«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
1.2 Cap benefits Another way of limiting benefits is by putting a ceiling on the amount that will be paid out over a period of time. For example, ALMAO’s funeral policy covers up to nine lives per household, but only covers two deaths per year per household. Karuna Trust pays for lost income due to hospitalization up to a maximum of 30 days per year. Life savings schemes always specify a maximum benefit; at MUSCCO, the maximum coverage is MK 100,000 (US$935), while, in Guatemala, Columna’s life savings coverage goes up to Q. 50,000 (US$6,000).
This benefit-capping approach is particularly common in health insurance. TYM goes so far as to only provide a health insurance benefit once during a client’s lifetime, and limits that benefit to VND 200,000 (US$13), which hardly seems sufficient to cover members’ needs. While this is certainly not an ideal benefit, it is the best that this informal scheme feels it can provide given its current management capacity and the members’ ability to pay.
Although not as severe, Grameen Kalyan and BRAC in Bangladesh both limit the benefit amounts for patients needing treatment from other healthcare providers. Although the vast majority of GK and BRAC policyholders have their healthcare needs addressed at the organizations’ own clinics, more severe cases must be referred to hospitals and other specialist facilities.
Where this arises, GK, for example, reimburses up to US$34 for hospitalization due to maternity complications and up to US$17 for hospitalization due to other complications.
Providing limited benefits reduces claims volatility and hence reduces the need to obtain reinsurance coverage. However, this approach does not solve the basic problem of helping low-income households to cope with large losses.
Disadvantages – The greatest need for insurance is to cover large medical bills; capping benefits defeats one of the primary objectives of health insurance, which is to prevent the poor from having to sell their assets or borrow from a moneylender to receive treatment. Insuring high claims amounts should be affordable if the incidence rate is small.
1.3 Target benefits If the low-income market cannot afford comprehensive cover, especially for health insurance, then it is necessary to ration benefits, and make some difficult choices regarding what is and is not covered. For instance, the public schemes in Bolivia (SBS) and Peru (SMI) limited their initial benefit packages to the most relevant epidemiological problems of maternal and early childhood health. AssEF and UMSGF clearly list the treatments covered, and do not pay for any that are not. This is necessary not only to reduce claims, but also to educate the policyholders.
Benefits can also be designed to fill key gaps in the existing mechanisms for coping with risk. For example, Karuna Trust’s benefits were designed to supplement services for the poor in public health facilities. These people do not need the actual healthcare coverage, but if the policyholder is hospitalized for more than 24 hours in a designated public health facility, Karuna provides Rs. 50 (US$1.10) per day as compensation for wage loss. This benefit package is very appropriate for workers in the informal economy who might otherwise not seek healthcare, not because of the cost of the care but because of the opportunity costs of not working. Other gaps addressed by the Karuna insurance coverage include pharmaceuticals and ambulance transportation.
It is best to involve the members in choosing the benefits to allow them to make the tough decisions about how much they are willing to pay and for what benefits. For instance, Microcare’s customers chose not to include medication for chronic diseases in their benefit package instead of excluding chronically ill persons. This made the package more affordable while being broadly inclusive, and therefore more attractive to the clients (although the chronically ill had to find some other way to pay for their insulin, inhalers and so on).
Disadvantages – When an insurer limits the benefits, members always want more.
– May not cover illnesses or risks that some policyholders are most concerned about.
– Risk of drop-outs if clients are consistently not covered for risks they face, and if coverage is not clearly understood (although these disadvantages can be tempered by involving the clients in choosing the benefits).
1.4 Focus on big-ticket items Another way of targeting benefits is to focus only on high-cost, low-probability items such as surgery, letting policyholders pay for their more mundane healthcare costs out of their own pocket. Although this approach reduces the likelihood that individual policyholders will actually benefit from their insurance policy, it also minimizes premiums while ensuring that protection is there when people need it most.
The prime example of this approach is Yeshasvini Trust. For a premium of just Rs. 120 (US$2.70) per year per adult, the insurance scheme covers more than 1,600 operations.1 The benefit covers surgery along with nearly all associated costs, including admission fees, bed charges in a common ward, nursing, anaesthesia, the surgeon’s charges, as well consumables and medicines during and after the operative period.
The underlying assumption that led to the creation of the benefit package is that poor households cannot afford surgery, which is often lifesaving.
Those who pay the full costs of surgery without insurance often further impoverish themselves and their households. Since only a few illnesses require surgery, a large number of households joining together in an insurance scheme can make surgery accessible for those who need it. While this approach undoubtedly benefits policyholders, there are still many expensive treatments that are not covered by the scheme, including hospitalization without surgery.
Sustainability strategy 4. Focus on big-ticket items Advantages – Focuses on major expenses that would force households to sell productive assets, starting a downward spiral further into poverty.
– Provides coverage for large and infrequent risks, lowering the administration cost of dealing with many small claims.
Disadvantages – Primary care measures have the greatest impact on reducing overall healthcare expenditure. Funding only the big-ticket items may result in increased cost over many years as the insured delay early cost-effective treatment.
– In the history of healthcare, expenditure on prevention and healthpromotion measures has had a far greater impact on reducing total health expenditure and improving the overall health of the population. Some would question the wisdom of insuring big-ticket items that save a few persons, when the same amount could save more lives, for instance if it were applied to a pre- and post-natal care programme.
2 Focus on efficiency Besides limiting the benefits, the second set of sustainability strategies focuses on minimizing costs through more efficient and effective products, systems and processes.
2.1 Provide member benefits The member-benefit approach is perhaps the most effective way of minimizing the operating costs for the insurer and the transaction costs for the insured. As the name suggests, the idea behind member benefits is that members of a group, such as a credit union or cooperative, automatically receive specific insurance coverage, usually without directly paying any premiums. A common example is the life savings cover provided by Columna, MUSCCO, La Equidad and other insurers of SACCO networks (see Chapter 2.3).
As there are no individual transactions, the operating-cost structure is minimal. For example, for its member benefits, MUSCCO’s total administrative expenses were just 15 per cent of premiums (2003), while for its individual sales of a complex product in India, VimoSEWA’s administrative expenses were 97 per cent of premiums (2004). In the developed insurance market, distribution costs are generally the major item in administrative expenses and therefore, by eliminating them, the member-benefits approach can make insurance much more affordable.
To offer a member benefit, the institution has to have another revenue source to pay for insurance. For example, Yeshasvini Trust collaborates with milk-producing cooperatives that pay premiums on behalf of members by deducting the amount from their monthly milk-production income.
In the case of life savings, the credit unions pay a lower interest rate on the savings to be able to pay the insurance company to provide the benefit.
Strategies for sustainability 571 This reduction in interest on deposits may make the savings product uncompetitive and cause client desertion, or it could be marketed as an attractive benefit that could cause members to increase their savings balances, since the greater the balance, the greater the benefit (up to a maximum).
Sustainability strategy 5. Provide member benefits Advantages – A cost-effective method of covering the whole membership.
– As long as the benefit is reasonably low, there will be little adverse selection.
– Minimizes administrative costs.
– Can be an attractive feature which may increase membership.
Disadvantages – Only members can receive cover.
– The level of cover may not meet the needs of the target population. For example, the client may withdraw from the savings account to pay for treatment costs prior to dying, resulting in inadequate benefits.
– The insured may not be aware they have benefits. If benefits are not claimed, this will distort data and lead the organization to believe it has better claims results than in other programmes where members know they have insurance.
2.2 Use low-cost premium payment methods Since low-income households have difficulty paying annual premiums in one lump sum, to make premium payments fit better with the cash flows of lowincome households, microinsurers have had to innovate. The most common approach is to increase the frequency of premium payments so they are in smaller amounts. Unfortunately, this is likely to significantly increase transaction costs, thus making products more expensive – more affordable and yet more expensive at the same time!
As described in Chapter 3.3 and elsewhere, VimoSEWA has an alternative solution to the lump-sum payment problem that simultaneously decreases the transaction costs. It offers a fixed deposit method whereby the interest from the savings account pays the insurance premium. This arrangement has the advantage of providing semi-permanent insurance with essentially no transaction costs once the total amount has been deposited. However, the poor find it hard to save up enough to put into the account and it is difficult to get policyholders to increase their deposit amount when interest rates decline or premiums increase. Only 25 per cent of VimoSEWA’s 120,000 policyholders use the
572 Conclusionsfixed deposit method to pay premiums; the rest pay through an annual marketing and renewal campaign, which partly explains why the associated administrative costs are still quite high.
Another low-cost premium payment method is through automatic deductions from the policyholder’s savings account. Instead of relying on physical transactions, which are expensive for the insurer and policyholder alike, electronic transactions can minimize the cost of collecting premiums.
For this to be an option, however, low-income households must have access to savings accounts.
In the Philippines, G-Cash has recently been allowing financial transactions via cell phone at a cost of 1 peso each.2 This can be a very cost-effective method of communicating premium due and collecting premiums as clients do not have to pay transportation costs and the insurer receives data quickly and efficiently. Indeed, additional innovation is required in this area to enhance efficiency further. Perhaps technology will provide new solutions.
Sustainability strategy 6. Use low-cost premium payment methods Advantages – Virtually eliminates transaction costs.
– Fixed deposit method provides semi-permanent coverage for the policyholder, and minimal lapses for the insurer.
– Lower costs make it possible to offer greater benefits.