«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
8. One price for all ages It is standard practice for insurance companies to apply different rates for life insurance to people of different ages and sex. However, this can be difficult for staff and clients to understand. In cases when simplification is deemed necessary, a single rate can be introduced if benefits are small (at least until both clients and staff have increased their knowledge of insurance). The single rate means that young people are penalized, but the sums insured and 6 Not all experts agree that a waiting period is an appropriate way of controlling adverse selection risk. One month may not sufficiently control the problem, yet members usually pay for full coverage even though they do not receive protection during the waiting period. Alternative approaches are also discussed in Chapter 3.1.
124 Microinsurance products and services premiums are so small that the differences are acceptable. For high value policies, a rating table will be necessary.
9. Simplified sales promotion The basis for marketing insurance is a simple product that meets an obvious need. Promotion and sales staff need to be well trained in effective sales techniques. As discussed in Chapter 3.2, sales arguments should concentrate on the most important factors: what is the cost, what is the benefit and who is covered? In addition, there should be publicity in connection with benefit payments.
2 Savings-linked insurance Banking regulations in most countries do not allow microfinance NGOs to offer savings facilities. However, during the last decade, some countries have developed separate legislation to regulate deposit-taking MFIs. In addition, savings and credit cooperatives, which constitute the majority of MFIs in some countries, are normally allowed to accept deposits from their members under cooperative regulations. For organizations that are allowed to accept deposits, savings-linked insurance has a huge advantage over credit-linked products because policyholders can have coverage without being in debt.
2.1 Life savings The most common type of savings-linked insurance is life savings. The benefit paid from a life savings scheme is normally equal to the savings balance at the time of death of the insured. In the event of an accidental death it is common for multiples of the savings balance to be paid instead, such as three times the savings balance. In most cases, the insured appoints beneficiaries.
The premium is normally deducted as a percentage of the insured’s savings balance. This structure makes the product very cost-effective for MFIs.
A very efficient way of running a life savings scheme can be found in a savings and credit cooperative movement in Malawi, MUSCCO, where life savings insurance is an additional benefit for all members. This makes it possible for the participating cooperative societies to pay the premium on a collective basis. The society makes one payment for all members, calculated on the basis of total member savings at the time of payment. The monthly premium rate was recently increased from MK 2.50 to MK 4.00 per MK 1,000 sum assured per month, largely due to the effect of HIV/AIDS on mortality rates.
Savings- and credit-linked insurance 125 It is difficult to design a more cost-effective payment system than this.
The great advantage is that all who have savings are insured and there is no risk of losing cover due to premiums being unpaid or in arrears. The risk of adverse selection is also minimal. Maximum coverage is MK 100,000 (US$935).
However, life savings schemes do suffer from some shortcomings. It is common for people to reduce or terminate their savings during the difficult times before death (for example, to pay for healthcare costs or simply to compensate for loss of income). Hence, the savings balance is low at the time of death and the benefit likewise, providing limited value to the beneficiaries.
It is possible to reduce this problem by basing the benefit on the average savings during, for instance, a six-month period one or two years before death.
Such a method can only be recommended when old savings records are easily available and are preferably computerized. The method would require additional administration and actuarial expertise to make the necessary calculations, but would enhance the value of the cover.
If an MFI’s members clearly demand life insurance, there are other solutions. A very effective way is to offer all members a fixed amount at the time of their death and to pay for the coverage once or twice a year as an administrative expense that is debited to the members’ savings accounts. This means that insurance would be compulsory and that all members, or rather their beneficiaries, would get the same benefit. It would be more of a memberlinked than a savings-linked insurance. The member’s savings account would only be used to facilitate the administration of the service.
A similar scheme could, of course, be offered on a voluntary basis and with a (limited) choice of fixed benefits. This would increase adverse selection risks and administrative costs, but also be more adapted to individual members’ demands. In computerized systems, costs may still be kept at a reasonable level.
2.2 Other savings-linked products Besides life savings and the long-term savings and insurance products discussed in the previous chapter, there are other ways in which savings products can be used to extend insurance protection to low-income persons.
Essentially, any type of insurance could be linked to savings with an account serving as a mechanism to minimize the transaction costs associated with premium collection. Opportunity International has started to experiment in Montenegro, Mozambique and Malawi with the savings account as a method of distribution. This arrangement allows the client to pay premiums incrementally over a month, with the savings account being debited at the month end.
126 Microinsurance products and services VimoSEWA and SEWA Bank used the same approach several years ago, but it was not very successful because many account holders were not aware that the premiums were going to be deducted from their accounts. As discussed in more detail in Chapter 3.3, SEWA Bank now offers a fixed deposit account with the interest on the account being used to pay the premiums. As long as depositors leave their money in the account and the premiums do not increase, they will have permanent coverage (up to a maximum age) without ever having to withdraw cash for the payment, while retaining ownership of the principal in the savings account.
Another example is from Sri Lanka, where Yasiru provides insurance to poor people through community-based organizations (CBOs). Yasiru’s system includes a “member’s account” for each member. Out of the annual profit, 40 per cent is allocated to each member’s personal account. The member can withdraw the money plus interest five years after termination of his/her membership. Unfortunately, in the present situation in Sri Lanka, where inflation exceeds the general savings interest level, including return on treasury bills, it is difficult to get real returns from members’ funds. Still, the arrangement helps Yasiru’s members to save some money for old age.
3 Product design and delivery issues Based on these experiences, a number of issues, opportunities and limitations emerge relating to savings- and credit-linked insurance products.
3.1 Voluntary v. mandatory A sensitive question for most MFIs is whether the service should be compulsory or voluntary. Mandatory coverage is by far the most cost-effective way to distribute insurance to the poor, and it protects far more people than if the insurance is marketed voluntarily. The risk of adverse selection is also minimized with compulsory coverage. Many microinsurance schemes suffer from a high drop-out rate, which over time will weaken people’s trust in insurance and jeopardize the financial viability of services. With mandatory schemes, this risk is eliminated. Even with a reasonable drop-out level, the administration of a voluntary product may become so expensive that too small a portion of the premiums remains to pay benefits. Transaction and other costs will simply consume too much of the premiums and leave the clients with a poor return (benefits) on the fees they pay.
One way to overcome the limitations of mandatory coverage is through client education. Clients of MFIs generally know very little about insurance.
Most microinsurance schemes face difficulties in reaching their target group Savings- and credit-linked insurance 127 with marketing, education, training and awareness campaigns. Yet wellestablished MFIs have built-in channels for providing these types of services to members, which can also be used effectively for insurance purposes. Savings and credit cooperatives have a particular advantage in reducing the scepticism of compulsory services: their democratic structure allows all members to take part in a decision to provide mandatory insurance services.
An MFI’s communication and training structure can also be used to involve clients in the design of insurance products, which can make mandatory cover more valuable or at least acceptable to the clients. If products have the type of benefits that the clients prefer, the viability of the insurance service also increases. As discussed further in Chapter 3.1, compulsory group insurance can be extremely useful as long as the clients are aware of what they are paying for and appreciate it.
3.2 Leveraging assets Since MFIs are already involved in financial transactions with their clients, it is easy to add fee collection for insurance products. Some MFIs, however, have copied cumbersome and expensive procedures from the commercial insurance industry instead of developing insurance services based on their own specific advantages. For example, instead of using their MFI partners’ savings and credit system for an integrated distribution of its products, Yasiru, in Sri Lanka, has recruited field agents to carry out marketing and collection of premiums.
All savings and credit cooperatives, and an increasing number of other MFIs, operate savings accounts. This provides for a very effective fee collection system. By means of direct debits authorized by the member, the premium is deducted from the account at specific intervals. Since most systems are computerized, this fee collection process is very cost-effective.
Microfinance institutions often have local knowledge about their customers that facilitates sales. It is easier to market something to a person you know, and easier for people to accept products promoted by known sources.
Hence, the marketing, the premium collection and the claims procedure become more effective and efficient. When people know each other, it is difficult for clients to cheat. Consequently, in the microinsurance market, significant accommodations should be made in the normally required claims procedures to make them more appropriate for the poor (see Chapter 3.4).
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3.3 Limitations There are inherent limitations in loan protection and life savings schemes.
Loan protection insurance, in some cases with a funeral aid rider, ends when the loan is repaid. Although this insurance has benefits for the client’s family, it is still supply driven. Even when other benefits have been added to loan protection insurance, the benefits are only there as long as the loan is outstanding. There is no long-term reduction of risk for clients and their families. This limitation can be balanced by offering continuation policies or voluntary life coverage to people who stop borrowing.
Generally, it can be said that insurance services offered by MFIs tend to be standardized, compulsory and simple. These characteristics add to the cost-effectiveness of the products but, at the same time, the service is inflexible and may not meet the actual risk management needs of individual clients.
Life savings is a natural insurance service for savings and credit organizations. An obvious weakness of the product is that the balance in the account (and therefore, the benefit) is often lower just before someone dies, perhaps due to old age or a long illness. One way to overcome the problem is to relate the benefit to the average savings balance during a period prior to the occurrence of death.