FAIR Innovation Survey
Affordability
Issues of affordability include both the cost of the policy in terms of premiums for adequate coverage, as well as the deductible. Research has identified some important affordability challenges that low-income individuals face when using insurance as tool for building resilience. First, people who lack the income necessary to meet their basic needs may be forced to make difficult choices. In these situations, insurance may come secondary to basic needs such as food and shelter, regardless of their perceived risk of an event, with the potential adverse consequences of underinsurance being discounted.
Secondly, low-income individuals face a complicated financial calculation to determine when to rely on savings versus insurance to protect against financial shocks. Lower-income households face different financial risks and must make different risk calculations. Often insurance products are targeted at infrequent high impact events whereas the types of risks that lower-income households face are more likely to be of lower relative impact but higher frequency.
Current Industry Practices
Insurance policies are typically priced based on factors such as risk, coverage limits, and property characteristics rather than the income of the policyholder. However, insurance companies employ a range of tactics to ensure that insurance products are affordable and accessible for low-income individuals and communities. These include:
a) Providing Flexible Coverage Options: Insurance companies provide a range of coverage options, allowing policyholders to customize their policies based on their needs and budget. This flexibility enables individuals to choose coverage levels and endorsements that suit their financial situation.
b) Discount Programs: Many insurers offer discount programs to lower the cost of insurance for eligible policyholders. These discounts may be based on factors such as bundling multiple policies, installing safety features, or maintaining a claims-free history.
c) Waiver of Deductibles: Insurers understand the financial strain that deductibles can impose on policyholders. Therefore, insurers endeavour to find ways to waive deductibles or offset them against payments for damaged contents, for example. This ensures that policyholders are not burdened with out-of-pocket expenses for deductibles.
d) Extend Payment Grace Periods: In some cases, insurers may offer grace periods or extensions for premium payments to policyholders experiencing financial difficulties. This temporary relief provides individuals and communities with more time to recover and stabilize their finances before resuming regular premium payments.
e) Group Coverage Through Partnerships with Nonprofit Organizations: Some insurers collaborate with nonprofit organizations to develop initiatives aimed at increasing insurance affordability and accessibility. This may involve providing discounted or subsidized insurance options through partnerships with nonprofit entities.
Product and Service Innovations
Some product and service innovations that aim to increase affordability include:
a) Usage-Based Insurance (UBI): UBI tailors insurance premiums to individual usage patterns, making insurance more affordable and accessible for those with low-risk profiles. This innovative practice not only promotes economic inclusivity but also incentivizes safer behaviours, ultimately fostering a culture of risk awareness and mitigation among policyholders.
b) Non-parametric (micro) insurance: Insurance products tailored to the needs of underserved individuals that provide limited basic coverage at lower premiums, often available on a pay-as-you-go basis. Microinsurance employs diverse distribution channels, including microfinance institutions, community-based organizations, mobile networks, and government initiatives.
c) Community-Based Catastrophe Insurance (CBCI) is a recent innovation that provides a model of group insurance. CBCI schemes provide disaster insurance to properties within a defined area and are typically arranged by a government or quasi-government body.
d) Peer-to-peer Insurance is an innovation where a group collectively pools its own risks as opposed to engaging the underwriting services of an insurer. In France, for example, the Inspeer project involves a group pooling their resources with a commitment to paying each other’s deductibles in the event of a claim. This allows members to increase the amount of the deductible on their policy, thereby reducing their premiums.
e) Micro-terms provide options for smaller terms such as 3, 6 or 12 months that offer limited coverage that may better fit within a constrained household budget.