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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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Electronic deductions: In countries where low-income persons have bank accounts, premium payment may take place electronically, with follow-up occurring only if the deduction fails. This is how endowment policies are sold to the poor in South Africa, where poor households often have one member with a formal sector job and bank account. Under present conditions, this model would be inappropriate for many low-income countries, although as new technologies emerge and banking changes, new opportunities may arise, for example premium deductions through cell phone banking.

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In the Philippines, deposits can now be made via cell phone for a charge of 1 peso (US$0.02) per transaction, which is considerably lower than the transport costs incurred to visit a financial institution (Chemonics, 2006).

Micro-agents: In India, Tata-AIG first began working with an MFI to sell its policies. The relationship did not work because the short-term nature of the MFI’s loan conflicted with the long-term nature of the endowment policies.

It was, therefore, difficult to collect premiums from clients who took out an endowment policy but only a single loan. While it is relatively easy to deduct a premium from the disbursed loan, if the client stops borrowing, then a new mechanism for premium collection is required. Tata-AIG therefore turned to individual agents, primarily low-income women, who are formed into Community Rural Insurance Groups (CRIGs) that operate as an insurance agency. These agents would view their income as supplementary and would be prepared to work for relatively low commissions. Tata-AIG’s model is discussed in more detail in Chapter 4.5.

Delta Life and ALMOA also rely primarily on poor housewives as their army of agents. Indeed, the basic element of door-to-door premium collection is the same for all three organizations. Such an approach may work in the Indian subcontinent where population densities are high and many people with sufficient levels of education are prepared to work for a low wage. It is unclear whether this model could apply to countries with lower population densities and low levels of formal education.

Linked payments: In the examples from CARD, Grameen and TUW SKOK, the costs of savings collection are minimized by linking with another financial transaction. The CARD and Grameen clients make their savings payments in the same weekly group meetings, generally located very close to their home, where they make loan repayments. At TUW SKOK, when the member makes her or his monthly deposit, a small amount is automatically deducted and at the end of the month accumulated with all the other premiums that the credit union needs to pay to the insurer.

3.5 Lapses and the problem of surrender values Another problem, which is very specific to endowment products, is lapsed policies. With the savings products, if depositors miss a payment or stop depositing, they may earn a lower interest rate, but they will not lose their savings. If a policyholder stops paying the premium on an endowment policy, however, it will lapse and only the surrender value – often only a small part of the savings – is returned to the client. Given the irregular incomes of 108 Microinsurance products and services low-income households, lapsed policies are a very significant problem for microinsurance.

The limited surrender value in the early years is related to the upfront remuneration of the agent along with other costs of initiating a policy, such as screening, data entry and contract preparation. Agents tend to receive their commission in the first few years of the sale (see Chapter 3.2). In a lapse situation, these costs are deducted from the savings component and the remainder is returned to the client. In the first few years of the policy, there is usually no surrender value at all.

There are various ways to deal with the issue of lapses. Delta allows a thirty-day grace period for late payments, after which time the insurance component is suspended. Policyholders can refresh the policy within 12 months if they pay a late fee and undergo an underwriting review. Policies can even be revived after two years with a late fee plus medical report showing acceptable health. Besides introducing an unsuccessful microenterprise loan product to help policyholders generate income (see Chapter 3.3), Delta has not adapted the endowment concept to deal with the realities of the lowincome market where irregular cash flows are to be expected; furthermore, with low sums assured, a medical report should not be necessary. In contrast, if Tata-AIG’s policyholders are late with their premiums, the insurer deducts the premium from the amount accumulated in the surrender value. This seems to be a more accommodating approach for the low-income market.

More innovation is required to deal with the problem of lapses. Perhaps an area to be explored would be the creation of incentives for regular payment, e.g. a bonus if all premiums are paid within five days of becoming due and a reduction in benefit if payments are not made, rather than a simple termination of cover. The crucial issue is that the surrender values must be fair, and clients aware of the policy conditions including the surrender value.

Fairness in this instance would mean that the savings and insurance portions of the premiums are understood by the policyholder, and that income or expense adjustments are clearly understood prior to the purchase of the policy.

4 Conclusions Long-term savings and insurance provide an exciting new opportunity to expand the frontier of finance. The demand is there. The challenge is to find the right product design, delivery mechanism and institutional arrangement to address that demand in a cost-effective way that provides value. Of the three products analysed in this chapter (since annuities were not considered viable for the time being), from a purely product design perspective, it Long-term savings and insurance 109 appears that the two products that separate savings and insurance (or do not include insurance) have a substantial advantage over endowment products.

Institutionalized savings services are not widely available to the poor, and if they are available, they may be provided by organizations that are not sufficiently solid or credible to offer long-term savings. Consequently, insurance companies are well placed to offer an alternative, an endowment product, which may also appeal to poor households if designed to accommodate the characteristics of, and provide value to, the low-income market.

The main findings of this chapter are as follows:

– Financial institutions have been slow to offer long-term savings to the poor because of regulatory hurdles, macroeconomic instability, underestimation of the demand for, and the costs of, providing such services, and a lack of consumer trust. These obstacles can be overcome, and in some countries progress is being made, but for now, most low-income households lack access to long-term savings services despite strong demand.

– Insurance companies could play a role in overcoming many of the difficulties associated with long-term savings, either on their own or in partnership with a grassroots financial intermediary, like a credit union or other type of microfinance institution.

– Annuities are not easy to develop for low-income clients in developing countries; these products are not currently recommended due to actuarial difficulties, and the substantial mortality and investment risk.

– All long-term savings and insurance products are difficult to offer in unstable political and economic environments.

– It appears that endowment products currently sold to low-income clients have not yet been designed to provide substantial value to the policyholder.

– The principal difficulties with endowments are: (i) ensuring that premiums can be cost-effectively collected over long time-spans, requiring innovative collection systems, (ii) low surrender values resulting in the policyholder receiving back only a fraction of premiums paid and (iii) mis-selling, a problem that has been rife even in developed economies.

– Donors and development agents should only recommend endowment policies in countries where they can be effectively regulated and where reasonable value is provided to clients compared to that offered by other savings vehicles.

– Instead of endowments, a better solution may be to combine the savings component of an MFI with an insurance benefit. This would have the simplicity of providing an insurance incentive to clients who save.

110 Microinsurance products and services To expand the availability of long-term savings and insurance products, insurers, bankers, donors and development agencies can play a significant role in improving the design of products for the poor, helping regulators to oversee them, and strengthening consumer protection mechanisms to ensure that the products are fairly designed and honestly sold.

None of the currently available products are flawless. Indeed, additional innovation is required to provide better long-term products for the lowincome market. Such innovations would need to be evaluated on their own merits. Are they safe, protected from inflation and well regulated? Do they provide real value for clients?

2.3 Savings- and credit-linked insurance Sven Enarsson, Kjell Wirén and Gloria Almeyda The authors appreciate the inputs and suggestions provided by Jean Bernard Fournier and Catherine Tremblay (DID) and Ellis Wohlner (consultant to SIDA).

Villages in developing countries have traditionally provided residents with simple forms of risk sharing or insurance. Whole villages, clans or voluntary groups have assisted members affected by shock. In many countries, funeral aid groups represented an early form of voluntary insurance. People formed associations which assisted the family of a member when somebody died.

The assistance could be in cash or in kind, and often the main part of the support was for the funeral, which was an expensive event. Some groups accumulated savings to meet the expenses, while others collected funds at the time of the death. The cases of accumulated savings show that the connection between savings and insurance has a long tradition.

Formal savings and credit cooperatives emerged to serve low-income people in the early decades of the 19th century. Since the normal financial system did not reach this market, the poor created their own institutions.

These cooperatives reached many people, in cities and towns, as well as in rural areas. Savings and credit cooperatives often offered emergency loans, which functioned as a simple risk-management service for the members. At a later stage, loan protection insurance was introduced and became one of the earliest forms of microinsurance, affecting a large number of poor people.

The insurance covered the repayment of a loan if the borrower died. An American insurance group, CUNA Mutual, played an important role in the introduction of loan protection insurance in many countries, in particular for savings and credit cooperatives.

In the 1960s and 1970s, a number of schemes were implemented in developing countries to provide credit, primarily to small-scale farmers. Many of the schemes failed to recover loans and there were no insurance arrangements. However, policymakers and donors still saw the provision of credit to the poor as an important means of facilitating development. In the 1980s and 1990s, a number of microfinance institutions were established, often in the form of an NGO, which largely targeted entrepreneurs, not farmers. As 112 Microinsurance products and services these microfinance institutions matured, loan protection became an increasingly common feature.

Step by step the insurance service provided by savings and credit organizations developed. These organizations, of both the cooperative and NGO type, often added one or two insurance options to the loan protection scheme as an integrated part of their operations, and sometimes carried the risk themselves. Others, instead, chose to become agents of commercial insurance companies (see Chapter 4.2). Some savings and credit organizations even established their own commercial insurance companies to offer a wide range of services to their members (see Chapter 4.1).

This evolution of the relationship between insurance and savings and

credit products boils down to two complementary dimensions:

1. Financial intermediaries want insurance to protect their loan portfolios.

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