«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
The frequency of premium collection also affects the total amount of premiums to be paid. If annual premiums are paid in advance, they can be invested in financial markets to generate surplus funds (unless they are used for claim settlements). Thus, where there is access to financial markets, the effects of inflation may be alleviated.
While annual premiums lower transaction costs, and theoretically increase investment income, it may be difficult for the target group to come up with the entire amount. In fact, this is another potential area where the interests of the insurer and the insured are different, as the poor often prefer to pay US$0.10 per week rather than an annual premium of US$5.20. The relatively small size of the premiums and the clients’ preference for small frequent payments pose a challenge to insurers.2 As discussed in Chapter 3.3, microinsurers have found innovative ways to resolve the premium payment issue. VimoSEWA uses a fixed deposit method, whereby interest from a savings account pays a member’s annual premium. Karuna Trust installed a health emergency fund to make loans available to pay for uninsured risks, and also to pay premiums. Microcare developed a loan product with FINCA Uganda whereby a premium for a 12month coverage period was paid back over a four-month loan period to FINCA. This proved very popular with clients, the only difficulty being the interest rate charged by the MFI. Where possible, it is preferable for microinsurers to assist clients to save up to pay an annual premium rather than borrowing to pay it.
The tasks that have to be accomplished during product manufacturing are summarized in Table 7.
2 Interestingly, BRAC’s experience on this is different: when offered the option to pay their premium weekly, clients explained that this would clash with their weekly savings and that fewer instalments are preferred.
Challenges and strategies to extend health insurance to the poor 81 Table 7 Overview of product manufacturing tasks and features
2.1 Provision of information Each sales process starts with the provision of information. The unique feature of microinsurance sales is the extensive information needs of the target group, which often lacks experience with insurance. The sales agent must explain the prospective nature of premium payments and the retrospective nature of claims, and why the premium cannot be repaid (at least in full) if no illness occurs. The experience of health microinsurance providers shows that it is difficult to explain the idea of advance payments for services that may perhaps never be used. Schemes therefore use various contacts with clients, including health workers. For example, AssEF, BRAC and Grameen Kalyan use their savings and credit groups to promote health microinsurance.
If potential clients are interested in insurance, the salesperson provides detailed information on eligible and excluded services and the procedure for filing claims. Future clients should be familiar with the required documents and the deadlines that need to be met for successful claims settlement.
Unclear procedures or benefits may soon cause dissatisfaction among clients.
Yeshasvini Trust, for instance, has a list of 1,600 types of surgery that can be obtained at certain hospitals. This makes it difficult to communicate the 82 Microinsurance products and services insurance coverage as much of the information is technical, which can result in confusion and dissatisfaction.
It is not easy to communicate technical information to an uneducated clientele. For the sake of credibility, the information should be relayed by someone who has the potential clients’ trust. Trust is the very foundation of any insurance market. From the clients’ point of view, there is a principalagent problem. Due to asymmetric information, they usually cannot tell how the product and pricing were designed (especially the commissions and profit margins included in the premium), or if an insurance provider will act against the interest of the insured or comply with agreements.
For clients to accept such a deal, the insurer’s obligations should be enforceable through the legal system. For microinsurance, however, the costs of legal action will quickly exceed the (financial) value of the claim as well as the potential policyholder’s financial capability. Formal systems of legal action often do not function well in developing countries. In the absence of enforceable contracts, if potential clients have doubts about whether the insurer will meet its obligations, they are unlikely to buy the cover. Only trust will make risky advance premium payments possible. A potential client
must be confident that the insurer will meet its obligations in two ways:
1. Trust in the willingness to meet obligations A potential client must expect the provider to settle a justified claim. Clients must either assume that it is in the interest of the insurer (intrinsic motivation) to fulfil its part of the agreement (trust in a narrow sense), or have confidence in their own ability to influence or put pressure on an institution (trust in a broad sense).
2. Trust in the ability to meet obligations (confidence) The client must believe that there will be enough money in the insurer’s coffers to pay claims over the long term. The size of the insurance provider and the subjective perception by potential clients of the reliability of the organization (abstract dimension) are the two determinants of confidence for longterm relationships.
Knowledge of the target group improves the quality and thus the efficiency of the relayed information – not only in terms of content, but also of style and the communication channels used. The professional quality of the information and the degree of trust among the target group are the first challenges to be overcome in the sales process. In Cambodia, GRET conducts a threestep sales process for its health insurance scheme. In two consecutive weeks, GRET employees inform potential clients and answer questions. The insurChallenges and strategies to extend health insurance to the poor 83 ance agent, who handles the actual underwriting process, does not arrive until the third week (Brown and Churchill, 2000).
SEWA also capitalizes on its long relationship with the target group, its knowledge of their needs and preferences, and its experience in communicating with the clients to gain their trust. Similarly, Karuna Trust, BRAC and Grameen worked on health and community development for years before going into insurance. In fact, many health microinsurance schemes started with other activities and only later introduced insurance. The trend to evolve from basic microfinance operations into health insurance is an area that would warrant closer examination, as the regulatory and operational environments for microfinance and health microinsurance require different structures and skill sets.
The lack of a relationship of trust and direct contact (both physical and psychological) with potential clients usually prevents insurance companies from entering the low-income market directly. Where an insurance company is involved in health microinsurance, a local institution (the agent) usually distributes the product on its behalf. However, agents need to be paid, which makes the product more expensive than distribution models without agents.
This is not a direct problem for the insurer, as it is passed on to its clients, but it can make the cost prohibitive for some low-income households. This conflict of interest between the insurer and the insured in the sales process is discussed in Chapter 4.4.
Regardless of the distribution channel, explaining insurance remains a challenging task. Most health microinsurers acknowledge that they have to find better ways of marketing health insurance benefits. As described in Chapter 3.2, street theatre, posters and cartoons are all important marketing tools for microinsurers. Many institutions, like VimoSEWA, make use of existing self-help groups to disseminate information about the beneficial attributes of health insurance for members. However, most schemes indicate that it is not enough to provide the information once; it has to be a continuing process to achieve a true understanding of insurance, and only then will positive operational outcomes such as a reasonable renewal rate ensue. Continuous provision of information is part of customer relations and is discussed further in the section on product servicing.
2.2 Underwriting After providing information, the next step is to issue policies to clients who opt to be insured. In this underwriting process, the necessary data and information on the future policyholder is gathered. Depending on the design of the insurance product, this may include not only personal data, but also 84 Microinsurance products and services information on the state of health, e.g. chronic diseases, and pre-existing conditions that may be excluded from coverage.
Exclusions must be defined for each insurable unit, for instance a family.
Thorough information on states of health and family sizes has a significant impact on the quality of measures to reduce adverse selection. A preliminary health examination may be an integral part of the underwriting process, although many microinsurance schemes use simpler methods like a declaration of good health. In this declaration, the scheme learns about a person’s health status based on information supplied by the insureds themselves.
Rather than bringing to light any pre-existing illness, it is intended to make people aware of certain exclusions and provides an easy mechanism to assess them. It essentially shifts the underwriting from the screening to the claims process (see Chapter 3.4).
However, excluding people because of pre-existing diseases often contradicts the intention of socially-driven insurance providers. Thus, BRAC, Grameen Kalyan, the Society for Social Services (Bangladesh) as well as the Seguro Báscio de Salud (Bolivia) and the Seguro Materno Infantil (Peru) decided to provide health insurance to anyone wishing to enrol. To make such unrestricted access feasible, additional mechanisms need to be put in place to stabilize the insurance scheme. Having wide group coverage or making use of the solidarity and social capital of communities to reduce moral hazard are possible options. Another way of reducing adverse selection is to introduce waiting periods for certain benefits. BAIF, near Pune in India, does not grant benefits for childbirth in the first nine months of membership.
Another possibility is a reduction of benefits for new members (see Chapter 3.1).
For small risk pools in particular, the inadvertent acceptance of risks that would not normally be borne by commercial insurers can change the risk structure and jeopardize the viability of the scheme. The completeness of information determines the stability of the system. However, more effort put into information retrieval means higher costs for policyholders to bear.
One unique advantage of microinsurance is the possible involvement of the community in the sales process, which could lower information collection costs. In closely-knit communities, members know a great deal about each other and, given the right incentive structure, can leverage this social capital to reduce both moral hazard and adverse selection. For example, members of Uplift Health need to democratically decide whether they want others to join their risk pool. As their pool is kept small (although linked to larger ones), they will certainly think twice before accepting high-risk members. Social capital is used in Karuna Trust as well – though not for screening Challenges and strategies to extend health insurance to the poor 85 adverse selection or moral hazard. At Karuna, only individuals below or at least around the poverty line are eligible to join the scheme; the self-help group members discuss whether applicants are poor enough to join.
Once an insurance policy is concluded, the first premium must be collected. When cashless collection methods are not possible, the premium needs to be collected directly from the member. Fraud is a significant concern when many field workers collect lots of small payments. To reduce the risk of fraud, Karuna Trust’s social workers issue numbered receipts to control the number of policies sold.