Shifting the focus to micro-insurance

By Kazim Alam, The Express Tribune

KARACHI: Speaking in a passionate banker-to-the-poor style at a roundtable conference on micro-insurance development organised by the Securities and Exchange Commission of Pakistan (SECP) on Tuesday, Tameer Bank President Nadeem Hussain called for a 180-degree shift in the basic business model of insurance companies if they wished to expand into the micro-insurance sector.

Drawing parallels from the branchless microfinance banking model, he urged insurance companies to gradually move away from the agent-based, brick-and-mortar approach they have grown accustomed to in Pakistan.

According to the International Association of Insurance Supervisors, micro-insurance is defined as insurance accessed by low-income people, provided by a variety of institutions, run in accordance with generally accepted insurance principles, and funded by premiums.

Prepared jointly by the SECP and the World Bank, a report titled “Micro-insurance in Pakistan: A Diagnostic Study on Demand and Supply” was also released on the occasion. The report put the current market size for life micro-insurance at 3.7 million. The potential number of policies is estimated in the order of 31.5 million. For health micro-insurance, the report says, the potential market will be similar to the life micro-insurance market of 31.5 million policies.

Micro-insurance supply

A typical distributor for micro-insurance in Pakistan is a micro-finance provider (MFP), or, to a lesser extent, a non-governmental organisation working with low-income households. Out of a total of 28 MFPs in the country, only 17 offer micro-insurance and currently have 2.4 million policyholders with a sum insured of Rs28.2 million.

There are 17 micro-insurance products – eight in health and 13 in life – that are currently offered by MFPs in Pakistan.

The most common micro-insurance product in the country is credit life insurance, which is typically designed to cover the risk of a loan default in case of the borrower’s death, with little or no additional benefits to the client’s family. The number of credit life micro-insurance policyholders in Pakistan is 1.7 million.

Enhancing insurance penetration

Speaking to The Express Tribune, SECP Commissioner (Insurance) Mohammed Asif Arif said the regulatory body was soon going to launch a campaign to increase insurance penetration by 50% in the next three years. Currently, insurance premiums in the country are only 0.8% of the gross domestic product (GDP). “We are hopeful that the figure can go up to 1.2% of GDP in three years.”

Weddings

Interestingly, the SECP and WB report says that marriage, education and childbirth have the highest cost impact, with a wedding costing 18 months of income on average.

The expense over a wedding ranges between Rs30,000 and Rs400,000. This is significantly high when seen in the context of a typical micro-insurance client, who is either illiterate or has up to secondary education with an income ranging from Rs5,000 to Rs25,000 a month.

It is the highest expense in financial terms, even though it is ranked lower in terms of stress because of its predictable nature. However, in some rural communities, weddings are far less expensive merely because they have agreed collectively to spend less on such occasions.

Funerals

In almost 95% cases, the report reveals, a family is financially unprepared for a death. Hence, it is the “most unique stressor” because the household is dealing with the loss of a loved one in addition to bearing the financial burden of a burial.

It is an expensive event, as the mourning period can go up to 40 days with family and relatives staying at the house of the deceased for the entire period. Expenses in the event of death range between Rs5,000 and Rs100,000.

Published in The Express Tribune, October 17, 2012.

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