Long before our modern insurance industry was formed, society used fundamental concepts of risk pooling and risk spreading to harness economic activity for the good of society. More than 3000 years ago, merchants understood that by splitting their goods across several caravans, their loss exposure per event declined substantially, and when loss did occur, it was borne by a group of merchants rather than any single trader. They could predict, bear, and plan for losses far more easily. Babylonians developed an even more elaborate system whereby merchants would pay lenders an additional fee to guarantee cancelation of the loans when shipments were stolen. Throughout the ages, societies have used collective contributions to support individuals who experienced loss.

Insurance organizations as we know them today arose from the aftermath of the Great London fire of 1666. The combined influence of readily available insurance with expansion of industrialization has been a driver for much of the global economic development experienced since that time. Without insurance, few would be able to own homes, start businesses, or leave inheritances. The necessity of insurance for economic development still holds true, and is a reason to hope that efforts to extend insurance throughout emerging economies will yield significant positive results.

The creation of Grameen Bank by Muhammad Yunus, for example, has demonstrated the power of micro-lending, and by extension, individual security. In some of the most impoverished parts of the world, that power has produced expanded economic development and caught the attention of many individuals and organizations.

The International Insurance Society (IIS) is one such organization. During the 2009 seminar in Amman, Jordan, for example, Chairman Norman Sorenson and other prominent IIS members met with King Abdullah II, who indicated keen interest in expanding the insurance marketplace throughout Jordan as well as the Middle East generally. The seminar further featured a number of sessions on the use of Takaful insurance to meet the needs of Islamic societies. Takaful insurance is not by definition micro-insurance – it was introduced as an alternative to commercial insurance companies whose principles violate Sharia law --  yet the two often are connected. Nelson Kuria, managing director of the Cooperative Insurance Company of Kenya, Ltd., for instance, spoke at the 2007 IIS seminar in Berlin about the development of (micro) insurance in Kenya. Because of the large Islamic population in Kenya, some development efforts have included the creation of Takaful programs. The IIS continues to highlight the importance of insurance for emerging economies; micro-insurance is one of the themes of the 2012 Rio seminar and we are partners in the United Nation’s campaign to launch the Principles for Sustainable Insurance.

Despite the interest, enthusiasm, and need for insurance to bolster developing economies, challenges remain significant in countries where even the concept of pooling risk is little understood. A number of researchers have investigated methods to teach people to think about risk and risk pooling, and they have identified some potential solutions. Simple games of chance appear to be useful but their significance may pall when compared with massive hunger and need.

Even where people understand the concepts of risk pooling, other complications exist. For example, services associated with an underlying need such as health care have been limited, and the benefits insurance to the populace are unclear. Furthermore, insurance itself often is provided by outsiders who may lack awareness of local custom and encounter substantial distrust. Creativity, flexibility, and patience are required to establish successful insurance mechanisms in any culture; this holds doubly true for entirely new opportunities that are created within emerging economies.

Beyond cultural differences that can hinder insurance expansion, underlying economic and regulatory issues may require attention before major advancement can be achieved. By definition, an emerging economy is one in which the majority of the population lives on incredibly modest incomes. Insurers, therefore, need to identify cost-efficient methods of product delivery and administration. Holding the 2012 IIS Seminar in Rio and participating in the United Nations Fund for International Partnerships (UNFIP) provide two outstanding opportunities for us to develop relationships and learn from those who are making headway. Brazil is one such example, as it is about to announce changes to its regulatory structure which will enhance the opportunity to deliver insurance in low-income segments of the population.

In recent years, several highly innovative initiatives offer potential guidance for the creation of strong insurance markets in emerging economies. A specific example generates from the successful KilimoSalama program in Kenya, offered through a partnership involving the Syngenta Foundation for Sustainable Agriculture, UAP Insurance, and Safaricom (a telecom operator in Africa). When farmers purchase fortified seed from participating dealers, both farmers and dealers pay half the cost of a policy to protect against losses due to extreme weather conditions of drought or excess rain. The fortified seed is intended as a risk mitigation effort. Without the dealer contribution, the farmers would be more likely to purchase cheaper seeds and experience far lower crop yields.

Each seed bag includes a bar code to identify it and the buyer. The code is scanned by cell phones supplied to the dealers by Safaricom, and the policy immediately registered with UAP. Losses are determined by weather data tracked through 30 recently renovated solar-panel-driven weather stations that send data to Safaricom’s 3G network. Advanced technology may be a requirement for successful implementation of micro-insurance products. Otherwise, administrative costs may lead to excessively large premiums relative to benefits received, a common cause of adverse selection. Insurance payments are made in the form of seeds, fertilizers, and other agricultural inputs rather than in currency, reducing moral hazard by limiting the benefit of failed crops.

The most common form of micro-insurance is credit life as micro-lenders around the globe add life insurance products to their loans. With the lending infrastructure already in place, administrative costs for the life insurance policies are minimal. The most difficult-to-insurance risk, and the one with the greatest demand, is health insurance. An innovative program also in Africa attempted to design a health insurance program whereby the “premium” was paid through participation in preventive care. The program demonstrated improved health outcomes, yet failed due to various financial and administrative issues. My student, Yi (Kitty) Yao, will present her work at the Rio meeting regarding a Pakistan program that also failed, likely due to astronomically high loss ratios. The challenges involving micro health insurance remain significant and deserve attention from academics, industry members, and policy makers.

Common to all micro-insurance initiatives is the problem of curbing adverse selection by limiting administrative costs so that the premium is not too large relative to the benefit. As previously noted, technological advances likely will drive success in sales, underwriting, and claims administration. Identifying opportunities for risk mitigation offers further potential for successful expansion of insurance markets in emerging economies. Insurance is, always has been, and hopefully always will be a strong motivator for safe behavior. Loss mitigation further generates greater opportunities for insurance markets.

As we learn more about how to introduce successful insurance programs in emerging economies, we may well develop ideas for improving insurance markets in developed economies. For example, Grameen Bank in Queens has initiated a program through which borrowers maintain their borrowing status by participating in financial literacy programs. Similar types of initiatives by insurers could enhance the market while extending financial security to a much wider population. As we review insurance practice and regulation that can assist creation of micro-insurance opportunities, we likely also will identify improvements for regulation in developed economies.

** Thank you to Lauren Tennant for excellent input on this article.

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