Designing Mobile Microinsurance Products: Premium Payment Methods
Increasingly, the mobile phone is being used throughout the microinsurance value chain to enable access to insurance for millions of people who otherwise would have no cover. CGAP’s recent brief notes that mobile microinsurance products are not only growing in number with 15 new products launched in the first eight months of 2013, but they’re reaching people in many of the world’s poorest countries in Sub-Saharan Africa and South Asia.
Premium collection has always been a challenge in the microinsurance industry. Customers in the target market have low incomes, irregular and unpredictable cash flows, and are often widely spread out in remote locations, creating poor access to traditional financial service payment mechanisms.
Unsurprisingly, the most common use of the mobile channel is to support premium collection through payment reminders or self-payments via the mobile device. Among the 39 paid products identified in CGAP’s research that collect premiums over the mobile phone, 22 do so via mobile money, 15 deduct airtime, and two use mobile-initiated card payments. With self-payments of premiums through mobile money accounts or prepaid airtime balances, mobile network operators and insurance companies have the potential to create huge cost efficiencies in the distribution of microinsurance.
But what should insurers and mobile network operators consider when deciding how and whether to use airtime or mobile money as a payment mechanism? A recent study on mobile phones and microinsurance by the ILO’s Microinsurance Innovation Facility revealed some key considerations when designing a product:
- Prepaid airtime balances are not equivalent to the same value in cash. Prepaid airtime, although it may be more pervasive than mobile money, does not operate on the same 1-to-1 deposit-to-balance value that mobile money does. For example, if you deposit 100 Kenyan Shillings (KSh) into a mobile money wallet, you more than likely have 100 KSh to spend or transfer to others. (Most mobile money products don’t charge deposit fees). But if you purchase 100 KSh of airtime, do you really have a balance of 100 Kenyan Shillings? In short, the answer is no. A portion of your purchase goes to pay commissions to airtime distributors and a portion to pay taxes (see below). Although your airtime balance may show 100 KSh worth of airtime, it’s no longer equivalent to the same value in cash. Thus if you’re to turn around and use this airtime to pay insurance premiums, someone has to eat the costs of taxes and fees—a cost which will ultimately fall on the consumer.
- Airtime purchases, unlike insurance premiums, are often taxed. Usually a value-added tax (VAT), sales tax, or excise tax is built into the cost of airtime. In Tanzania in 2012, for example, an excise tax of 12% combined with 18% VAT plus local and regulatory charges combined for an ultimate duty of 32% tacked onto each airtime purchase. These taxes in many cases can make airtime a commercially infeasible payment mechanism for insurance products, which otherwise would not need to price taxes into their premiums.
- Although mobile money must also build in fees, these are generally less than airtime fees. Despite mobile money’s ability to avoid the tax issues of airtime, MNOs still have to factor in the costs of distributor commissions and transaction fees when using mobile money as a premium collection tool. Nevertheless the costs of transaction via mobile money to the MNO are generally less than airtime—an obvious reason why many MNOs encourage consumers to shift airtime purchases from physical agents to mobile wallets.
- Mobile money has a smaller captive market than airtime. Outside of the few places like Kenya and Tanzania, mobile money penetration still remains relatively limited in many markets. Should an insurance product rely solely on mobile money for premium collection, it can severely limit its potential client base. Prepaid airtime, on the other hand, remains the dominant way consumers fund their mobile phone use and allows a linked insurance product to potentially reach a much larger base.
- Consumers can be averse to multiple behaviour changes at one time. For markets with limited insurance and mobile money penetration, using mobile money for premium payment requires consumers to learn and trust both the insurance product and the payment mechanism at the same time. As was observed in the case of MTN Mi-Life in Ghana, if the market must become comfortable with too many new concepts at once, this may create additional barriers to scale.
- Regulation can dictate what payment mechanisms are most feasible. Each individual market comes with its share of regulatory requirements. Not all countries allow for the use of airtime to pay for non-mobile services, while other countries may lack facilitative mobile money regulation. On the contrary, certain countries might be open to growing their mobile money ecosystem through products like insurance.
Despite the trade-offs discussed above, airtime and mobile money do not need to be exclusive of each other. In the initial stage of market development or during the introduction of a new insurance offering, airtime might be the best way to facilitate access to a larger client base and align with a payment mechanism with which consumers are already familiar. However, as mobile money penetration grows and after providers have a sufficient client base familiar with their insurance product, they will most likely want to migrate clients to a lower-cost, mobile money platform. In some cases, the two payment mechanisms can coincide from the beginning to allow for multiple premium channels.
Each market’s constraints and unique environment will ultimately determine how and whether airtime and mobile money are feasible solutions to facilitate payments for a mobile microinsurance initiative. What’s certain, however, is that by taking the ability to pay premiums to the homes and handsets of the end users, valuable financial services like insurance can reach greater numbers of people in the some of the furthest corners of the world—and do so with a benefit to the product providers as well.
Thanks for nice blog! One point that can be considered by while deciding on the payment mechanism is the ability with airtime to do small deductions every day, so that a lump-sum doesn't "pinch" the low income customer. Also, automatic deductions (so that customers do not miss out or "forget" paying the premiums) may be simpler for airtime.
Look forward to further developments in this field!
It's an interesting idea but surely a daily deduction will increase the cost of fees due to the greater number of transactions required?