and Microfund for Women (Jordan)[4], who experienced steady renewal rates after the introduction of bundled insurance. In both cases, the MFIs paid special attention to claim procedures[5], investing in simplification, standardisation, decentralisation and efficiency, such as establishing procedures allowing the MFI to quickly authorise small claims on behalf of the insurer.
Failure to ensure great experience has implications for the insurer, distributor and, most importantly, clients. In the case of SKS, the majority of clients who dropped out lost access to microloans altogether, hurting their businesses and livelihoods.
It is harder for clients to test insurance since they may never file a claim. However, free insurance products from trusted brands such as mobile network operators[6] or savings banks are giving many clients a first taste of its potential benefits. Some providers go one step further to create an experience. Econet gave new clients one dollar to transfer to a friend or relative, in total giving away USD 100,000. This allowed clients to experiment with the service for free, gaining their trust and creating a buzz[7].
Providing value-added services, such as free health check-ups or SMS weather alerts provide a positive experience, even for those who never make a claim, hence can have a substantial effect on renewals.
5. Remove obstacles
Barriers to action greatly influence demand, even among people who are convinced about insurance. People are influenced, sometimes disproportionately, by seemingly inconsequential constraints, such as requiring clients to submit the enrollment form at the insurer’s office without knowing the location of the office. Researchers in Nicaragua found that when they allowed market vendors to enrol directly at their market stall, uptake was 30 percentage points higher. A study in China[8] revealed renewals were higher when clients had to opt-out, rather than stay in insurance. Such a default option, however, needs to be clearly communicated to clients, as an undesired renewal can easily lead to distrust in the scheme.
Demand is a complex problem, but an important one to crack. Practitioners need to understand the demand puzzle in their context, identify the most important determinants and design specific products, pricing, promotion and distribution strategies to best address the needs and appeal to their client base.
Co-written by Aparna Dalal and Michal Matul
Based on an article that appeared in the Microinsurance Network annual magazine, the State of Microinsurance 2015
[2] http://www.womensworldbanking.org/news/blog/unintended-secret-microinsurance-morocco/
[3] http://www.microinsurancefacility.org/projects/lessons/kore-w-catastrophe-insurance
[4] http://www.microinsurancefacility.org/projects/lessons/pioneering-womens-world-banking-caregiver-policy
[5] http://www.impactinsurance.org/emerging-insights/ei47 and http://www.impactinsurance.org/emerging-insights/ei60
[6] http://www.microinsurancefacility.org/publications/bn21
[7] http://www.impactinsurance.org/emerging-insights/ei94
[8] http://www.ilo.org/public/english/employment/mifacility/download/repaper8.pdf
