«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
2.3 Rely on inexpensive distribution systems One of the major reasons why insurance companies cannot reach lowincome markets is their lack of appropriate distribution systems. However, as the experience with the partner-agent model illustrates, grassroots or community organizations can be inexpensive and effective insurance distribution channels. When considering this approach, the most logical delivery agents are microfinance institutions, since they already have savings and credit transactions with the poor. Similar experiences are found in mainstream 2 The authors wish to thank John Wipf for providing the details about G-Cash.
Strategies for sustainability 573 insurance where very efficient bancassurance products can reach a large number of policyholders.
However, to really expand the availability of microinsurance, it is also necessary to look beyond financial institutions as possible delivery agents.
Yeshasvini uses the existing cooperative network to sell health insurance, collect premiums and distribute photo ID cards. Likewise, the partnerships between insurance companies and retailers in South Africa (see Chapter 4.6) seem like potentially inexpensive mechanisms to extend insurance to the poor.
For microinsurance, a key aspect of inexpensive distribution is to have minimal screening and underwriting requirements. This is possible with group policies whereby everyone who is part of the group and meets the age criteria is eligible for insurance cover. Even with individual policies, it is possible to have minimal underwriting up front (perhaps just a signed declaration of good health), shifting the burden to the claims process. This back-end scrutiny is more cost-effective since it applies only to those few people who claim instead of the huge volumes of people who join the scheme.
Sustainability strategy 7. Rely on inexpensive distribution systems Advantages – Can use the existing distribution structure.
– Easy to implement.
Disadvantages – Overloaded staff of existing system may not clearly explain the insurance benefits.
– The risk carrier may not acquire the necessary in-depth understanding of the target market.
– Only appropriate for basic insurance cover.
2.4 Control costs A key strategy for controlling costs is to enhance efficiency by differentiating requirements depending on the size of the insurance policy. For example, simple microinsurance products can be handled by less expensive employees.
Or if the sums insured are below a certain amount, then a more streamlined, less expensive approach can be taken. At Delta Life, if a policy is for more than US$2,000, then the applicant must undergo a medical examination; for amounts below US$2,000, only a health declaration is required. Similar adjustments can go a long way towards making the smallest policies more sustainable.
574 ConclusionsThe community-based model often relies on volunteer labour of its members as a cost control strategy (see Chapter 4.3). This approach has been particularly effective in making it possible for many small schemes to cover their costs in a short period of time, but it is not a long-term strategy; volunteers tend to become de-motivated resulting in high turnover.
In health insurance, minimizing claims costs is a major challenge. Organizations that manage their own healthcare providers, such as ServiPerú, BRAC and Grameen Kalyan, can exert a greater influence on healthcare costs. At ServiPerú, for example, doctors’ salaries, usually a fixed cost, are rendered variable by linking remuneration to the number of consultations provided. If properly managed, such a capitation compensation system can provide a direct link between income and expenses.
In addition, regardless of who provides the healthcare, microinsurers must make sure that appropriate treatment protocols are followed, such as only prescribing pharmaceuticals that are actually needed (a challenge since consumers always want pharmaceuticals, even if they are not necessary), providing generic pharmaceuticals where possible, and not conducting unnecessary tests – BRAC’s MHIB has made significant progress in this regard.
Although these approaches are relevant for conventional insurance as well, one microinsurance-specific cost-control strategy is to appeal to the members’ sense of solidarity in the expectation that they will voluntarily refrain from over-usage. For example, as a cooperative, ServiPerú asks its members to avoid excessive or unnecessary use of services so that the company can keep prices low. While such an approach will undoubtedly engender a certain amount of free-riding, it will probably be less severe in a mutual or NGO than it would be in an organization driven by profit.
Another element in keeping costs down is loss prevention. Microinsurers can reduce claims costs by providing health education that encourages people to eat better and obtain treatment early, and by health promotion campaigns, for example providing insecticide-treated mosquito nets in areas of high malaria risk to and developing access to clean water supplies (see Chapter 3.9).
Such prevention campaigns do not necessarily need to be conducted by the insurer. Indeed, strategic partnerships are a particularly useful way of stretching the budget. For example, several microinsurers collaborate with organizations raising awareness about HIV/AIDS or with government immunization campaigns to provide valuable services to their members at a limited (or no) cost, while striving to reduce claims.
Strategies for sustainability 575
Sustainability strategy 8. Control costs
Advantages – Differentiated processes, with more streamlined requirements for small policies, appropriately balance costs and controls.
– With proper guidance, many healthcare providers can reduce costs without adversely affecting quality; in fact, clear treatment protocols can reduce costs, and improve the quality of healthcare and service.
– Small investments in prevention can often reap significant returns in the form of lower claims, especially if implemented through mutually beneficial strategic partnerships.
– Prevention campaigns enable policyholders who do not make claims to receive some benefit from the scheme.
Disadvantages – Dependence on volunteer labour is not a long-term solution.
– Heavy downward pressure on the salaries of insurance and healthcare providers could result in high staff turnover and poor-quality service.
– Reliance on solidarity to minimize claims and insurance risk becomes less effective as the organization grows.
2.5 Buy benefits in bulk Another way to keep claims costs down is for the microinsurer to negotiate with the benefit provider to get a better deal. For example, ServiPerú’s cover includes a funeral benefit. The organization has negotiated a discount from associated funeral service providers in exchange for bringing in large volumes of business. Consequently, low-income households have access to a funeral of the same quality for less money by going through the insurer.
Yeshasvini followed the same strategy. Given the significant over-capacity in the local hospitals and clinics, the Trust was able to persuade its network of providers to agree to fixed prices for operations 30 per cent below the average price. The healthcare providers agreed to the lower rates because the insurer will actually pay and because they want to increase the utilization rate of their facilities and staff.
576 ConclusionsSustainability strategy 9. Buy benefits in bulk Advantages – Can make benefits more affordable.
– Advantage for service providers (e.g. clinics, funeral parlours) as they receive a certain “guaranteed” clientele in exchange.
Disadvantages – Only appropriate when benefits are provided in kind.
– Providers of in-kind benefits may deliver poorer quality services to the insured since they are being paid less.
– The strategy relies on use of excess capacity, which may not always be available.
3 Diversify income sources One problem in providing insurance to the poor is that they may not be able to afford it, even if the benefits are small and the operating costs are kept to a minimum. The third general approach to making microinsurance sustainable is to diversify income sources so that low-income people only pay for a portion of the costs. This approach is common among the traditional financing mechanisms of social health insurance, whereby financing is based on wagerelated and bipartite contributions shared between the employer and the employee, such as that used by Bienestar Magisterial in El Salvador.
However, such an approach can only work in the formal sector. For workers in the informal economy, more creative strategies are required. Some microinsurers become involved in unrelated income-generating activities.
Microcare, for example, has a number of contracts for software development and teaching computer skills, which are unrelated to providing health insurance, but they help pay the rent. Yeshasvini is selling advertising on the back of its ID cards to bring in additional revenue. Other ways of diversifying income sources are discussed below.
3.1 Cross-subsidize from other products or markets One strategy is to subsidize the premiums from other, more profitable products or market segments. Indeed, for a microinsurance scheme to be considered as constituting social protection, it should have a redistribution function from the not-so-poor to the poor.
Strategies for sustainability 577 For example, Grameen Kalyan and BRAC’s health insurance schemes serve the broader communities in which they operate. They charge higher premiums for the non-poor to be able to minimize the premiums for lowincome community members. Penetration of these higher-income populations is intended to help the plan achieve viability by bringing in more revenue, although the schemes are not quite there yet. In 2003, 10 per cent of BRAC’s insureds and 13 per cent of GK’s were non-members, providing 18 per cent and 15 per cent of premium revenue respectively. Both organizations have learned that greater effort is required to increase the participation of the non-poor and to avoid adverse selection with this market segment.
Tata-AIG intends to follow a similar strategy. Once its micro-agents have exhausted the market that they can serve easily, they will be taught how to offer more expensive products to higher-income clients. VimoSEWA adopted this approach in 2001, introducing a new benefit package with higher sums insured targeted at higher-income customers. However, sales for this product were quite slow and after two years, VimoSEWA abandoned the strategy. It realized that its existing distribution mechanism was not particularly effective in serving the non-poor, a market where SEWA’s brand was not as powerful. In addition, efforts to move up market distracted management from achieving viability in the low-income market.
To extend coverage to the poorest members of the community, the MHOs promoted by UMSFG also intend to cover the destitute when the organizations are in a strong financial situation. However, a major challenge to offering sliding-scale premiums is that the distinction between those who can and cannot pay premiums is not easy to make. In the Forestry Guinea area where UMSFG operates, anybody can become destitute.
This sustainability strategy is also appropriate for commercial insurers serving the low-income market since they naturally have a range of other business lines. For these insurance providers, there is a risk that they will try to generate short-term profits from the poor. Instead, the cross-subsidizing approach can be justified, even to shareholders, if the insurers adopt a longterm view of this market and strive to cultivate customer loyalty in the expectation that these policyholders will be profitable in the future. Indeed, the primary goal today should be to develop an insurance culture in the lowincome market, whereas a strategy of maximizing short-term profits is likely to undermine that objective.
TUW SKOK’s approach was different because its two market segments were the credit unions and their members. The insurer initially focused on corporate policies for the credit unions, including deposit insurance, coverage for fire and robbery, and fidelity bonding. After it had saturated its corporate market, TUW SKOK turned its attention to meeting the needs of