Mexican insurers go for 'microinsurance'

Dec 2006
Mexico , December, 14 2006 - Just as Mexico's microfinance lenders have carved out a lucrative niche making tiny loans to some of the country's smallest entrepreneurs, a handful of insurers are proving that it can be profitable to sell life insurance to the country's working poor and lower-middle class.


"The issue isn't that the population doesn't have the economic capacity, disposable income, or an insurance culture, rather we as insurance companies need to adapt to their means," said Alfredo Honsberg, chief executive of insurance company Seguros Azteca, in an interview.

There is a ready market for microfinance products in Mexico where the average monthly wage is about $500, and many people, especially the urban and rural poor, have little or no relationship with a financial institution. Mexico's biggest microfinance bank, Banco Compartamos, has over 573,000 clients, while retailer Grupo Elektra's bank Banco Azteca has made over 19.24 billion pesos ($1.8 billion) in loans to the low-income clients who frequent the group's stores.

Now investors like Elektra and Citigroup's local insurance unit Seguros Banamex have latched on to the idea of offering microinsurance, or very small policies, with microcredit.

Microfinance -- making tiny loans to poor people to fund business ventures -- was pioneered by Bangladeshi economist Muhammad Yunus through Grameen Bank. Earlier this month, Yunus was awarded the Nobel Peace Prize for his efforts to fight poverty.

In recent years, microfinance lenders have sprung up across Latin America, Asia and Africa to provide basic financial services to the working poor, a market virtually ignored by traditional banks.

Mexican insurers have traditionally sold policies to upper income consumers through agents, which isn't a cost effective distribution channel for microinsurance policies costing just a few dollars.

"To date we have found that credit is the most important vehicle (to sell microinsurance) because it is the principal need of the people in these segments," Seguros Banamex Commercial Director Hugo Aguilera said in an interview last month.

To make their policies as simple and inexpensive as possible, Seguros Banamex and Elektra's Seguros Azteca have done away with selective underwriting. In other words, potential clients don't have to provide information about their health, age, or medical history to be insured.

Instead, the companies rely on proprietary mortality tables they have developed for this segment of the population in order to balance premiums and claims.

"Life insurance is very simple from an administrative point of view. It doesn't require big investments in infrastructure and it continues to be a product of fundamental importance to the population," Honsberg said.

Seguros Banamex developed a life insurance policy with 15,000 pesos ($1,383) in death benefits that Compartamos has bundled with its loans since mid-2005. To date the joint venture has issued more than 400,000 policies.

Last month, Seguros Banamex started testing a voluntary policy whereby Compartamos clients can buy up to 105,000 pesos ($9,700) in benefits in 15,000 peso ($1,383) increments, which cost less than two dollars each for about 19 weeks of coverage.

"The challenge now is to see if this market really is interested in buying additional coverage," said Luis Portillo, director of strategic alliances at Seguros Banamex.

Seguros Azteca relies on Banco Azteca, which has about 1,564 branches, including 925 in Elektra stores, to distribute its policies. Elektra clients are given the option of buying a life insurance policy when they take out a consumer or personal loan with the bank.

"We are selling between 50,000 and 60,000 policies a week. We have insured 9 million Mexicans since Seguros Azteca was born three years ago," said Honsberg, who expects to underwrite over 1 billion pesos ($92 million) in premiums this year.

Policies cost between five pesos (46 cents) and 40 pesos ($4) a week with benefits ranging from 7,500 pesos ($692) to 90,000 pesos, or about $8,300.

Billing is handled by Banco Azteca to keep operating costs down.

"We have to give them the opportunity to distribute payment of the insurance on a weekly basis because our clients have weekly income," Honsberg said. "We have had to adjust our billing to the type of income of our client."

Seguros Azteca has exported its microinsurance products to other Latin American countries through joint ventures with insurance companies in Guatemala, Honduras, El Salvador, Panama and Peru.

Participating insurers have sold several hundred thousand policies since Seguros Azteca launched the first joint ventures last year, Honsberg said.

"It has given results in every country. It's not just a phenomenon in this country, because we know with our experience to date that microinsurance is perfectly viable in similar economies in Latin America," he said.

Next year, Honsberg wants to sign similar joint ventures with U.S. insurers to sell insurance products to Latin American migrants in that country.

Seguros Azteca sees a lot of potential in the estimated 10 million Mexicans living in the United States, who sent home more than $20 billion in remittances last year.

Honsberg hopes to have the first joint ventures and pilot projects running in the first half of 2007.

"We are thinking about a product that in the event the Mexican in the U.S. died, his family in Mexico would continue to receive during one, two, or three years the same amount of remittances they were used to receiving when that person was alive," he said.


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