1. Microinsurance Core concepts to structure microinsurance products Brandon Mathews World Bank Workshop Uganda 2 March 2009

2. Microinsurance © Zurich Financial Services 2 3/1/2009 Agenda of core product issues Incentives Utility for customers (demand) Utility for providers (supply) Technical Insurance & operational risks Partners and intermediaries Customer needs

3. Microinsurance © Zurich Financial Services 3 3/1/2009 Agenda of core product issues Incentives Utility for customers (demand) Utility for providers (supply) Technical Insurance & operational risks Partners and intermediaries Customer needs

4. Microinsurance © Zurich Financial Services 4 3/1/2009 Utility… insurance must be useful for those that use it (that have a claim). Ten people know there’s a risk event that they believe costs $30 and it will happen to one of them so ten buy insurance. For the one that claims, insurance must Correctly pay incurred losses. Pay in time to be useful. Pay in a way that is useful. Be in a useful amount. Make certain that the claims benefit suits customer requirements

5. Microinsurance © Zurich Financial Services 5 3/1/2009 … should be useful for those that don’t use it (don’t claim). Nine people bought the insurance but didn’t have a claim… but also no longer saved toward the $30 event. Insurance should allow: Release of savings Acceptance of ordinary risk. Good insurance changes the behavior of the insured.

6. Microinsurance © Zurich Financial Services 6 3/1/2009 … perhaps will be useful for those that don’t even buy it. Ten insurance buyers live in a community of twenty people. The $30 claim pays for services that otherwise aren’t available. Insurance allows services to form that eventually can also serve the uninsured.

7. Microinsurance © Zurich Financial Services 7 3/1/2009 Customer utility affects product design… Products that benefit the claimant directly and sufficiently are more valued and will drive sales over the medium term. Products that benefit non-claimants are more valued. Voluntary purchases are more likely to have proven their use Products that deliver services directly add utility. Funeral / burial insurance Medical services instead of reimbursement.

8. Microinsurance © Zurich Financial Services 8 3/1/2009 Agenda of core product issues Incentives Utility for customers (demand) Utility for providers (supply) Technical Insurance & operational risks Partners and intermediaries Customer needs

9. Microinsurance © Zurich Financial Services 9 3/1/2009 Providers should supply microinsurance out of self-interest. Insurance capital, opportunity, & other costs exist. Demand is marginally affected, at best, by profitability. Whether the premium in my example was $3.00, $2.90, or $3.10: Person whose claim was paid is better off People that didn’t claim assessed experience based on total price Formation of services for non-buyers is not affected Possible to justify with some other benefits: Employee moral – good to work for a company that is good. Innovation – disaggregating value-chain improves performance. Alignment with other market actors.

10. Microinsurance © Zurich Financial Services 10 3/1/2009 Provider utility impacts product design… Corporate responsibility is to try to make a profit in this space… not just CR on its own. To continuously lower the median income of customers requires profit.

11. Microinsurance © Zurich Financial Services 11 3/1/2009 Agenda of core product issues Incentives Utility for customers (demand) Utility for providers (supply) Technical Insurance & operational risks Partners and intermediaries Customer needs

12. Microinsurance © Zurich Financial Services 12 3/1/2009 Microinsurance products require that we modify in 3 basic dimensions Insurance Risk Operational Risk New partners Existing partners New Customers Existing Customers

13. Microinsurance © Zurich Financial Services 13 3/1/2009 Agenda of core product issues Incentives Utility for customers (demand) Utility for providers (supply) Technical Insurance & operational risks Partners and intermediaries Customer needs and situations

14. Microinsurance © Zurich Financial Services 14 3/1/2009 Direct expenses (operational risk) and commissions are knowable factors. Most customers Wealthy customers Micro customers Claims Direct Capital Comms

15. Microinsurance © Zurich Financial Services 15 3/1/2009 Innovate over time to gain profit and then to improve market position. 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

16. Microinsurance © Zurich Financial Services 16 3/1/2009 Product design must reduce or anticipate operational requirements. Pre-underwritten one-price-fits-all Make obvious who the product targets Female health insurance Specific item property Timing of cashflows should be priced Cash maybe collected any time during a month More frequent cancel/rewrite possible In-kind claims benefits reduces moral hazard Warranty Prosthesis vs payment Reducing operational risks often systemically benefits insurance risk.

17. Microinsurance © Zurich Financial Services 17 3/1/2009 Control and anticipate operational risk in each step of product rollout. Start with products that require the fewest changes from present: Sell through a known intermediary type Sell products with a low operational risk Progress to products that require organizational adaptation.

18. Microinsurance © Zurich Financial Services 18 3/1/2009 Do we need to reinvent the wheel? Credit: Q-Drum

19. Microinsurance © Zurich Financial Services 19 3/1/2009 Zurich programs have grown more ambitious over the years. Bolivia Credit Life -> Savings Linked -> Health -> Retail PA Bank -> Bank -> Bank -> Multiple channels Venezuela Credit Life -> Credit Auto -> Voluntary Pick Four Bank -> Bank -> Bank / Multiple Brazil Personal Accident -> Unemployment -> Small property Retailers -> Utilities

20. Microinsurance © Zurich Financial Services 20 3/1/2009 Zurich programs have grown more ambitious over the years. (2) China Personal Accident -> Critical Illness Agent -> Agent to group Indonesia Credit PA/Property -> Cattle Bank -> Bank South Africa Funeral/Property -> Credit life Agent -> Bank

21. Microinsurance © Zurich Financial Services 21 3/1/2009 Sequence products realistically for value and operational achievement. Customers value products which They know about They choose to purchase That deliver when it matters Insurance companies value products which Limit operational risk in implementation Create innovation value for other lines/segments Deliver profit

22. Microinsurance © Zurich Financial Services 22 3/1/2009 Thank you Brandon Mathews Zurich Financial Services brandon.mathews@zurich.com Tel: +41 (0)44 639 2000 www.zurich.com