Microinsurance programs have overcome some incredible challenges. They’ve found ways to distribute an intangible product — one for which a customer may pay regularly and seem to receive nothing in return — to local markets with limited financial education and experience. And those schemes have developed the financing relationships necessary to help launch and maintain operations, at least for a certain amount of time.
But as microinsurance grows and matures around the world, new difficulties can arise, particularly regarding capital management. Whether a program needs to source additional growth capital or provide an exit strategy for donor agencies, risk transfer can quickly become a priority. Moving risk off a scheme’s balance sheet can free up capacity and increase strategic flexibility.
With few exceptions (such as the World Bank initiative in Haiti), reinsurance has been difficult for the microinsurance community to access. Short track records, insufficient historical loss data, small risk transfer amounts, and the absence of an independent third-party loss-reporting agency have contributed to the difficulty of accessing traditional risk transfer markets.
However, global reinsurance trends may signal a future change in perspectives on microinsurance risk transfer. For most regions and lines of business around the world, a significant influx of capital into the reinsurance industry has led to pressure on rates, which has impeded traditional growth opportunities. Further, the same capital market capacity that has taken an interest in property catastrophe risk may see an opportunity in direct participation in microinsurance risk transfer, at least as a diversifying peril.
For microinsurance schemes to access the capital to execute longer-term strategies, little needs to change. The development of an independently managed industrywide loss aggregation service — to estimate the size of catastrophe loss events — is the necessary first step. Partnering with an organization experienced in this process can bring the reliability and credibility needed to help third-party capital providers feel comfortable with what would be a protection facility’s triggering mechanism.
So, with an independent loss aggregation service in place, would there still be a market for transferred microinsurance risk?
This is new territory, but industry demand for new forms of risk certainly signals potential. And the emergence of new forms of capital market risk transfer, such as “cat bond lite,” should help keep frictional costs to a minimum. Risk bearers, in general, have used the cat bond lite structure — a form of securitized reinsurance with a less onerous regulatory regime — to securitize reinsurance risk with limits as low as $7 million, according to public reports. As a result, the cat bond lite structure is well positioned to support the needs of microinsurance schemes in optimizing their capital — and supporting their core missions.
Risk transfer and capital management can play a fundamental role in turning the immense effort of launching a microinsurance program into a self-sustaining entity with ongoing positive impact. Alternative risk transfer could help fill a gap that currently exists in this market, providing the support and strategic flexibility necessary to help a local economy develop.