«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Otherwise, microinsurers cannot offer this level of access without significant pricing implications.
3 Client considerations
3.1 Financing insurance premiums To expand the outreach of microinsurance and make existing schemes more viable, providers need to explore ways of assisting policyholders to finance their premiums. Indeed, for most low-income households, the problems encountered in affording premiums are not an absolute barrier to purchasing insurance. Rather, the problems arise because they do not have enough money at the right time – many poor households could afford premiums if they had access to suitable financing mechanisms. These mechanisms may enable microinsurance providers to expand their markets, and gain larger and more reliable client bases. Appropriate financing mechanisms also champion the social nature of microinsurance, as clients for whom insurance was previously unaffordable will be able to benefit from formal risk coverage.
One of the simplest ways of providing financing options is to work with self-help groups or rotating savings and credit associations. Insurers that are linked to SHGs or ROSCAs can encourage members to make small increases in their regular savings deposits so that when an annual premium comes due, the members already have the money. Through financing partnerships with ROSCAs, insurers benefit from existing informal savings mechanisms, while their members can amass the insurance premiums without additional transaction costs.
Working with cooperatives may provide similar benefits. Customized options for financing premiums could be developed because of cooperatives’ financial relationship with their members, as illustrated in Box 36, while providing the insurer with a group of premium payments from an income 208 Microinsurance operations source. In addition, cooperatives are more formal entities than ROSCAs, and therefore may make safer partners from a legal perspective. It should also be mentioned that because of the “pseudo-employer” nature of cooperatives, members might have an additional incentive to remain current with their premium payments.
Paying premiums in milk at YeshasviniBox 36
Mangsandra is a small village in India with about 1,000 inhabitants. About 200 families are members of the Mangsandra Cooperative Milk Society, which is one of Yeshasvini Trust’s partners. Mr. Krishnamoti, the society’s secretary, is responsible for providing information about Yeshasvini’s health insurance, enrolling members and collecting their premiums. In the first year, 96 persons joined the scheme. In the second year, 230 members and dependants enrolled.
Mr. Krishnamoti reports that it is difficult to pay the premium for a full family at one point in time. However, the milk union developed a solution for this problem. Every morning the members of the cooperative bring in their milk and Mr. Krishnamoti records each member’s contribution in his books. Every day a lorry collects the milk and transports it to the union for processing and distribution. On a monthly basis, the union pays the society for the milk received, and then the society pays the members for the quantity of milk they have delivered in the month.
When members subscribe to Yeshasvini or renew their policy, they can have their premium deducted from the income the cooperative pays them.
When Mr. Krishnamoti hands over the list of enrolees to his union, he informs the Extension Officer how many have opted for the premium deduction. The milk union advances the premium payment to Yeshasvini.
The advance is then deducted from the union’s monthly payment to the coop, which in turn deducts it from the share of the respective member. If members decide to enrol their dependants in the scheme, the society only deducts the amount for one person each month and so enables the member to pay in instalments – of milk.
Source: Adapted from Radermacher et al., 2005b.
expensive in absolute terms because of the interest on the loan. An annual premium of US$50, for example, becomes US$60 if financed by an annual loan with an effective rate of 20 per cent. This results in an even lower return to policyholders in terms of claims to premiums. Similarly, the lender also takes on the additional risk of loan repayment, and therefore requires full repayment well in advance of expiry of the cover.
TUW SKOK has designed a more appropriate financing mechanism to encourage clients to purchase its more expensive insurance policies. The insurer encourages its partner credit unions to offer interest-free loans to their members, thus making the higher premium amount affordable to lowincome members. To compensate the credit unions for the income that they forgo on the loan, TUW SKOK pays them a higher commission. In this way, TUK SKOK has managed to limit its liabilities, while making more expensive products more affordable.
In summary, several lessons emerge about microinsurance financing mechanisms. First, where possible, encourage policyholders to save on a regular basis so they can pay an annual premium. Collaboration with cooperatives allows microinsurers to deduct premiums at an income source. When offering a loan to finance a premium, it is more transparent if the loan is specifically for the premium. However, the increased cost of cover makes interest-bearing loans a sub-optimal choice.
3.2 Balancing efficiency and affordability The balance between efficiency for the organizations and affordability for clients is a classic trade-off. There are no one-size-fits-all answers and the balance has to be appropriate for the business environment. However,
Leftley (2005) provides a useful rule of thumb to address affordability:
Make sure that the premiums are affordable for the poorest clients. The easiest way to define affordable is to work out what cash a client will have spare on an average day. Clients are unlikely to always save for a premium payment, so a monthly premium needs to equate to the cost of a non-essential item (such as a bottle of beer).
When considering the costs to the clients, it is also important to recognize that the premium is not the only expense. If policyholders have to travel to pay their premium, the transportation and opportunity costs of being away from work can be even higher than the premium costs. Consequently, efficiency needs to be monitored and assessed on the basis of transaction costs for the insurer and the policyholder relative to the amount of coverage provided.
210 Microinsurance operations To create a balance between efficiency and affordability, some organizations add a fee to the premium for convenience of collection. For example, premiums are reduced for people who pay by standing order or in fewer instalments. This arrangement increases efficiency while making the product more affordable.
3.3 Preventing lapses and non-renewals Lapses and non-renewals are an important indicator of the appropriateness of premium collection mechanisms. The ideal of completely eliminating nonrenewals, however, needs to be balanced with the realities of serving poor people.
Nevertheless, microinsurance schemes should aim to protect themselves from the problems of lapses and non-renewals. Rather than relying solely on penalties, such as terminating cover for late payers, innovations are needed to help people who need leniency. For example, with Tata-AIG’s endowment policy, if clients miss premiums, the insurer deducts the missed amount from the accumulated value of the policy to keep the cover in force.
Incentives can also play a role in encouraging payment discipline. For example, policyholders who regularly pay on time could be eligible to pay a lower premium. The key lesson is that rules pertaining to missed premium payments should reflect poor people’s realities while being well enough designed not to be abused.
Every time clients have to pay a premium, they are forced to a make a purchase decision. This may lead clients to actually choose not to pay for insurance premiums due. Therefore, the more frequent the premium collection, the more chances clients have to relinquish their insurance policies. This is illustrated quite well in the experience of AssEF (Benin), which collects premiums monthly. By December 2003, AssEF had only received premiums from 71 per cent of the people who had enrolled at the beginning of the year and realized that in schemes with frequent premium collection, more promotional and marketing work was needed to encourage clients to keep their policy in force. Following awareness campaigns in 2004, retention rates increased to between 84 and 86 per cent.
Another strategy to reduce lapses is to help policyholders to boost their incomes. Indeed, one of the major reasons why the poor fail to pay their premiums is a lack of money. However, if they had access to a microenterprise loan that enabled them to increase household income, then it would be easier to pay the premium as well. This was certainly the experience of a community-based health insurance provider in Tanzania, which learned this lesson accidentally. UMASIDA began working with two otherwise identical Premium collection 211 MHOs – the only difference was that one had access to a separate microfinance institution and the other did not. As Figure 14 shows, the drop-out rate in the group without access to microfinance was much higher than the group with access (Kiwara and Fungu, 2005).
Microinsurance drop-outs and access to microcredit Figure 14
This finding suggests that the link between microinsurance and microfinance is even more important than just the efficiencies that can be generated through integrated financial services. Access to microfinance may also make it possible for poor policyholders to afford their premium payments more easily. Early on, Delta Life recognized this link between premium affordability and microenterprise loans, and attempted to address this issue on its own.
However, as illustrated in Box 37, it is quite risky for insurers to get involved in microenterprise lending directly.
Delta Life – combining microcredit and microinsurance Box 37
Although repayments were in an acceptable range in the mid-1990s, the recovery rate plummeted at about the same time as the insurance portfolio skyrocketed. In fact, one of the explanations for the growth is that organizers (agents) were using the project loans as a marketing tool, promising to provide loans once people bought a policy.
The poor credit quality of the policy loans was not a major cause for concern. They were fully secured and organizers actively encouraged policyholders to pay their premiums rather than their loans, if they had to choose between the two, to keep the insurance contract in force. However, repayment problems with the project loans were a serious concern because the amounts were larger and were only backed by the commitments of other
group members. The main problems with the lending activities included:
– Staff were not trained in using a group lending methodology or in managing borrower groups, and therefore the group guarantee was not particularly effective.
– The primary indicators used to measure the performance of organizers were the number of new policies and the amount of premiums collected;
their loan repayments were not carefully monitored and chased up.
– The culture associated with collecting timely repayments is quite different from collecting premiums. With a premium payment for an endowment policy, the organization is essentially asking the client to let it hold his or her money, so it is inappropriate to press too aggressively if the client is not able to pay right away. With a loan, however, the client has the organization’s money, and the organization has a responsibility to get it back.
Furthermore, as a regulated insurance company, there is some question as to whether Delta is legally able to provide project loans. There are restrictions on the investment practices of insurers and it is probably inappropriate for Delta to be investing premiums in its own loan portfolio.
Source: Adapted from McCord and Churchill, 2005. Premium collection 213