«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Sustainability strategy 10. Cross-subsidize from other products or markets Advantages – Redistribution is a core element of social protection systems.
– Market diversification increases the security of microinsurance by spreading risk and increasing volumes of insureds.
– Increased volumes should result in increased efficiency, if well managed.
– Can reach sustainability sooner.
Disadvantages – Reaching a higher-income market may require a different, more costly distribution system.
– The microinsurer may not have the correct brand image to attract higherincome clients.
– The natural tendency with all insurance operations is to drift to higherincome markets over time, as they are usually more profitable. This strategy requires strong governance to maintain focus on serving the needs of the poor.
– In a competitive market, other insurers may have more efficient distribution systems for higher-income populations.
– In a mutual organization, those providing subsidies may be elected to the governing body and change this policy.
3.2 Use an endowment fund to subsidize operations Another source of compensating revenue could be an endowment or capital fund, from which investment earnings could contribute to operating costs.
For this to work, the insurer has to have a significant amount of money and investment opportunities that generate decent returns. Some investment earnings would have to be ploughed back into the fund so it could grow in line with inflation to maintain its purchasing power. It would also be important for the management of the fund to be transparent to ensure that the money is not used elsewhere.
Strategies for sustainability 579 Grameen Kalyan and VimoSEWA have both received endowment grants for this purpose. For VimoSEWA, GTZ provided a capitalization grant in the early 1990s as a strategy to defray administrative expenses. This fund served its purpose as long as the number of insureds remained at around 30,000.
However, when membership grew to 90,000, the income from the invested endowment fund was no longer sufficient. Grameen Kalyan’s endowment fund was provided by its parent organization to establish health microinsurance. If the scheme were expanded to serve all of the communities where the Grameen Bank operates, however, the fund would not generate sufficient income to cover operating shortfalls.
Sustainability strategy 11. Subsidize from an endowment fund Advantages – Increases the value of the insurance programme.
– Provides financial flexibility to target and serve the poor and destitute.
– Provides stable funding for the scheme to plan its future.
Disadvantages – Who provides the original endowment? It would be difficult to endow many microinsurance programmes or have a large impact on the poor.
– Large endowments require good governance to ensure that they generate earnings and are not diverted to other uses.
– A growth in the covered population may result in deficits if the endowment does not grow at the same pace.
– Even with a stable population, the endowment fund has to generate returns at least at the rate of inflation to maintain its purchasing power.
3.3 Access government subsidies Microinsurance schemes that emerge from the social protection perspective are either financed in whole or in part by government funds, or a strategy for sustainability is to gain access to these subsidies eventually. For example, the health insurance initiatives of SBS (Bolivia), SMI (Peru) and SI (Paraguay) were all started by the public sector with government funding to extend healthcare to specific high-risk market segments. Other schemes, such as UMSGF, AssEF and Karuna Trust, have benefited from indirect government subsidies. The costs of the healthcare services used by members of these organizations are kept artificially low by subsidies from the government.
A major disadvantage of this approach is that it is vulnerable to political interference. The SBS and SMI both experienced major upheaval when new governments, with different priorities, were elected. Consequently, it is hard
580 Conclusionsto count on long-term or permanent subsidies from the government. When subsidies are discontinued or decreased, microinsurance operations can experience considerable problems. For example, Yeshasvini received a direct government subsidy in its first two years of operation, which was helpful in providing good benefits at a very low cost. In its third year, when the government subsidy disappeared, the premium had to be doubled, resulting in a renewal rate of only 43 per cent.
Sustainability strategy 12. Access government subsidies Advantages – Healthcare should be seen as a human right, and therefore it is entirely appropriate for governments to channel resources to facilitate access for those who cannot afford to pay the premiums themselves.
– Microinsurance can be a cost-effective vehicle for governments to deliver benefits to the poor.
Disadvantages – Government bureaucracy may not provide timely payments, creating a strain on the microinsurer’s cash resources.
– A change in government policy may result in an abrupt cancellation of the subsidy.
– Governments may seek to impose certain methodologies that are not in the interest of the implementing organization.
4 Good management None of these twelve strategies for sustainability are appropriate in all circumstances, and all have drawbacks. The challenge is to find ways of combining selected strategies in an approach that makes sense for each particular microinsurance scheme. Consequently, the bottom line for success in microinsurance is the same as for any other enterprise: the most essential strategy for sustainability is good management.
Among other things, microinsurance managers must have appropriatelyskilled employees in place, realistic product pricing, a sound business plan, timely and reliable management information, and possibly reinsurance if required (Chapter 5.4). They also need boards that know how to manage managers effectively (Chapter 3.8). As many of these elements are not in place in organizations intending to offer microinsurance, it would seem logical to start with a focused or limited insurance benefit. When appropriate skills and systems have been established, the insurance programme can be expanded.
Strategies for sustainability 581 As with other businesses, managers need a business plan that helps them stay focused on delivering high-value protection at the lowest possible cost.
Before expanding benefits and enhancing protection, mangers must understand the implications. To do so, managers need tools to allow them assess the options, and to weigh the advantages and disadvantages of higher premiums, lower benefits and so on, ideally in consultation with current or prospective policyholders. Managers also need an information system to track progress towards achieving the goals in the business plan.
As mentioned above, a key aspect of this plan is to define a balance between appropriately compensating employees, giving customers the best product and ensuring that shareholders receive an appropriate return on their investment. This trade-off is simplified if the interests of the parties are aligned. For example, for insurance provided through cooperatives (Chapter 4.1), the clients are the shareholders. In the community-based model (Chapter 4.3), the employees are often clients and owners.
The importance of having appropriate expertise among the staff, management and board cannot be over-emphasized. Some microinsurers do not have a good grasp of what they are doing or are not paying sufficient attention to their microinsurance activities to even know whether they are succeeding. To be managed effectively, microinsurance should be seen as an independent activity – separate from credit and savings and from conventional insurance – so that management can assess its viability and potential and deploy appropriate expertise to allow it to achieve that potential. In this respect, the community-based model has the advantage of only focusing on microinsurance.
Microinsurers do not have to have all of the required expertise in house, as long as they have access to it. Community-based or mutual schemes accomplish this objective through federations, with second-tier organizations maintaining technical expertise that can benefit many smaller, primarylevel organizations. Partnerships between organizations with different types of expertise are a particularly effective strategy. If there is a lack of insurance skills, technical assistance can assist in achieving sustainability. As discussed in Chapter 5.5, various international organizations provide technical assistance to microinsurance programmes, as do many independent consultants.
If international expertise is too expensive or not readily available, fledgling microinsurance schemes might also consider local insurance talent.
While expertise at the head office or federation level receives most of the attention, for microinsurance schemes to be sustainable, they need to have policyholders, many policyholders. Volumes are critical to the success of microinsurance schemes. So if they want to attract and keep customers, microinsurers need to have effective sales and service functions, and a good reputation for customer service. Indeed, microinsurance providers have to
582 Conclusionsbuild up trust among their client base by clearly providing value. In short, the frontline people need to know what they are doing and need to make a good job of it. Consequently, greater investment in training frontline personnel is often warranted.
Well-managed insurance companies usually use reinsurance to manage risk, although reinsurance is not necessary in all situations. Some of the larger insurance companies that are involved in microinsurance, such as AIG Uganda, Madison, Delta Life and La Equidad, do not purchase reinsurance for their smallest polices because they cover many people for small sums over a large geographical area. However, microinsurers without significant reserves and without portfolios diversified between traditional and microinsurance would be well-advised to explore reinsurance arrangements (or at least insurance for catastrophic losses).
Last but not least, good management means using available opportunities and confronting imminent threats effectively. It is an art and a science.
Though there are some business fundamentals to keep in mind and respect (such as the solvency ratio and capital levels required to meet obligations to policyholders), survival often depends on problem-solving that calls for judgement. Judgment can be better-informed by the use of industry standards and benchmarking, which for microinsurance is just beginning to emerge (see Chapter 3.10). In addition, good judgement comes from experience, and experience comes from bad judgement. It is hoped that from a review of the experiences – good and bad – of other microinsurers, throughout this book and in the case studies, current and future microinsurers will gain wisdom and avoid repeating the mistakes of others.
6.2 The future of microinsurance Felipe Botero, Craig Churchill, Michael J. McCord and Zahid Qureshi The authors would like to thank August Pröbstl, Christina Hahne and Andreas Moser of Munich Re for their insights and comments on this chapter.
Considering the future of microinsurance involves looking at the whole picture, which includes 1) current and potential policyholders and their families,
2) the range of different insurance providers and their distribution channels,
3) the insurance regulators and supervisors and 4) the general environment in which all of these interact (see Figure 39).