«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
With a mandatory product, it is rather difficult to gain a firm understanding of the true demand for microinsurance. CARD has made an effort to understand this demand and how it affects its business. In a qualitative survey conducted by Freedom from Hunger, many clients identified insurance as the most valuable aspect of the entire CARD product portfolio. Such a finding should inspire other microinsurers to market their mandatory insurance products in such a way that clients will actually appreciate it.
– How can the product be depicted in a positive light?
– What type of prevention campaigns and other public relations activities would have the greatest impact in raising awareness of your organization?
– How can your organization move beyond information and communication to include education about insurance?
– Do you have methods to assess whether your customers or the market really understand the main messages that you are trying to convey?
– What possible partners can be involved to assist in the education and promotion activities? What tools and training will they require to fulfil that function?
– Is the product and claims process sufficiently simple for salespersons to explain it to potential clients?
– What marketing techniques are likely to be most successful in attracting clients (e.g. enrolment campaigns, raffles)?
– What incentives will effectively motivate salespersons while cultivating an appropriate microinsurance sales culture?
– How can you encourage or solicit word-of-mouth marketing?
– How can you ensure that clients perceive that you are providing outstanding customer service?
– Are you monitoring customer satisfaction and retention?
– How can you persuade customers to appreciate the benefits of mandatory insurance?
3.3 Premium collection: Minimizing transaction costs and maximizing customer service Michael J. McCord, Grzegorz Buczkowski and Priyanka Saksena1 The authors would like to acknowledge the contributions to this chapter from Aristotle Alip (CARD) and Ellis Wohlner (consultant to SIDA).
When extending insurance to the low-income market, the process of collecting premiums is a major challenge. The target market is largely selfemployed or works in the informal economy, and is unlikely to have a savings account with a bank. Consequently, the primary premium-collection mechanisms used by mainstream insurers – salary deductions from employers and standing orders or direct debits from savings accounts – will not work for many poor households. To compound the matter, by definition the target market has low, often irregular and unpredictable incomes, so another challenge is to schedule the premium payment for a time when the policyholder has funds available.
For microinsurance to succeed, the premium payment mechanism needs to find a balance between being efficient and being sensitive to the needs and capacities of clients. Simply collecting a large number of small premium payments may make the products more accessible to the poor, but can also result in higher transaction costs that drive up premium rates.
Based on a review of the case studies, this chapter proposes possible solutions to these problems, organized around the following four topics:
1 Modes of premium collection The way in which premiums are collected has a direct bearing on per unit transaction costs. Indeed, to make microinsurance viable, it is necessary to minimize transaction costs. Undoubtedly, however, the key factor in decid
ing on the mode of premium collection is still the clients’ circumstances and access to other financial services. This section describes four modes of premium collection.
1.1 Premiums linked to loans Many types of microinsurance products are linked to other financial products, especially credit. Premium collection at the point of loan disbursement or repayment is attractive since the transaction is “piggybacked” on top of another financial transaction. Consequently, the marginal cost of premium collection is kept to a minimum.
This can be demonstrated by comparing the premium collection costs of stand-alone insurance with cover combined with another financial service, such as loans. For its stand-alone tenant’s cover, for example, TUW SKOK (Poland) pays the handling agent market rate commissions of, on average, 15 per cent. For integrated products such as its loan-linked AD&D coverage, the insurer incurs a total cost of less than 1 per cent of premium. TUW SKOK’s systems have been developed to manage monthly premium collection from loan add-on products for over 200,000 insureds, and from more than 60 credit unions nationwide, handled by three staff members at the insurer’s headquarters.
Linking insurance to loans is the mode of collection employed by many MFIs. Some clients, like those of Pulse in Zambia, are content with this method because they “don’t feel the pinch”. In addition, as described in the previous chapter, the insurance cover can be marketed as a benefit of getting a loan. For other clients, this linkage can be a major cause of dissatisfaction.
With CETZAM’s funeral insurance product in Zambia, for example, clients complained that the deduction of the premium from the loan reduced the amount of cash that they received. The actual premium payment mechanisms vary, as described in Box 34.
Linking insurance premiums to loans Box 34 Many MFIs offer insurance by linking it to their loan products. There are, however, several different ways in which the premium can actually be
paid, all of which have advantages and disadvantages. The five general alternatives are:
borrowers pay interest on the premium amount, which increases the gross cost of the insurance.
2. Adding the premium to the loan amount Another approach is to grant a loan of, for example, US$400, but to oblige the client to repay a total amount of US$410 plus interest. In this way, the client at least receives the expected sum, but still pays interest on the premium amount.
3. Building the premium into the loan interest rate Some organizations increase their interest rate slightly, and use the additional revenue to pay the premium on behalf of the clients. Of the five options, this is probably the least advantageous because: a) it makes the interest rate appear less competitive and b) it disguises the premium so that borrowers may not realize that they have insurance coverage. However, this method is by far the simplest of the loan-linked premium payment methods since it is just an internal accounting transaction.
4. Paying the premium with each loan instalment To make the premium more affordable, the amount can also be divided up and paid in instalments with each repayment. However, this approach shares some of the disadvantages of combining interest and premium rates: clients may not know they have insurance and the MFI probably has to pay the insurer in advance. Additionally, will the coverage be cancelled if the client falls behind with loan repayments?
5. Paying in cash up front If borrowers pay the premium up front, either when they apply for the loan or when they receive it, there is a greater likelihood that they will be aware that they have insurance. However, compared with options 1 and 2, this creates an additional transaction and increases vulnerability to fraud as cash changes hands.
The most notable disadvantages in using this mode of collection are:
1. Lack of transparency The same reasons that make Pulse’s clients “not feel the pinch” may also mean that clients are not aware of the actual price they are paying for the benefits. Interestingly, in Zambia, many clients assumed that they were paying more for insurance coverage than they actually were (Manje, 2005).
200 Microinsurance operations
2. Unaware of cover Even worse, clients (or beneficiaries) may not know that they have insurance, so they may not receive the benefits that are due. This situation undermines one of the important development objectives of microinsurance that is to create an insurance culture in which the low-income market develops an understanding of and appreciation for the risk-management role of insurance.
3. Protection limited to loan term This payment mechanism means that the target market can only receive insurance protection when they have a loan. While they might require continuing cover, most people, rich or poor, prefer not to be perpetually in debt.
In response to this last problem, members of the credit unions associated with Columna (Guatemala) can renew their insurance policy without borrowing again. However, because the initial distribution system is linked to credit, it is difficult to get the credit union staff to renew the policy because it is no longer related to their core activities. Indeed, in the Philippines, CARD MBA and CARD Bank have been in dispute because the insurer wishes to continue coverage when borrowers are no longer borrowing from the bank.
The bank argues that this eliminates an incentive for people to continue borrowing.
Finally, loan-linked insurance premiums are certainly appropriate for coverage that directly enhances the security of the loan for both the borrower and the lender. Credit life and property insurance for collateral are products which lend themselves to being linked. Other products may not be as appropriate, such as family life cover or health covers. Such products cannot generally be part of mandatory loan-linked cover since they are relatively expensive and do not have a direct connection to the loan.
1.2 Automation: Deducting premiums from savings accounts Where possible, automatic premium collection is advantageous in reducing transaction costs. For TUW SKOK, since all its low-income policyholders have savings accounts, the credit union can easily deduct the premiums from the members’ accounts and forward them to the insurer, with hundreds of small premiums batched into one electronic transfer. Standing orders/direct debits lower transaction costs and minimize vulnerability to fraud.
The main disadvantage of automatic payments is that the target market may not have a savings account, or even the possibility of opening one.
Indeed, to expand the availability of microinsurance to more low-income households, a key strategy is to increase their access to savings services.
Premium collection 201 However, some microinsurers have this option available to them and they are not taking advantage of it. For example, ALMAO in Sri Lanka was started by the savings and credit societies of the Sanasa movement. Yet, despite the 2 million Sanasa members, ALMAO only has a few thousand policies, in part because it is relying on door-to-door collection rather than standing orders.2 This premium collection mode is vulnerable to public relations problems if not properly implemented. VimoSEWA (India) experienced significant difficulties when it used automatic payments for its then mandatory insurance scheme because it had not adequately informed savers that the payment would be deducted from their accounts. Consequently, the organization experienced a significant backlash from policyholders and ultimately had to change to voluntary coverage.
1.3 Premiums paid from savings account interest Perhaps the simplest mode of collection is to allow premiums to be paid from the interest on a savings account. The most common example of this approach is the life savings product offered by many credit union insurers, as