In the late 1800s, agents in the U.S.representing Metropolitan Life Insurance Co. traveled door to dooreach week collecting industrial life insurance premiums from poorworkers. Today, in the world's developing countries, insurers arecollecting life and property insurance premiums from the workingpoor directly through a country's utility providers or a worker'scell phone.

Although the basic concept is the same—providing low premium,low coverage protection for the working poor—commercial insurersare banking on the growth of developing countries to justify theirinvestments in microinsurance.

Related: Read “Microinsurance in EvolutionaryStage.”

“In emerging markets, people are just getting above the povertyline and trying to stay there,” said Marik Brockman, partner withPwC's Diamond Advisory Services. “Microinsurance is intended to bea safety net preventing one incident—death, disability, naturaldisaster, severe weather–from knocking them back down below thepoverty line.”

Insurers, recognizing that today's working poor are tomorrow'smiddle class, see microinsurance as a logical way to get a footholdin the world's emerging markets. A 2011 study by the Microinsurance Network polled the top 50commercial insurance companies from the Forbes “Global 2000Insurance” list. Thirty-three of the 55 targeted companies wereinvolved with microinsurance, with most citing access to newmarkets as the main reason, guided by financial profit expectationsand brand concerns.

The survey also found:

• Respondents provided coverage for more than 27 million lives in2010, about 20 percent of the currently served low-income insurancemarket
• India, China, Brazil and South Africa are top markets formicroinsurance
• The most common coverages are life, endowment products,accident and credit insurance
• Most respondents collaborate with local partners for productdevelopment and distribution
• Respondents note benefits in both increased profits and brandrecognition, despite the challenges of high client acquisitioncosts and lack of demand
• Most respondents anticipate microinsurance business to grow bymore than 100 percent during the next 3 years.

The roots of microinsurance began in the late 1940s, whencountries—such as India—began claiming independence. The firstproducts were basic health and term life policies. As more globalcarriers became involved, products like agricultural and livestockinsurance, credit life insurance and a form of small businessinsurance emerged.

Today, microinsurance and microfinance go hand in hand, bothfacilitated by technological advances that streamline processes andaccessibility.

An example: Swiss Re, through its Microinsurance CatastropheRisk Organization (MiCRO) platform, delivers hurricane, extremerain, earthquake and cholera insurance to the borrowers of Fonkoze,the largest microfinance institution in Haiti. The organizationserves more than 58,000 loan clients and 255,000 savers, most ofthem rural.

Related: Read “Isaac Triggers MicroinsurancePay-Out.”

Building a developing country's insurance market from the groundup is a no-brainer for insurers seeking growth beyond the stagnantmarkets of the industrialized West, said Andrea Keenan, vicepresident of research and ratings criteria for A.M. Best. Comparedto the U.S. and the European Union—currently plagued with defaults,low interest rates and wobbly economies—“these ­countries don'tlook that risky anymore,” she said.

 Global brokerages like Marsh & McLennan, Willisand Guy Carpenter have found innovative ways to reach into thisgrowing marketplace. Willis Brazil is selling personal accidentfuneral assistance, crime victim assistance and sweepstakesinsurance products underwritten by Generali through text messaging(SMS).

Micro versus Mini

A Swiss Restudy finds that the microinsurance market has the potential ofcovering 4 billion of the world's working poor (defined asmaking less than $1.25 a day). A study from the InternationalLabour Organization and Munich Re states that as many as 500 million people worldwide are microinsured, afigure that Brockman expects to grow by double digits during thenext 5 years. However, the market will continue to shift as theworking poor advance economically—making them eligible for moretraditional insurance.

Keenan agrees that the market will rapidly evolve. “In 5 years,we will see a metamorphosis. Small policy microinsurance will stayas it is and reach more people, but a certain number of currentpolicies will move upmarket. On the continuum of policies, fromtraditional commercial and personal to microinsurance, there's agap at the level of lower middle class. These people are toowealthy for microinsurance but not wealthy enough to be wellinsured.”

For this gray area, there's “mini insurance,” which helps theworld's lower economic classes (those making between $1.25 and $4 aday) by insuring their modest homes and appliances, Brockman said.In Latin America and Africa, global insurers write this coverageand collect premiums through the state-run electric companies, hesaid.

Making it Work

Scale and retention help turn a profit in microinsurance, andcarriers need a streamlined business model that ties distributionto a strong local presence. Insurers and brokers can do thisthrough affinity group sales, such as through a churchorganization, which is written as a single risk by an insurer withthe cost of distribution handled by the group it comes out of,Keenan said.

Microinsurers find customers where money is exchanged. Dependingon the country, this includes banks, small retailers, and placesthat cell lottery tickets and cell phones.

Related: Read “Microinsurance: Small Price, BigGrowth.”

Mobile phones are ubiquitous in Africa, even among the poorestpoor, Brockman said. “Millions of people in Africa have bought lifeinsurance through their cell phones and pay their premiums throughtheir mobile phone bill,” he said. “It's a smart way for a growingindustry to penetrate growing nations. Some African countries don'thave banking systems yet, so financial services are distributedthrough small retailers and through cell phones, because these arethe only methods people trust. Phones are the payment system forthe country.”

Carriers involved in microinsurance view the market as along-term strategy. Half of the respondents in the MicroinsuranceNetwork survey believe microinsurance is or will be profitable.Others are motivated by corporate social responsibility and imageand/or brand recognition.

Most participants recognize that investment in microinsurancewill pay dividends in the long run. “If microinsurance does itsjob, the kids of today's policyholders will have a nice shot at afuture, which will lead to a growing middle class,” Brockman said.“Insurance is a staple of getting an economy up the maturitycurve.”