High transaction costs and lack of trust prevent private micro-insurance companies from extending coverage to the poor despite low premiums, said participants in the 21st general annual conference of the Association of Insurers and Reinsurers of Developing Countries (AIRDC) which concluded on Wednesday.

The objective of micro-insurance providers is to provide health coverage to low-income households and cover small farmers against crop failure due to drought or other extreme climatic events, and prevent them from falling deeper into poverty. However, high transaction costs prevent micro-insurance firms from expanding their reach.

Nearly 480 delegates from 20 countries participated in the two-day conference organised with the theme Building Financial Resilience: Disaster Risk Financing and Insurance. They said that micro-insurance schemes should be promoted in underdeveloped countries like Nepal by making them more accessible through digital technology.  Mobile phones can be used to help bring micro-insurance to rural and remote areas, they said.

Micro-insurance faces high cost of distribution, premium collection and providing insurance coverage, said Jimmy Molyneux, senior vice-president, head of Strategic Advisory Asia-Pacific at Guy Carpenter. “Through the use of digital technology, it is possible to bring these costs to almost zero,” he said.

In Nepal, the Insurance Board (IB) has made it mandatory for life and non-life insurance companies to launch micro-insurance schemes. As per IB directives, the policy amount ranges from Rs100,000 to Rs200,000 and the annual premium has been fixed at 0.1 to 5 percent.

Insurance companies are required to ensure that their micro-insurance transactions reach 10 percent of their total insurance transactions within two years, as per the government’s budget statement. Citing high operation costs, the country’s insurers are reluctant to extend micro-insurance coverage to rural areas.

There are 38 insurance companies in operation in the country—20 non-life insurers and 18 life insurers. Among them, two are state-owned while three are foreign companies.

According to Molyneux, increasing rural access to social insurance platforms, providing a quick SMS alert system and developing related mobile apps can help reduce operation costs in the micro-insurance sector. “Similarly, collaboration with other institutions including banks and financial institutions can help reduce operation costs.”

Molyneux also stressed the need to use banking channels to offer micro-insurance schemes in rural areas. Banking services are available in 653 out of the 753 local units in the country.

Dirk Reinhard, vice-chair of the Munich Re Foundation, a charitable organisation founded by reinsurance company Munich Re, said micro-insurance could serve as a safety net mainly for people with low incomes. “Micro-insurance may not necessarily bring people out of the poverty line, but it can help people overcome any shocks.”

Chunky Chettri, chief executive officer of Sagarmatha Insurance Company, said there were huge business opportunities in the micro-finance sector despite the many challenges.