Microinsurance and the insurance industry Brandon Mathews Washington DC 5 February 2013 Interamerican Development Bank

Rise of the middle class in LatAm Source: World Bank Economic Mobility and the Latin American Middle Class

Despite tremendous gains, Latin American households risk poverty % Middle Class 37.5% Vulnerable 30.5% Poor Est. probability of entering poverty during next 5 years Source:s World Bank Economic Mobility and the Latin American Middle Class & Stonestep estimates.

Lower income households carry high debt and low savings, esp in Brazil. Insurance penetration is low. Higher frequency, lower severity events – along with low frequency, high severity events – threaten lower income households. Insurance product and service requirements are different for these households but lessons about what sells do exist.

Products sold to low-income people are a large part of Brazils market. Source: FUNENSEG, CENFRI, CNSEG, Microinsurance in Brazil, Toward a strategy for Market Development

Theres room for innovation with the most common products. Source: FUNENSEG, CENFRI, CNSEG, Microinsurance in Brazil, Toward a strategy for Market Development

Profitable products and proven methods, why not more micro? Multidimensional challenge for insurers Insurance best practice makes action difficult Discomfort with foggy definitions Reputation risk/reward

Challenge in three dimensions, not just one. Insurance Risk Operational Risk New partners Existing partners New Customers Existing Customers

Operational risk is especially interesting to consider. 9 3/1/200 9 Most customers Wealthy customers Micro customers Claims Direct Capital Comms

10 3/1/200 9 ImmediateMid termOver time Higher ER Lower LR Acceptable CR Lower ER Higher LR Attractive CR through innovation Lower Rate Same ER Same LR Acceptable CR and increase market share Same Rate Same ER Higher LR Acceptable CR and increase penetration Innovate over time to gain profit and then to improve market position.

Profitable products and proven methods, why not more micro? Multidimensional challenge for insurers Insurance best practices make action difficult Discomfort with foggy definitions Reputation risk/reward

Current customers are best served by insurance best practice. Whereas microinsurance takes a customer view, insurance is managed by peril. Insurance is supervised and also controlled internally by peril. Comparative advantage encourages companies to organize by functional area – marketing, underwriting, sales, operations, etc – and it is rare to organize by customer. Increasingly insurers organize by distribution focus and Affinity is good news for growth of insurance sales. TBD on customer value.

Profitable products and proven methods, why not more micro? Multidimensional challenge for insurers Insurance best practices make action difficult Discomfort with foggy definitions Reputation risk/reward

The microinsurance definition is very open to interpretation. Insurance for low income people. Insurance can include Life, Health, P&C, Pension, as well as the social security systems of countries Low-income – is this the middle, vulnerable, poor, or is it all three? Insurance with some kind of moral imperative. How can we measure this? Does this mean the other insurance is bad? Microinsurance discussions can feel like an ethics lesson for insurance executives.

Profitable products and proven methods, why not more micro? Multidimensional challenge for insurers Insurance best practices make action difficult Discomfort with foggy definitions Reputation risk/reward

Microinsurance is understood differently from various perspectives. Microinsurance and Financial Inclusion spark interest from important stakeholders Regulators & Supervisors Own-company employees Media Existing customers & investors The innovation requirement predicts some number of failures...

Good news from the free market: specialist entrepreneurs are filling in. Administrator/brokers: Microensure & Paralife Private Equity Investors: Leapfrog & others Venture project development: Stonestep & Planet Finance

Good news from the free market (2): big industry is also stepping up. Marsh-led Microinsurance Innovation Facility Swiss Re & Allianz Microinsurance units Zurich Insurance appointment of Cassio dos Santos as Regional Chair Compartamos and others defining new strategies

Thank you