«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Some microinsurance schemes provide valuable information and resources for risk prevention. By providing education about risks and promoting good health habits, these schemes can reduce incidents of disease and extend life expectancy (see Chapter 3.9).
Interestingly, microinsurance can also assist in promoting gender equality and empowering women (see Chapter 2.4). If insurance can help protect vulnerable households from falling back or further into poverty, they will be less likely to have to choose which child to send to school. Furthermore, longterm savings and insurance policies enable the poor to accumulate assets that can be used to pay for education, for daughters as well as for sons.
2 The two faces of microinsurance There are two main varieties of microinsurance – one focused on extending social protection to the poor in the absence of appropriate government schemes and the other offering a vital financial service to low-income households by developing an appropriate business model that enables the poor to be a profitable (or sustainable) market segment for commercial or cooperative insurers.
Yet these two varieties have much in common. One might consider microinsurance like Janus, the ancient Roman god of gates and doors, also the god of beginnings, who is depicted with two faces, yet one body (Figure 1). Regardless of whether one is looking at microinsurance from a social-protection or a market-based approach, the body of the insurance scheme, its 16 Principles and practices basic operations, will be largely the same. Hence a book on microinsurance operations must draw lessons and experiences from both.
2.1 Deepening access to insurance services: A new market The guru behind the articulation of the “new market” perspective is C.K.
Prahalad (2005), who illustrates in his book The fortune at the bottom of the pyramid that the “private sector, in its desire to … gain market coverage, will invent new systems depending on the nature of the market”. Prahalad identifies the more than four billion persons living on less than US$2 per day as a market opportunity if the providers of products and services, including multinational corporations, innovate new business models and create lowincome consumers.
This thinking is certainly not new to those involved in microfinance, where commercialization has been underway since 1992 when the Bolivian microfinance NGO Prodem created BancoSol, the first commercial bank dedicated to serving the low-income market. The creation of BancoSol started a revolution that has inspired at least 39 other NGOs to create regulated financial institutions (Fernando, 2004) and numerous commercial banks and finance companies to reach “down market”.
Besides microfinance, Prahalad also draws examples from other industries, including construction, consumer goods and healthcare. Based on case studies of successful innovations, Prahalad identifies common principles to be considered when innovating for the bottom of the pyramid (BOP). Even though he does not analyse insurance case studies, Prahalad’s “Twelve Principles of Innovation for BOP Markets” are remarkably applicable to the provision of microinsurance (see Box 2).
What is insurance for the poor? 17 Applying Prahalad’s “Twelve Principles of Innovation for BOP Markets” Box 2 to microinsurance
1. New understanding of price-performance relationship Obviously, the poor cannot afford to pay high prices, but that does not mean that they deserve poor-quality products. For microinsurance, it could even be argued that the low-income market requires a better-quality product (e.g.
quick claims settlements, few if any claims rejections) to overcome their apprehension about paying up-front for some undetermined future benefit.
Prahalad also contends that the BOP market is surprisingly brand-conscious, something that microinsurers must keep in mind as they strive to secure the market’s trust and confidence.
2. Combine advanced technologies with existing infrastructure Although this is just beginning to emerge in microinsurance, several microfinance institutions are experimenting with technologies, (including ATMs with biometrics, smartcards, palm pilots and point-of-sale devices) to enhance efficiency and productivity. Microinsurers will undoubtedly follow suit.
3. Scale of operation In a BOP business model, the basis for returns on investment is volume.
Even if the per unit profit is minuscule, when it is multiplied across a huge number of sales, the return can become attractive to shareholders. This attribute is a perfect fit for insurance and the Law of Large Numbers, whereby actual claims experience should run much closer to the projected claims when the risk pool is larger. When projections can be estimated with a high degree of confidence, then the product pricing does not have to include a large margin for error, making it more affordable for the poor.
5. Requires different functionality Products and services for the BOP market cannot just be scaled down or less expensive versions of traditional products. With microinsurance, for example, insights into how low-income households might use an insurance payout illustrate key differences with the conventional insurance market. For example, instead of a lump sum of cash, the poor might prefer in-kind benefits (e.g., funeral service, groceries) possibly spread over a period of time.
6. Process innovation When designing a product for the BOP market, it is necessary to adapt the process as well as the product, taking into account the limited infrastructure typically available for the poor. In microinsurance, for example, one must recognize that the premium is not the only expense. The indirect costs of accessing and using that product, including transportation and the opportunity costs of lost wages, may be much higher than the actual cost.
7. Deskilling work Service industries are naturally labour-intensive; those focusing on the BOP market are even more so, given the scale of operations. Since labour costs can represent over half of the total operating expenses, one strategy to contain costs is to simplify the operations so that products can be sold and serviced by less expensive workers. Such an approach is quite appropriate for microinsurance because the customers also want simple, easy-to-understand products.
8. Significant investments in educating customers Prahalad is explicit about the importance of creating BOP consumers through education and the raising of awareness, using innovative mechanisms to reach persons in “media dark zones”. This has also been the experience of microinsurers which need to explain to their clients how insurance works and how they will benefit from it.
9. Designed for hostile conditions The products and services designed for the BOP market must take into consideration the unsanitary conditions and limited infrastructure (e.g. electricity blackouts, poor water quality). For microinsurance providers, this involves investing in loss-prevention measures such as promoting low-risk behaviour, water purification and hygiene in order to reduce claims for health and life insurance.
What is insurance for the poor? 19
10. User-friendly interfaces The heterogeneous BOP market speaks a myriad of languages with a variety of different literacy levels. Serving this market requires careful consideration to make it easy for poor households to use the service. For microinsurance, the application form should be short and perhaps completed by the sales person. More challenging is the simplification of claims documentation to make it easy for clients to access benefits while protecting insurers from fraud.
11. Distribution One of the great challenges in serving BOP consumers is to get the product to the market; yet, insurance companies are particularly weak at distribution.
The main solution to this problem is to collaborate with another organization that already has financial transactions with low-income households so the insurer can leverage existing infrastructure to reach the poor.
12. Challenge the conventional wisdom In sum, to serve the low-income market, insurers have to think differently – about customers’ needs, product design, delivery systems and even business models. There is a viable market out there if insurers are willing to learn about that market and develop new paradigms for serving it.
To understand clearly how to develop new business models for microinsurance, it is necessary to assess why the current insurance business models do not reach the poor. Although the insurance industry is beginning to notice the vast under-served market of low-income households, insurers have encountered numerous obstacles that need to be overcome if they are to offer microinsurance on a large scale.
Besides the problems associated with high transaction costs and inappropriate distribution systems identified in Box 2, the products generally available from insurers are not designed to meet the specific characteristics of the low-income market, particularly the irregular cash flows of households with breadwinners in the informal economy. Other key product design issues include appropriate insured amounts, complex exclusions and indecipherable legal policy language, all of which conspire against effectively serving the poor.
It is generally assumed that low-income men and women are more vulnerable to risks than the not-so-poor; however, insurers generally do not have data to interpret the vulnerabilities of the poor. To address such a problem, insurers may build in a hefty margin for error and then make adjustments once the claims experience starts rolling in. However, if insurers build 20 Principles and practices in a cushion on top of the high administrative costs required to serve the lowincome market, premiums may not be affordable.
Insurers assume, rightly or wrongly, that the low-income market cannot afford insurance. Interestingly, when insurance first became widespread in the late 19th century, it was seen as a poor man’s financial service. The wealthy did not need insurance because they could essentially self-insure.
Somewhere along the way, as insurance became more sophisticated and the wealthy recognized their vulnerabilities, the perceptions reversed.
Insurers do not have the right mechanisms to control certain insurance risks, such as adverse selection and fraud, among the low-income market.
For example, the claims documentation methods and verification techniques used to ensure that someone with a US$100,000 life policy is not defrauding the insurer are inappropriate for a US$500 policy.
A major challenge in extending insurance to the poor is educating the market and overcoming its bias against insurance. Many are sceptical about paying premiums for an intangible product with future benefits that may never be claimed – and they are often not too trusting of insurance companies. Creating awareness about the value of insurance is time-consuming and costly. To be fair, the bias goes in both directions. The people who work for insurance companies are usually unfamiliar with the needs and concerns of the poor. Similarly, the culture and incentives in insurance companies reward salespersons for focusing on larger policies and more profitable clients and portray the idea of selling insurance to the poor as ridiculous.
This low-income market has massive potential if insurers can address these issues with efficient and effective innovations. While these obstacles are significant and daunting, they can be overcome – they are being overcome – by a number of formal and informal insurers around the world that are developing new techniques to reach a vast under-served market.
2.2 Providing social protection for informal workers Even with significant innovations to insurance business models, product designs and delivery channels, it is clear that not everything or everyone is insurable based on market principles. Nor should that be the case. Indeed, governments have a critical responsibility to provide social protection to their citizens.
Social protection is the other face of microinsurance. It generally includes a variety of government policies and programmes to reduce poverty and vulnerability by diminishing people’s exposure to risks and enhancing their capacity to protect themselves. Social protection refers to the benefits that
society provides for its members, including: