Small is beautiful: Insurance companies turn to micro for growth

Luke Savage, director of finance, risk management and operations for Lloyd's, says, "In the short term, there is a huge need for this kind of product on a global scale -- to protect against climate change, energy, food and water shortages." In the near term, Lloyd's is unlikely to become involved directly, but a robust microinsurance market will eventually need reinsurance protection, especially if policies are held to the profitability standards of other lines of business. Carriers will need to be able to manage the risk in their portfolios, which implies having the ability to transfer it to other parties.

Craig Churchill, chairman of the Microinsurance Network, sees the sector as being "a new field and we are still figuring things out, but experience shows that where insurers create efficient low cost distribution systems and offer appropriate products for low income individuals, the business can be viable," according to a report by Reuters. The network includes a variety of members, including donor organizations, multilateral agencies and policymakers. Among the insurance companies belonging to the network are Zurich (ZFSVY), Munich Re (0KFE:UK) and Allianz (AZSEY).

For now, data is among the primary challenges the microinsurance industry faces. Without loss history and other information for markets that don't have an insurance infrastructure yet, it's extremely difficult for insurers to model their portfolios and allocate their capital effectively. So, expect early entries to be cautious; it will take a while for this sector to develop. But, an industry short on growth options will need to find a way to enter the space.