«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
– Controlling adverse selection, e.g. pre-existing condition exclusions – Reducing moral hazard, e.g. suicide exclusions – Reducing the cost of insurance by removing high-frequency or common claims and targeting only specific causes of claims, e.g. accident-only cover which excludes death due to illness – Controlling covariant or catastrophe risk, e.g. war and riot or weather catastrophe exclusions – Reducing the extent of initial underwriting, e.g. one-year HIV/AIDS exclusions applied to life cover to eliminate the need for testing As discussed above, microinsurers may adopt a different approach to exclusions from that of traditional insurers. While the moral-hazard exclusion is justifiable regardless of the type of insurance, a microinsurer may allow typically excluded conditions for covariant risk and certain adverse selection risks in the spirit of social protection.
Where covariant risks are taken on, it is essential that appropriate riskmitigation strategies exist, such as reinsurance or donor support in the form of guarantees. Otherwise, the only consequence of dropping the catastrophe exclusion will be the insolvency of the scheme in the event of a catastrophe, which benefits no one.
The argument against exclusions for pre-existing conditions is not quite as clear. If a microinsurer offers voluntary individual insurance, then highrisk people are most likely to sign up; if only high-risk people join, the insurer cannot effectively pool the risk. However, if it is group coverage, especially if it is mandatory, or the microinsurer recruits large volumes of policyholders, 172 Microinsurance operations then it can be more inclusive with regard to pre-existing conditions. This additional risk is highest at product launch. If renewal/persistency rates can be kept high, as the scheme matures, the risk associated with pre-existing conditions becomes more manageable because new insureds become a smaller proportion of the entire portfolio. It may be appropriate to fund this start up risk with donor support, which can be relaxed subsequently as the scheme moves towards sustainability.
A microinsurance-friendly alternative to exclusions is the waiting period, whereby policyholders cannot access certain benefits for some time after they enrol. For example, in South Africa, HIV/AIDS-related adverse selection is managed using six-month to one-year accident-only waiting periods for life policies backing up low-income housing loans. A waiting period has essentially the same effect as excluding pre-existing conditions except that the insurer does not have to incur the claims verification costs. If the insured event occurs during the waiting period, the claim is rejected; the insurer does not have to check with doctors and review medical records to determine if the policyholder already had the problem, as it relates to exclusions for preexisting conditions.
Another alternative to exclusions which is more in-line with the spirit of microinsurance is to offer benefit schedules with gradually increasing benefits. For example, if the insured event occurs in the first year, the benefit is small, but if it occurs after the first year, the benefit is much larger. Such an approach is an effective way to control adverse selection while creating an equitable microinsurance scheme that encourages long-term participation and renewal. CARD MBA has adopted this incremental benefits approach, as illustrated in Table 21.
Table 21 Benefit amounts at CARD MBA
5.4 Fraud control A final, critical component of microinsurance product design and risk management is a system to prevent fraudulent claims. Products must be designed in such a manner as to support coverage and claims validation with clear objective criteria. One way to implement cost-effective fraud controls in microinsurance schemes is to make use of their relationship with community structures.
In addition, cost-effectiveness needs to be considered from both the insurer and the policyholder perspective. If having sight of the death certificate involves two or three 10-kilometre trips, unofficial fees and a month’s wait, is it really necessary if the agent attends the policyholder’s funeral?
6 Conclusions The main messages from this chapter are:
– Microinsurance product design must strike a balance between broad inclusion, appropriate benefits, low premium rates and sustainability (or targeted profitability).
– Products have to be customized to clients’ needs and preferences.
– Affordability and product design features have to be considered together.
– Microinsurance is relatively easy if the target market is a well-organized group;
significant challenges are faced when trying to serve unorganized individuals.
– Group coverage is generally more appropriate for microinsurance because it minimizes administrative costs, which should lead to lower premiums.
– Mandatory coverage has significant advantages, while its disadvantages can be curbed through marketing and education efforts, and some choice in benefit packages.
– Short-term insurance is generally more appropriate for the low-income market.
– The heterogeneous low-income market prefers a variety of premium payment frequencies and mechanisms.
– It is advisable to limit benefits to the most important insurable risks.
– The spreading of life insurance benefits over a period of time might be advantageous to both parties as long as transaction costs can be minimized.
– If policyholders cannot easily claim for a benefit, then the policy is not very beneficial.
– Deductibles, co-payments and benefit limits are important claims controls for health insurance schemes.
– Product design features like waiting periods and benefit schedules allow microinsurance schemes to include high-risk persons without incurring additional screening costs.
3.2 Marketing microinsurance Craig Churchill and Monique Cohen The authors would like to thank Herbert Meister (Munich Re), Dirk Reinhard (Munich Re Foundation) and Tamsin Wilson (MicroInsurance Centre) for their comments on this chapter.
When designed properly, microinsurance can be a valuable financial tool for low-income clients. Yet even with a strong product, a microinsurance scheme will fail without an effective marketing campaign. When asked about insurance, low-income persons often express ignorance or indicate that they think it is only for rich people. A major hurdle for marketing insurance to the poor is the lack of differentiation between microinsurance and conventional insurance products. The mentality that insurance is only for the rich will persist until microinsurers can adequately differentiate their product in the market place.
Marketing insurance to the poor presents some other challenges as well. If they have had access to conventional insurance (or know of other people who have had insurance), the experience has often been negative, tainted by claimsprocessing delays, rejected claims and lapsed policies – all of the characteristics that microinsurance product design must avoid. Low levels of literacy among potential clients make marketing the product even more difficult.
Most people, rich or poor, do not enjoy buying insurance because they do not want to think about risks or the pending occurrence of perils. Many do not like the idea of buying peace of mind and then feeling the expense was wasted if the insured event does not occur. However, that idea is even harder to swallow when one is poor, living from day to day, not planning for the future, and without surplus cash to waste.
This chapter is organized into four sections. The first section summarizes the main marketing messages commonly conveyed by microinsurers. The second section reviews the techniques used for conveying those messages.
Section 3 considers the important marketing role of after-sales service, and the final section looks at the marketing implications of mandatory insurance.
Marketing microinsurance 175 1 Main marketing messages The first step in designing a marketing strategy is to determine whom the microinsurer is trying to reach, including their literacy and income levels.
One important lesson emerging from ICMIF (2005) is that microinsurers should avoid trying to serve too many different market segments since that can require many products and corresponding marketing channels, which can significantly drive up operating costs.
After identifying the target market, the next step is to determine the main messages that microinsurers want to convey. This is accomplished by considering the anti-insurance arguments that the target market might have, and then designing messages to counter those arguments. From the available case studies, four main marketing messages emerge: protection, solidarity, optimism and trust. Unfortunately, given the data available, it is not possible to assess their relative effectiveness, so this section merely describes the most common marketing messages.
1.1 Protection A main marketing message conveyed by microinsurers is to remind lowincome households that they are vulnerable, that people like them incur risks all the time, and if they do not have a way of effectively managing those risks, they will be worse off. This emotional approach often relies heavily on testimonials of persons who did benefit and were able to survive a crisis (as well as negative testimonials of those who did not have protection and suffered).
Delta Life (Bangladesh) uses this approach with its new marriage endowment product, which is supposed to benefit the policyholder’s daughter when she turns eighteen, either from the savings or, if the policyholder dies during the term, from the insurance benefit. In the brochure for the product (see Figure 10), the bride is crying – even though she is getting an appropriate wedding – because her parent is not there to share her joy.
176 Microinsurance operations Daughters’ wedding insurance plan: Delta Life Figure 10
1.2 Solidarity While the protection message is essentially the same for insurance and microinsurance, some microinsurers also emphasize solidarity as a key marketing message. This message builds on informal self-help mechanisms, with which people are familiar, to make insurance and risk-pooling more comprehensible
to an uneducated market. For example:
The solidarity message is more common, and perhaps more effective, when policyholders are also involved in shaping the benefits and the procedures. This message is particularly important to avoid the confusion that often happens when the policy term comes to an end, and clients who did not suffer the insured event want something back. The challenge is to help lowincome households understand from the outset that insurance requires solidarity and that even though they might not benefit this year, they might in the future, and they have made it possible for many others to do so.
1.3 Optimism Several microinsurers recognize that they need to put a positive spin on their marketing messages since the “doom and gloom” approach can reinforce the negative perspective that poor consumers have of insurance. This positive approach can best be seen by contrasting a smiling girl in TUW SKOK’s brochure (Figure 12) with the crying bride from Delta Life.
Marketing microinsurance 179
This optimistic approach is probably easiest with endowment or accumulating value life insurance policies. The message can focus on the amount of savings that one might have at the end of the term, or on the purposes for which that money could be used – such as building a house, sending children to school or paying for a wedding – instead of on the sum insured that the beneficiary would get if the policyholder died.
The positive spin on health insurance focuses on people being and staying healthy, rather than on illnesses and medical treatments. It is even possible to present term life from a positive angle, by linking the cover, which is relatively inexpensive, to a common superfluous expense. The same idea underlines the slogan for a health insurance scheme in India – “For just a rupee per day” – since it costs Rs. 365 per person annually.1 1.4 Trust One of the problems with selling insurance is that policyholders do not know whether the insurer will pay out the benefits in the event of a claim.