EM paper2 - M ICRO ICRO I I NSURANCE NSURANCE A A GENCY...

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Unformatted text preview: M ICRO ICRO I I NSURANCE NSURANCE A A GENCY GENCY : H ELPING ELPING THE THE P P OOR OOR M M ANAGE ANAGE R R ISK ISK Siming Zhu (sz86) October 8, 2008 AEM 4420 Report #2 P ROBLEM Micro Insurance Agency (MIA) has brought risk management tools to millions in low-income countries around the world. While MIA has experienced success in penetrating the market, it must now define its strategy for future growth as a micro-insurance provider. The main problem surrounding MIAs growth approach is its simultaneous pursue of two conflicting strategies. On one hand, MIA is pursuing a (profit led) strategy of growing its market share within its current markets; while on the other hand, it is pursuing a (scale led) strategy of expanding and diversifying its business into new markets. There lies a conflict between these two strategies, as diversification into new markets will ultimately divert attention away from MIAs existing markets and customers. Thus, in order to achieve either of its goals (scale or profitability), MIA must make a trade off between growing its business within its existing markets and diversifying into new markets. A NALYSIS Political: As exemplified by the political violence resulting from Ugandas snap election, political instability are often a problematic issue in emerging markets that undoubtedly adds an additional degree of risk to the insurance industry. Emergence of political turmoil will not only curtail microfinance activities, but will likely also prevent the growth and sustainability of micro-insurance. The development of micro-insurance in such a politically unstable environment can entail greater risks and costs for insurance providers if violence erupts from the instability. Under such circumstances, insurance providers are likely to face increased claims from those that are covered, which will result in a large loss during periods of political instability. Given the level of political risk, micro-insurance providers may choose to cease operations in countries that are particularly susceptible to political risks. Economic: Providing insurance in developed nations is usually a profitable business because of the high premiums, but the same cannot be said for emerging countries that cannot afford to pay a mere $9 per month and are much more susceptible to a number of risk factors (political, health, security). In providing low cost services, micro-insurance agencies are forced to forgo security measures and are exposed to higher risk levels, but gain a lower margin in return. This can lead to low or even negative profits during times of political instability or if fraudulent claims become rampant. However, providing micro-insurance can assist in lifting the poor out of poverty and improve the overall economic condition of developing nations. the poor out of poverty and improve the overall economic condition of developing nations....
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EM paper2 - M ICRO ICRO I I NSURANCE NSURANCE A A GENCY...

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