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As mobile access has exploded in the developing world, new products and services are increasingly hitching a ride on those rails – and sometimes, the results can be impressive. For example, in Zimbabwe in 2010 the mobile network operator Econet offered microinsurance to its subscribers. According to Jeremy Leach, director and head, insurance at Bankable Frontier Associates, “Twenty percent of the adult population were covered in this model – 1.6 million people – in seven months. It’s an amazing story.”

However, as Leach describes it, linking microinsurance and mobile networks can also pose considerable risks for MNOs, insurance providers and their clients. He explores these risks – and the reasons many companies are willing to look past them – and gives an overview of the state of mobile insurance in part two of his Q&A with NextBillion Financial Innovation. You can read part one here.

James Militzer: Can you give me an idea of how it works for a mobile network operator to start getting into the insurance business? How do the customers pay and how do they make claims? Is the mobile company working with a separate insurer, who pays the mobile company for the opportunity to access their customers? How does that break down?

Jeremy Leach: There are three dominant models in m-insurance. The first is the loyalty model, where the mobile operator is essentially giving insurance away for free as a value-added service, as a loyalty program to their clients. And they obviously don’t have a payment issue. And for some, the more you use your phone, the more insurance you get. So it’s a nice incentive for the clients to pay more to their mobile operator – whether that’s desirable is another question (note: see below). So that loyalty model is one of the first dominant models.

The second dominant model is airtime deduction, where basically you are selling your insurance product to your client, and your client is paying for it by deducting airtime on their cellphone.

And the third dominant model is linked to mobile money, where basically people buy insurance through the cell phone or through the agent or mobile money infrastructure, using mobile money to pay the premium for that kind of product.

There are also a few hybrids – probably the most successful is the “freemium” model, where the client basically gets free insurance as a loyalty product, along with the option to buy more insurance beyond the basic coverage. For example, Tigo in Ghana offered the ability to double the cover for a small premium. Loyalty cover is relatively low, so the X-tra Life product doubles your cover for a small premium. And then there are other models that are using vouchers, and others that haven’t taken off so far.

In terms of the partnerships, there’s an interesting mix coming through, basically linking MNOs with normal insurance companies, or with an intermediary or a broker. And then there’s the very aggressive model of Vodaphone, which has bought life and general insurance licenses, actually bringing the insurance capabilities inside themselves to be able to offer a product to their client base. So again, you are seeing these different models and different structures come into play, and we are still waiting to see which is the most successful model, which one is going to be the one that rolls out across markets and paves the way.

The ones that look best are the loyalty and “freemium” models at this stage, primarily because consumers need the market-making capabilities of experiencing their product first, before they are willing to pay for it. My sense is that the mobile money model will be the product of the future. Once people understand the product, mobile money will provide the best value for the money. It’s just that mobile money is not working well enough to support that at this stage.

JM: Why are mobile network operators gravitating toward insurance? What’s the incentive in that particular product, as I assume there are other options that would be less complex?

JL: Good question. I think mobile operators globally seem to be pressured on their margins. In the glory days, they were extremely profitable and growing very fast. But these days there’s obviously more growing saturation in the market sector they are in. Which also means that there is more competition, so their margins are being threatened and they are looking at other ways to drive consumer loyalty, and new revenue sources as well. And they are seeing insurance as a way to address loyalty and stickiness, so that clients will stay with them. They’re also seeing that in terms of driving the ARPU, the average revenue per user, so that people will spend more on their mobile operator – and also seeing it as a distinct revenue stream through commission or share of profit.

JM: Are there potential downsides to linking insurance with MNOs?

JL: Yes. For example, Econet is the largest Internet operator in Zimbabwe, and they partnered with an insurer to offer an m-insurance loyalty product to their client base. And it was wildly successful, as I mentioned. In seven months, 1.6 million people opted in, 20 percent of the adult population. But unfortunately, it seems there was a disagreement between the parties, which led to court cases between them, and that legal fallout essentially led to the cessation of that scheme. So 20 percent of the adult population lost insurance overnight. And that undermines trust in the insurance industry. So I am very concerned about what happened there, and I think the lesson is there’s a need for more extensive regulation. If you look at microfinance, the approach was, “Do not rush to regulate,” because they said you should allow MFIs to grow and test their markets, instead of overregulating from the start and killing them off before they get going. And I agree with that for microfinance, because the ability to scale up is limited. It takes a long time to build those models.

But with some of these m-insurance models, you get into systemic levels within seven months, in the case of Zimbabwe. So there is much more need for regulators to think through what kinds of code of conduct need to be put in place upfront with mobile operators, insurers and whatever other parties are involved – before they actually launch. For instance, if they cancel the scheme they must provide alternative paid cover, which is made available to customers seamlessly. There also needs to be some kind of code of conduct for the mobile operator, in terms of disclosure and the type of product they should offer.

So I sense there’s a role for the GSMA, the trade association of mobile operations, to think through how to provide guidance to their members on how they should be rolling these initiatives out in different countries. I think there are some tough lessons to learn, but I think these are really exciting models. They offer huge potential to add value and provide valuable coverage to their clients. At the same time you need to manage the risks, so you don’t undermine the very market you are trying to build.

James Militzer is the editor of NextBillion Financial Innovation.