«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
When CETZAM first introduced credit life, the product covered sickness. If the client was ill for a prolonged period, then Madison Insurance would pay up to three monthly loan instalments. Experience showed that it was hard for clients to claim under this provision because they could not provide formal medical records, as required by Madison. As a result, CETZAM negotiated to have the credit life just cover death at a reduced premium.
Source: Adapted from Leftley, 2005.
Loan protection insurance with additional benefits may be an appropriate first step towards extending coverage to the low-income market. Since the basic product is an integrated part of a loan, the transaction costs can be kept to a bare minimum, which allows more of the premium payments to be earmarked to pay benefits.
In practice, however, this type of coverage has had a strong bias towards the lending organization – for example, by paying loan instalments when the borrower is sick or when his house has burned down, but offering little assistance to borrowers to get back on their feet again. Microfinance institutions (and their insurance partners) could theoretically provide more comprehensive benefits, but that would mean larger premium payments, which may be hard to impose on borrowers, especially in competitive credit markets.
Experience, particularly from the savings and credit cooperatives, shows that MFIs should be cautioned against adding benefits without careful and thorough preparation. Indeed, when considering additional benefits, microSavings- and credit-linked insurance 119 finance institutions have to assess the demand to understand which benefits would be most useful for members, ensure that the benefits are simple and easy to understand, and ensure that management and staff are involved in the process and that they are rewarded for their work with the insurance service.
1.4 Voluntary life insurance Besides the mandatory covers associated with loan protection, MFIs can also offer group life insurance on a voluntary basis that is still loan linked. The main reasons for linking these products to the loan are efficiency and affordability. The efficiency argument is the same as with loan protection; most of the transaction costs for insurance (e.g., sales and premium collection) are integrated into the lending activities. As for affordability, poor families often have difficulty gaining access to cash to pay premiums. When they receive a loan, however, this problem is temporarily overcome. In the actual financial transaction, prospective borrowers are usually asked if they want the cover before the loan is issued, so that the premium can be deducted from, or added on to, the loan amount.
For loan-linked voluntary life insurance, the MFI must agree with clients on a realistic way of paying premiums after the loan has been fully repaid so that the coverage can continue even if the clients prefer to stop borrowing.
The clients’ full understanding of the future arrangement is necessary to secure a continued risk cover for them.
Besides providing credit life, La Equidad distributes voluntary group life through its cooperatives and a microfinance NGO, Women’s World Fund (WWF). The loan officers of WWF sell the insurance product, Amparar, when they appraise the clients’ loan applications. There are six options based on insured values: from CoP 3 million (US$1,245) to CoP 20 million (US$8,290). To enhance efficiency and affordability, borrowers who are interested in the coverage agree to have the amount of the annual premium included in their loans. The annual premium cost for the smallest plan is equivalent to 2.3 per cent of a US$500 loan. Premiums can also be paid with loan repayments (plans include monthly, quarterly, and half-yearly payments). Yet the scheme faces the common problem of non-renewal for those who do not continue to borrow.
ALMAO in Sri Lanka offers a funeral insurance product for a low premium of less than US$2 a year. Up to nine persons – the member, spouse, children, parents and in-laws – can be covered under one policy. The benefit, US$100, is payable upon death of any of the covered persons, although limited to two deaths per year per family. One of the objectives is to use this product as an introduction to insurance for members of Sanasa, a large savings 120 Microinsurance products and services and credit cooperative movement. The funeral aid insurance is very popular, complementing the services offered by the numerous traditional funeral aid groups in Sri Lanka.
As with the loan protection, life insurance can also be augmented with other benefits that are relevant to the policyholders. At Columna for example, besides its loan protection (discussed above) and life savings coverage (discussed below), the insurer offers a group life product, “Plan de Vida Especial” (Special Life Plan) for cooperatives to sell to their members.
Although it is voluntary from the insurer’s perspective, 75 per cent of the cooperatives that have joined the scheme have preferred to make the product compulsory for new members to increase volumes and streamline paper work.
For a premium of Q. 63.39 per sum assured of Q. 10,000 per year, the main benefit from the Special Life Plan is funeral expenses, with a sum assured between Q. 10,000 (US$1,235) and Q. 50,000 (US$6,173), depending on the age and preference of the insured.4 In addition, the policy offers the
following additional benefits:
– Accidental death: If the death occurs due to an accident, the insured sum is doubled.
– Special accidental death: If the death occurs as a result of a “special” accident, e.g. travelling as passenger in public transport, in a lift, or as a result of fire in a public building, the insured sum is multiplied by three.5 – Total and permanent disability: In the event of permanent disability caused by an accident, the policyholder receives the insured sum.
– Loss of limbs: Compensation for the loss of limbs as a result of an accident is
paid according to the following schedule of benefits:
· 100 per cent of the insured amount for the loss of both hands, both feet, the sight of both eyes, of one hand and one foot, or the loss of one hand or one foot together with the sight of one eye · 50 per cent for the loss of one hand or one foot · 33.3 per cent for the loss of sight in one eye · 25 per cent for the loss of the thumb and any other finger on the same hand 4 Exclusions for this product include: suicide during the first two years; natural deaths occurring during the first 180 days; and death or disability occurring while engaged in illegal activities. To be eligible, one must be younger than 64 when joining and no more than 74 for renewals.
5 Some experts have concerns about special benefits that pay multiples of the sum insured because they can be misused as marketing ploys, when in fact the insurer rarely if ever pays out special benefit claims. Another disadvantage of higher sums insured for accidental deaths is that it increases the costs associated with claims verification, since the insurer or its agent would have to determine if indeed the death was accidental, a process that is often more complicated in poorer communities (see Chapter 3.4).
Savings- and credit-linked insurance 121 Similarly, the scheme of Yasiru Mutual Provident Fund in Sri Lanka has built on a life insurance base to add benefits that were developed in dialogue with the membership. Members are divided into four categories depending on their household situation, so smaller households pay lower premiums.
Within each category, the member can choose between five different levels of monthly premiums to receive a range of benefits (see Table 14).
Table 14 Different benefit classes for minimum/maximum premiums at Yasiru
Even though these group life products are voluntary, by distributing them through savings and credit organizations, the insurers and their delivery agents can streamline paperwork, minimize the number of transactions, and make the product more affordable for the low-income market. These voluntary products provide greater benefits to customers than coverage associated with loan protection, yet generally their market share is not particularly high (see Table 15). One explanation for the limited amount of sales is the fact that frontline staff are not sufficiently motivated, trained or rewarded to sell something that is not a core service. Another explanation is that the development of an insurance culture takes time: as people start to benefit from the coverage, others will start to be interested in it as well.
122 Microinsurance products and services Table 15 Market coverage of selected voluntary life insurance products
Based on the lessons from several case studies, it is useful to consider the following features when implementing loan-linked voluntary term life insurance for the low-income market:
1. Demand is critical If the product is designed together with the clients to make sure that the most needed coverage is included, then it will be more likely to succeed. The product has to be simple and easy to understand. Premium affordability, sum insured, and the number of dependants covered are all critical factors to ascertain from market research.
2. Distribution and premium collection In microinsurance, the most common way of making term life available is by linking it to an MFI’s loan term and using the loan as the mechanism for collecting premiums. Yet protection is only available for borrowers and often clients want insurance even when they are not borrowing. MFIs with savings services should link the continuation of life insurance to a savings account.
Such MFIs should, of course, also market life insurance directly to members with savings accounts without waiting for them to take out a loan.
3. Make premiums affordable The best way to make premiums affordable to the client is to collect them regularly. While frequent payments increase transaction costs for the MFI and the client, the burden can be reduced by using loans or savings accounts as conduits for premium collection.
The waiting period should be long enough to discourage those that seek to abuse the product, but short enough not to be seen as prohibitive.6 Strict age limits with reduced benefits may also be necessary to limit adverse selection in life insurance. The negative effect of early terminal illnesses, like AIDS, is difficult to control. The local knowledge present in MFIs’ network is of vital importance for coping with this and other problems of adverse selection, which would otherwise threaten the viability of life insurance products.
Adverse selection is also reduced by the fact that members have originally joined the organization to get savings and credit services, not insurance coverage.
5. Make it easy to make a claim The best way to drive up administrative costs and ensure that clients are dissatisfied is to have an elaborate claims process. By making the products simple (e.g. if you are dead, then we pay) and reducing the scope of coverage (it is hard for a loan officer to assess whether someone is sick, but easy for them to see that someone is dead), costs will be lowered and satisfaction will be increased.
6. Avoid contestability for existing illnesses Some insurers require that deaths arising from an existing illness are subject to a contestability period that can be up to a year. In reality, this stipulation is difficult to explain to clients and loan officers, and it can be difficult to implement because clients often do not have formal medical records.
7. Minimize the number of exclusions A long list of exclusions is difficult (and time-consuming) for staff to explain and hard for clients to understand.