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July 22, 2020 David Dyck

Understanding your client: Munich Re’s experiment with microinsurance in Indonesia

The story of how Till Heydel distilled the concept of insurance into a product that could benefit some of Indonesia's most impoverished population.

Back in 2008, Till Heydel was standing on the banks of the Manggarai River in Jakarta, Indonesia. He’d been trying to find accurate historical data on water levels, and his search had led him to a keeper of the Manggarai flood gate, whose job was to measure the water level every hour. It was a good start, but the gatekeeper only had the data for the current year, recorded by hand in a small notebook.

The gatekeeper had been collecting data for the past ten years. Before him, his father did this job for 50 years. This meant that somewhere existed detailed information on river levels going back over half a century.

The problem was that the gatekeeper didn’t have those records. In fact, he couldn’t answer any of Heydel’s questions about why the data was being collected, or who was paying him to collect it. All he knew was that every week a man showed up on a moped and paid him 10 dollars. Every year, he would take the book and give him a blank one to fill over the upcoming year. As far as he knew, it had always been done this way.

For Heydel, this was a potential gold mine. If he could find where this data was being stored, he’d have his answers. He asked the gatekeeper whether he had a contract or anything that would point him towards the source.

The answer was short: “No.” 

What time does he come by?

“Every Wednesday around lunchtime.”

He would have to come back.

Microinsurance and the Manggarai River

Why was Heydel on the Manggarai River trying to locate notebooks full of flood data? His employer, Munich Re, together with the German Ministry for Economic Cooperation and Development, was building a new innovative microinsurance product for lower income Indonesians, and it was his job to build it, from soup to nuts.

“This was honestly the most interesting project I’ve done in my career,” said Heydel, who currently serves as a Vice President for Strategy and Development for HSB, a Munich Re Company, in Canada. That’s saying something. Heydel has worked in the insurance industry for more than 20 years on four continents.  

The purpose of microinsurance, today often named Inclusive Insurance, is to provide a risk management solution to low income people. It protects them from specific perils in exchange for premium payments that are rated to the likelihood and cost of the risk. This enables those living in low-income situations to recover from disasters and losses without falling into further impoverishment. A common microinsurance product in parts of the developing world is life insurance for a family’s primary breadwinner, without whom the family would be more or less helpless. 

From an industry perspective, although the premium is low, the volume is potentially quite high, and it introduces insurance to those who wouldn’t otherwise use this financial service at all. From a governance perspective, a strong microinsurance program can work towards eliminating poverty by giving low income citizens a chance to improve themselves. This benefits a country’s national economy writ large. Bangladesh as an example has a governmental micro health insurance strategy including the poorest of the poor, people living below the poverty line. 

Learning about the consumer from the ground up

To understand how something like microinsurance would impact people in Indonesia, it’s important to really understand the population. This led Heydel and his team to conduct focus group discussions in major centres like Jakarta, Padang, and Bali.

“The learning was dramatic,” said Heydel. A few facts were particularly pertinent. 

They found that most people live off of one or two dollars per day, which they collect in cash by the end of the day, and then spend on food and their childrens’ education. There’s no biweekly paycheque, and bank accounts are rare. “They don’t even go into banks, because these are air conditioned,” said Heydel. “They believe that air conditioning is for rich people only.” 

If that cycle is disrupted, they don’t get paid, which means they don’t have money to buy food or pay their children’s teacher.

Many different things could disrupt this cycle, but one of the biggest and most consistent risks is flooding. “Flooding constantly came up. People said the flood usually stays for 10 days, or sometimes 14 days,” said Heydel. “It’s a long period where basically disruption of payment happens.”

Other smaller inconveniences could be worked around. If, for example, a motorcycle broke down, the driver could get it fixed and then pay the mechanic back in installments. Flooding was a different story. The maids didn’t have work. The market wasn’t open. The motorcycle driver couldn’t work, which meant the repairman didn’t have work either. Nobody could borrow money from anyone else, because everyone was out of work. 

Financial literacy is also an issue. At one of the group discussion sessions, when Heydel explained that he was from the insurance industry, one of the participants tried to hit him.

When she settled down, he asked her why she was so angry. “I used to buy insurance,” she told him. Someone had sold her a home insurance policy and explained that if her house burned down, she would get paid. She paid the premium, but soon things got tight. She lost her job, and bills for school and food started piling up. 

Taking her insurance agent’s promise of a payout at face value, her solution was to burn her own house down. She went to collect the insurance money, and said exactly what happened: she needed money, so she burned her house down. Obviously, her claim was denied, leaving her without a house and unable to pay her bills. The experience left her bitter. She thought insurance was a rip off.

“Honestly, that was very striking,” said Heydel. The conversation made him realize the importance of financial literacy in the product they were building; it had to be extremely simple, with no room for misunderstandings. 

Heydel was faced with finding a microinsurance product for a population that lived hand-to-mouth, would not step foot in a bank, and were not financially literate. His team realized that they didn’t need a product to provide monetary compensation to replace something: they needed a product that compensated someone’s salary when everyone’s subsistence was disrupted. “We were driving around and said, ‘Okay, we have to find information, data about the flood risk,’” said Heydel. That’s what led him to the banks of the Manggarai River.

Building a product for the consumer

On a Wednesday morning, Heydel was back at the floodgate, waiting for the man on the moped to show up to pay the gatekeeper. Sure enough, he arrived around noon. He said he worked for the city of Jakarta, and the books they were looking for were available in the archives at City Hall, full of flood data from the past 70 years. Heydel could have the data, but they couldn’t remove the books from the premises. 

“It was really funny,” said Heydel. “We hired two guys and a copy machine, and put the copy machine next to the entrance of that department. The guys copied all the books for two days.” When they were done, they entered all data into an Excel sheet, and cross checked it to make sure there were no mistakes. 

The whole process took about a week and when they were done, they had a massive amount of data. “We could quickly evaluate the risk of a flood: how often it occurs, and the level of overflow. Jakarta’s actually relatively flat, so if the river overflows it’s a huge part of the city that’s really affected. And even those areas that were not physically affected by water, were still affected indirectly because people can’t go to work.”

Using the data, the team developed a microinsurance product that would trigger an automatic payout when the water level reaches 9.2 meters. They knew how often it flooded on average, taking into consideration deforesting upstream of the river, intensity of rainfall, and other factors. 

To deploy it, they developed a plastic card that would pay out the holder if the river reached flooding levels. They used plastic for two reasons: firstly, it’s more durable than paper, and secondly, it carries an air of affluence that paper doesn’t have. On the back of the card was a picture of the floodgates and the scale, with a red bar showing the flood line. On the card was written: “If the water rises above this mark, you get a payout of X amount.” That was the entire policy wording, with instructions on how to collect the claim. The holder could take it to an automatic teller and insert it into the machine. If the water level had risen above the flood line, the user would get paid, and the machine would keep the card. If someone needed more coverage, they could simply buy more cards. 

Distributing the product

Now that Heydel’s team had a microinsurance product, the next step was to come up with a distribution strategy. Based on his tense experience during the first focus group, Heydel knew that westerners weren’t exactly trusted by the poor Indonesians who would benefit from the product.

To remedy this, Heydel reached out to influential members of local communities, known as RTs and RWs. They aren’t official representatives, but they tend to be educated and highly respected. “You’d go to that person if you have some problems with your wife, with your children, financially — whatever,” said Heydel. “He would be like a neighborhood consultant.”

They approached these individuals and explained the product to them. Rather than giving them a commission if they sold a certain amount, they offered items for their community to use, like inflatable boats, ropes, or dry food. 

There was some initial push back, especially around the amount of the payout. But Heydel broke down the math for them, and explained that they were collecting that money over a period of time. This was based on the frequency of the occurrence, as you might do it with a savings account. Once they understood the numbers, they promoted and distributed the product in their communities. 

Design thinking in Indonesia

Looking back on that experience, Heydel says it taught him a lot about design thinking. Because the problem they were solving was so complex and existed in an area where they had absolutely no background, they were forced to leave all of their previous assumptions at the door. 

“We had to dig really deep, whereas what happens often is, we think we understand everything,” said Heydel. “That’s when we make mistakes. We assume we know what our clients want.”

Heydel says in many cases, a bunch of insurance people sit around a table and assume, “The clients want this or that. They don’t want to have a sub-deductible here, so let’s get rid of this one.” And so it goes. But they don’t always know.

The case of the woman who burned her house down in good faith in order to get the insurance payout might seem far-fetched, but financial literacy when it comes to insurance isn’t that much better in the developed world. Even Heydel admits that when his own basement flooded, the first thing he did was check the policy to see if it was covered. “I’m from the insurance industry, I signed this contract, and I still didn’t know whether flooding is actually insured and to what extent with my homeowner’s policy,” he laughed.

That’s why for Heydel it all comes back to properly understanding the client’s needs and capacity. 

“Honestly, would we ever go through investigations or focus groups to better understand people [in the West or North]? We don’t,” he said. “Probably we don’t have to do that, but in many cases we don’t really know. We just develop something, sometimes just throw it on the market, and then ask ourselves, “Why is it not flying?”

Instead, he would like to see a more disciplined approach to understanding a client, one that doesn’t make assumptions. He believes that much can be learned from taking a blank slate approach, and in the end, it is the consumer that will benefit. 

Heydel continues to leverage the risk assessment and management expertise of our industry combined with a relentless pursuit to understand client needs. His focus on creating consumer value inevitably leads to continued learning, growth and development of the insurance industry and the value we bring to consumers. Today Heydel resides in Toronto, Canada, and is helping BI&I, part of the Munich Re Group of companies, expand on their success and achieve new heights!

David Dyck

David is the editor-in-chief of Apollo Magazine, and co-founder of Apollo Insurance Solutions. He is an award-winning journalist who also enjoys ping pong and swimming with whale sharks.