MFIs and Risk Management Tools for the Poor: An Introduction to MicroInsurance

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MFIs and Risk Management Tools for the Poor An
Introduction to MicroInsurance

• Fifth Annual Conference of MicroLending
• Institutions in CEE and the NIS
• 16-18 May 2002
• Budapest, Hungary
• Danubius Thermal Hotel Margitsziget
• Michael J. McCord
• The MicroInsurance Centre
• www.microinsurancecentre.org

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Outline

• Insurance Basics
• The Client
• Risks
• The Supply Side
• MicroInsurance Models
• The Partnership Model
• Lessons Learned and Special Issues

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Definition MicroInsurance

• Micro-
• Insurance products that are designed to be
  appropriate for the poor in relation to cost,
  terms, and coverage

• Insurance
• Financial product that protects against
  unexpected losses through pooling resources.
• Policy holders pay only the average loss
  experienced by its risk pool

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Definition Risk Pooling

• Bringing together resources from a large number
  of people and or groups, to share in the losses
  of a few resulting from a risky event.

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Principles for Insurance Provision

• Large numbers of similar units exposed to the
  risk
• Limited policyholder control over the insured
  event
• Existence of insurable interest
• Determinable and measurable losses
• Calculable chance of loss
• Non-catastrophic losses
• Economically affordable premiums

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Insurance Risks

• Adverse Selection (Tendency of persons with a
  higher-than-average chance of loss to seek
  insurance at standard (average) rates, which, if
  not controlled by underwriting, results in
  higher-than-expected loss levels )
• Moral Hazard (Hazard arising from any
  non-physical, personal characteristic of a risk
  that increases the possibility of loss or may
  intensify the severity of loss for instance bad
  habits or low integrity. An example might include
  failing to properly care for an insured goat
  because it is insured, thereby increasing the
  chance it will die of disease.)
• Fraud (Intentional perversion of truth in order
  to induce another to part with something of
  value.)
• Cost Escalation (risk that the costs re-price
  faster than the premium.)

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MicroInsurance The Clients
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Client Risk Response Options
Adapted from C. van Oppen
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Risk Management Savings, Credit, and Insurance
Degree of Uncertainty
Highly
Highly
Certain
Certain
Uncertain
Uncertain
Flexible
Small
Small
Savings and
Life
Life
Cycle
Cycle
Credit
Events
Events
Property
Property
Insurance
Health
Health
Death
Death
Relative
Relative
Loss /
Loss /
Flexible Savings
Disability
Disability
Cost
Cost
-
Partial protection
-
Mass,
Co
-
-
Mass,
Co
variant
variant
Very
Very
Large
Large
Brown and Churchill, 11/1999
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Household Life Cycle Financial Needs
Marriage (C, S)
Working Capital (C)
Death (C, I)
Fixed Asset Acquisition (C)
Old Age (I,S)
Health (C,S,I)
Asset Protection (I)
Investments (S)
Birth (C,S,I)
Marriage Ceremony (C,S)
Education (C,S)
C Credit S Savings I Insurance
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Impact of Shocks on Family Income
Wealthy
Non-poor
Vulnerable non-poor
Economic Levels
Poverty Line
Moderate poor
Extreme poor
Destitute
Loan Cycles
Adapted from a slide by Bill Grant (Ebony
Consulting International)
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Impact of Financial Shocks on MFI Clients

• Impact on
• The affected client (cash, business, assets)
• Their family (reduced HH income, outflows)
• Their group (in a group scheme loss of friend,
  member, savings, morale)
• The MFI (destabilization, reduced morale, maybe
  loss of PI)

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MicroFinance and MicroInsurance

• MicroFinance can help people move out of poverty
• Credit
• Savings
• MicroInsurance can help people protect the gains
  they have made

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The Supply SideGeneral Models of MicroInsurance
Delivery
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General Models of MicroInsurance Delivery

• Community-Based Model (UMASIDA Tanzania)
• Owned and Managed by Members
• Provider Model (GRET Cambodia)
• GRET insures, and primary doctor is employee
• Insurer Model (SEWA India)
• MFI is insurer (Limited with C.U.)
• Partnership Model (AIG and MicroCare with Uganda
  MFIs)
• No risk to MFI, administrative burden minimal

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Community-Based Model
Risk
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Provider Model
 
Risk
Sales Market policies, address questions, provide
feedback)
Product Manufacturing   Development, Pricing,
Testing, Management, Risk controls, Reserves
Policy Holders
Service Assess and pay claims to policyholder or
beneficiary
Primary Care GRET Doctor
Provider Responsibilities
Secondary Care Hospital
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Full Service Insurer Model
Risk
SEWA
LIC/NIA
Product Manufacturing Health and Property
(Development, Pricing, Testing, Management, Risk
controls, Reserves)
Sales (all policies) (Market policies, address
questions, provide feedback)
Product Manufacturing Life and Accidental
Death (Development, Pricing, Testing, Management,
Risk controls, Reserves) Provided through SEWA.
Policyholders (Purchase policies, make health
reimbursement, property coverage, and life claims
to servicing, accesses hospital care, and saves
for premiums at SEWA Bank)
Service (all policies) (Assess and pay claims to
policyholder or beneficiary)
SEWA Bank (manages client savings for premiums
and Insurance program accounting)
BENEFICIARY (for life and property)
HOSPITAL (for health issues, client pays direct)
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Partnership Model Group Personal Accident
Insurance
Risk
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Partnership Model - Health
Risk
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Insurance Delivery Roles in Partnership Model
Each company uses its comparative advantage to
create a professional product that can benefit
all parties.This is done without anyone doing
anything significantly outside the bounds of
their core and normal operations.
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MicroFinance Partnerships
Credit
Transfer Services
MFI Partner
CLIENTS (Individuals or groups)
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Decision-Tree for MicroInsurance Product
Development
Negotiate
Partnership
Found
Solicit Insurer
Solicit Insurer
Solicit Insurer
Solicit Insurer
Partnership
Partnership
Partnership
Partnership
YES
YES
Potential
Potential
Potential
Potential
Consider Starting
Consider Starting
Consider Starting
Market?
Market?
Defer Product Development
Market?
Market?
with Simple Types of
Not
Not
with Simple Types of
with Simple Types of
NO
NO
Found
Found
Coverage
Are clients interested in insurance
protection? and Is this protection the most
effective risk management solution?
Coverage
Coverage
Consider
Consider
-
-
Developing
Developing
Consider Starting with Simple Credit Life Coverage
-
-
Alternative
Alternative
Defer Product
Defer Product
Defer Product
Risk Managing
Risk Managing
Development
Development
Development
Financial
Financial
Services
Services
Consider Alternative
Consider Alternative
Consider Alternative
Consider Alternative
Risk
-
Managing
Risk
-
Managing
Risk
-
Managing
Risk
-
Managing
Financial Services
Financial Services
Financial Services
Financial Services
Warren Brown, Colleen Green, Gordon Lindquist
Cautionary Note for MFIs and Donors Considering
Developing Microinsurance Products
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Risk is the key issue!!

• Insurance Risk can deplete MFI capital (CARD
  Bank, health insurers the world over)
• For formal insurers risk of MFI clients can be
  negligible (AIG did not even reinsure their MFI
  portfolio)

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Why MFIs should be interested in the Partnership
Model

• Keeps MFI free of insurance risk while allowing
  MFI to satisfy client demands
• Usually limited capacity with MFIs
• MFI capacity-building focus is with CREDIT and
  savings
• Insurance has a much different risk structure and
  requires significantly different skills
• MFIs can earn commissions with virtually no risk
  and limited effort
• Insurance is NOT a new product, it is a new
  business

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Issues with the Partnership Model

• Insurers need convincing
• In most countries they do not see this market
• India legal mandate
• Ghana Insurance Commissioner (high demand)
• Insurers have an upper hand in negotiations
• Be prepared (need a basic understanding)
• Track agreement (ex. claims period agreement)
• Legal Issues
• Agent (insurance and banking regulators)
• Profit flows (to insurer with commissions to MFI,
  flows with risk)
• The relationship (management can be trying)

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Some Special issues

• Demand
• Willingness to pay
• Voluntary versus Mandatory

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Demand

• Do not assume there is demand
• Generally
• L.A. and Caribbean Cases (est. 25, employed,
  ILO)
• SEWA India (100 compulsory to 20 voluntary,
  MIC)
• AIG Uganda (up to 70 voluntary purchase over
  time, MIC)
• Jordan (appropriate for only non-poor, Loewe,
  GDI)
• Zambia (questionable demand, Manje, ILO draft)
• Specific Products
• CMF Nepal (maternity benefits, Sharma et al)
• GRET Cambodia (cattle insurance, Brown and
  Churchill)

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Why is demand questionable?

• Risk pooling (lack of understanding)
• Bad reputation of insurance
• Methods of premium collection
• Poor marketing
• Culture

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Assessing Demand

• Qualitative research
• For concept and prototype development
• Focus Groups
• Participatory rapid appraisal
• Quantitative research
• Prototype testing
• Surveys
• Questionnaires
• Product satisfaction studies (quant and qual)
• A continuous process as with all market research

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Willingness to pay

• Willingness to pay a premium is a factor of
• Family resources
• The relationship between product components and
  client needs (must be understood by the potential
  client)
• The method of payment (frequency or savings
  mechanism)
• The total cost

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Voluntary vs. Compulsory Provision

• Benefits to Voluntary
• Determine real demand
• Forces understanding of staff and clients
• Forces marketing

• Issues with Voluntary
• Slow growth of risk pool
• Higher premiums because of low volume risk pool
• Operationally more complex

• Benefits to Compulsory
• Operationally simple
• Insurers prefer
• Lower marketing costs

• Issues with Compulsory
• Client annoyance
• Masks demand

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Lessons Learned1

• Make sure to address real needs of clients
  (coverage, terms, collection, claims)
• Follow a new product development process
• Some protection can be provided without insurance
  (MFIs should provide savings and emergency loans
  first)
• MicroInsurance can be profitable

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Lessons Learned2

• Initial premiums need to
• be conservatively priced, and
• balance coverage, premium, mode of payment, and
  client resources
• Maintain strong, but appropriate, controls and
  systems (moral hazard, adverse selection, fraud
  ex. death certificate and flexible paperwork)
• Training, training, training
• staff and management insurance and marketing
• clients risk pooling

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Challenges to MicroInsurance

• Getting more formal sector insurers interested in
  this market
• Understanding demand and attrition
• Getting clients (and staff) to understand the
  insurance concepts
• Developing savings products to assist with
  premium payments
• Tying insurance to loans? Savings? Nothing?
• Matching clients needs with products
• Scarcity of actuarial data (impacts premium and
  risk)

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Things to remember

• Capacity (an honest assessment and a review
  structures will show honest MFIs that they should
  not be insurers)
• Start simple (often an expanded life product is
  best to start so everyone gets used to insurance
  and the relationships developed to offer it)
• Follow a product development process (concept
  development based on client demand, prototype
  development and testing, pilot testing, rollout,
  assessment)
• Partnerships (seek out partnerships rather than
  try to become an insurer yourself)

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www.microinsurancecentre.org
The MicroInsurance CentreCreating partnerships
to insure the Worlds Poor