Insurance is a market-based risk management tool that is fundamentally based on sharing and diversifying risks among a community of policyholders. It creates a safety net against unpredictable events, protecting individuals and societies from potentially hazardous financial losses. This invaluable system not only provides a sense of security to its members but also fosters innovation and exploration, encouraging humans to embrace calculated risks. Thus, insurance makes our world more resilient, fostering innovation and stability.
Regrettably, a significant portion of the global population lacks adequate access to insurance, a deficiency most acutely felt by those already struggling economically:
- Consider a Swiss farmer experiencing a drought that eliminates an entire year’s crops. Although this is a devastating event, it isn’t life-threatening given Switzerland’s excellent social security system. The most serious consequence for this farmer might be seeking governmental aid or using up some of their savings.
- Contrast this with a similar drought striking a farmer in an economically disadvantaged country. Such an event could lead to total loss of property, necessitate high-interest loans, or even drive them towards criminal activities. In extreme cases, this farmer faces dire outcomes like starvation, disease, or even death.
The stark contrast experienced by both farmers underscores the crucial role insurance plays in providing economic stability and security.
There are many reasons why the insurance penetration is low in some countries, including underdeveloped financial systems, inadequate infrastructure, corruption, and low levels of education, among others. Microinsurance, also referred to as inclusive insurance, tries to reach people with a low income, by offering tailored insurance products with much lower premium than typical insurance policies.
Although microinsurance has made significant strides, it has yet to reach its full potential. One intriguing avenue for potential expansion could lie with Bitcoin and the Lightning network. In this article, we will explore how these cutting-edge technologies could potentially foster the continued growth and development of the microinsurance market.
Understanding Microinsurance
So what exactly is microinsurance? Wikipedia offers a good definition:
Microinsurance is the protection of low-income people […] against specific perils in exchange for regular premium payment proportionate to the likelihood and cost of the risks involved.
While this definition aligns with that of traditional insurance, it distinctly targets low-income individuals. Notably, ‘low-income’ here does not refer to the underprivileged proportion of citizens in developed nations, but to the 50% of the global population surviving on less than $6.25 per day. This demographic is often overlooked by mainstream commercial and social insurance schemes, or lacks adequate access to insurance products.
Just like conventional insurance, microinsurance can cover a broad spectrum of potential hazards. This encompasses health-related risks like illness, accidents, or mortality to property-related risks such as damage or loss. There is a diverse array of microinsurance solutions available, ranging from crop and livestock insurance, to theft or fire protection, health coverage, term life policies, death benefits, disability coverage, and safeguards against natural calamities.
Microinsurance holds the potential to address some of the world’s most pressing challenges like poverty, hunger, gender disparity, and economic development. For both individuals and their communities, access to microinsurance can mark a transformative difference.
However, the expansion of microinsurance is met with several impediments. Let’s delve into these challenges.
Current Challenges in Microinsurance
As per the “2022 Landscape of Microinsurance” report published by the Microinsurance Network, microinsurance has barely scratched the surface of its target market with a mere 8% penetration. This statistic highlights an untapped potential of 92% within the target demographic. Furthermore, the estimated market value of current microinsurance premiums sits at $30.9 billion, against a possible market worth $441 billion, underscoring vast areas for expansion in the microinsurance sector.
So, what are the primary hurdles? We can broadly identify the following microinsurance-specific challenges and roadblocks:
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Education and Distribution: Financial literacy emerges as a fundamental issue. Insurance, being a complex product, requires a good grasp of financial concepts, which requires education to be understood by potential customers. In economically underdeveloped countries, many people – especially women – do not have the opportunity to attend schools. Literacy rates are still low in developing countries. Consequently, insurance companies and intermediaries face considerable difficulty in articulating the nuances of an insurance contract to customers and justifying regular premium payments.
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Payment: According to the Microinsurance Network, payment of microinsurance premiums was done in the following ways: Bank transfers (28%); Cash (28%); Mobile money (12%); Credit/loan (10%); Free/subsidized (3%); Other (20%). If we take a look at bank transfers, cash and mobile money – we can see that each of these payment methods presents unique challenges for low-income individuals:
- Bank transfers can be costly for low-income individuals, due to their low-creditworthiness and subsequent high bank maintenance fees. In remote or rural areas, access to banking infrastructure might be entirely unavailable.
- Payment in cash involves a number of risks for insureds by itself, including theft and fraud. Furthermore, managing cash payments incurs extra costs for insurance companies, which are invariably passed onto the insured parties.
- Mobile money – while playing an important role in the financial development of developing nations – relies on trust to the operator of the mobile money system as a central authority. Furthermore, mobile money transactions aren’t cheap, especially for the poorest members of society who transact small amounts of money. According to an article by The East African newspaper, the average cost of sending $1 through the mobile money platform to a user on the same network is 9.5% of the value of the transaction, while the cost of sending $20 is 2.6%. Also, the mobile money transaction network across Africa is scattered with very low cross-system interoperability.
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Legislature: In many countries, especially developing ones, there is a lack of specific legislation for microinsurance. The rules and regulations designed for traditional insurance products are not always suitable for microinsurance, which could result in regulatory barriers. There are also challenges related to the enforcement of contracts, dispute resolution, and issues with fraud.
With these challenges identified, let’s now analyze if and how Bitcoin and Lightning can help alleviate some of these challenges.
Let’s delve into how Bitcoin and the Lightning network could potentially address the three challenges outlined above, with the most significant potential lying in the realm of premium payments for microinsurance:
- Firstly, Bitcoin and Lightning allow any individual with a phone to open a wallet without needing authorization from any institution. This is transformative for the millions lacking access to traditional banking, as it allows them to store and transact value, and also enables them to manage and pay for their own microinsurance products.
- Secondly, payments in the Bitcoin Lightning network are simple to handle, have virtually no transaction fees and are settled within seconds. As such, Lightning combines the low transaction fees of cash payments with the accessibility and speed of mobile money, while removing any entrance barrier for people. This makes the Lightning network a perfect fit for microinsurance.
- Finally, Bitcoin and Lightning present innovative avenues for insurance companies to provide highly automated, programmable microinsurance policies. For instance, natural disasters could be insured automatically without transferring distribution and operating costs to the customer. Premium payments could be collected via Bitcoin Lightning, with agreed insurance payouts automatically triggered by certain metrics, like a specified amount of rainfall within a given period. This enables the construction of so-called ‘smart contracts’ with Bitcoin and Lightning.
Regarding education and distribution, Bitcoin and Lightning could enhance the accessibility of microinsurance products via the internet, allowing potential customers or their representative intermediaries to purchase insurance directly online. This would increase productivity and reduce operational costs, freeing up time for agents and brokers to focus on educating customers about the benefits of insurance.
In terms of legislature, Bitcoin and Lightning might present new opportunities. There is, as of now, a limited but growing body of legislation concerning Bitcoin, with its interpretation and enforcement varying greatly from jurisdiction to jurisdiction. While this will initially present a challenge in establishing a uniform regulatory environment for the use of Bitcoin and Lightning in microinsurance, the open, transparent, and programmable nature of Bitcoin can also present opportunities for regulatory innovation. For instance, smart contracts on Bitcoin can be transparently audited and automatically enforced, which might facilitate dispute resolution and deter fraudulent activity.
Summary
Bitcoin and the Lightning network could bring substantial benefits to the microinsurance sector by addressing key challenges. They could revolutionize the way premiums are paid, removing the barriers posed by traditional banking systems and mobile money platforms. They have the potential to automate microinsurance policies, bringing efficiency and cost-effectiveness. Online accessibility can enhance the distribution of microinsurance products, while also enabling better focus on the critical aspect of customer education.
Furthermore, as Bitcoin and Lightning become more mainstream, they could foster a more conducive legislative environment that is adapted to the specific needs of microinsurance. With transparent and programmable financial instruments such as smart contracts, dispute resolution and fraud prevention can be significantly enhanced, while fostering trust among customers and regulators.
Nevertheless, the potential of Bitcoin and Lightning should also not be overestimated. While they offer promising solutions, they do not solve all the challenges facing microinsurance. Issues related to education and literacy, infrastructure, corruption, and unstable political systems remain significant hurdles that need to be addressed through a combination of interventions.