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«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»

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Parameter risk can be subdivided into statistical inference (predictions derived from data on previous events are prone to error) and forecast risk arising from the uncertainty about the validity of past statistics for the future (e.g. possible changes in diseases). Forecast risk is the most serious component (Albrecht, 1992).

As a consequence, the insurer must rely on sound professional knowledge as well as on reliable data to guarantee long-term stability. The collection of reliable data has to continue beyond the product manufacturing process for monitoring and modification purposes. The scarcity of data, however, is a major problem for microinsurers. Therefore, there is a need for timely and efficient transfer of data on insured risks, incidence of events and the resulting costs among the insured population. Ultimately, this could be done using software that would simplify and automate accounting and reporting operations, starting with the registration of newly enrolled members, up to and including reinsurance calculations. Management software, like that used by Microcare, would help capture data and make it available for easy analysis; it would help link sales and servicing with maintenance of long-term stability and, ultimately, back to (new) product design.

The claims statistics for subsets need to be checked continually. If errors have been made in the premium calculation, these must be corrected, possibly through iterative adjustments. Many microinsurance schemes have had to adjust the premium. Grameen Kalyan did not use actuarial calculations to set the premium; it has been set through trial and error and continuous consultations with its members. Like Grameen Kalyan, ServiPerú generally revises the premium every year taking into consideration the costs of the varChallenges and strategies to extend health insurance to the poor 91 ious benefits paid. VimoSEWA aimed to close the viability gap by increasing the premium from Rs. 12 (US$0.24) in 2002 to Rs. 39 (US$0.78) in 2005 for the health insurance component3 and legitimized the increase through an improved benefit package. An improvement in the benefit package was not offered when Yeshasvini Trust doubled its premiums in 2005 for the sake of stability – and as a consequence, the number of clients declined by a third.

Downward adjustments of the premium are also possible, as Karuna Trust showed when it had a loss ratio of less than 100 per cent. UMSGF had a similar experience, but decided to stick to the existing premium and set aside any surplus as reserves, which is perhaps a wiser decision for attaining long-term stability.

Another approach to achieving stability is to generate income from other sources. If the policyholders’ premiums are well invested, the accumulated reserves can be used to lower the premiums or to cover unexpected losses.

However, in most schemes, the premium income barely covers the claims due to clients’ limited ability to pay. Therefore, it is generally not possible to invest premiums to generate additional revenues, although there are a few exceptions.4 Some organizations, including Grameen Kalyan and VimoSEWA, have generated additional income by investing subsidies or endowment funds (see Chapter 6.1).

As shown in Table 10, several health microinsurers appear viable when claims are compared with premium. However, when all expenses are taken into account, many clearly still need subsidies. BRAC and Grameen use their own healthcare staff, the costs of which are only partly covered by the premium collected; hence, they have high administrative costs compared to premium collected. It is interesting to note that the renewal rate is highest in mutual schemes, but the number of schemes compared is too small for firm conclusions to be drawn.

3 VimoSEWA’s insurance product covers various risks. The relationship between the premium and specific benefits is not shared with the policyholders; they pay a set amount for the entire package, which includes life and asset protection as well as health.

4 UMSGF earned investment income of 0.1 per cent of net income in 2000, which increased to 2.8 per cent in 2004. Yeshasvini Trust built reserves out of excess contributions and earned investment income of Rs. 3,700,000, or 2.6 per cent of the scheme’s total income. However, Yeshasvini also received public subsidies in the same year.

92 Microinsurance products and services Table 10 Some key ratios of health microinsurers

–  –  –

n.a.: information not available; – not applicable 1 This figure is without subsidies; with subsidies, the expense ratio was 83 per cent.

2 This figure reflects the average last four years.

An element of risk always remains. Bearing this risk is the task of the insurer. An alternative to bearing risk is reinsurance, through which part of the risk is outsourced to an external provider. The smaller the risk pool of a health microinsurance scheme, the higher the need for reinsurance because unexpected costs can hardly be covered by reserves and because claims variability is much greater in smaller risk pools. However, while formal insurers have access to reinsurers, informal health microinsurers currently lack this access.

Whether or not an insurer should seek reinsurance depends on the magnitude of the accepted risks in relation to the insurer’s financial capability and the probability of loss. If the magnitude of potential loss is high, the insurer should seek reinsurance, even if the probability of occurrence is low. Losses of low magnitude, which from the viewpoint of formal insurance companies are typical of health microinsurance pools, should be borne by the insurance company itself. However, most small microinsurers cannot accumulate sufficient reserves to be prepared for a series of bad years. Furthermore, reinsurance may offer a cheaper way to ensure sustainability than reserves (see

Chapter 5.4).





Who manages and carries the risk is a critical issue for all insurance schenes. While the participatory nature of community-based schemes appears attractive, they may not have sufficient expertise to manage risk and have limited options for sharing the risk (e.g. reinsurance). Linked to the carriage of risk is the management of reserves. If a scheme lacks adequate Challenges and strategies to extend health insurance to the poor 93 reserves, it may not be able to pay for services rendered if higher than expected claims occur. This can quickly erode the confidence of the health service providers, which will in turn affect the quality of service delivery and ultimately impact the clients.

Table 11 summarizes the tasks outlined above.

Table 11 Overview of the tasks to be undertaken to maintain long-term stability

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5 Conclusion

In many aspects, problems associated with health insurance are true of other microinsurance products as well. Education and information about insurance are a necessary precondition for satisfied customers. Furthermore, the benefits must correspond to the needs and expectations of the clients. However, while for other microinsurance product lines a consensus seems to exist that high-cost, low-frequency events are especially worth covering, this does not necessarily hold true for health. The poor are very much aware of the burden of low-cost, high-frequency events, but these are difficult for a health insurer to cover. The claim process produces high costs as it is difficult and expensive to obtain the information needed for claims’ verification. For a viable health insurance scheme, it is therefore recommended that the policyholders and the community be involved in the business process, thus mobilizing their social capital. The greater the degree of convergence of the interests of insured and insurer, the more viable the arrangement will be.

2.2 Long-term savings and insurance James Roth, Denis Garand and Stuart Rutherford The authors would like to thank John Pott (Aga Khan Agency for Microfinance) and Ellis Wohlner (consultant to SIDA) for their detailed inputs and suggestions, which have added substantial value to

this chapter.

As described in Chapter 1.2, one way low-income households manage risk is through savings. Unfortunately, there are a number of limitations to this strategy, including: 1) the challenges that the poor face in amassing assets and

2) the inability of their small nest eggs to cope with major losses. A possible solution to the first problem is a contractual savings account, also known as a commitment or recurrent savings plan, which helps create savings discipline and build up assets over time. As for the second problem, the savings facility could be linked with insurance to address major losses.

This chapter explores the possibilities for extending long-term contractual savings and insurance to the poor. The first section considers the reasons why more low-income households do not have better access to savings, and how insurers might be a possible source for such services. Next, the chapter reviews the current products of this type that are available to the low-income market. The final section looks at what microinsurers can do to bridge the gap or at least contribute to bridging the gap between the insufficient supply of long-term contractual savings and the demand for such services by the poor. It also examines the benefits and risks of such policies and suggests ways in which these risks can be managed.

1 Providing savings to the poor Despite evidence that there is a demand for formal savings services for lowincome households,1 the actual supply is quite low. A glance through the MIX data (2004) on the performance of microfinance institutions indicated that of 302 MFIs for whom data was available, the institutions averaged 62,246 active borrowers, but only 33,657 voluntary savers.2 Of course, many

–  –  –

low-income households save in institutions that do not consider themselves MFIs, and therefore do not report to the MIX, but generally there is a lack of

institutional savings services for the poor for a number of reasons:

– Regulatory obstacles make it difficult to obtain a licence to accept deposits – The political economy of development rewards donors and government departments for spending their budgets, creating the incentive to promote credit rather than savings initiatives – Related to the above point, donors keen to spend their budgets often provide wholesale loans to MFIs at rates of interest much lower than the rates they would need to pay depositors, thus undermining MFIs incentive to attract deposits – The development agenda has assumed that microenterprise credit was a key missing ingredient in economic development – Many providers consider savings mobilization as a costly way of assembling capital – There is a continuing widespread belief that poor people cannot or do not wish to save – Generally, there is a lack of facilities for saving in a secure and cost-effective system Today, these perspectives are being reconsidered and revised. Many countries have new or prospective regulations for micro-savings. Providers of financial services and their backers, increasingly aware of the benefits of savings for their institutions and their clients, are busy improving their systems to enhance efficiency and build trust with the market. Research continues to reveal high levels of demand for savings services among poor households.

However, for the time being, many would-be low-income savers are inadequately served.

Furthermore, many problems associated with savings services become magnified with long-term products – as opposed to open-access “passbook” or “demand deposit” savings. Regulators are especially concerned when institutions attempt to hold what are often the life savings of clients. A high level of trust is required to induce clients to part with their savings for five years or more, and trust in financial institutions is often not high in countries that have witnessed currency collapse, failed financial institutions, inadequate capital markets, hyperinflation and coups d’état. In such unstable environments, it may not be feasible to offer long-term savings products. Even in countries with macroeconomic and political stability, financial institutions are often weak or relatively new and fragile.



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