«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
4 Premium collection controls Fraud and mistakes in premium collection are significant concerns for microinsurers as their small margins do not allow for much financial mismanagement. Therefore, effective controls for premium collection need to be in place. There should be a combination of both hierarchical and horizontal controls.
Hierarchical controls require that the insurer set up at least a rudimentary structure within the organization to monitor the quality of the premium collection process. These controls generally work better for insurers that use their own structures to manage the process, than for those that outsource the process to other organizations. Should the latter solution be selected, it might be advisable for the insurer to create horizontal controls, for example, by demanding some sort of collective security from the organization or structure to which the process is outsourced. One solution, which was widely used in Poland until compulsory liability insurance for agents was introduced, was to demand a blank promissory note from the agent, co-signed by one or more agents from the same organization or group. The note could only be used to collect on claims resulting from an agent’s fraudulent actions against the insurer, but it created an additional level of security for the insurer through a collective responsibility arrangement between agents.
The significance of fraud should also not be underestimated. Indeed, the structure of entire schemes has had to be modified to deal with it. For example, at AIG Uganda, one reason why the product originally moved from voluntary to obligatory was to reduce the incidence of fraud by the MFI’s field officers who took premiums from clients and pocketed the money. By making the product mandatory, the fraud risk was reduced by having premiums paid through cashless transactions in the back office.
ServiPerú has implemented an audit of collected amounts to try to avoid fraud as well as mistakes. The fee collection procedure begins with invoices that are distributed by the collectors in their designated geographic zones.
Collectors visit clients mainly at their place of work, up to three times if necessary, to collect the fees. At the end of the day (or more frequently if the volumes are high), collectors deposit the money in ServiPerú’s offices or bank accounts together with a record of the payments collected. Once the fee collection period for the month is over, collectors must present a report of uncollected premiums, indicating the reasons for non-collection. Internal auditors follow up with a sample of the non-renewals to ensure that they really did not pay their premium.
214 Microinsurance operations 5 Conclusion Premium collection is a daunting aspect of efficient microinsurance provision. Some insurers (or their delivery channels) have found ways to minimize premium collection costs and maximize efficiency. Efficient arrangements mean prompt and full payment without affecting the safety of the premium transfer mechanism or sacrificing customer service advantages. To achieve their financial stability, insurers must make every effort to ensure that premiums are paid on time.
The common premium collection methods respond to client needs to varying degrees. Among the least expensive methods for the insurer is for community groups to collect the premiums from their members and make consolidated payments to the insurer. Collection by insurers of aggregated premiums from MFIs and other groups, which link the premiums to another product or electronically transfer the premiums, can be equally inexpensive.
The door-to-door method of collecting premiums from individual policyholders is typically very expensive.
Premium payment lessons include:
– A balance must be maintained between the efficiency of the insurer, and the cash flow and transaction costs of the policyholder. Without an acceptable balance between the two, microinsurance may not succeed. It does not help retention or new client generation if the insurer reduces its collection costs to near zero, while simply transferring the costs to policyholders who may then be expected, for example, to travel to make payments.
– Electronic transfers reduce the costs of all parties involved. Greater availability of savings services for the poor can dramatically improve affordable premium payment mechanisms.
– Where possible, collect premiums from a specific source of funds at a time when those funds are available, such as a loan disbursement, the monthly payment from a milk cooperative, or an employer’s salary payment.
– Fraud is an important problem for premium collection. Having individuals handling premiums requires strong controls. Fortunately, some of the more efficient transaction methods, such as electronic transfers, can be among the easiest to control.
– Collection frequency and timing require an understanding of policyholder cash flows and preferences. The assumption that policyholders prefer frequent small premium payments does not necessarily hold true. Market research is required.
Premium collection 215 – Clients must understand the collection mechanism, and that must lead to an understanding of the policy they are purchasing to move towards developing an insurance culture among the poor. It is not sufficient simply to pay premiums through interest rates where the policyholders do not know they are insured.
– Strategies to minimize non-renewals should take account of poor people’s realities. The objective is to keep the policyholder active in paying premiums.
It is important that late payment penalties control adverse selection and fraud, but still allow for client retention.
Clearly, efficiency cannot be the only criterion in selecting the best mode of premium collection. The insurer must keep in mind its strategic position and its strong points, as well as the long-term goals it wishes to attain. If the insurer stresses product price as its greatest strength – i.e. attempts to offer lowest possible premium for competitive coverage – it should focus on the least expensive methods, such as electronic transfer from add-on products. If, however, the insurer’s strengths lie in a close relationship with the market and high mutual loyalty, the increased cost of door-to-door collection may be offset by lower lapses and lower fraudulent claims from customers who feel they have a closer relationship with the insurer, at the expense of higher premiums. In short, no single aspect can be used to find a solution to a multifaceted problem of the insurer-insured relationship, the ultimate success of which depends on the long-term survival of the insurer, in turn resulting in secure protection for the insured.
3.4 Claims processing Michael J. McCord and Richard Leftley1 The authors appreciate the editing and suggestions of the following readers: Aris Alip (CARD), Dubby Mahalanobis (formerly Microcare) and Ralf Radermacher (University of Cologne).
Claims processing, from notification to settlement, is often a costly and timeconsuming activity fraught with difficulties. The balance between operational costs – including controls to minimize improper claims – and the cost of fraud, leads to an expensive process, especially for health insurance. Yet for microinsurance to be successful, the costs of operations and controls must remain low to maintain premiums that are affordable to the market.
The claims process for microinsurance differs from that of traditional
insurance in its recognition of the realities of low-income life, for example:
– Claims need to be settled rapidly because low-income people have insufficient access to funds to manage the financial costs of risks.
– Health claims should be paid directly to the provider since low-income people frequently do not have the available funds to obtain treatment and wait for reimbursement.
– Conventional documentation requirements must often be replaced by alternative evidence because of the difficulties low-income people have in obtaining some documents.
– The claims process often replaces underwriting because it is cheaper to look closely at a few claims than to require extensive underwriting for large volumes of small policies.
– With small premiums and very limited benefits, the options for different claims documentation requirements must be assessed on the basis of their costs and benefits – To be efficient, insurers should streamline their controls for the smallest policies, since effort involved in enforcing the controls may be more costly than the actual benefit.
– In general, the process must be as simple as possible.
This chapter discusses these differences in detail, using examples to illustrate why there is a need to manage microinsurance claims differently from in conventional insurance. It also summarizes the lessons learned in trying to make microinsurance claims processes efficient, effective and controlled. The chapter first looks at the process in general, and then looks specifically at claims notification, settlement, controls and management.
1 IntroductionArguably the most important aspect of insurance for the policyholder is claims. Without efficient and effective claims processing, it will become difficult for the insurer to sell policies as customer dissatisfaction mounts. The right to efficient claims under certain circumstances is what policyholders buy with their premiums.
The cost of processing claims is a critical factor in determining success for insurance companies. They must be efficient with effective controls to ensure that only legitimate claims are settled and for the correct amounts. Yet the controls and processes that work for a wealthier market can be ineffective in the low-income market. Indeed, where claims processing becomes too demanding or too expensive, the related products simply cannot be offered to the low-income market. Such is the critical nature of claims processing.
1.1 The claims settlement process
The claims process generally includes the following components:
– An insured event leading to notification of loss – Collection of required documents – Presentation of the claims application to an intermediary or the insurer – Claims adjustment – Claims settlement
Note: In a case where documents are not properly filled in (Step 1 or Step 5) the claim will be returned to Credit Officer/client and the process will require additional days – around 2–3 more days.
1.2 Upfront screening versus back-end controls In many microinsurance schemes, the effort to reduce costs has shifted the normal policy underwriting from the underwriting department to the claims department. Prospective policyholders do not undergo a medical examination, for example. They do not have to present birth or marriage certificates, or health records upon initial policy application. In many cases, screening of 2 VimoSEWA is in the process of testing a cashless payment system to overcome this problem.
220 Microinsurance operations potential policyholders is eliminated, or to some extent covered by the underwriting of partners. For instance, a woman belonging to an MFI may require microinsurance. She would be accepted automatically for insurance as long as she met the MFI’s loan criteria. The cover may even include family members, as with AIG Uganda, Spandana (India) and CARD MBA (Philippines), without any additional underwriting requirements.
Even with individual sales, such as with Delta Life, prospective policyholders simply have to sign a declaration of good health. If anyone suffers an insured event, then the insurer requires confirmation of the declaration, for example, that there were actually no pre-existing conditions. In this manner, microinsurers minimize the workload associated with assessing the mass of applications for cover, and concentrate their efforts on the few claimants.
In general, there must be enough checks and balances to ensure that fraudulent claims are not paid, but the process also must be user-friendly and cost-effective for all parties. However, the whole insurance process must be considered. Where controls are minimized for the mass of insurance purchasers, there is a heavier burden on the claimants. Another strategy for improving efficiency is to have tiered claims requirements, with a limited number of documents and a simple process for the smallest claims, but more stringent controls for larger claims.