«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Short-term covers can have a renewable-term arrangement whereby the policyholder can continue to have coverage up to a maximum age without additional underwriting or applications, as long as premium payments are made. Renewable terms combine the advantages of both short- and longterm coverage. The insured are guaranteed continued coverage, yet the insurer can adjust the pricing, up or down, depending on its experience. The renewal option may be subject to adverse selection in that policyholders more likely to claim are more likely to renew their cover, and this may need to be factored into pricing.
Local preferences are important in determining the term. Microcare in Uganda has migrated from four-month term products (matching loan cycles) to annual cover in response to client demand. Conversely, VimoSEWA had the opposite experience. Historically it only offered twelve-month insurance cycles, but it is now experimenting with three-month terms as clients wanted more regular premium intervals and coverage renewal. In general, short terms have high operational costs, as well as the significant cost of nonrenewals because the shorter the term the more frequently the client has to make the purchase decision and the less time there is for the demonstration effect to make itself felt.
156 Microinsurance operations 3.2 Premium payment frequency The microinsurance target market often has irregular and unpredictable cash flows. To minimize lapses (and maximize renewals), the premium payment mechanism has to find ways of timing payments so that they correspond with periods when the households have some surplus income.
When Delta Life began offering microinsurance, it assumed that the poor needed to pay premiums on a weekly basis, because that is what they did at Grameen, BRAC and the other Bangladeshi MFIs. To make this possible, Delta employed field staff to go door-to-door to collect premiums from all the policyholders at their homes or workplaces each week. Not only was this method extremely expensive for Delta, but as it turned out, it did not quite meet the needs of its clients either. When Delta introduced monthly, quarterly, semi-annual and annual payment options, it found that different segments of the market had different preferences.
When determining premium payment schedules, another factor to consider is the time value of money. As described in Chapter 3.5, when insurers receive premiums in advance, they can invest them; the returns on that investment are used at least in part to keep the cost of the insurance down. So generally, insurers prefer up-front premium payments instead of instalments.
From the insurer’s perspective, up-front payments also eliminate or reduce problems with lapsed policies. Lapses occur when a policyholder neglects to make a premium payment within a certain period of time, similar to a borrower missing a loan repayment.3 The big difference with a loan repayment is that the lender still wants to get its money back; whereas a lapsed policy could work out to the financial advantage of the insurer that has taken money from the policyholder but is no longer obliged to provide insurance benefits, as illustrated in Box 26.4
Lapses at Delta LifeBox 26
From the start, Delta’s microinsurance products have been voluntary. The fact that the insurer has sold nearly 2 million policies over the years suggests that there must be some level of customer satisfaction. Yet less than half of those policies are still in force, which possibly reflects the lack of a connection between product design and customer needs. A reasonable measure of customer satisfaction might be continued payment of premiums. When peo
ple become dissatisfied, they may stop contributing. Certainly other factors also cause lapses, but it is still a reasonable indicator of dissatisfaction.
Of the 1.9 million policies sold by Delta Life up to September 2004, 57 per cent are inactive.
In some cases, this is due to maturities and settlements.
Inactive policies could result from changes in the customers’ financial situation, or differences between what they thought they were buying and what they did buy. Alternatively, the cause may simply be dissatisfaction with the product. Customers have complained about delays in claims processing and claims being paid by crossed cheque, which means that they have to open a bank account. Some policyholders also compare Delta Life’s returns unfavourably with those of banks.
Management recognizes that it has a problem with lapses. In the past, lapses have not been a priority, perhaps because the organization benefits financially when policies lapse. Field staff were not monitored or rewarded on the basis of the number of policies that remain in force, and they have not received training on how to encourage timely payments. Delta anticipates, however, that reengineering and better management information will improve the situation.
Source: Adapted from McCord and Churchill, 2005.
As described in Chapter 2.2, with endowment policies, one way to prevent lapses is through a non-forfeiture clause. Similarly, the primary product for a mutual benefit association in the Philippines, as required by law, is life insurance with compulsory participation of all MBA members. According to the regulations, 50 per cent of the gross premiums must be set aside as member equity. If a policy lapses, however, then the equity can be used by the MBA as a premium loan so that coverage is continuous, at least until the equity is consumed. If the member then wants to reinstate, he/she is required to first replenish the borrowed equity. Clearly, this cannibalism of policy value undermines the usefulness of insurance as a long-term savings vehicle, but at least the cover remains in force.
3.3 Premium payment mechanisms As discussed in Chapter 3.3, besides minimizing lapses and non-renewals, the other critical factor to consider when designing premium payment methods is to keep the administrative costs (and the transaction costs to the customer) as low as possible. As a general rule of thumb, the best time to collect premiums is when policyholders have cash, for example at harvest time, or when they receive a loan or a government cash transfer. Even better, collect 158 Microinsurance operations the premium at the source so that premiums can be bundled for multiple clients. For example, Yeshasvini in India collects premiums from producers’ cooperatives who deduct the amount from the members’ incomes.
Group cover has the advantage of streamlining the premium collection process: there may be only one central policyholder, who pays a premium on behalf of many persons. The collection of premiums is effectively outsourced to this policyholder.
To streamline premium payments, another common strategy is to “piggyback” the premium on top of another financial transaction. For example, one of the easiest ways to achieve the high renewals and minimal administrative costs is to link the premium payment to a loan, since clients have cash when they receive the loan and can easily pay the premium. The downside of relying on this approach is that only clients who receive a loan can get insurance coverage.
Another approach is to deduct the premium from a savings account, which is done by La Equidad in Colombia and others. This approach is strongly recommended in Chapter 2.3, as long as customers know that the money is being deducted. Another more innovative link between savings and insurance is to establish a fixed deposit account and allow the interest to pay the insurance premium, a strategy that VimoSEWA uses successfully. One challenge with this method is for the poorest clients to save up enough money to deposit in the account.
What does an insurer do when its clients do not have a regular place to live and work, let alone a bank account? There are other ways of piggybacking besides financial transactions to reach a clientele in the informal economy. For example, African Life found that many clients for one of its low-end products in South Africa had a common regular practice: going to church every Sunday. So it issued “pass books” to customers which they have stamped at the church when they pay their weekly premiums.
3.4 Premium amounts It is standard practice for insurers to apply different premium rates depending on the policyholder’s age and sex, especially with individual insurance.
For microinsurance, this adds a layer of complexity that can be difficult for staff and clients to understand. Within the context of the partner-agent model, several MFIs, including TSKI (Philippines) and Shepherd (India), have negotiated with insurers to provide a single rate for all ages (see Box 27).
Such an arrangement is possible when the sum insured is small, if there is a continuous influx of younger members, if there is a maximum coverage and/or entry age, and with annual actuarial pricing review. For higher-value Product design and insurance risk management 159 policies or with elective participation, the MFI will probably have to implement age-structured rates prepared by the insurance company or actuary.5 Whatever the premium terms, it is difficult to overstate the importance of managing premium delinquency. Many insurance schemes have failed because they provided cover without actually collecting premiums.
Flat-rate pricing for ShepherdBox 27
When Shepherd was developing its hospitalization product with United India Insurance Company (UIIC), one of the sticking points in the negotiations was the age brackets that the insurer proposed. Initially, UIIC wanted to offer a lower premium for members between 18 and 45, and charge those in the 46 to 60 age bracket a higher price. As is its custom, Shepherd took this proposal to its members and they voiced significant concerns, preferring instead a uniform price. Given the complications that arise from trying to determine a person’s age in rural India, and the administrative costs and challenges of segregating policyholders into two categories, this was probably a fortunate choice.
Source: Adapted from Roth et al., 2005.
4 Benefits The benefits provided by the insurance product should be largely determined through demand research: what is it that people need coverage for? The general lesson is that microinsurance benefits should be kept as simple as possible for several reasons. First, to keep the premiums low, the administrative costs have to be kept low; and it is easier to accomplish that objective if the benefits are straightforward. More complicated products could be managed cost-effectively if the organization had an excellent management information system, although this is not an area in which microinsurers have as yet excelled.
Second, the target market for microinsurance is often illiterate or uneducated and lacks exposure to insurance. Complicated benefit packages are difficult and time-consuming to explain to clients. Indeed, one of the reasons why the new products introduced by ALMAO in Sri Lanka have not been popular is that they are harder to explain to customers than the old basic funeral insurance product.6 If a product cannot be easily explained in a few sentences, then low-income clients will not understand it and the product
will not be well received. In fact, where the benefit package is complicated, salespersons tend to omit to mention certain benefits.
Another reason for keeping the product simple is that many of the bells and whistles in complicated products are really just there as window-dressing, used for marketing purposes to make the product appear more impressive. In practice, however, there are hardly any claims for certain benefits, and therefore people are paying for things that they do not really need or want. For example, ASA was offering insurance in partnership with Life Insurance Corporation (LIC) of India that provided multiple benefits (see Table 17) for an annual premium of just Rs.100 (US$2.22). The problem from ASA’s perspective was that the insurer would hardly ever pay accidental death claims, as elaborate documentation was required to prove that death had been due to an accident, and hardly any clients made disability claims. Therefore, when ASA switched insurance partners, the MFI simplified the benefits, requesting only death cover, regardless of the cause, and no disability benefits.
Table 17 Benefits of LIC’s Janashree Bima Yojana