Providing insurance for the working poor in developing countries is expanding rapidly, although the market faces social and economic challenges.

Most often, policyholders are women such as an Indonesian seamstress who took out a loan to buy three sewing machines to start a business to make batik dresses to sell to locals and the occasional tourist.

Policyholders also include men, such as a Brazilian who wanted to buy cattle to haul a cart over rocky terrain so he could transport cargo from one town to another.

These two entrepreneurs are examples of the 75 million working poor who have obtained loans and greater economic security with the help of "microinsurance." That term encompasses a variety of special insurance products that are tailored to protect policyholders' jobs, lives, health and sometimes property from a variety of risks including sickness, accident, death and weather-related catastrophes.

Most of the global working poor (see box, page 10) make the equivalent of $2 a day or less, often as part of the informal economy and outside the reach of their countries' safety nets, if such nets exist, observers say.

The concept of microinsurance, which New York-based American International Group Inc. pioneered 10 years ago in Uganda, is now attracting other major insurers and reinsurers. They see an emerging market opportunity in meeting the needs of the working poor now, and if entrepreneurs increase their earnings and holdings, in the future, too.

'Win-win-win'

Reaping profits and market share, however, require sensitivity and flexibility to gauge the emerging consumers' wants and needs, observers say.

"It can be a win-win-win--for insurers, intermediaries and customers--but there has to be a significant effort in making sure products are designed for the market," said Michael J. McCord, president of MicroInsurance Centre L.L.C., an Appleton, Wis.-based consultant and research firm. It recently published a report on "The Landscape of Microinsurance in the World's 100 Poorest Countries."

Some reinsurers and insurers agree wholeheartedly.

"Munich Re sees significant growth potential in this field of business" in coming years, Stefan Mosel, the reinsurer's executive manager for its Southern Latin America unit, said in an e-mail. "Even with low sums insured, thousands of clients add up to an important accumulation and produce the need for reinsurance protection."

The German-based reinsurer is writing microinsurance business in Columbia and is interested in the potential for covering property in Latin America.

The Munich Re Foundation also has played an important independent role by cosponsoring annual conferences, including one in Cape Town, South Africa, last year and one planned for Mumbai, India, in November. The foundation also copublished a book last year, "Protecting the poor: A microinsurance compendium," with the International Labour Office in Geneva, Switzerland.

In addition, American International Underwriters Ltd., a unit of AIG, now sells microinsurance products to 2.25 million individuals in 12 countries, "with an expectation that this will exceed 10 million by year-end 2008," Len Battifarano, an AIU senior vp, said in an e-mail. Over the past 18 months, AIU embarked on a worldwide expansion and is exploring new opportunities in the Middle East, and in Asia and Latin America "where the demand is particularly high," he said.

AIG also gave a $1.5 million grant in April to the Washington-based Foundation for International Community Assistance Inc., a major microfinance organization. The grant supports developing products, institutional risk management programs and training financial educators.

Also, Allianz A.G. of Germany has been selling microinsurance products in India since 2003 and now has about 250,000 clients. Following the devastating 2004 tsunami, Allianz also began a pilot program to sell life and nonlife products in Indonesia, where it now has more than 20,000 clients, said Michael Anthony, a member of Allianz's Sustainable Strategy Team.

"Emerging markets imply an enormous economic potential," because 86% of the world's more than six billion people live there, according to the 2006 Cape Town conference report. "In 2003, they accounted for a mere 10% of worldwide nonlife premiums and only 11% of life premiums."

The numbers are impressive, but so is the challenge of understanding emerging consumers' needs and how to address them successfully.

"It is very important to understand that microinsurance requires a different mindset" to craft a successful distribution strategy, appropriate products and efficient processes, Mr. Mosel said.

Microinsurance is delivered through a variety of channels. The most typical is a partner-agent model that links an insurer with community-based or nongovernmental organizations, such as FINCA or the Cooperative for Assistance and Relief Everywhere Inc., that act as intermediaries by operating a microfinance unit, such as a village bank, that deals directly with the consumer. In Latin America, though, agents are more involved in delivering products, some insurers said.

Following Yunus

Many microinsurance programs start by providing mandatory credit life insurance for microloans, which have gained prominence since Bangladeshi banker Muhammad Yunus won the Nobel Prize last year for microlending.

The Indonesian seamstress who sought the sewing machine loan had microinsurance through Allianz to guarantee her loan of ,87 for a five-month period at a one-time cost of ,43. If she died during the loan period, her credit life insurance would pay off the loan and pay her heirs twice the loan amount, Mr. Anthony said.

While most microinsurance generally tends to grow out of credit, in South Africa it has grown out of funeral insurance that is purchased by an estimated 7% to 15% of the population.

As microinsurance programs develop, they usually expand coverages and develop appropriate local products.

Depending on the country, AIU offers a variety of coverages, including personal asset protection, and accident and health coverage that includes a variety of hospital-related coverages, accidental death and disability as well as repatriation of remains and burial, Mr. Battifarano said. "We also provide cattle insurance as well as cover for two-wheeled vehicles and farm tractors."

Allianz said in a statement that its microinsurance operation in India covers accident, household, fire, cattle, motor insurance and some life-related coverages. Microinsurance policies range from about 5,000 to 50,000 rupees.

Meanwhile, consumers elsewhere want different coverages. For example, parents in Ecuador want protection that covers their schoolchildren's expenses, observers say.

Developing efficient processes for marketing microinsurance and handling claims also can be challenging.

Marketers often must start by having to explain the benefits of insurance.

In some cases, "the market doesn't understand insurance, or has a negative attitude toward it," said Mr. McCord, a microinsurance expert whose previous work included the AIG and FINCA programs. In some countries, potential consumers are wary of insurance because they had been victimized by state-mandated auto insurance companies that did not pay injured pedestrians' third-party claims, he said.

All microinsurers emphasize the need to write policies in simple and clear language and to educate potential consumers about insurance. For example, AIU provides training and education on financial literacy. "We believe that this education is as important as the coverage we provide," Mr. Battifarano said.

Although AIG does not relax its underwriting standards, "we do provide for easier claims procedures," he said.

Marketing strategies

Particularly in a small village, for example, the first time someone with microinsurance coverage dies, Allianz considers it "extremely important" to have a claims-paying ceremony, which typically includes presentation of a check to the heirs, Mr. Anthony said.

Other marketing strategies include enrollment campaigns, testimonials, and raffles and lotteries.

For the concept to grow and develop, a book of microinsurance business "has to be economically viable," Dirk Reinhard, vice chair of the Munich Re Foundation, said in an e-mail. "Do not listen to your heart, listen to your calculator," he said quoting an epigram from Aris Alip of the CARD Mutual Benefit Assn. in the Philippines.

For example, AIG uses its standard underwriting criteria and does strictly for-profit business, Mr. Battifarano said.

Microinsurance programs need to provide sustainable contributions, not handouts, said Ned Cloonan, vp of corporate and international affairs with AIG in New York. Intermediaries and customers value the company for its "experience, core competencies and market-based discipline," he said.

AIG's requirement that microinsurance generate an underwriting profit "is more stringent" than some other insurers, said Scott Graham, a FINCA senior manager. While FINCA's mission is more general--to improve the quality of life and standard of living for the poor--Mr. Graham said he supports AIG's profit-making approach as "the most transparent way to work."

Allianz considers microinsurance "a strategic investment" because it anticipates that economic development in many emerging countries will convert today's customer for microinsurance to tomorrow's customer for more mainstream coverage such as auto and property, Mr. Anthony said.

The Brazilian man who sought the loan for his business is such an example. He repaid the money he borrowed to buy cattle to haul his wares and then returned to borrow again--to buy a truck--and expand his business.

Spurred by regulation

In two countries, microinsurance is encouraged through regulation, Mr. McCord said. India requires that some nondomestic insurers cover a small percentage of rural risks according to a formula that varies depending upon how long the insurer has been doing business in the country. South Africa has a more general requirement that some insurers write a demonstrable percentage of "down market" risks, he said.

Some insurers say participating in microinsurance goes beyond economics.

Startup microinsurance programs have relatively high administrative costs, which is why some insurers begin such programs as a charitable activity of their corporate social responsibility unit, Mr. Anthony said. Allianz's Indonesian project began as a social responsibility project, but has transitioned to being run by a local affiliate.

"AIG is focused on this market because we believe in supporting the underserved much as we have done since C.V. Starr founded (American Asiatic Underwriters) in Shanghai in 1919," Mr. Battifarano said.

Mr. Cloonan said he is impressed that local cultural norms support repayment of more than 95% of all loans. In addition, helping women to earn more has a "multiplier effect" because they use extra income to improve their children's health and education, which enhances society.

"Microfinance has proven to be a successful tool to help people out of poverty," Mr. Reinhard said. "Microinsurance is an important tool to complement microfinance," he said.

The third annual Microinsurance Conference will be held Nov. 13-15 in Mumbai, India. It is cohosted by the Munich Re Foundation and the Consultative Group to Assist the Poor Working Group on Microinsurance. For details, go online to www.microinsuranceconference2007.org.

Microclimate

Some 78 million policyholders are paying premiums to 246 insurers for 357 microinsurance products that are sold in the world's 100 poorest countries. Policyholders have sought ways to protect their lives and income by purchasing insurance--excluding social security-type coverage--according to the April report, "The Landscape of Microinsurance in the World's 100 Poorest Countries." Eleven experts gathered the data and reported that: