Microinsurance

1
Microinsurance Risk Management Strategy

• What risks do poor people face and how do they
  protect themselves?
• What is micro-insurance?
• Basic insurance principles
• What are the difficulties in providing insurance
  to poor people?
• Microinsurance legislation in India
• What are some micro-insurance delivery models?

2
Examples of Risks and Crises
Category Examples
Natural Risks Heavy rainfall, landslides, earthquakes, floods, drought
Health Risks Illness, injury, accidents, disability, epidemics
Life-cycle risks Birth, maternity, old age, family break, death
Economic Risks Unemployment, business failure, technological or trade related shocks
Social Risks Crime, domestic violence, riots
Environmental Risks Pollution, deforestation, land degradation

3
Classification of Risks and Crises

• Idiosyncratic Risks
• - Risky events that are individual or household
  specific
• - Narrow geographical or social spread
• Covariate Risks
• - Risky events that affect many households
  simultaneously
• - larger geographical or social spread

4
How Do Poor PeopleProtect Themselves from Risk?
Prevention and Avoidance

• Careful sanitation
• Identifying business opportunities

• Saving
• Accumulating assets (i.e., livestock)
• Buying insurance

Preparation

• Taking emergency loans
• Depleting savings
• Selling productive assets
• Defaulting on loans
• Reducing spending

Coping
5
Different Financial Services for Different Risks

• Two variables for classifying the risks
• - the degree of uncertainty (time and frequency)
• - the relative size of the loss (one time or
  ongoing)
• Efficacy of savings, credit and insurance as risk
  management tool based on the typology of risks
  classified by these two variables

6
What is microinsurance

• insurance refers to a financial service that
  uses risk-pooling to provide compensation to
  individuals or groups that are adversely affected
  by a specified risk or event.
• Risk-pooling involves collecting large groups (or
  pools) of individuals or groups to share the
  losses resulting from the occurrence of a risky
  event.
• Persons affected by a negative event benefit from
  the contributions of the many others that are not
  affected and, as a result, they receive
  compensation that is greater than the amount they
  have invested in the insurance policy.
• Thus, products that allow an affected individual
  to receive only up to the amount they have
  contributed are considered as savings products,
  not insurance.

7
What is microinsurance

• The micro- portion of the definition refers to
  the subset of insurance products that are
• designed to be beneficial to and affordable for
  low-income individuals or groups

8
Basic Insurance Principles
Large number of similar units are exposed to the
risk (risk pooling)
1
Policyholder control over the insured event is
limited (minimize moral hazard and adverse
selection)
2
Insurable interest exists
3
Losses are determinable and measurable
4
Losses should not be covariant (catastrophic)
5
Chance of loss is calculable
6
7
Premiums are economically affordable
9
What Are Some of the Difficulties in Providing
Insurance to Poor People?

• Requires specialized capacity, which is
  complicated by the lack of reliable data
  characteristic of low-income, informal markets

• Technical Specialization

Marketing and Sales
Most poor people do not understand insurance or
may be biased against it
Requires a distribution system that can handle
small financial transactions efficiently in
convenient locations, and engender trust
Distribution Channels
10
Micro-insurance Legislation in India

• Regulated by Insurance Regulatory and Development
  Authority (IRDA) India
• Obligations of Insurers to Rural Social Sectors
  2002
• - A quota system, which compels insurers to sell
  a percentage of their policies to low income and
  rural clients

11
Micro-insurance Legislation in India

• Quota for Rural clients
• - Life insurers must sell 7 of total policies
  by number (not value) in the first year with
  increasing amounts up to 16 in year 5.
• - With general insurance, 2 of gross premium
  income must come from rural areas in the first
  year, 3 in year 2, and 5 thereafter.

12
Activities Involved in Offering Insurance
Product Sales Marketing, education, signature of
policies
Product Manufacturing Design issues such as
pricing, claims procedures, level of coverage
Policy Holders
Product Servicing Premium collection, payment of
claims
13
Examples of Microinsurance Delivery

• Partner-Agent Model
• Insurers utilize MFIs delivery mechanism to
  provide sales and basic services to clients
• There is no risk and limited administrative
  burden for MFIs

• Full-Service Model
• The provider is responsible for all aspects of
  product manufacturing, sales, servicing, and
  claims assessment
• The insurers are responsible for all
  insurance-related costs and losses and they
  retain all profits

• Community-Based Model
• The policyholders own and manage the insurance
  program, and negotiate with external health care
  providers

• Provider Model
• The service provider and the insurer are the
  same, i.e., hospitals or doctors offer policies
  to individuals or groups

14
Partner Agent Model

• Agents act as intermediaries between an insurance
  company and its market.
• The MFI acts as the agent, marketing and selling
  the product to its existing clientele through the
  distribution network it has already established
  for its other financial services.
• The insurance provider acts as the partner,
  providing the actuarial, financial, and
  claims-processing expertise, as well as the
  capital required for initial investments and
  reserves as required by law.

15
Partner-Agent Model
Partner
Agent

Product Sales
Policy holder
Product Manufacturing
Product Servicing
Service Provider
16
Partner Agent Model - Benefits for MFI

• Limited Initial Capital Investment and Low
  Variable Costs.
• Compliance with Legal and Regulatory
  Requirements.
• Potential for Stable Revenue Stream
• Learning the Business

17
Partner Agent Model - Benefits to Insurance
Company

• Access to New Markets
• Access to Clientele with Strong Financial
  Records.
• Lower Transaction Costs for Serving a New Market.
• Regulatory Compliance.