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«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»

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Another factor to consider with life insurance benefits is when they are paid out. Typically, after a claim has been processed, the beneficiary gets a lump-sum benefit and that is it. If a breadwinner has died, the household will have to find ways of replacing the lost income. Under such circumstances, a lump-sum benefit could quickly disappear. To address this issue, La Equidad provides households with several benefits. Besides a payout if the policyholder dies or is permanently disabled, its Amparar (Spanish for “to protect”) product – offered to the low-income market through the MFI Women’s World Foundation – also provides financial support to help beneficiaries pay for groceries and utilities (see Table 19). For an additional premium, policyholders can purchase a children’s education rider that would make additional monthly payments for two years to assist with education expenses.

Table 19 Benefits of La Equidad’s Amparar microinsurance product

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Note: there are six plans. Only the smallest and largest are included.

Source: Almeyda and Jaramillo, 2005.

The provision of benefits over a period of time after the insured event is likely to have a greater development impact than a lump-sum payment, which may be spent on an elaborate funeral but not help the household cope with the loss of income. The staggered benefits approach is also adopted by ALMAO’s “Senehasa” product (see Chapter 2.4) and CARD MBA’s total and permanent disability (TPD) cover, which pays out over an 18-month period. The main disadvantage of staggered benefits is the transaction costs involved, especially if they are provided by cheque which might be difficult for beneficiaries to cash. This disadvantage can be overcome if benefits can be paid directly to a savings account, or to a service provider such as a grocery store or utility company.

Product design and insurance risk management 167

4.4 Cash-back benefits As mentioned above, one of the difficulties in marketing microinsurance is to convince clients that they are getting value for money, even if they do not claim. Policyholders are often left with the perception of poor value if they pay premiums for some time without receiving any benefits in return, not recognizing the importance of having enjoyed the security and protection. This may be especially true if the insured becomes too old and is forced to drop out.

To help address this problem, some benefit features may be added to longer-term products, such as those described in Chapter 2.2, although these may introduce pricing risks typically inherent in most long-term guarantees (see Chapters 3.5 and 3.6):

1. Premium-back features generally refund all or part of the premiums paid after several years of enrolment, as is required under the MBA regulations in the Philippines. If the term is long enough, a modest interest payment may even be included. Yasiru (Sri Lanka) does this as well, distributing 40 per cent of its profits to clients with at least five years of membership, which serves as a loyalty incentive.

2. Paid-up insurance means that after several years of premium payments, the coverage may continue for a lifetime without additional premiums. The amount of insurance may also be determined by the entry and exit age of each client. For example, with ALMAO’s “Pilisarana” product, premiums are paid until the policyholder turns 60. The benefit after that age depends on how old they were when they started paying into the scheme.

3. Savings features may be bundled with the product and contributions returned with interest dependent on the net earnings of the portfolio. It may be difficult to market a non-guaranteed interest rate, but this can be done with hypothetical projections.

4. Endowments pay a guaranteed cash benefit, perhaps equivalent to the life coverage amount for a certain period of time or when the policyholder reaches a certain age.

These features tend to be relatively expensive and potentially risky for the insurer if not designed properly, especially if interest rates are low or in decline. Although “no claim” or persistency-linked cash-back awards may seem attractive to clients, like any other benefit, they must be charged for, and effectively reduce the risk spreading of insurance, which is to redistribMicroinsurance operations ute resources from those unaffected by the risk to those affected by the risk.

In addition, care must be taken to keep the product simple when introducing such features to preserve its appeal.

5 Risk management and claims controls For both health and life insurance, it is essential to design products with the claims controls and adverse selection features to sustain the scheme and keep premiums low. In general, elective participation, diverse target populations, broader inclusions and numerous product choices all tend to increase adverse selection and thus need more controls, especially in smaller schemes.

The principle of simplicity that applies to benefit design and marketing is also applicable to risk management and claims controls. Insurers seem to have an inherent tendency to make things complicated, a tendency that microinsurance must curtail. For risk-management purposes, product options should not be choices at all, but rather pre-defined and linked to circumstances outside the applicant’s immediate control. For example, if applicants have a family, then they should be required to take the family package.





Other key controls to consider include health declarations, co-payments and deductibles, and microinsurance-friendly alternatives to exclusions.

5.1 Health declarations If the potential for adverse selection is significant, then the applicant should be required to sign a declaration of good health, an approach used by many of the organizations that offer life insurance. It is even useful with credit life to discourage older or sick borrowers from attempting to maximize their loan amounts once they become aware of a terminal disease such as cancer.

The basic idea of a health declaration is that the applicants state that they are in good health to the best of their knowledge at the time of application. If policyholders then die and the microinsurer can determine that they knew about the terminal health condition at the time of the declaration but lied about it, then the microinsurer has the right to deny the claim based on the false declaration. So instead of expensive screening of all applicants, the insurer concentrates its resources on verifying a few claims.

The health declaration is useful not only as a tool for the microinsurer to reject claims, but also as a deterrent to adverse selection. For example, if a terminally ill loan applicant knows that the credit life claim is likely to be declined because of the declaration, then he/she may be discouraged from proceeding with the loan application because of the burden that will be put on the surviving family.

Product design and insurance risk management 169 For credit life, health declarations may either be required for all loans or only for larger loan amounts. For efficiency purposes, microinsurance schemes minimize controls for the smallest policies, but introduce them for larger sums insured. If only required for larger loans, the microinsurer will still have some exposure to adverse selection, but will put up with it to save the administration costs involved in processing a declaration for every single loan. In such cases, the trigger for a declaration should be based on the total amount of all outstanding loans granted to the borrower rather than each individual loan.

5.2 Co-payments and benefit ceilings For health microinsurance, deductibles and coinsurance (which are different types of co-payments) and benefit ceilings are important claims control mechanisms. The most effective design combines all three. That is, all claims below a certain amount, the deductible, are paid by the insured. Then, the insured pays a coinsurance of x per cent of the claim (or a fixed amount) in excess of the deductible. The insurer pays the difference up to a certain maximum amount. These control mechanisms can be applicable to each claim or on an annual policy-year basis.

The point of such payments is two-fold: 1) to reduce the actual claims amount paid by the insurer, and perhaps more importantly 2) to help reduce the claims incidence. For example, insureds will be more reluctant to admit themselves to hospital for minor ailments if they have to pay a deductible, and would also be discouraged from remaining hospitalized beyond the necessary period if a coinsurance were payable in excess of the deductible.

An additional objective of a deductible is to reduce the administrative burden for the insurer of processing many small claims. So if a deductible were in place, the insurer would only process claims that were in excess of the deductible. Interestingly, although coinsurance is common in microinsurance (see Table 20), none of the case study organizations included deductibles. The UMSGF mutuelles did use deductibles initially, but when the network introduced a third-party payment system where the insurer reimbursed the healthcare providers directly, deductibles were no longer considered necessary because the administrative processes were sufficiently simplified. From a pricing perspective however, all claims should be coded in an MIS, whether or not the deductible is exceeded, whether or not a claims payment is made. This is necessary to determine true morbidity rates and medical costs (see Chapter 3.5).

Healthcare schemes that only provide inpatient benefits may find co-payments unnecessary as well. For example, Yeshasvini, which only covers surMicroinsurance operations gery, does not require either since it assumes that people will not have surgery unless they really need it (and elective surgery is excluded). Similarly, neither VimoSEWA nor Shepherd has a co-payment for their hospitalization covers.

Table 20 Coinsurance and payment ceiling of health microinsurers

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The co-payments amount must be carefully determined. If it is too high, then the tendency may be for the insured to wait too long to seek treatment, or not to seek treatment at all, thus possibly causing the condition to deteriorate to a more severe illness, eventually resulting in a much larger claim or perhaps even death. When considering co-payments (or deductibles), microinsurers should bear in mind “implicit” co-payments – for example the costs of travel to access healthcare services or losses of income from time away from business, which may already act as disincentives to unnecessary claims.

Another consideration for co-payments in particular is whether the infrastructure is in place to accept cash payments. For example, three of the four Product design and insurance risk management 171 government schemes analysed in Latin America also avoid co-payments because financial transactions open up vulnerability to fraud (Holst, 2005a).

For health insurance, several organizations control claims by instituting a maximum claim per annum or per hospitalization, or by limiting the number of hospitalizations per annum. BRAC and Grameen Kalyan apply these limits when cardholders have to be referred to other healthcare providers, but do not limit the amount of care from their own clinics. Yeshasvini Trust has a maximum amount that can be claimed in a calendar year (US$4,545). These controls protect the viability of the scheme – especially since the schemes do not have reinsurance – but limits cannot be set so low as to undermine the usefulness of the insurance cover.

5.3 Alternatives to exclusions

Insurers may use exclusions for a number of reasons:



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