«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
The notion that NGOs and MFIs are working towards the empowerment of women and thus automatically consider the gender perspective in their microinsurance operations has proved to be wrong. Greater attention to gender-specific needs is required. Shortcomings are exposed when the “household” or the “family” is considered as a (homogeneous) unit for riskmanagement strategies. Rather, emphasis needs to focus on gender-specific risk-management instruments.
Gender differences can significantly affect the design of an insurance product. Experience has revealed the need for customized products reflecting the needs of women and children, particularly girls. Even if products are jointly developed with female clients, their needs are not necessarily addressed; insurance providers often exclude benefits such as gynaecological diseases and treatment related to pregnancy. Even if microinsurers exercise their negotiation power, there are limits to what low-income groups can pay in relation to what an insurance provider may include in the benefit package.
In these cases, other risk-management instruments such as preventive measures or microfinance can complement microinsurance products. Furthermore, private microinsurance should be seen as complementary to the social protection responsibilities of the state.
Women on average are subject to greater vulnerability than men since they work predominantly in the informal economy, without any social protection. They earn less than men on average, have little ownership of and control over assets, are more likely to care for children and elderly, are more likely to live in poverty, and are less likely to have health insurance and pension coverage. These conditions, combined with a low status in society, cannot be solved through microinsurance, but need long-term policy intervention at the macro level. If these circumstances are changed in favour of women (and other discriminated groups such as children), their protection will be enhanced and microinsurance can live up to its full potential.
3 Microinsurance operations 3.1 Product design and insurance risk management John Wipf, Dominic Liber and Craig Churchill1 The authors would like to thank Bruno Galland (CIDR), Herbert Meister (Munich Re), Aude de Montesquiou (CGAP) and Ellis Wohlner (consultant to SIDA) for their valuable insights and suggestions.
Product design for microinsurance follows the same basic rules as conventional insurance: the insurer needs to establish demand from the market for insurance, determine the risks that can be insured, and devise insurance riskmanagement processes for ensuring the product’s viability.
The design of microinsurance products, however, has some unique complications. Particular challenges are the small premiums and benefits driven by the market’s limited resources and extreme cash-flow constraints, which restrict the scope of underwriting, claims management and product complexity. These challenges require scale, innovation, efficiency, simplicity and intelligent risk management.
Moreover, some microinsurers have a more complex mandate than insurance companies. The financial and economic drivers of sound insurance business may be supplemented by a development agenda, for example to expand access as widely as possible or to ensure inclusion of certain risks that might be commercially excluded. Not all microinsurers are subject to these influences, but where they are, it is critical that sound risk-management principles are not sacrificed. Where “non-commercial” risk is taken, it must be understood and managed.
As explained in Chapter 1.2, there is no “one size fits all” solution. Customer needs, preferences, appropriate delivery mechanisms and regulatory requirements vary tremendously from one territory to the next. Deep knowledge of local conditions is a prerequisite for designing successful microinsurance products.
This overview of product design answers the following questions:
– What are the needs and demands of the target market?
– Who is eligible for microinsurance?
– What are the terms of cover and the premium payment options?
– What are the benefits?
– How does product design provide for control of insurance risks?
1.1 Initial market research The product design process begins with market research, which involves four basic steps.
a) Define the target market Some organizations, like microfinance institutions, may determine that the insurance market is the same as their existing savings and credit markets.
Others may introduce insurance to gain access to new markets – for example, persons who are not interested in borrowing, but do want insurance. A key decision is whether the microinsurer will just target the most vulnerable or whether it wants to service the broader low-income community with a range of product options. For example, the health insurance schemes of BRAC and Grameen Kaylan in Bangladesh do not just serve the members of their corresponding MFIs, but the community in general, charging higher premiums to non-members as part of the organizations’ sustainability strategy.
b) Identify what risks they face and need to insure (and which risks are insurable) Demand research will help identify the most appropriate insurable events to cover: What risks are target groups most worried about, or least able to cope with through informal mechanisms? As illustrated in Chapter 1.2, lowincome persons typically worry about the premature death of breadwinners and their own sickness and that of their family members. Often the poor have some coping mechanisms at the community and/or household level through savings, borrowing and reciprocation. Insurance should complement these existing mechanisms.
themselves, or would they prefer to include their spouses, or their whole families? How quickly would they need, want or expect to receive claims payments? Where can policyholders make premium payments or submit claims?
d) Establish how much potential policyholders are willing and able to pay Lastly, it is necessary to determine what the target market is willing to pay for these services. Demand can vary tremendously, even within the same country. Two surveys of microfinance clients in the Philippines came up with very different results. The borrowers from an MFI in central Luzon wanted at least Php120,000 (US$2,160) life insurance coverage for themselves and Php 60,000 (US$1,080) for their spouses and children, and they were willing to pay for it, having been conditioned to paying premiums to the MFI’s previous insurance programme. A sample of similar clients of an MFI in northern Mindanao indicated that they could at most afford premiums providing Php 30,000 (US$540) of coverage for themselves, Php 10,000 (US$180) for their spouse, and Php 5,000 (US$90) for death of a child.2 It is useful to investigate affordability and product design preferences in concert with each other. Everyone might like to have claims paid immediately, or to cover their whole family, but how much are they willing to pay for those features? Given the cost constraints facing the target market, an explicit link between product design and financial consequences helps clients make appropriate value-driven decisions, while securing their buy-in to the scheme. An example of this type of process has been developed under the Social Re programme to enable sensible decisions to be made around benefit package design (Dror and Prekker, 2002).
When assessing willingness to pay, through focus groups or individual interviews, prospective customers may overestimate their capacity to pay, which could lead to subsequent dropouts. Information about the level of income is another, perhaps more reliable, means of assessing the payment capacity of the target population. For example, when comparing the annual income with the actual contribution paid to micro health insurance schemes, CIDR found out that poor households in western Africa do not allocate more than 2 per cent of their income (Galland, 2005a). In addition, when designing a product for the poor, it has also to be taken into account that income may change from one year to another. A product that is affordable one year may not be affordable the following year.
2 Research conducted by RIMANSI (Risk Management Solutions, Inc.), a microinsurance resource centre based in the Philippines.
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1.2 Ongoing market research Market research must not fall by the wayside once a product is launched.
Insurers should maintain contact with their clients periodically to ensure that the services are still relevant and valued by customers.
The very high lapse rates experienced by some microinsurers may be a consequence of failing to keep an ear to the ground: problematic elements of product design should be identified and, where possible, rectified to ensure ongoing viability. Policy renewals or persistency and new business rates jointly provide feedback about the value perceived by clients, and should be carefully monitored. Qualitative research such as focus group discussions may also provide further insight into the mechanics of the market and customers’ preferences and dissatisfactions.
1.3 Consumer education The target market’s exposure to or familiarity with insurance must be assessed. As discussed in Chapter 3.2, if the market does not understand insurance, or does not trust it, then client education needs to be built into the marketing and product delivery. Insight into the preferences and concerns of existing policyholders will also help the insurer design appropriate financial education to manage policyholder expectations.
1.4 The competition To date, many microinsurance initiatives have been the first movers in the local market, trailblazers entering virgin territory without competition. As time goes by, this is likely to change, as competitors enter the market with better products. Consequently, it is important to gather market intelligence on what competitors offer and the perceptions of their value in the market when considering a new product.
There can be an advantage in being a “smart follower”, learning from the mistakes of those who have gone before. The Ugandan MFIs that collaborated with AIG in 2000–2002 rode on the coat tails of FINCA Uganda, which was the trailblazer in learning about insurance and the low-income market.
The costs of introducing insurance in those organizations were significantly lower than in FINCA.
150 Microinsurance operations 2 Eligibility Who should be eligible for coverage? This difficult question must be considered in the context of the microinsurer’s objectives and the membership’s preferences, but with an acute awareness of the risk-pooling principles that apply. For microinsurance, the goal is to strike a balance between broad inclusion, sufficient benefits, low premium rates and sustainability. Eligibility considerations may be driven purely by economic circumstances since large volumes of clients with small premium amounts require minimal underwriting work, permitting broad inclusion. There may also be social objectives that require broader inclusion.
When determining eligibility, it is necessary to consider whether the product is designed for groups or individuals, whether it should be mandatory or voluntary and what approach the insurer wishes to adopt to covering higher-risk persons.
2.1 Group insurance The primary feature distinguishing commercial group insurance from individual insurance is that many people are insured under one master policy.
The group policyholder decides what type of coverage to buy for the members of the group. The policyholder is responsible for enrolling members, collecting premiums, disseminating certificates of insurance and product information, and helping members file claims. The policy describes and defines the eligible members of the group.