Microinsurance is defined as the sale of simple, low-cost insurance products to low-income sectors of the population for segments such as health, life and property risks. Typically these customers may not be formally employed, nor have been previously insured. According to an April 2015 study by BSLatAm, a banking and insurance consultancy, Colombia is the third-largest microinsurance market in the region, with some 8m customers, out of a regional total of 47.3m. In terms of percentage, Mexico leads the ranking with 31.9% of existing microinsurance customers, followed by Brazil with 23% and Colombia with 17.1%.
On a regional basis, the BSLatAM report added that Colombia had low market penetration in microinsurance, with only 7.6% of potential customers having bought policies. The consultancy attributed this low penetration rate to three factors: a culture of low insurance awareness; insufficient marketing; and operational and risk-related issues linked to the nature of the products on offer. However, Federico Juan, director of market research at BSLatAm, told Bogotá-based daily La República that there is strong growth potential in Colombia, particularly among unbanked informal workers.
An important step for the microinsurance sector came in early 2015, when the government gave both banks and insurance companies permission to sell microinsurance policies through third-party distribution partners. Banks had already been offering basic products through partners such as retailers, pharmacies and supermarkets. In February 2015 BN americas reported that the Colombian Insurers Association (Federación de Aseguradores Colombianos, Fasecolda) welcomed the move. The association said it meant that low-income citizens and families living in rural and remote areas of the country would now have increased access to insurance coverage.
Fasecolda added that the types of microinsurance products to be sold would likely include personal, accident, unemployment, funerary, individual life and agricultural insurance. In late 2014 it was estimated that through distribution partnerships there were a total of 87,887 microinsurance points of sale.
Alejandra Díaz, a microinsurance specialist at Fasecolda, told La República that one of the most promising ways to expand penetration and grow the market is through prepaid mobile phones or a system under which minutes of airtime can be exchanged for cost-effective insurance products. She said, “Another opportunity is third-party agents who are well placed to serve the public in local stores or stationery shops, and who would function like a channel for the commercialisation of insurance.”
Shock Vs Prevention
According to Díaz, one of the problems facing the microinsurance sector in Colombia is that low-income families tend to react to losses in a short-term manner. She said a number of studies reveal that when faced with property losses caused by fire or earthquake, or the death of a main household provider, low-income families have a tendency to respond “with shock measures rather than protection measures”. These can include reducing spending on food, withdrawing children from school or drawing down savings. “This is where microinsurance has a key role to play, because it can minimise the negative impact that an unexpected event of this type can have on family finances,” said Díaz.
With El Niño weather events having a disruptive impact on Colombia in 2015/16 and expected to cause losses for low-income farmers, there has been interest in developing what are known as parametric microinsurance products. These do not simply cover pure loss, but instead pay out on the occurrence of a pre-defined triggering event, such as rainfall or wind speed levels, or earthquakes of a certain intensity. Provided the triggering event is well defined, claims then become a simpler process. However, this type of insurance is currently still in its infancy in Colombia.