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«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»

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Before profits are distributed, a target should be set to maintain a certain level of contingency reserves. The level of this contingency or surplus should be based on the risk the insurer faces. For example, in health insurance, many organizations such as AssEF aim for six to nine months premiums as a contingency reserve.8 For credit insurance, the level of contingency reserves may be calculated using risk-based capital measures, i.e. a capital measure that links risk and capital adequacy, as practised by commercial insurance companies.

Some organizations have bylaws or are subject to legal requirements that

determine profit distribution based on a prescribed formula. For example:

– La Equidad in Colombia complies with the cooperative law and allocates 20 per cent of profits to education, 10 per cent to its solidarity fund, 20 per cent to members’ reserves, and 50 per cent to members’ dividends based on premiums paid and claims paid.

– Spandana in India uses its profits to fund scholarships for its members’ children.

– Yasiru in Sri Lanka distributes 40 per cent of its profits to members with at least five years of membership, 10 per cent to a welfare fund, and 50 per cent to a contingency fund.

– UMSFG in Guinea is building up reserves to a level of 75 per cent of prior year claims. Once this is attained, it plans to use surpluses to fund a health promotion campaign and improve health facilities.

– MUSCCO is considering profit distribution to SACCOs with good performance or claims experience. However, it will only be paid when a SACCO pays its premiums on time – one third of the SACCOs are behind with their premium payments.

– By law, 90 per cent of Delta Life’s profits must be returned to its endowment policyholders and the remaining 10 per cent may be paid to shareholders.

Microinsurance is no exception.

In the partner-agent model, the agent usually works on a commission basis, and the insurer’s shareholders benefit from the company’s overall performance. However, there is another way to structure the relationship. For example, the distribution channel could negotiate a surplus share with the insurer, as Pulse has done with Madison Insurance in Zambia. In this case, after paying claims, Madison deducts 30 per cent of the premiums for its expenses, and then shares the balance 50-50 with the microfinance institution.

This approach seems to be more in line with the spirit of microinsurance

–  –  –

since at least a portion of the surplus comes back to the community. It is also better risk-management practice for the insurer, since it gives the agent a financial incentive to produce a quality risk portfolio and not to be indifferent to adverse selection or fraud.

7 Conclusion

The main messages in this chapter are as follows:

– Sound financial management is one of the most important requirements for long-term success in the insurance business.

– Insurance is the business of risk management. The quantification of these risks, which should be done by an actuary, is the basis for determining the amount of reserves and capital required to sustain the scheme.

– For marketing purposes it makes sense to charge the same price for each client, at least for small policies; the applicable rate should be derived from the weighted average mortality or morbidity rates to take into consideration the actual age-sex demographic profile of the group.

– The objective of good investment management is to achieve a balance between risk and return, matching anticipated inflows from investments to expected outflows, while maintaining appropriate liquidity to meet obligations as they arise.

– Long-term products are vulnerable to reinvestment risk. To manage this risk, it is necessary to match interest rate guarantees (both in amount and duration) with the available assets at the time that the guarantee is made.

– Microinsurers should have investment policies and controls to ensure that the policies are implemented.

– Reinsurance cannot take a losing proposition and turn it into a viable entity.

It is particularly appropriate for small risk pools and those with heterogeneous risks and irregular claims patterns; it is also extremely relevant for all microinsurance schemes, big and small, to cover catastrophe risk.

– Microinsurance programmes should aim to accumulate capital to manage risks, and only distribute profits or surplus once an actuary determines that the scheme has sufficient reserves.

3.7 Organization development in microinsurance Craig Churchill and Richard Leftley The authors appreciate the feedback and suggestions from Toon Bullens (Interpolis), D’Arcy Delamere (CUMIS) and Zahid Qureshi (consultant).

Organization development is a planned effort to increase an organization’s effectiveness by intervening in the operational processes. The organization development field, which emerged in the first half of the 20th century, has since evolved to sharpen its focus on change to emphasize the notion of a learning organization.

Warner Burke (1992) stresses that organization development is not just anything done to improve an organization, but a change process designed to bring about an intentional end result, requiring organizational reflection, system improvement, planning and self-analysis. Leadership theorist Warren Bennis (1993) describes organization development as a complex strategy to change the beliefs, attitudes, values and structure of organizations so that they can better adapt to new technologies, markets and challenges.

Indeed, such changes are required, in both insurers and delivery channels, if they wish to offer insurance to the poor effectively.

A basic measure of an organization’s success is the extent to which it meets the changing needs of its clients and stakeholders. Service industries depend on the effectiveness of frontline staff who interact with, and are expected to provide value to, the customer. This is particularly true of insurance which, as an intangible service, is often not well regarded and understood. Microinsurance has an added complexity because there may be different levels of customers, such as the holder of a group policy and the endusers. Moreover, since the risk-carrier and the distributor can be different organizations, the insurer may have little or no control over the staff who interact with persons covered by a group policy.

The lack of control over frontline staff, coupled with a reluctant and uninformed market, necessitates some creativity in deploying, training and rewarding staff for delivering microinsurance. This chapter considers five aspects of organization development: 1) organizational structure, 2) recruitment, 3) training, 4) compensation and 5) institutional culture.

Organization development in microinsurance 271 1 Organizational structure: Where does microinsurance fit in?

Microinsurance is often just a small piece of a larger organization’s business activities. In an insurance company, it may be a product line or even just a few policies. For organizations involved in distribution, such as microfinance institutions, microinsurance tends to be treated as an additional financial product, but one that has less importance than the organization’s core savings and credit services.

The only exception to this general characterization is the communitybased model (Chapter 4.3), the sole purpose of which is to provide microinsurance to a defined group. Perhaps if the market had more organizations that were only or primarily focused on providing microinsurance, greater energy and attention would have been harnessed for structural innovation.

For organizations that are only marginally involved in microinsurance, there are still some simple and clear lessons about how it can be structured within a larger organization – both the distribution channel and the insurance company – to achieve the best results.

1.1 Distribution channels When considering the structure of microinsurance in a distribution channel such as an MFI, it is necessary to consider how it fits into both the front and back office structures.

Head office To ensure that sufficient attention is given to microinsurance, distribution channels should have designated staff members or even a small department at head office to enable them to focus on insurance. Obviously, this will depend on the size of the organization and the functions that the distribution channel has assumed from the insurer. For example, if it is involved in claims processing, it will require more personnel. In general, however, when microinsurance is just a piece of someone else’s job, it too often has a low priority.

In a distribution channel, a microinsurance department acts as a first line of response to queries from field staff and clients. It consolidates all premiums from the branches and arranges monthly payments to insurers. It acts as a filter for claims, by ensuring that they are valid and that the documentation is in order as claims pass through from the field to the insurance company. To simplify the administration, often the microinsurance department will hold insurance application forms and only submit them to the insurance company if there is a claim. The department also performs a vital record-keeping function and might therefore require a bookkeeper. In addition, the department 272 Microinsurance operations may need training specialists to provide field staff and clients with sufficient information and expertise.

At ASA in India, for example, of the 350 people that work for the MFI, seven work exclusively on its microinsurance activities. ASA needs this level of commitment because the MFI assumes responsibility for claims management. If a delivery agent anticipates trying to create a formal brokerage or even an insurance company in the future, then it would be wise to assume a greater role in the delivery of insurance, especially claims processing.

Besides having a dedicated microinsurance department, it is also essential to have a champion within the senior management team and on the board.

While these persons are not involved in the day-to-day insurance operations, they can represent and promote the product in management and governance circles, giving insurance a voice at a strategic level in the organization. These champions should receive regular updates from the department handling the business.

Field structure As for field operations, there are two main ways to structure responsibilities when insurance is not the organization’s core business. The more common approach is to integrate insurance into the activities of the frontline staff, such as tellers and loan officers. When they are opening up savings accounts or marketing credit products, they could also encourage clients to buy insurance.

However, if the frontline operations become sufficiently large, the recruitment of an insurance specialist at the branch level may be justified. For example, when insurance operations in credit unions collaborating with TUW SKOK (Poland) and La Equidad (Colombia) generate a certain number of policies per year, they employ a credit union staff member to work exclusively on insurance. This person is trained to handle the more complicated questions and solve problems that typical frontline staff cannot handle.

This arrangement tends to have a compounding effect on sales; premiums in credit unions with insurance specialists tend to grow faster than in those without specialists.

The choice between generalists and specialists in the field is not just a matter of scale. TSKI in the Philippines has over 150,000 borrowers, but it relies only on its loan officers to sell insurance. The other factor involved is the product type. If insurance is integrated into the distribution channel’s other services, such as savings and credit, and is never offered on its own, the organization may not need an insurance specialist in the field.

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