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In 2004, VimoSEWA improved its approach to claims adjustment when it trained three office staff in claims investigation techniques. The cell was trained by the COO for the purpose of discreetly procuring correct groundlevel information from hospitals, doctors, nursing staff, and relatives and neighbours of the claimants. They were also trained to analyse healthcare bills and information on claimants’ income, work and family, depending on the details of the claim. Investigation results are discussed only with the claims coordinator and COO along with the CEO for final decisions.
4.2 Other general controls Some controls relate to the structure of deductibles and co-payments, which limit the volume and value of claims. Additionally, these play an important role in limiting the incentive for fraud by the policyholder. For example, with property claims, TUW SKOK limits settlements to 50 per cent of replacement value. In this way, the policyholder still takes a 50 per cent stake in the risk of loss.
Sometimes common controls cannot be implemented; for example, TataAIG could not introduce a waiting period because the national insurance regulations prohibit it. The regulators feel that such a provision can cause ill will among policyholders with little knowledge of insurance when a claim arises within the waiting period. Tata-AIG has paid claims within the first month of policy activation.
At Grameen Kalyan and BRAC in Bangladesh, staff members frequently interact with clients and get to know their families personally, which works as a moral deterrent against fraud and false claims. Many MFIs have observed that borrower groups tend to exclude those individuals that have a history of poor health or are known to be sick. Group members fear that such individuals will struggle to repay their loans, leaving other members to repay them under the mutual guarantee. Opportunity International has used this observation in negotiating with insurance companies in Africa and the Philippines to remove waiting periods and existing illness restrictions from their life insurance products.
234 Microinsurance operations
Countering these fraud problems calls for close claims analysis, but even more importantly, requires that controls be built into the systems to stop fraud before it occurs. For example, to control fraud, Microcare places a receptionist in the waiting room of the approved healthcare provider. These qualified nurse receptionists ensure that only covered individuals receive treatment by checking the identification cards; the photos on the card are matched to both the patient and the database available to the nurses.
Using this technology, Microcare can ensure at each stage that only covered care is provided, and the insurer has an immediate record of the treatment costs that can be compared to the hospital’s invoice when it arrives.
Thus, Microcare can make sure that its policyholders receive the care they buy, and is able to keep the premiums lower. However, although this extensive system mitigates policyholder fraud, it does little to encourage true managed healthcare because Microcare has no control over the physicians and clinics.
As a means of controlling the financial transaction, Delta Life pays about half of its claims with crossed cheques (requiring the payee to deposit the cheque into a bank account). This is a common procedure at insurance companies. However, frequently the beneficiary does not have a bank account into which to deposit the cheque, and many banks are not prepared to open an account since they know that the payee will deposit and immediately withdraw the proceeds, and then close the account. Even when banks agree to open an account, they impose heavy service charges that make the insurance transaction more expensive for the beneficiary.
The bottom line with microinsurance is that controls must be strong, yet must reflect both practicality and the market situation. It makes little sense to implement expensive controls that the market cannot comply with, or that cost more to implement than the likely cost of the aggregate loss. As margins are smaller with microinsurance, the cost-benefit analysis is particularly critical.
5 Claims considerations in product design A simplified product design will greatly aid the claims process. Microinsurance product designers must think through the steps policyholders will go through to make a claim. When CARD MBA tested a health insurance product, it found the risk management and paperwork simply too costly and onerous for the MBA and its members, so it pulled the plug on the product.
Claims processes and costs must be addressed and honestly recognized in the product development process.
236 Microinsurance operations In general, life policies are relatively easy because there is one obvious insured event – the death of the covered person. Several programmes offer simple policies where if the person dies (and is covered, and the death is proven), the beneficiary is paid. Other programmes add complexity with exclusions for suicide, death due to civil strife or acts of nature. The author’s favourite microinsurance exclusion is one for policyholders who die “while a passenger in a rocket-propelled vehicle”. The greater the number of exclusions, the more complex the settlement process will be.
A range of benefit options also adds complexity. Some microinsurers offer an additional benefit (double indemnity, for example) for accidental death; Columna has special accidental death benefit for certain causes of death, for example while travelling as a passenger in public transport or in a lift, or as a result of fire in a public building, where the insured sum is multiplied by three. With accidental death policies, two problems occur. First, there is significant ambiguity surrounding the definition of an accident, which can lead to conflicts in the adjustment process – something that public relations-sensitive microinsurers should want to avoid. It is difficult and unpleasant to explain to expectant beneficiaries that something they see as an accident, or a special accident, is not one.
A second issue with accidental death claims is that people have an incentive to convert a death due to illness into an accidental death. Microinsurers have reported cases of beneficiaries creating fraudulent police reports and bribing physicians for fraudulent post mortem reports. The incentive generated by a potentially significant claims settlement has led many people to indulge in fraudulent activities. The problem is eliminated when there is a simple death policy where any death leads to a common settlement. Compartamos, for example, uses the slogan “death is death”; with its insurer partner Seguros Banamex, it treats all deaths in the same way. Policies with simplydefined benefits and simple claims procedures are critical for efficient microinsurance operations.
Tata-AIG has developed a broad strategy in designing its microinsurance products. Its objective is to limit costly underwriting, and to focus instead on claims verification. While reducing its operating costs, the problem with such a strategy has been that its products have been mis-sold by commission-seeking agents who have sold products to people who do not qualify for them.
When such people make a claim, it may subsequently be rejected during claims verification. This does not create a good impression of Tata-AIG, nor does it help create an insurance culture.
In some mutual and community-based programmes, like ServiPerú, the scheme managers found that it was important for members to self-limit their claims behaviour and worked to raise awareness among policyholders of the Claims processing 237 benefits of prevention and minimizing claims so that prices could be kept low in the future. This reduces the volume and value of claims, ultimately allowing for a potential reduction in premiums. BRAC takes an interesting approach to this type of limitation for their health insurance, allowing each cardholder only one referral reimbursement per year.
6 Conclusions In summary, the following key lessons and recommendations about claims
management are worth considering:
– To be efficient, insurers should streamline their controls for the smallest policies, since the effort needed to enforce the controls may be more costly than the actual benefit.
– Efficient microinsurance must have simply-defined coverage, appropriately rapid claims settlement and controls that can be easily applied.
– The closer the settlement is to the policyholder, the faster it can be provided, though there are potential issues of control and inconsistent application of claims rules that need to be monitored.
– Claims must be based on documentation that is appropriate for the clients.
– The overall microinsurance processes are more efficient and cost-effective when the underwriting is conducted through claims rather than at the point of purchase. However, where the controls are minimized for the masses of insurance purchasers, there is a heavier burden on the claimants and a risk of mis-selling.
– With health insurance, the greatest benefit for policyholders is when the insurer settles directly with the provider. Procedures and controls can be more efficient when the providers are responsible for initiating the claims.
– A settlement appeals committee is important to offer beneficiaries an opportunity to have their claim results reviewed and clarified.
– Distribution agents such as microfinance institutions are not always the best arbiters of client needs, and thus insurers must make sure that the final client is being satisfied.
– Computerization greatly enhances the potential of developing and implementing efficiencies, and may be the most important input to efficient processes, especially for health insurers.
– A simple brochure for each client showing the breakdown of fees and benefits, the coverage period, and describing the claim settlement process, would be a worthwhile consideration.
3.5 Pricing microinsurance products John Wipf and Denis Garand The authors would like to thank Susanne Daniela Bürger (Munich Re), Dominic Liber (Quindiem Consulting), M. Francisco Villagrasa and Carlos Martínez Gantes (DVK Seguros), and Ellis Wohlner (consultant to SIDA) for their useful feedback on this chapter.
Commercial insurance companies employ actuaries, specialists trained in the mathematics of insurance and risk management, to calculate the financial impact of contingencies for which policyholders are insured. More specifically, the actuary ensures that the company’s premium rates are prudent and sufficient, that its reserves for future liabilities are adequate, and that the policy dividends paid to its policyholders are equitable.
Similarly, a microinsurance programme should also contract the services of an actuary to derive the premium rates for its products and to assist with other aspects of managing the scheme. In the beginning, many unregulated microinsurers underestimate the technical rigour required to price products correctly. They often yield to the temptation of duplicating products and rates from the commercial insurance market or from other microinsurance programmes without considering the underlying assumptions behind those rates.
The main objective of this chapter is to illustrate how insurance products are priced and how to design and maintain databases so that they can be used for pricing purposes and sound management, and to highlight some good and bad examples of microinsurance pricing derived from the case studies.
This chapter is particularly relevant for unregulated microinsurance schemes that carry their own risk, but also for organizations that distribute products underwritten by insurance companies – if distribution channels understand pricing, they will be more adept in managing data and negotiating with insurers.
The discussion is limited to life and health insurance, although many of the issues and points made apply to pricing other products as well. It is by no means an exhaustive treatment of the subject – indeed, an entire book could be written on microinsurance pricing.