«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
2. Since they already have financial transactions with the target market, it is very cost-effective for them to offer low-income households insurance services linked either to their savings or to credit products.
This chapter is mainly based on ten case studies of savings and credit organizations involved in the provision of microinsurance. The studies cover many different environments, conditions and types of service delivery.
Although other savings and credit organizations may provide microinsurance services a little differently, the ten cases cover the important aspects of savings- and credit-linked insurance.
The abbreviation MFI is used for all types of savings and credit organizations that provide financial services to low-income households, including NGOs, microfinance banks, and savings and credit cooperatives. Only when there is a specific reference to savings and credit cooperatives is this term used. Similarly, the term “client” and “member” are used interchangeably to refer to the person buying insurance or being protected.
1 Loan-linked products A range of insurance products could be linked to loans. Where the insurance products are designed and managed by the microfinance institutions themselves, the products tend to be simple and closely related to the credit services. Where there is a closer involvement of a professional insurance organization, services are generally more attuned to the needs of the clients, and correspondingly less related to the savings and credit operations.
Savings- and credit-linked insurance 113 It should be noted that numerous MFIs only offer loan services to their members. They do not accept deposits. These MFIs are naturally inclined to offer only insurance services which are directly related to the loans. When the loan is repaid, the MFI has no business transactions with the client and the insurance coverage also ceases.
1.1 Loan protection Many MFIs have introduced loan protection insurance, also called credit life, to achieve two objectives: 1) to cover the loss that an organization may incur upon the death of a borrower and 2) to relieve the borrower’s family of the burden of repaying the remaining loan, hence ensuring that “the debt dies with the debtor”. Compared to the other products discussed in this chapter, loan protection provides the most limited coverage to the client or beneficiaries; yet it is also the most affordable and often a compulsory part of the loan.
A common way to operate a loan protection scheme is for MFIs to integrate insurance into the loan, which simplifies the administration. As the scheme is mandatory, there is little risk of adverse selection and there is no need for additional staff since premiums are paid through the loan, normally as a slightly higher interest. The aspects of loan protection coverage are
fairly common across the different organizations. The key distinguishing features are:
1. Who carries the risk?
Some MFIs carry the risk of their loan protection scheme themselves. This may be somewhat hazardous since an unregulated insurer cannot obtain reinsurance. In an unregulated insurance operation, there is also a risk that the interest of the policyholders is neglected, although in reality, if the MFI fails, the clients probably will not need loan protection cover anyway. It is when the insurance provides other benefits besides loan cover that the consumer protection concerns become warranted. Another concern with the MFI carrying the risk is that the insurance funds may be inappropriately mixed with funds from the savings and credit operations. The advantages and disadvantages of self-insurance are explored in more detail in Chapter 4.7.
2. What risks are insured?
Besides covering the borrower’s death, loan protection can also cover permanent disability and illness. Inclusion of such coverage for the low-income market may cause problems and needs careful preparation and well-designed terms and conditions (see Chapter 3.1).
114 Microinsurance products and services
3. What is the price?
It is a little difficult to assess the price of loan protection by itself because the rate can be quoted in many different ways. Columna, in Guatemala, charges the cooperatives 0.71 per Q. 1000 per month. In Zambia, Madison’s coverage ranges from 0.8 per cent of the loan amount for four months for FINCA, to
3.5 per cent of Pulse’s loans that are longer than one year. OIBM in Malawi pays 0.35 per cent of loan principal per month of the loan term, whereas at Opportunity International in Mexico, the premium is calculated as ((0.0039 x loan principal /52) x loan term in weeks).
These examples indicate that the insurance fees in terms of effective interest on an outstanding loan balance may vary from less than 1 per cent to more than 8 per cent. The varying terms and conditions may justify different fees, but the high fee variation calls for improved regulations, research and actuarial analysis.
4. What is the sum insured?
A comparison of the fee rates is also complicated by the fact that the sum insured differs from one scheme to another. Columna covers the outstanding loan balance and accrued interest, which is perhaps the most typical loan protection benefit. At FINCA Zambia, loan protection from Madison Insurance covers the outstanding loan, which includes interest because interest is charged at a flat rate and added to the loan balance when the loan is disbursed. However, for the two Opportunity International affiliates and CARD MBA in the Philippines, the sum insured is the disbursed loan amount. OI prefers this approach because the lender is guaranteed cover for the full outstanding balance regardless of whether or not the loan is in arrears on the date of death. The other attraction of purchasing credit life on the disbursed amount is that it leaves a balance, sometimes substantial, for the beneficiaries.
5. Is it combined with other benefits?
Loan protection may be of great value to a family after the loss of a member who might have been the breadwinner. A crucial shortcoming is that the cover only facilitates loan repayment, whereas the need to manage risk is much wider in poor families. Consequently, as described below, the value of loan protection can be improved by offering additional benefits as long as they are also easy to administer.
Loan protection is a rudimentary form of insurance, often the first type of formal insurance encountered by poor people in developing countries. If it is properly implemented with comprehensive awareness campaigns, it can Savings- and credit-linked insurance 115 improve knowledge about insurance among the target population. Unfortunately, from the experiences in the case studies, clients (and the beneficiaries of policies) do not always know that they have this protection, and therefore by itself, loan protection does not automatically contribute to creating an insurance culture. The importance of involving the clients in the design of the products and providing them with information and training cannot be overemphasized. Another way to overcome some of the disadvantages may be to offer mandatory life insurance with a loan instead of pure loan protection, as described in Box 21.
Life insurance as an alternative to loan protection?Box 21
Instead of loan protection, some MFIs offer mandatory life insurance with the loan. For example, ASA in India has offered insurance in one form or another for more than a decade, but has never offered credit life. Instead, its basic term life insurance policy (now offered on behalf of three different insurance companies, each responsible for the clients in different branches) provides a flat benefit of Rs. 20,000 (US$222) to the beneficiary in the event of the borrower’s death. Upon receiving the benefit, the beneficiary is responsible for repaying the loan (less any savings held by the MFI).
The disadvantage of this approach is the extra transaction that must occur when a claim is made. Instead of the MFI being paid directly by the insurer, it must collect from the next of kin. The advantage, however, is that it is a more transparent approach. Borrowers are more likely to know that they have bought insurance and to know how much they paid for it.
Perhaps most importantly, this approach has a much stronger demonstration effect than loan protection because it creates an opportunity for a public ceremony to provide the beneficiary with the insurance payout. All the members of the deceased’s self-help group, and many people in the community, can see first hand the insurance company fulfilling its contractual obligations – basic loan protection does not provide such an opportunity to plant the seeds of an insurance culture.
perspective, this may even be more attractive since it eliminates the need to recover the loan balance from a sum already paid out in public.
A great advantage of a separate life insurance is that it facilitates a continuation of the insurance. The disconnection of the insurance from the loan means that it will be natural to explain terms and conditions of the insurance to the client and to agree on a system for payment of the fees after the loan has been repaid.
1.2 Loan protection combined with funeral aid The most common additional benefit in loan protection schemes is funeral aid protection for the borrower. Besides the repayment of the loan, the insurance provides a benefit to the family of the deceased to meet funeral costs. Usually, the benefit is equal to the original loan amount or to the remaining loan balance, or for another fixed amount. Sometimes the benefit for an accidental death is higher than for a natural death.
The coverage of funeral aid insurance is sometimes extended to cover the death of non-borrowing family members as well.1 Besides assisting the borrower in a difficult situation, this arrangement also facilitates his or her continued loan repayment. Therefore, indirectly it also benefits the MFI. The microfinance institution (or its insurer) also benefits because the family approach increases the number of persons covered, including low-risk persons such as children over five. Since the client joined the MFI to access savings and credit services, not to get insurance, the risk of adverse selection for family members is reduced. However, if the funeral aid coverage of family members is not a compulsory part of the loan protection scheme, there is a risk that borrowers with sick or near-to-death relatives will opt for this additional coverage to a larger extent than borrowers with a healthy family.
Although funeral aid is mainly a benefit for the borrower and his/her family, it is often compulsory because it is coupled with loan protection. This is a cheap and effective administrative option for savings and credit organizations; however, there is little room for flexible solutions that take into account the explicit needs of the individual members.
CARD MBA has introduced an All Loan Insurance Package, which is mandatory for borrowers (Table 13). Upon the death of a borrower, besides repaying the remaining loan balance, the benefits include the payment to a designated beneficiary of an amount equal to the already repaid instalments.
In addition, a spouse and up to three children are covered by the family
repays the client’s loan if fire damages numerous microenterprises (but does not help with rebuilding).
At TYM in Viet Nam, besides covering the outstanding loan and providing a small family funeral benefit (US$32 for members, US$13 for spouse and children), the Mutual Assistance Fund also pays a small benefit to members for serious illnesses or surgery – although, as each member can only claim this benefit once in their lifetime, its use is limited.
Madison has added another health-related benefit, illness cover, to its loan protection scheme. If a borrower becomes ill, the policy covers the instalments during the illness period, depending on the repayment frequency – 8 weekly, 5 fortnightly or 3 monthly instalments. To claim this benefit, the illness has to be certified by a doctor, which can be an obstacle (see Box 22). It does not cover any of the direct health care costs; it ensures that the MFI gets paid, and for clients it reduces the risk of borrowing, but they have to find another way to cover the doctor and pharmacy bills.
Illness cover in a credit life policy?Box 22