«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
2.3 Savings completion insurance A third way of addressing the long-term savings and insurance needs of the low-income market is through savings completion insurance. TUW SKOK, the primary provider of insurance to Polish credit unions, offers such a product to encourage credit union members to develop a regular savings programme. The member determines the savings goal and time period, up to a maximum of 10 years. The credit union has software that will then calculate the amount of the monthly deposit to achieve the savings target. The software also calculates the monthly premium for insurance coverage. In the event of accidental death of the member, TUW SKOK will pay the beneficiary the difference between the savings target and the savings balance at the time of death. There is also a disability component that supplements the member’s salary if he or she is unable to work for more than 30 days.
This insurance product is of particular interest to the credit unions because it is closely integrated into their core business and helps them achieve their own goals by making the contractual savings product more attractive. It is also easier for credit union staff to sell than stand-alone insurance products because they can ask when setting up the account whether the member wants the additional insurance coverage.
A major difference between the endowment and savings completion insurance is that with the latter, the insurer does not hold the savings – the credit union does. From the insurer’s perspective, this is a very simple prodMicroinsurance products and services uct: just basic term life with a declining sum insured. It may be less attractive to insurers than an endowment product because they would generally prefer to invest the funds and generate additional revenue. However, savings completion insurance may provide better value to clients, since their savings are no longer used to pay the agent’s commission. The savings completion insurance is an affordable group policy; for example, TUW SKOK charges 0.07 per cent of the remaining savings balance per month for the coverage,6 while the credit union pays three to six per cent per year on the savings balance.
2.4 Separating long-term savings and insurance A fourth approach is to offer savings and insurance separately. Term life tends to be relatively easy to obtain. Long-term savings can, of course, only be offered by institutions licensed to accept deposits with reputations that motivate their clients to trust them. As mentioned earlier, the supply of such services is limited, but there are some important examples of institutions offering long-term contractual savings (see Box 19).
Deposits are made during the weekly meeting that all Grameen members are obliged to attend. Grameen thus uses its own “agents”, and does so extremely economically, since the agents are also responsible for servicing the loan portfolio.
Now five years old, the scheme has attracted more than 3 million accounts, and the total GPS portfolio held by Grameen at the end of 2005 was approximately US$83 million. The GPS has been one of the main elements in converting Grameen from a microcredit provider into a true financial intermediary: its total savings portfolio, from all savings products, is now US$450 million and exceeds its loan portfolio.
Understanding precisely why the scheme is so popular is complicated by the fact that all borrowers with a loan of more than US$125 are required to hold a minimum-value GPS account. Nevertheless, many accounts have balances above this minimum, and many savers hold more than one account, suggesting that the scheme is valued for its own sake – a finding reinforced by testimonies taken from savers for a MicroSave-funded research project.
Source: Rutherford, Personal notes based on research done for MicroSave, 2005.
CARD Bank ended up offering long-term contractual savings after its disastrous experience with annuities. Instead of worrying about the complexities of insurance, it created a provident fund into which all members pay PhP 5 (US$0.09) per week. When they reach 65, they are guaranteed a single payment based on the value of deposits received plus accumulated interest (currently at 8 per cent per annum).
Relative to the other options discussed above, for clients the main advantage is that they can save without needing insurance. Yet that is also the disadvantage. If they die or are disabled during their savings-generating years, they (or their families) will not have anything to fall back on. If they do want insurance to complement the savings scheme, they may be able to shop around. However, when seeking individual coverage, they are not likely to find a more affordable option than a term policy offered by the organization that takes their savings (ideally underwritten by an insurer).
3 Key issues in offering long-term savings and insurance When long-term savings and insurance are offered to the poor, several issues need to be carefully considered, including macroeconomic and political stability, financial sector infrastructure, mis-selling, premium collection mechanisms, lapses and surrender values. Some of these challenges affect endowments more significantly than the other savings products.
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3.1 Macroeconomic and political stability For any financial instrument intended to retain value into the future, macroeconomic and political stability is a key concern. Many people from around the world, rich and poor, have awakened one day to realize the money they had saved was now virtually worthless. The culprits: inflation and/or devaluation. These risks are not trivial. The AIG Uganda case study relates a story of a man who paid his premiums as required and waited until the endowment had reached full maturity. When he arrived at the insurance company office, his payout was less than the cost of the bus ticket he bought to come to town to collect the benefit.
In unstable economies with high inflation, it is particularly difficult to offer long-term savings and insurance. There are, however, ways to manage inflationary risks. For example, the financial institution could offer foreign currency accounts and make international investments. Established insurance companies may be better placed than more recent financial intermediaries to carry out the complex transactions required to hedge effectively against inflation. Interest rates or investment returns are sometimes inflation linked, with deposits, premiums and benefits increasing based on inflation.
The financial situation of low-income people is precarious. If policies with long-term investment components are to be sold to this market, the policies should be developed to provide protection from macroeconomic instability and real value to clients. All economies are subject to unforeseen inflation; product design has to develop returns to policyholders to protect them from the ravages of inflation. If insurers cannot achieve that objective, then clients should be encouraged to save in assets that retain their value, like livestock or gold, and to explore short-term insurance coverage to manage risks.
3.2 Financial sector infrastructure Another important requirement for long-term savings and insurance is for there to be an effective investment or capital market in the country. Longterm savings can be beneficial to all if the institution receiving the funds can invest in a variety of instruments for varying lengths of time. Investment in bonds, treasury bills, equities and property would be possible forms of longterm savings to the extent that they match the desired investment time frame.
The ability to rate the investments would also be required to assess their risk profile. In some countries, these conditions do not exist, making it difficult to properly manage long-term savings.
Long-term savings and insurance 105 A lack of financial sector infrastructure has a greater effect on endowment products than on savings completion or savings alone because the insurer relies more on the investment market for returns. If there are limited investment opportunities, and it is difficult to assess the risk of the few opportunities that are available, it will be particularly difficult for endowment products to succeed. The credit unions or Grameen Bank on the other hand invest a significant amount, if not all, of their savings in the associated loan portfolio.
Although this creates an ill-advised concentration risk (see Chapter 3.6), such investments do not require stock exchanges or rating agencies.
3.3 Mis-selling Another problem with long-term products is the potential for mis-selling, since the client is not able to effectively assess whether the financial institution and its agent are indeed trustworthy for some time, sometimes years, after they have purchased the product. This issue is much more problematic for endowment policies (see Box 20) than savings schemes because the latter are more transparent. In addition, the staff “selling” savings products are unlikely to earn an individual commission based on savings volumes, so they do not have the incentive to misrepresent the product or press persons who are not interested to buy it.
Mis-selling in South AfricaBox 20
The Black Sash is a South African human rights organization which runs community advice bureaus that assist with a range of consumer protection issues. Many of the cases taken up by the Black Sash involve the agents of insurance companies who sell a plethora of insurance policies, including endowments, to rural consumers. A fairly typical case involved a domestic worker in a local government agency.
Until her retirement in March 1993, she earned US$162 each month. She paid US$37 per month for insurance policies from four major insurance companies. After her retirement, all she received from her numerous policies was US$58. She went to the Black Sash for assistance.
In this case, after a long struggle involving many months of correspondence with insurance companies, she eventually received US$169 in total (from surrendering policies). One policy was surrendered when she retired, four years before the policy became due. She was “assisted” by the personnel officer of the government agency she worked for, who failed to inform her that if she waited until the policy became due she would have received much more.
Source: Adapted from Roth, 1995.
106 Microinsurance products and services Mis-selling can be a major problem, even in countries with highly-regulated financial markets. In the UK, it has been estimated that 5 million people were mis-sold endowment policies.7 For the most part, these persons bought endowment policies together with a mortgage believing that the endowment policy would pay off their loan when the endowment matured, but that did not happen. The UK Treasury Select Committee which investigated the problem estimated a nationwide shortfall of £40bn (US$69.6bn) One needs to bear in mind that while it may be in the agent’s interest to mis-sell policies (depending on the structure of the sales incentive), it may also be in the interest of the insurer, especially if the policy lapses. Some insurers rely on lapses in latter years to avoid paying benefits. Endowment plans designed to rely on lapses can be beneficial to the few clients who have the ability to maintain premiums, but they are of poor value for the majority of clients. Fortunately, with consumer pressure in some countries, some insurance companies have been forced by regulators to pay out hundreds of millions of dollars to misled consumers. This has not only been costly, but has proved a public relations fiasco for insurers.
3.4 Savings and premium collection methods A key issue with all products is minimizing the costs of collecting savings and premium payments; otherwise the savings of the poor will merely be paying the operating costs of the provider. One way to reduce costs is to reduce the frequency of payments, but for the low-income market it is reasonable to assume that periodic payments (weekly, monthly or quarterly) are probably more appropriate for their cash flow than annual payments (see