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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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Perhaps this microinsurance culture is easier to create in a mutual insurance company or a community-based scheme than in a private, for-profit company. By definition, member-owned schemes are intended to maximize member benefits rather than shareholder profits, and are therefore more likely to go to greater lengths to provide appropriate microinsurance service. Plus, any profits that are generated are returned directly or indirectly to policyholders.

6 Conclusions For microinsurance to provide more people with better services over the long term, current and future risk carriers and delivery channels will need to consider their beliefs, attitudes, values and structure. Given the current dearth of good practices, there appears to be significant room for improvement in this area. The organization development of microinsurance is a high

priority, and should take into consideration the following lessons:

– Microinsurance requires its own space in the organizational structure of both risk carriers and distribution channels to ensure that there are people who are committed to making it work better.

– Commitment from senior management and the board is instrumental to the success of microinsurance.

Organization development in microinsurance 287 – Outsourcing can be an effective way of accessing (micro) insurance expertise.

– For both insurers and distribution channels, when introducing microinsurance, consider the implications it might have on existing job descriptions and recruitment criteria.

– A greater emphasis must be placed on staff training, particularly for field staff. One way of testing the effectiveness of the training is to independently assess the clients’ knowledge of insurance and the products after interacting with the staff.

– Compensation and incentives that reward client retention are likely to be more appropriate for microinsurance than incentives strongly linked to sales.

– A microinsurance culture has to take into consideration the characteristics of its target market. It should strongly emphasize relationship-building and after-sales service, while ensuring the organization minimizes claims delays and rejections.

3.8 Governance Zahid Qureshi The author would like to thank Hans Dahlberg (ICMIF), Klaus Fischer (Laval University), Augustine Hatch and John Pott (Aga Khan Agency for Microfinance), and Frank Lowery (The Co-operators Group) for reviewing this chapter and providing insights and details that added depth and value to this look at corporate governance in microinsurance.

Governance is the act of planning, influencing and monitoring, through policy, the affairs and direction of an entity. It involves systems and processes ensuring accountability and openness in the conduct of its business, whether the entity is a country, community, corporation or another organization.

Governance involves the exercise of power and decision-making that reflects the interests of those who have a stake in the entity and those with whom the entity interacts or over whom it may exert influence.

At the organizational level, governance refers to the actions of its board of directors – the official group of persons, elected or nominated, who set and oversee the long-term direction of the organization. Like other enterprises, microinsurance schemes will not fully succeed without good governance. However, good governance for microinsurance providers is hard to come by, and it will be achieved in different ways depending on their ownership structure.

This chapter begins by introducing the concept of governance in general, and describing its unique characteristics in the context of microinsurance. It then covers the important issues of composition and expertise of the board.

The bulk of the chapter describes five case studies that illustrate lessons for microinsurance governance.

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Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. In addition, factors such as business ethics and corporate awareness of the environmental and societal interests of the communities in which a company operates can also have an impact on its reputation and its long-term success.

Source: Adapted from OECD, 2004.

And no again, because governance of both mainstream insurers and microinsurers involves corporate social responsibility (CSR) in addition to commercial objectives. Few annual reports these days neglect to tout CSR and an earnest pursuit of a triple bottom line, benefiting the consumer and community as well as the shareholder.

Yet microinsurance governance is different because the microinsurer cannot just dispense with its CSR by a do-good programme or project on the side. Microinsurance has CSR at its core, and its board of directors must ensure that a social or development perspective is coupled with commercial objectives to sustain the organization. Social protection, as the other face of microinsurance (see Chapter 1.1), is ever-present and cannot be put away for occasional attention.

The United Nations Conference on Trade and Development (UNCTAD), in its study “Selected Issues in Corporate Governance”, draws the main elements of governance from several definitions. From the financial perspective, a fundamental of corporate governance is that it must assure an adequate return on investment to the suppliers of capital. More capital will flow to the company to help it grow to its potential if its governance mechanisms produce a good return for investors. This definition, applied to microinsurance, must encompass not just the financial returns on investment, but also the social returns. Indeed, the suppliers of capital for microinsurance schemes, including the policyholders in cooperative and mutual schemes, want to see evidence that such a scheme enables poor households to be less vulnerable.

290 Microinsurance operations Perhaps another way of defining governance is to consider the mandate of the board, which is responsible for guiding the institution in fulfilling its corporate mission, for protecting the institution’s assets over time, and for ensuring that it respects the laws, rules and regulations pertaining to the type of business it transacts. The board sets the strategic direction of the organization, ensures that it complies with all legal and regulatory requirements (including any industry codes of practice to which it subscribes), and carries out a fiduciary or stewardship function to guard the institution’s assets. In achieving that mandate, a microinsurer’s governing body would not steer and direct it effectively without being mindful of the universal prerequisites of governance (see Box 56).

The four pillars of governanceBox 56

1. Accountability, or the capacity to call officials to account for their actions.

2. Transparency, entailing low-cost access to relevant and material information.

3. Predictability, resulting primarily from laws and regulations that are clear, known in advance and uniformly and effectively enforced.

4. Participation, needed to obtain reliable information and to serve as a reality check and watchdog for both government and corporate action.

Source: Adapted from ADB, 1997.

One of the great challenges of governance is understanding the boundary between management and supervision. The board provides the strategic direction; management is responsible for implementing a programme of activities to achieve that direction. In practice, however, the distinction between management and governance often gets blurred, to the detriment of successful operations – usually with some board members crossing the line into the management’s area of responsibility or management pursuing a strategic course without the board’s knowledge or approval.

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Corporate insurers that are going downmarket to serve low-income households – either on their own or in partnership with delivery channels – are likely to be entering uncharted waters. Invariably, the effectiveness of a board depends on the mix of individual directors, their experiences, risk appetite, causes and agendas. The chair and the chief executive should jointly ensure that officials nominated to the board have expertise that will complement rather than duplicate that of other directors, and will be appropriate given the direction of the organization. For example, if microinsurance is an important strategic direction, the board will need guidance to respond to the special needs and buying behaviour of the low-income market and someone who can have an effective voice on the board to balance the insurer’s natural commercial orientation.

Cooperative, mutual or other popularly based microinsurers have an advantage over corporate insurers because they are closer to and more familiar with, and often themselves are, the target market. However, their natural social focus must be balanced with a commercial orientation. Development experts who have helped establish popularly based insurance programmes in a number of countries over the years identify leadership training as a key factor. This is a euphemism for two “room for improvement” items that they

find among many organizers and elected officials of grassroots financial service providers:

a) technical understanding, andb) grasp of a board member’s responsibilities.

Except for those elected or selected by virtue of education and experience in financial services, board members of popularly based organizations have no more than a cursory knowledge of insurance. They display leadership too, but it is driven more by a populist cause or belief than by an in-depth knowledge of financial services.

Not having the proper mix of skills and expertise on the board is not only hazardous for an organization but potentially fatal. Many popularly based organizations, among them financial cooperatives, have struggled and gone under because of a lack of the required skills in the people running them.

Their managers were not up to par on technical elements of the business and elected officials on the board were high on ideology, but had no more than a modicum of business acumen.

Even when in some cases the board had the foresight to hire a technically qualified manager, it tended to put him or her on a short leash, with frequent conflicts leading, before long, to the manager’s resignation or dismissal (see ICMIF, 2005).

292 Microinsurance operations Even though the governance challenges for corporate and popular microinsurance organizations appear quite different, they have three key issues in common. First, to succeed, an enterprise needs a champion. Each board of directors involved in microinsurance can use at least one such entrepreneur as a member – this is particularly an issue where microinsurance is just one product or set of activities in which the organization is involved.

These boards also need others who can complement the champion’s advocacy of the cause with a good understanding of the business and their own responsibilities.

Second, external directors can bring expertise that a board may be lacking. This is particularly relevant if microinsurance is quite different from the organization’s core services, or the target market is quite different. An external independent director does not represent any particular shareholder, but rather has relevant experience and skills to help shape the board’s guidance. In situations where the legal or corporate structure does not allow for external directors, this function could be addressed through an advisory committee.

Third, board members need to know what they are supposed to do.

While this seems obvious, not all directors are aware of their responsibilities and how they should be carrying these out. Intensive training of new directors, with regular updates on governance issues, is essential. A good starting point is a “job description” (Box 57).

Responsibilities of the board of directors Box 57

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