«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
This fixed deposit payment approach undoubtedly minimizes transaction costs. However, it may also be limited in its penetration if the amounts required from clients are too high. At ASA in India, which also experimented with this payment method, not enough of its members could come up with the funds to justify continuing this mechanism. In VimoSEWA’s case, if a member is just insuring herself, she needs to make a fixed deposit of Rs. 2,100 (US$46) or she could pay an annual premium of Rs. 100 (US$2.20). Even though a quarter of its members use the fixed deposit approach, the propor
tion has declined over the years (down from 33 per cent in the case study (Garand, 2005)).
This fixed deposit approach works better in a high-interest environment, and is vulnerable to interest rate decreases which may lead to a situation where interest is not sufficient to cover the cost of insurance. In such a situation, as well as when premium rates are adjusted upwards, VimoSEWA has found that it is difficult to get depositors to top up the savings account.
When it is topped up, the cost to the depositor is dramatically greater than the amount of the premium increase. For example, if the interest rate is 10 per cent and the increase in premium is Rs. 10 (US$0.22), the top-up amount must be at least Rs. 100 (US$2.20) to cover the increase.
1.4 Physical premium collection The fourth approach is to physically collect the premiums, either by going door-to-door to collect individual payments, or through group mechanisms where many premiums can be collected at once, or by requesting policyholders to come to a central location to pay their premiums. A key distinction between this method and those discussed above is that it is an insurance-only transaction, whereas the other modes are all linked to either a savings or a credit product. Consequently, physical premium collection is most appropriate for: a) organizations without other financial transactions such as community-based health insurance schemes (see Chapter 4.3) and b) accumulatingvalue policies that are difficult to combine with other financial services (see Chapter 2.2).
This physical collection method has the advantage of being accessible to clients while providing opportunities for personal interaction between the insurer and its customers. For example, in Bangladesh, Delta Life’s door-todoor collection gives clients a physical link with the company, while potentially reducing lapses (although they are still a significant problem) and strengthening the relationship between field staff and the customer. In addition, women in some households are discouraged or prevented from travelling, so door-to-door collection also provides them with access to a valuable service.
The most apparent deficiency of physical premium collection is the insurer’s transaction costs – door-to-door premium collection is expensive. Compensation for employees must be aligned with their perceptions of the effort involved. If staff are not motivated to collect premiums, schemes will undoubtedly fail. For example, La Equidad experienced collection problems when it experimented with door-to-door collection because the small commissions were insufficient to motivate its sales force.
Premium collection 203 Requesting individual low-income policyholders to come to a central location to make premium payments is not a practical solution unless they are already coming to perform another transaction. People are naturally averse to spending time and money to make such a payment, especially within a dictated period.
The possibility of fraud also increases dramatically through this mode of collection because of the number of people handling the premiums. A dangerous aspect of door-to-door collection is that in many legal systems, once the premium is collected by an agent or representative of the insurer, it is legally considered collected by the insurer, entitling the insured to coverage even if the agent does not transfer the premium to the insurer. If not detected early, this may lead to significant financial losses, as claims would have to be paid even though the insurer had never received premiums. In many jurisdictions, it is very difficult and expensive to recover premiums from those guilty of fraud, even if they are identified and caught.
Fraud in premium collection will not only cause financial deficits, but will also make clients wary of insurance, perhaps reinforcing the market’s negative preconceptions. In one of the mutual health organizations linked to UMSGF in Guinea, group leaders misappropriated premiums collected from households. The members have lost confidence in the MHO, which is having difficulty overcoming the crisis. Mitigating such fraud requires strong controls that in turn lead to more expense.
1.5 Conclusion A comparison of these four approaches, summarized in Table 24, has to consider the cost-effectiveness of the mechanism in relation to the value that is provided to policyholders (e.g. ease of access, understanding of the product, premium rate).
The difference in costs between maintaining a team of agents for door-todoor collection and using an intermediary entity can be substantial. Consider a comparison between Delta Life and AIG Uganda, which both serve a million or more customers. Delta employs its own agents to service policyholders on an individual basis, whereas AIG Uganda offers mostly mandatory group policies sold through 26 MFIs. The difference in operating costs between these two methods as a percentage of premiums is about 10 per cent, with the MFI agencies being significantly less expensive than an army of agents.
Door-to-door premium collection offers an opportunity to maintain a close relationship with the insured, which, if managed and exploited properly, may offer valuable information to the insurer, as well as help maintain 204 Microinsurance operations loyalty and keep lapse rates low. However, physical collection results in high costs because of the need to pay sales commissions out of very small premiums and the strong controls required to prevent fraud. The dangers of fraud must also not be underestimated, as they can destroy the crucial bonds of trust between the parties, and result in financial losses for the insurer. In general, it is best to stay away from physical collection if any alternative method is available, and to identify ways of collecting premiums from groups of policyholders.
Table 24 Comparison of premium collection modes
2 Collection frequency and timing Besides the mode of collection, microinsurers also have to consider the frequency and timing of collection. As discussed in Chapter 3.5, insurers generally prefer to be paid in advance of policy activation so that they can generate additional income by investing the money, which in turn should lead to lower premium rates. For the low-income market, however, it may not be possible to pay premiums up front; it may be necessary to pay in smaller instalments over time. Similarly, it may be useful to allow for variability in clients’ means by offering a flexible time frame in which premium payments can be made.
Periodic payments – monthly, quarterly or annually – are a popular mode of premium collection because they are inherently more attuned to the limited purchasing power and liquidity of the target market. The main disadvantages are the additional transaction costs (especially with more frequent payments) and the increased likelihood that the policyholder will choose to cancel the coverage – every possibility that clients have to renew their affiliation to a scheme is also an opportunity for clients to temporarily or permanently cease their membership.
One of the key lessons about collection frequency is that assumptions by microinsurance providers about clients’ preferences and abilities to pay are not always valid. Delta Life started off with weekly payments in the 1980s, but experience over time led to a better appreciation of client preferences;
today most policies are paid through monthly and quarterly payments.
BRAC MHIB serves a particularly poor and financially vulnerable target market. As a result, it may seem obvious that payments should be as small as possible and thus collected frequently. However, BRAC MHIB’s clients were unhappy with weekly premium collection because it was too burdensome to make savings contributions and loan repayments, and pay insurance premiums all at the same time.
The timing of premium collection is another critical factor. For example, BRAC MHIB learned that clients engaged in activities such as agriculture, fisheries and poultry, which generate income quarterly or semi-annually, preferred premium payments to coincide with their cash flow. Indeed, trying to collect premiums at an inconvenient time for clients can be futile. At the end of Karuna Trust’s pilot phase, premiums were collected in June and July when there was unfortunately little employment for most daily labourers. Obviously, it was not appropriate to collect premiums at a time when many households barely had enough money for food. After further discussions with clients, Karuna realized that September to November would be a 206 Microinsurance operations better time for premium collection since they expected to have sufficient work then.
To probe the issue of timing a bit further, it is necessary to consider not just when the target market will have money, but where are they getting the money from. If many people receive money from the same source, it may be possible for that source to pay the premiums en masse for many policyholders and therefore enhance efficiency. This is the essence behind the loanlinked mechanism described above – people (usually) have money when they receive a loan. Are there other common providers of money that would allow the insurer to collect premiums at the source?
Another approach allows policyholders to make premium payments within a defined period, as opposed to a specific point in time, and is quite popular among informal funeral insurance providers in South Africa (see Box 35). Indeed, this approach tries to accommodate the variability in poor people’s incomes and purchasing abilities. However, more administrative capacity is needed to monitor flexible payment systems, and transaction costs are higher if clients are allowed to modify their payment plans.
Flexible premium payments for funeral insurance in South AfricaBox 35
Funerals are a major life-cycle expense for low-income South Africans. In the Grahamstown township, low-income households spend approximately 15 times their average monthly household income on a funeral. A common means of funding them is through funeral insurance. A myriad of formal and informal insurers compete to sell coverage to the low-income market, including funeral parlours that provide a benefit in kind. Some of these informal funeral schemes have adopted an interesting flexible premium payment mechanism.
Households pursue multiple livelihood strategies, with incomes from a variety of sources at different times. They need to pay the premiums whenever they have money, not at a specific time during a month. As one informal insurer put it, “people here live a hand-to-mouth existence; you cannot expect them to pay at the same time each month”.
Therefore many informal insurers allow clients to pay premiums – including partial payments – by bringing whatever cash they have on hand to the funeral parlour, perhaps making multiple visits during the course of the month. When a premium is received, the client’s booklet is stamped and dated. As long as they are up to date with their payments by the end of the month, then the policy remains in force (some schemes keep policies active as long as clients are not more than three months in arrears).
The use of booklets or coupons is attractive to both insurers and their clients. With this system, clients feel they have a secure document with which Premium collection 207 they can prove premium payment. Such a system is comparatively cheap and easy for insurers to operate. In addition, payment flexibility is also beneficial since it helps adapt insurance products to poor clients’ cash flows.
Source: Adapted from Roth, 2002.
Flexibility in the timing of premium payments is an important component of access to microinsurance; however, there are significant costs, including losses associated with greater exposure to staff fraud, involved in providing that flexibility. The ability to manage such flexibility requires information systems that can accommodate it without a major increase in costs.