«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
2.3 Business model The third challenge for microinsurance providers as they move forward is developing an effective business model. As illustrated in Part 4, all of the models currently in use have advantages and disadvantages. Obviously, one model will not be appropriate in all circumstances, and therefore the real challenge is to improve the existing approaches, exploiting their strengths and overcoming their shortcomings.
The criteria for success are business models that work for both the clients and other stakeholders, balancing short-term sustainability and long-term growth. Since the target market for microinsurance is relatively new, insurers need to adopt a market development approach whereby profitability is founded on volumes and long-term relationships.
Any insurance business model must acknowledge the need for reserves and reinsurance. Indeed, reinsurers are actively trying to identify a role for themselves in microinsurance. The reinsurer’s role should focus on catastrophic risks, which are often excluded in microinsurance products. If catastrophic risks are excluded, insurance is not there to help people when they need it most; by covering these risks, reinsurance can play an important part in fortifying an emerging insurance culture.
A reinsurance-like approach could also help professionalize the activities of community-based and local microinsurance programmes. Although these schemes would still act as the first line of protection for their members, a local regulated insurer could “reinsure” these programmes. The regulated insurer could provide the financial back-up for certain risks and also technical input that may be lacking in community-based schemes. This would represent a new hybrid of the community-based and partner-agent models, while offering a greater variety of products to low-income members with greater professionalism.
The emergence of new models and delivery channels will be an important development for the future expansion of microinsurance. The distribution channel is the face of microinsurance for the customer, both for sales and servicing. The development of microinsurance depends largely on the quality and quantity of the delivery channels. The primary channel used today, The future of microinsurance 595 microfinance institutions, has limitations. While they certainly will have an ongoing role in extending insurance to the poor, to expand the outreach dramatically it will be necessary to engage new distribution channels. In particular, there is a need to organize the unorganized to offer group insurance.
Involving social organizations, such as cooperatives, workers’ associations and the like, in organizing the poor will greatly facilitate their access to insurance.
To involve new distribution channels in microinsurance, there will be a clear role for intermediaries, such as insurance brokers, which can serve as translators between grassroots distributors and corporate risk carriers. By understanding the priorities, needs and language of both parties, the intermediary can help improve the quality of the products and the relationship between the partners.
In the long term, the face of insurance will change and adapt to this market. Thanks to the massive expansion of Internet access, low-income people will be able to buy insurance on-line from insurers and their agents. Delivery channels will expand far beyond financial service providers like MFIs and will become omnipresent in retail shops, post offices, hospitals and doctors’ surgeries – anywhere that a link can be made with risk-management needs.
Even the products themselves will be transformed to respond more accurately to the direct needs of potential policyholders. Insurers will be able to offer such products because improved distribution will allow them to serve very large volumes of policyholders.
3 The regulatory landscape The basis for providing risk-management services to the poor is a sound regulatory and corruption-free political foundation. Without this, it is impossible for microinsurance to develop in a sustainable way.
Insurance is and needs to be a highly regulated industry. Building a riskmanagement culture is difficult enough – it only takes one or two company failures to destroy it. Insurance supervisors are primarily responsible for consumer protection, which comes in two main forms: 1) protecting policyholders in general against insurance company failure and 2) protecting individual policyholders (or potential policyholders) against unscrupulous sales and unfair policy documents. As described in Chapter 5.2, there is also a third type of consumer protection – concern for the protection of those who cannot access insurance – which represents a market development function for insurance regulators. The extent to which regulators are willing and able to embrace this development function will have a significant influence on the future scope of microinsurance in their jurisdictions.
596 ConclusionsA significant share of the microinsurance market is currently covered by organizations outside the reach of supervisors. While it is not appropriate for supervisors to look the other way, the costs and benefits of supervising informal microinsurance need to be considered: is it better to have no access to insurance or to have access to unregulated insurance? Some countries have legal structures that take greater account of different types of ownership structures and regulatory requirements. For example, in the Philippines, CARD has created a mutual benefit association for its members. This MBA has professional management, reserves, limited products and markets, and a link to the regulatory system. Similarly in Senegal, health mutuals have been incorporated into the legal framework. Such regulatory flexibility will be necessary in the move to a massive expansion of microinsurance.
Efforts to offer alternative business structures for microinsurance are limited by the ability of the regulatory structures to manage the system and fulfil their consumer protection role. The reduced capital requirements advocated by some have significant potential for abuse. Generally, regulators use minimum capital requirements in two ways: (1) to ensure that an insurance company has sufficient capital to meet future obligations to policyholders and (2) to maintain efficiency in the insurance system to prevent it being overrun by inefficient operators that they cannot properly supervise.
The balance between prudence and entry barriers is a tenuous one. A hybrid approach linking informal schemes to regulated insurers may help to create a higher level of supervision in the system while opening up opportunities for greater microinsurance provision. In addition, self-regulated schemes of cooperative and mutual organizations need to be seriously considered as a means of extending insurance to the poor without overwhelming the insurance supervisors.
It is advantageous to have a certain level of consistency across regions and on a global basis for multinationals to enter this market, so that they can implement their processes on a global scale. Although regulations on a global or regional basis are a noble but improbable goal, it is realistic to envisage a certain level of collaboration among regulators that would eventually result in improvements and standards for all nations. Through the International Association of Insurance Supervisors (IAIS), for example, it may be possible to design and promote model microinsurance regulations. This association could act as a standard-setting body, recommending appropriate reserve levels, solvency limits, etc. for microinsurance.
Indeed, the expansion of microinsurance would receive a big boost if insurance authorities believed they had an active role to play in enhancing the inclusiveness of the insurance markets. How involved should regulators become in promoting microinsurance? Their approach will depend on The future of microinsurance 597 whether they see the low-income market as a threat to the financial stability of the insurance industry, or as a market opportunity that could potentially strengthen insurance companies. Some countries may follow India’s approach and require commercial insurers to serve the low-income market, while others will explore less prescriptive means of making their insurance markets more inclusive. Either way, microinsurance promotion by regulatory authorities should help expand the product range and delivery channels insurers use to gain access to the poor, while opening up opportunities for alternative types of insurers.
Long the poor relation of the banking sector which has benefited from significant aid in the last ten years, the insurance sector in some countries is now beginning to receive some development assistance. This will result in much greater capacity at insurance regulators and will in turn allow for a greater variety of insurance provision models, but this will take time.
4 The environment for microinsurance Many factors determine whether microinsurance can be made available, what products might be offered, how they will be offered, and the costs and benefits. The environment in which microinsurance operates is as important to consider as the policyholders, providers and regulations.
4.1 Healthcare quality Health insurance has little value if there is no access to good-quality healthcare providers. Outside urban areas, such healthcare is often not available.
Government and donor inputs have most frequently been invested in the cities, leaving the rural poor with low-quality medical practitioners and frequently no doctors. In some countries, the government healthcare systems advertise themselves as being free to all, yet the poor who need to access these facilities are quite aware of the value of the “gift” that must be provided even for the least assistance.
Governments and civil society must create healthcare systems guaranteeing quality, equality and transparency. The involvement of patients in the process of managing or governing local healthcare providers is one way to ensure that they are responsive to the needs of their market, which is a key advantage of the community-based health insurance schemes. If they are supported by a strong apex body, MHOs can open the systems to effective health insurance products, improve care of those in need and allow governments to focus more on the people who are truly destitute and can only be covered by social protection.
4.2 Data for risk management The limitations of healthcare monitoring systems in the developing world also have a great impact on the ability of insurance companies to understand the risk of the low-income market, and thus to calculate premiums appropriately. Where they exist, morbidity and mortality data that filter into the national databases generally reflect the wealthier segments of the market because these are the people who can pay for healthcare and access systems that are able to record critical risk information accurately. The illnesses and deaths of the poor may not make it to the national databases, for example when they rely on informal medical care or return to their rural home to die.
This leads to severe loadings on microinsurance products, or overly optimistic risk premiums – neither of which aids microinsurance outreach.
Better data will result from better healthcare, improved government record management and requirements by insurance regulators, many of whom review premium calculations prior to product approval. This will improve the foundation upon which risk calculations are made.
A particular data-management challenge in some developing countries is the fact that there is no national identification system. This dramatically increases the potential for insurance fraud – a dead person mis-identified as a policyholder, a hospital patient being covered under someone else’s policy, and numerous other ways in which the non-insured might be covered as an insured. The significant cost of such fraud is reflected in premiums. This problem is not limited to insurance and as countries move towards introducing reliable national identification systems, the financial sector in general will improve.