«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
When determining insurance benefits, it is important to ask whether it will be easy for policyholders to make a claim. If the client cannot make a claim, or at least not easily, then the proposed benefit will not be particularly beneficial. This logic has led others to follow ASA’s lead in staying away from accidental death coverage and disability benefits. Leftley (2005) agrees that disability benefits should not be included in microinsurance: “Many clients cannot claim for disability because they are unable to demonstrate that it was not a pre-existing condition as they lack formal medical records. Plus, trying to explain that they get 50 per cent of the sum insured for one arm, and 25 per cent for an eye, and so on, is also complicated and off-putting for a newcomer to insurance.” In contrast, CARD MBA does offer additional accidental death benefits (see Table 21 below). Since it is a member-owned scheme, it is easier for peers to assess if indeed the death was accidental even without a police or coroner’s report, which are difficult to come by on remote Filipino islands. CARD MBA also follows a simple rule regarding claims settlement: “When in doubt, pay.” Such an approach helps build member confidence in the scheme.
Product design and insurance risk management 161 Although the benefits should be simple and “claimable”, microinsurers should also consider offering a couple of different benefit levels so that the low-income market can experiment with a very basic and inexpensive product. If they come to believe that insurance provides good value for their money, they might be enticed into higher benefit levels. This graduation from entry-level products to more substantive benefits would be a strong indicator of customer satisfaction and loyalty (and possibly an adverse selection risk!).
4.1 Basket coverage?
In India, which is perhaps the world’s most sophisticated microinsurance market, there is a trend toward basket coverage, whereby a number of benefits are all thrown into one integrated insurance policy. For example, VimoSEWA’s product covers death, hospitalization and asset loss – benefits that come from two different insurance companies – all bundled together into one comprehensive product (see Table 16 in Chapter 2.4).
Table 18 summarizes the benefits of an insurance policy provided by UIIC to Shepherd. The core benefit from this product is the hospitalization cover. Although this is a relatively new product without a lot of claims experience, it is unlikely that there will be many claims for most of the other benefits. If that is indeed the case, then clients are paying 20 to 25 per cent more than they should for the hospitalization benefit. Indeed, one problem with basket coverage is that policyholders may be buying benefits that they do not want (although this does have the advantage of reducing adverse selection).
The rationale behind a bundled product is that it delivers a more comprehensive risk protection package while reducing expenses (i.e. it would be more expensive to sell three separate products). The marginal cost of adding additional benefits is minimal. Plus, when selling the product, the salesperson can offer a cost-effective solution to the diverse risk-management needs of the target market.
One major issue with this basket cover approach is the lack of transparency. Clients would never be told the contribution of each individual benefit to the total price, nor would they be allowed to choose the specific benefits they want. Another potential problem is that the inadequate servicing of one component of the product may taint the perception of the entire product, since the life and non-life risks are usually ceded to different companies. So if health claims are not paid on time, for example, the whole package will be affected. The converse is also possible: good servicing and good value of one component could increase the appeal of the entire package, so that an inferior component is propped up, at least for a time.
162 Microinsurance operations To summarize, this is an unresolved issue, as the attraction of providing more comprehensive coverage is in conflict with the compelling rationale for keeping the product simple.
Table 18 Benefits from UIIC’s UniMicro insurance scheme
– A family is a group of sorts, and consequently family coverage carries many of the same advantages as group coverage: larger numbers, lower adverse selection risk, etc. The price for a family unit is generally lower than the sum of individual premiums.
– Family coverage can have a positive selection effect by purposefully enrolling very low-risk persons. For example, African Life entered the HIV/AIDSridden low-end market by developing a product where the family, rather than an individual, was the insured unit.
– Family coverage often has a better marketing effect because claims are more frequent and thus there are many more examples to demonstrate the value of microinsurance.
– Microfinance institutions concerned about protecting their loan portfolio realize that borrowers have repayment problems when death or illness strikes family members.
– If the whole idea behind microinsurance is to reduce the vulnerability of low-income households, then coverage should be extended to include all household members.
The disadvantage of family benefits is that not everyone has a family, or that some people have larger families than others. To deal with the size of the family, microinsurers either ask the policyholder to identify the specific dependents who are covered by the policy or they offer different prices for different-sized households. To ensure that women and children are not left out, it is preferable to require family coverage where possible.
ALMAO’s funeral policy covers up to nine people, including parents and in-laws. CARD MBA covers the spouse and up to three children under 21.
Those without children can include their parents. For those who are not legally married, CARD assists by organizing weddings (see Box 28). Another disadvantage is that family benefits are more expensive in absolute terms (though possibly not in per capita terms), which may make coverage unaffordable for some market segments.
Mass weddingsBox 28
CARD MBA requires that for coverage of other family members there must be legal documentation to prove the relationship. Many MBA members have not yet formalized their relationship with their spouse, often because of the costs involved. Thus, as a member benefit, the MBA occasionally organizes mass weddings for its members. This event helps members comply with MBA requirements, puts women in a better legal position, and saves them money.
Source: Adapted from McCord and Buczkowski, 2004.
164 Microinsurance operations One cannot assume that households have nuclear families of mother, father and two children. Depending on the country, many households contain extended families including grandparents, nieces, nephews, aunts, the children of friends, etc., particularly in HIV/AIDS-ravaged areas where grandmothers are taking care of orphans. Consequently, microinsurers have to be very clear who they consider to be a dependant, relying on local definitions where possible (see Box 29).
UHC definition of family in UgandaBox 29
When it agreed to sponsor the development of the Uganda Health Cooperative, management at Health Partners, a United States-based HMO, expected that many of its North American assumptions and ways of doing things would have to be adapted to the Ugandan context. One adaptation that was quickly deemed necessary was the definition of who was included under “family” coverage. The North American definition of family did not accurately reflect the reality of the lives of potential Ugandan policyholders.
Instead, UHC developed a more “local” definition: “everyone who eats from the same pot”.
Source: Adapted from Brown and Churchill, 2000.
For example, TSKI and its insurance partner Cocolife agreed that children born outside wedlock can be included in the policy as long as they share the same family name as the TSKI client. Illegitimate children with a different family name cannot be included. However, children from previous marriages who have different names can be included under the microinsurance as long as there is documentation to prove that they are the client’s biological children. This example is not necessarily a good or bad practice, but it illustrates the types of issues that will need to be clarified under a family coverage.
Even more important than defining which dependants are eligible, is to identify them in advance. To minimize claims fraud, each person covered by the policy must be individually identified using official documents (where possible) and/or with photographs. It is not sufficient to specify which persons are covered without combining this with explicit identification of the additional persons. It is also important to control movements of dependants on or off the policy. For example, clients may have the option of adding newborn children to the policy at birth (or within a short timeframe thereafter) but not subsequently. This controls adverse selection.
Product design and insurance risk management 165 When extending life coverage to spouses, it is important to recognize that men often have higher claims ratios. For example, in AIG Uganda’s experience, the claims ratio of men to women is 4:1, while at CARD MBA it is 3.2:1. Spandana has had similar experiences. There are various factors involved, for example men tend to be older than their wives, while having a lower life expectancy. However, there also appears to be a screening problem.
In each of these cases, the women are borrowers who have to meet specific criteria, e.g. less than 55 years old, economically active and accepted by their borrower group. However, no screening or age restrictions are applied to spouses, which leads to an adverse selection scenario in which women with sick husbands can join the scheme.
4.3 Cash or in kind? Now or later?
With health insurance, benefits are either conveyed in kind, in which case the benefit is the healthcare service, or in cash. Cash healthcare benefits are usually paid on a reimbursement basis; the policyholder has to pay the bills and then submit the receipts for reimbursement. Such an arrangement is generally less appropriate for poor clients who do not have the money to pay the bills in the first place (see Chapter 2.1).
The benefit of having health insurance is that people do not have to delay care because they have to find the money. Most community-based health insurance schemes use a third-party or cashless payment system whereby the microinsurer pays the healthcare provider directly, so the insured does not experience any out-of-pocket expenses, except perhaps for a co-payment or transportation (which is sometimes also reimbursed by the insurer). Health insurance on a reimbursement basis is a distant second-best option.
In Georgia, where Aldagi Insurance is in partnership with Constanta Foundation, policyholders are given cash in the hospital so that they can pay the bribes required for care (which are unreceipted and thus not payable to the hospital or reimbursable to the beneficiary). While this approach may not be recommended in other contexts, it illustrates the inventiveness required to serve the low-income market.
For life insurance, benefits are almost always paid in cash, although there are some interesting exceptions. ServiPerú’s coverage is paid through funeral services, which includes a coffin, flowers and a hearse. In fact, ServiPerú has found the low-income market more receptive to service provision because it is easier for it to understand than risk pooling. One advantage of the in-kind approach is that the insurer can arrange a discount by essentially buying the funeral services in bulk, so low-income households can get better value for 166 Microinsurance operations their money. The disadvantage is that, when a death occurs, the family often has to pay for other expenses besides the funeral, and therefore needs a cash payment as well.