«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Therefore, adverse selection occurs most commonly in health insurance when people who know they have a higher than average risk of claiming buy the insurance (or low-risk people opt out). For example, a woman who has just learned she is pregnant will join a scheme with generous maternity benefits, or a person who knows he/she is HIV positive will join a scheme that covers antiretroviral drugs. The costs of such insureds drive the average premium upward with the consequence that people with below-average utilization may decide the insurance is too expensive and opt out. AssEF, a women’s self-help association in Benin, included prenatal visits and birth in its benefit package. Although enrolment was open for the entire family, mainly women joined. The situation was aggravated by a massive dropout of members and pregnant women were thus over-represented among the remaining members. Thus, adverse selection might affect the scheme’s riskpooling and its economic viability.
By focusing on theoretical and technical aspects of health insurance, one runs the risk of ignoring the specific conditions of health financing in the developing world, where microinsurance could become an important component of social protection. What could be considered as demand-side, userdriven moral hazard is very likely to be nothing more than the expression of a real need for epidemiological and clinical treatment. In other words, it is not a question of over-utilization after joining a health scheme, but rather under-utilization prior to joining. And many microinsurers set out to tackle precisely this.
Nonetheless, in a given context, microinsurance has to define primary targets and to explore concrete measures for controlling undesired moral hazard and adverse selection. The approaches applicable in the specific context of health microinsurance will be treated in more detail later in this section; the chapter now proceeds to discuss the various elements of product manufacturing, starting with defining the target group.
1.2 Define the target group The first step in product manufacturing is to define the target group. In general, health microinsurance only works with pre-existing groups; the premium required to cover individuals off the street would be prohibitively high due to the cost associated with adverse selection. Furthermore, as previously mentioned, products for different occupational groups will look different (at Challenges and strategies to extend health insurance to the poor 71 least they should, as long as comprehensive coverage is not achieved and benefits have to be rationed). However, occupation is not the only factor to consider when defining groups; gender might be the most important characteristic, and regional differences can play a crucial role as well. Bienestar Magistral in El Salvador, for example, offers a scheme for public-sector teachers;
the Union des Mutuelles de Santé de Guinée Forestière (UMSGF) defines its target group broadly as households in a certain area. For the latter, occupation does not play any role, but the area of operation restricts membership.
Defining the core target group should not necessarily exclude others. It may be in the insurer’s (and the insured’s) interest to include other household members as the burden of illness is often borne by the entire household. Several microinsurers have recognized this. In India, VimoSEWA’s target group are self-employed women, and only members of this group can take out an insurance policy. However, self-employed women can decide to cover their spouses and children as well. Similarly, in Yeshasvini Trust (India), clients must be members of a cooperative society, but they can also cover their entire family. The insurance scheme could even require an entire household to join (or to offer a reduced fee as an incentive if this is done). At Uplift Health in India, for example, members are expected to enrol their entire household, and failure to do so results in a doubling of individual premiums.
Whatever the criteria used for group definition, it is important to select the target group in a way that is conducive to group cohesion. If there are no strong ties or there is generally a low degree of social capital among group members, they are more likely to display selfish behaviour, including higher degrees of moral hazard and adverse selection, as well as a lower level of renewals after a year with no claims.
1.3 Study the demand Once the target group has been defined, its needs must be carefully understood. For this purpose, Karuna Trust in India worked with a research institute to conduct a baseline study of the target population. In a household survey, healthy behaviour, spending on health, knowledge about insurance and willingness to pay for insurance were examined. The results were taken into account when designing the benefit package. As the high cost of medicine proved to be one of the main burdens for households when illness occurred, a drug fund was initiated as part of the insurance scheme. As a response to the reported high indirect costs of illness, Karuna also decided to compensate loss of wages when insured clients are hospitalized. Other institutions use their field staff to conduct demand research. BRAC (Bangladesh), for 72 Microinsurance products and services instance, consulted groups and individual members about their preferences;
VimoSEWA’s research department relies on the feedback from its field staff.
1.4 Define the benefit package A benefit package can then be designed based on the insights gained from demand studies. Defining the benefits of the product and the premium required to obtain these benefits makes up the core of product manufacturing. Both aspects determine the market opportunities for the product and the balance between the needs and wishes of the target group.
In any insurance arrangement – and microinsurance is no exception – aggregating risks through pooling is key. However, not every risk can be pooled.
The following preconditions need to be met in order for the risk to be insurable and transferable into an insurance solution (Churchill et al., 2003; Brown and Churchill, 1999; Vaté and Dror, 2002):
– Randomness: The occurrence of loss or damage must be unpredictable.
Otherwise, systematic saving is a better alternative because risk pooling would not result in lower premiums.
– Low probability of occurrence: If the majority of members are likely to incur a loss or damage, premiums will be similar to the cost of individual provision.
– Independence of risk: Collectively insured risks of individuals have to be independent with regard to their occurrence in order not to threaten the long-term stability of the insurance.
– Uncontrollability of loss or damage: The policyholder should not be able to cause the occurrence of loss or damage.
– Unequivocal: The insurer must be able to verify the occurrence and the scope of loss.
– Existence of insurable interest: For an individual to be interested in an insurance solution, the loss must have adverse financial consequences. The potential losses should be high in relation to the cost of premium payments.
Insurable risks should have a low probability of occurrence, yet strong adverse consequences if the risk does occur. This is where risk-pooling mechanisms come into play. Since part of the individual risk is borne by the entire group of policyholders, the individual risk premiums can be relatively low in relation to the size of a potential loss. The more frequent the occurrence of loss, the more difficult it becomes to insure. The greater the chance of an event occurring, the closer premiums will be to the amount of a potential Challenges and strategies to extend health insurance to the poor 73 loss, so that the event will ultimately no longer be insurable at a price that clients will find acceptable.
The classic case of an insurable event in the health sector is hospitalization, with a low probability of occurrence but high costs. VimoSEWA reimburses the cost of hospitalization up to a certain amount for its members.
However, the preferences of a target group might go beyond these low-frequency events as households seek to cover frequent events as well. Simple outpatient medical treatment, with lower costs but higher probability, falls into the category of hardly insurable risks from the insurance provider’s perspective, as the administrative costs of settling claims are often too high.
This highlights one major difference between the preferences of insurance providers and policyholders. Insurers like to cover rare, high-cost events, and dislike many small claims that drive up administration costs. In contrast, insureds are loss-averse, preferring products that reduce their losses, which do not necessarily result from low-probability, high-cost events, but rather from an accumulation of low-cost, high-probability events.
Besides the insurer-insured conflict, there is a further conflict of interests within the insurance scheme. If minor illnesses suitable for outpatient treatment were not covered by health insurance, the policyholder would have an incentive to delay treatment until the health condition is serious enough to warrant a claim. In the end, delayed treatments can become very expensive for the insurer. Incentives aside, many poor people find it difficult or impossible to pay for the treatment of what are initially minor diseases in periods of low income (e.g. agricultural workers whose income is seasonal). There is also the additional perverse incentive for a doctor to admit patients unnecessarily to benefit from the income available from the inpatient coverage.
The postponement of treatment may lead to severe deterioration and ultimately cause higher costs for the insurer. Therefore, it may be in the insurer’s interest to encourage people to seek treatment early, while ensuring that they do not use the health services unnecessarily or excessively. Prevention and regular health check-ups fall into the same category. Although the benefit package of Yeshasvini Trust focuses on surgery and succeeds in offering rare but high-cost treatments like heart surgery for a reasonable premium, it also includes free outpatient consultations to encourage members to seek care at an early stage. How often a benefit like outpatient treatment – if granted without limitation – is used is determined only by the insured, and hence the “uncontrollability of the loss” criterion is not fulfilled. The same is true for health check-up camps, optional surgery or childbirth. They cannot really be risk-pooled, but many schemes nevertheless find it necessary to include these benefits.
74 Microinsurance products and services When covering frequent but (relatively) low-cost events, schemes have to limit the scope of benefits or increase the fees accordingly. One UMSGF mutual offers outpatients services and drugs for a flat fee co-payment. The insurance product of Grameen Kalyan (Bangladesh) provides a range of services, but limits coverage to a certain percentage of the actual costs for benefits accessed at external healthcare providers. This restriction – either in the variety of benefits, the total amount covered or the co-payments patients need to bear – is a logical consequence of the limited premium that insurers can charge their clients.
A problematic issue is the treatment of chronic diseases and their longterm effects. These are often difficult to identify (and consequently prone to adverse selection), and therefore constitute a potential for conflict with the insured. The same is true for diseases like HIV/AIDS, where long-term treatment is necessary – and costly, generally exceeding the financial capacity of the individual. However, consequent and comprehensive treatment of HIV/AIDS-infected individuals can turn out to be highly cost-effective as proven in the case of Brazil (Holst, 2005b). As international drug prices for antiretroviral treatments are falling, cost-effectiveness might eventually become achievable even for microinsurance (Jamison et al., 2006). Inclusion and coverage will depend on the solidarity principle and the degree of social capital among the target group. Microinsurance schemes are therefore facing a challenge in obtaining sufficient resources in the short term to treat HIV/AIDS properly and prevent disease progression, and ultimately benefit from long-term reductions in claims costs for people living with HIV/AIDS.