Innovations in Microfinance in Southeast Asia_4 pot

• Some MFPs have begun bringing mainstream insurers into microinsurance through relatively simple products such as credit life and basic term-life insurance.. The health insurance market

insurance companies have to develop or adapt new delivery mechanisms Aldagi Insurance in Georgia, for example, offers health cover through the Constanta Foundation, a local MFP (microfinance provider) Delta Life in Bangladesh cre-ated a new division with an entirely different set of agents, rather than their tradi-tional agents, to create an infrastructure that makes it possible to offer life insur-ance and long-term savings attractive to extremely poor people in a profitable manner

Microfinance has helped insurance move into the low-income market in several ways

• MFPs have effectively entered low-income markets and have created infrastructure to conduct financial transactions

• MFPs have shown that low-income people save, pay bills on time, and can

be financially responsible

• MFPs have identified risk management opportunities among their clients

• Some MFPs have begun bringing mainstream insurers into microinsurance through relatively simple products such as credit life and basic term-life insurance

The health insurance market has hardly been touched by commercial insurers, although the potential demand is staggering Their general lack of interest reflects the difficulty in calculating adequate premiums Margins are very small because it is difficult, even for actuaries, to estimate the likely frequency of illnesses and acci-dents.6 There is often no data available for their actuarial calculations Compounding these deterrents is the cost of controls to manage fraud, moral hazard, and adverse selection Typically, life insurance provides a greater return to insurers than health insurance, as reflected in the divergent levels of insurer interest and development

In fact, commercial insurers’ interest in microinsurance has focused largely on life products, less so on personal accident and property coverage

Although few, there are examples of health microinsurance products, including:

• Microcare Health Limited in Uganda offers comprehensive health cover

• Constanta in Georgia is working with Aldagi Insurance

• La Equidad in Colombia provides life insurance that covers the health of children

low-Box 1: The Case of Insurance Liberalisation in India

In 2000, India liberalised its insurance market A new law prescribed quotas requiring insurers to maintain an annually increasing outreach to rural areas based on the number of policyholders for life insurers or percentage of premi-ums for other insurers Unlike any other country, India, through its Insurance Regulatory Development Authority (IRDA) has actively promoted microinsur-ance in this way The IRDA is also developing a separate microinsurance law

How Microinsurance Can Be Delivered Efficiently

Simplistically, insurance premiums should be set using the following calculation:7

Table 2 The basic method of calculating premiums

Premium Component 8 Description

+ Risk Premium

(The benefit amount) times (the probability that the risk event will occur) This projected amount should approximate the actual value of claims when they occur

+ Operating Costs Include: marketing, administration, reinsurance, actuarial acti-vities, commissions, and others

+ Profit Margin Value based on a percentage of premiums projected by the institution

- Investment Income Most relevant for long-term products like endowments Short-term products may generate some investment income

= The Premium

Initial operating subsidies from government or donors, or from public or private investors at any stage, could reduce the pre- mium

There are several ways to keep the cost of microinsurance low while maintaining profitability:

• Reducing the value of the benefit or restricting the coverage can reduce the risk premium AAR Health Services in Kenya reduced the value by limiting access to “C,” “D” and some “B” level hospitals.9 GRET Cambodia restricted coverage by specifying illnesses and covering certain diseases only and

“surgery of the torso”.10 However, demand research clearly highlights that many low-income people would like more comprehensive protection Thus, the objective for developing a health microinsurance product would include the widest possible range based on the demand in particular areas

Box 2

AAR Health Services in Kenya had 220 policyholders in November 2003 199,

or 90%, chose comprehensive cover even though it cost about 2.5 times the cost of the product that provided only in-patient coverage

(AAR Health Services data calculated by the author)

• Controls also reduce costs, as elaborated later Having systems that simply confirm that the insured is the one receiving care, or who is the deceased, can reduce claims costs Substitution of an uninsured for an insured is a classic loss for insurers, especially where doctors might not be very well paid One health insurer claims to save between thirty and forty percent of premiums through their careful, yet efficient, management of controls.11

• Providing an inexpensive, popular, comprehensive, profitable product requires processes that ensure maximum efficiency in all areas of operation Most community-based health microinsurers do this partly through volunteer management and the elimination of commissions Some hospitals set up their own provider-based schemes that take the premiums right into their coffers, but this requires several types of insurance skills that are often lacking Insurers are also developing more efficient networks with MFPs and others for the low-income market

• Subsidies have been very important for institutions like SEWA in India that leverage donor subsidies to reduce the cost of premiums However, subsidies can be dangerous, often promising too much, especially when the donor is not knowledgeable about efficient insurance operations

9 The hospital quality scale ranks “A” as the highest quality facilities, “D” as the lowest

10 McCord, M.J., “Microinsurance: A Case Study of an Example of the Provider Model of Microinsurance Provision – GRET Cambodia”, Nairobi, MicroSave, 2001 Available at www.microinsurancecentre.org

11 McCord, M.J and S Osinde, “Microcare Ltd Health Plan (Uganda): Notes from a visit 17– 21 June 2002.” MicroSave, Nairobi, 2002 Available at: www.microinsurancecentre org

Linkages between insurers and MFPs in the broad sense are being created in many countries

Microinsurance is typically offered through a partnership of regulated insurers selling through intermediaries, or by a mutually-owned entity These relationships create a synergy of skills when organisations that have access and capacity to work with low-income people are coupled with insurers who know the risks and how to manage them In this case, each party shares its skills, without which nei-ther could effectively serve this insurance market For these relationships to be successful, transactions have to be efficient, and good communication is essential between insurers and the party representing the insureds

Several areas of growth are soon likely to occur on parallel paths Programmes and relationships will be upgraded and expanded as insurers become more inter-ested in this market and experiment with new mechanisms for effective collabora-tion Gemini Life is experimenting by placing an agent in rural bank branches in Ghana to sell life and endowment products Many MFPs are making microinsur-ance mandatory for borrowers, which is more efficient but not an ideal response to client demands A few new insurance companies may arise from MFP activities such as the CARD Mutual Benefit Association in the Philippines or from NGOs like Microcare But this greenfield route is difficult

Some insurers may be enthusiastic about downscaling into this market and may modify their operations to reach down-market clients For example, Delta Life suc-cessfully built its own low-income market network Others will downscale through intermediaries such as MFPs AIG Uganda is a good example, with 1.6 million lives insured as of mid-2004 through nineteen group policies to MFPs The success of either method will depend on costs Though preliminary and not a perfect compari-son, the operating cost ratio of Delta Life’s proprietary delivery structure12 was about ten percent greater than that of AIG Uganda’s MFP network.13

Opportunities for Insurers in Microinsurance

Growth

A study conducted by Swiss Re sigma on the future market for insurance products

in India and China states that, “emerging markets will be at the frontier of ance in the 21st century Non-life premiums collected in emerging markets are expected to double by 2014…at constant prices Life premiums will increase even

insur-12 McCord, M.J., and Craig Churchill “Delta Life Bangladesh: CGAP Working Group on Microinsurance – Good and Bad Practices in Microinsurance, Case Study No 7”, ILO, Geneva, 2005

13 McCord, M.J, Felipe Botero, and Janet S McCord “AIG Uganda: CGAP Working Group on Microinsurance – Good and Bad Practices in Microinsurance, Case Study No 9”, ILO, Geneva, 2005

faster … over the same period.”14 While China and India will provide a tionate amount of this growth, dramatic expansion is also likely in many other developing countries and emerging markets There are great opportunities for innovative and flexible insurers that seek profitable growth in the low-income market Growth will come from expanding markets that will cover a much wider range of household incomes Microinsurance will be a key instrument for insurers who want access to these markets

dispropor-Box 3

„[The low-income markets] were previously regarded as not worth spending any time developing products for However, clearly they are a big emerging market Any insurer would be well advised to give it focus, to study their needs, and get in there whilst there is still time.”

Barrie Cambridge, Chief Executive, East Africa Underwriters

How Big Is This Market?

Nearly 3000 MFPs participated in the 2003 Microcredit Summit Campaign They reported that they served a combined pool of 81 million borrowers of whom 55 million were amongst the “poorest”,15 and 45 million were women.16 These num-bers typically represent one family member within an average household of possi-bly five people, which could translate into life, property and health cover for 400 million people Many large MFPs are or will soon be able to offer savings prod-ucts, which is likely to produce client bases in which depositors typically far out-number borrowers Finally, annual aggregate MFP growth in the numbers of cli-ents is between twenty-five and fifty percent in many countries Although this growth rate will certainly decline, the opportunity for growth is phenomenal If insurers develop appropriate products that can be managed efficiently, the micro-insurance premium potential could dwarf that of other insurance products It is not unreasonable to expect that the total microinsurance market could consist of well over one hundred million policyholders before 2015.17

The Microcredit Summit Campaign also points out that the upper fifty percent

of the poor who live below the poverty line comprise 235 million families around the world If efficient outreach mechanisms were available, these families could potentially be microinsured

Profitability

Profitability in microinsurance is earned by offering appropriate products to masses of people in an efficient manner Microinsurance products have very low margins But if these products are sold to large numbers of people, the accumu-lated income could be quite substantial A number of microinsurers have reported profits from microinsurance operations, especially with life products Examples include La Equidad in Colombia, Tuw Skok in Poland, CARD MBA in the Phil-ippines, AIG Uganda, and Delta Life in Bangladesh

Creating profitability in health insurance is more difficult Despite several tempts by regulated insurers, no sustained profitability has been recorded for health microinsurance Some community-based groups show a surplus because they use local volunteers, keeping their operational costs low while permitting a higher loss ratio that benefits their members, but other factors may make it diffi-cult for some to keep their loss ratios below 1.0

at-What makes one programme or product more profitable than another? The key seems to lie in the quality of the risk premium calculation and operating effi-ciency Too many “microinsurers” still base their premiums on what they think their customers can pay or at a level the customers say they will pay, often without any real understanding of the product they are asked to value At the same time, such insurers usually want to offer as much coverage as they can, leading to di-verging cash flows Where actuaries carefully set premiums, there is a signifi-cantly better chance that the risk premium will be consistent with claims

Controls

Microinsurance demands strong and innovative controls for adverse selection, moral hazard, and fraud Lax controls in these areas commonly bankrupt even regulated insurers While microinsurance requires strong controls, there must be

a flexible approach to managing them For example, a death certificate usually accompanies a death claim But in many countries it is almost impossible to obtain a death certificate in rural areas, making it inappropriate to require such a document from rural policyholders To confirm the death, some organisations use a service with a wide network and may settle the claim immediately in cash

or in kind Others require letters of confirmation from religious and/or local political leaders In this way, control is maintained using mechanisms that are manageable for rural policyholders

Health insurance is prone to fraud and moral hazard Doctors will submit claims for treatments and medications that they do not dispense, even splitting the

proceeds with the policyholder Another common ruse is to substitute an sured person for an insured Both of these deceptions can be disastrous for the insurer Microcare in Uganda counters these problems by having an insurance desk

unin-in the waitunin-ing rooms of the hospitals they work with, which allows them to confirm the identity and status of the covered person Using these strategies hand in hand with software that they have developed has minimised these control issues Micro-care Management believes these processes save more than thirty percent on premi-ums after covering the costs of their personnel and equipment in the hospitals These controls are examples of insurance risk management in a niche market

Good quality care is important, but not just because an insurer should pay only for good treatment The availability of good treatment, combined with microinsur-ance that helps people to pay for it, reduces losses for the household as well as for the insurer In contrast to the uninsured, evidence from Uganda and South Africa shows that people who have health microinsurance are more likely to seek care earlier in the disease cycle This leads to faster recovery, reduced business losses, and lower treatment costs charged to the insurer.18

A Role for Donors

Microinsurance is and should be a commercial venture Donors should focus on research and product development when insurers are reluctant to invest With such support, some of these products, like that of AIG Uganda, might have been launched in a form better suited to the market For insurance to be successful, the insured must pay at least the cost of claims based on realistic projections

The GLICO life policy with an endowment rider in Ghana had significant nor input through CARE in its research and development (R&D) phase This col-laboration produced a product that was well received, though marketing requires invigoration Without donor input, GLICO would probably not have entered the low-income market Other insurers, such as Tata AIG in India, have received lim-

do-18 Blanchard-Horan, C “Health Microinsurance Affects Health Behaviour and Malaria Treatment: A Multi-Site Case Comparison Study in Uganda,” 2006, and “Health Microinsurance in Uganda,” International Journal of Public Administration, 2007 Also see David Dror et al., forthcoming

ited donor funds and/or donor-paid research Donor funding that was promised was slow to come in these cases, prompting the insurers to use their own funds to invest in these products Some microinsurance has been developed and offered without direct donor funding These include Delta Life, CARD MBA, and AIG Uganda Donors can have the greatest influence on microinsurance development

by funding R&D in ways that are likely to lead to commercial sustainability

Table 3 Examples of activities for investors in microinsurance markets

Investment option Discussion

Insurance brokerages

Brokerage activities are weak in many developing tries Brokers could serve the whole market with a special focus on microinsurance products Brokers help develop products and ensure that communications and processes are efficient Their activities might be manageable on a re- gional basis, increasing market potential and bridging the gap between insurers and potential delivery channels Licences for joint ventures

coun-in other countries for

suc-cessful domestic companies

with good microinsurance

operations

Some domestic insurance companies are testing and proving systems and procedures that create successful microinsur- ance provision for insurers, intermediaries, and policyhold- ers Invest in these companies’ expansion in other countries and in the adaptation of their “technology” to a new market

Development of

efficiency-enhancing infrastructure

Microinsurance success is predicated on efficient tions and huge numbers of policyholders New technology will be necessary to manage the volume of small premium payments In India, for example, ICICI is testing life insur- ance sales by computer from the villages

opera-Efficient claims settlement

Long-term savings custodian

In Georgia and many other countries the private sector is or will be able to collect pensions and long-term savings The limited confidence in these institutions could be enhanced

by a credible custodial company that would expand the market by encouraging reluctant savers to invest

New delivery channels

Partnership model delivery channels have tended to have limited success Innovative delivery mechanisms should be identified and developed, such as through remittances, enhanced technology, or new linkages

Assisting Greenfield Microinsurers

The extensive network of insurance companies throughout the world obviates the need to start specialised microinsurance companies Exceptions consist of situa-tions in which there are no insurers to provide the critical services that the low-income market requires For example, the demand for health care financing was great, but no insurance company would offer coverage after the last one remaining

in the market went bankrupt because of weak controls This was one reason for the development and licensing of Microcare in Uganda Private investment provided the capital for its insurance licence, and donors are funding some of its transition and scaling-up In the Philippines CARD helped start a Mutual Benefit Associa-tion (MBA), which has CARD (an NGO) and CARD Bankas the MBA’s only insured clients Being an insurer would have created a great risk for CARD as an NGO with a small capital base The MBA as an independent legal entity does not generate a financial risk for CARD

There is a role for donor support in helping insurers expand into the low-end market Initial R&D assistance could help more insurers better understand the low-end market as a viable risk

Role for Investors

There are a number of opportunities for investors in microinsurance, some of which are suggested in Table 3

Key Market Access Points – Efficiency Is the Key

Microfinance Providers

Organisations conducting financial transactions in the low-income market can produce efficient interventions for microinsurance Typical institutional agents have been banks, credit unions, and other MFPs These institutions that work in-tensively in the low-income market can process additional financial transactions such as microinsurance at little additional cost

As microinsurance sold and serviced by “traditional” agents becomes better understood and managed, it should be expanded to include other potential agents The prolific funeral societies might be able to provide better financial services to their members if they were linked to insurance companies Community-based groups might also be able to improve their risk management services if they were linked to an insurer or overseen by a “social reinsurance” mechanism Around the globe, many cooperatives and mutual benefit associations are moving towards specialised regulation, and some may be able to offer new products For example, CARD Mutual Benefit Association manages life and long-term savings very well,

and is negotiating for health cover with PhilHealth19 through CARD MBA and its CARD partners This type of relationship enables insurance organisations to pro-vide additional products keyed to their own level of risk

If microinsurance is to realise its potential, agents must be skilled and regarded, the importance of such non-traditional relationships must be recognised, and tools must be developed that make these relationships efficient and effective

well-Remittances

The World Bank’s Global Development Finance report for 2005 noted that tances to developing countries approximated USD128 billion,20 and that the vol-ume was growing by an average rate of about twelve percent per year.21 Linkages between remittances and microinsurance products might create efficiencies: mi-grants could have a more powerful effect on their home country households if they could designate part of their remittances to pay microinsurance premiums For example, a life policy could cover the cost of their parents’ funerals and the mi-grant’s cost of going home to attend And, the family could be covered for health care By smoothing the expenses of the migrant and providing protection for the family, these types of arrangements could produce a very positive, valued impact

remit-Electronic Applications to Speed up Processes and Expand Cover

The objective of providing effective microinsurance products to as many income people as possible requires the development of efficient physical processes and technology-based infrastructure Although this infrastructure is expensive to develop, test, and bring online, it could dramatically and efficiently expand the market Some examples:

low-• A project to create employment and electronic access to people in rural India has led to the installation of computer kiosks in over three thousand villages Beyond the benefit of access to information and potential participation in national, regional, and/or international markets, kiosks could be used to sell insurance products In fact, they already are used to promote basic life insurance products, and it might be possible to expand their use to include in-patient health insurance

19 PhilHealth is the Philippine Government social health care programme

20 “Global Development Finance, 2005.” The World Bank, Washington DC, 2005

21 C Sander in “Capturing a market share”, Bannock Consulting, 2003, reminds us that remittance data is notoriously difficult to quantify, partly because of the variety of formal and informal means of transmitting remittances Thus, these data should be viewed as the minimum amount of remittances for these years

• To speed premium collection, one church-based funeral insurance programme created a procedure so that its parishioners could pay their premiums after church services This church developed bar coding for their policyholders’ insurance cards, which speeded up transactions

Conclusions

Insurance companies are searching for ways to expand their markets in developing countries The microcredit and savings services offered by most MFPs do not provide sufficient risk management in the low-income market Yet, there is sub-stantial demand for effective risk management tools specifically designed and supplied for this market The market potential is huge – possibly one hundred million covered lives within the next ten years Regulated insurers should view the low-income masses as a market niche that can yield reasonable profits Success will require extremely efficient delivery mechanisms that greatly reduce operating costs Such innovation starts by using banks and other agents It must also identify new and effective intermediaries, and make better use of technology to simplify all processes in ways that enhance efficiency for the insurer, agent, and policy-holder The roles and potential roles of the numerous parties involved in micro-insurance are likely to become increasingly integrated, reducing transaction costs Service should inevitably expand to cover more people and more risks

Appendix 1: Summary of La Equidad Basic Protection and

Small Business Protection Plan Coverage

Basic Protection 22 Insured Benefits (USD)

USD1850 Plan USD3700 Plan

Monthly Children’s School Fees (24 months) 17 33

Assistance with household member Funeral

Small Business Protection 23

Fire Basic

Repair Basic Earthquake Optional Unemployment Optional Electrical Equipment and Electricity Optional

Transport of valuables except in war or strikes Optional

References

Blanchard-Horan, C “Health Microinsurance Affects Health Behaviour and Malaria

Treatment: A Multi-Site Case Comparison Study in Uganda.” International

Journal of Public Administration, forthcoming

Blanchard-Horan, C “Health Microinsurance in Uganda.” International Journal of

Public Administration, 2007

Bohórquez, Martha Presentation by La Equidad Seguros, VII Inter-American

Forum on MIcroenterprise Cartagena, Colombia, 2004

CGAP Working Group on Microinsurance Preliminary Donor Guidelines for

Supporting Microinsurance ILO, Geneva, October 2003 Available at: http://

www.microinsurancecentre.org/index.cfm?fuseaction=resources.documents

Churchill, Craig, Dominic Liber, Michael J McCord, and James Roth Making

Insurance Work for Microfinance ILO, Geneva, 2003

Cohen, Monique and Jennefer Sebstad Reducing vulnerability: the demand for

microinsurance Journal of International Development Volume 17, Issue 3,

2005 Pages 397-474 John Wiley & Sons, Ltd

Daley-Harris, Sam The State of the MicroCredit Summit Campaign Report 2004

Washington DC 2005

http://www.microcreditsummit.org/pubs/reports/socr/2004/SOCR04.pdf 23 Mar 2005

Dror, David M., Elmer S Soriano, F Marilyn E Lorenzo, Jesus N Saron, Jr.,

Rosebelle S Azcuna, and Ruth Koren “Field based evidence of enhanced health

23 Ibid

care utilization among persons insured by Micro Health Insurance Units in the Philippines.” International Journal of Public Administration Forthcoming

“Global Development Finance, 2005.” The World Bank, Washington DC, 2005 IndiaOneStop.com 25 February 2005

Matul, Michal Understanding Demand for Microinsurance in Georgia Memphis

TN, The MicroInsurance Centre, February 2004

McCord, Michael J Microinsurance: A Case Study of an Example of the Provider Model of Microinsurance Provision – GRET Cambodia Nairobi, MicroSave,

2001 Available at www.microinsurancecentre.org

McCord, Michael J and Craig Churchill Delta Life Bangladesh: CGAP Working Group on Microinsurance – Good and Bad Practices in Microinsurance, Case Study No 7 ILO, Geneva, 2005

McCord, Michael J., Felipe Botero, and Janet S McCord AIG Uganda: CGAP Working Group on Microinsurance – Good and Bad Practices in Microinsurance, Case Study No 9 ILO, Geneva, 2005

McCord, Michael J., and Sylvia Osinde Microcare Ltd Health Plan (Uganda): Notes from a visit 17 – 21 June 2002 MicroSave, Nairobi, 2002 Available at: www.microinsurancecentre.org

Sander, Cerstin “Capturing a market share.” London, Bannock Consulting, 2003 Simkhada, Nav Raj, Sushila Gautam, Mira Mishra, Ishwori Acharya, and Namrata Sharma Research on risk and vulnerability of rural women in Nepal Kathmandu, December, 2000

“Swiss Re sigma study: high growth potential puts emerging markets at frontier of insurance – China and India in the spotlight.” 7 October 2004

van Oppen, Charles “Insurance: a tool for sustainable development.” Insurance Research and Practice Volume 16, Part I, pp 47-60 London, Chartered Insurance Institute, 2001