«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Today CARD MBA offers life and disability insurance, and a pension savings plan (see Chapter 2.2) to 600,000 low-income people. It is a success story – the story of an MBA that was created by a microfinance institution (MFI), but not before the MFI nearly went bankrupt by offering insurance without the needed professional and technical expertise. As one of its leaders explains, “It is fair to say that CARD MBA…arose from a severe miscalculation resulting from too much good heart.” What happened?
In 1994, several years before it created the bank or the insurance company, the CARD NGO began offering basic life insurance packages to its members. As these services were popular, CARD offered additional and more complex insurance products. In 1996, it decided to introduce a retirement annuity that proved to be extremely popular with members. However, CARD had not evaluated its impact on the institution. An assessment later showed that a member would have to pay premiums for two years just to cover one month of benefit. The institution was at risk of losing its entire capital.
CARD learnt that an insurance business must be run by professionals and should not be tied to the capital of a microfinance institution.
Management extricated CARD from the liability and transferred the assets of the fund to members, who then started a separate company with a separate board.
It appears that, when CARD NGO entered the insurance business, it was being administratively managed, but not governed.
Governance 299 From the management perspective, combining the readily accepted insurance services and a pension plan made sense. However, not much thought was given to the new products’ impact on the direction and future of the organization – until the chickens came home to roost.
To its credit, CARD learnt its lesson well. The case study says: “When the board of an insurance company comprises only members or policyholders who have virtually no experience in corporate governance, it is necessary to have an advisory group that is experienced and has the authority to guide the board. Such an advisory committee has been critical to the successful supervision of CARD MBA.”
4.3 Steer an organization with a strategic bent of mind It is the vision thing. If vision and strategy permeate board meetings – more so than political squabbles and operational details – one can count on an organization’s survival and success.
TUW SKOK, an insurer of credit unions in Poland for eight years and of their members and other individuals for the past five years, owes its assured presence in the market to the foresight of the credit union movement’s leaders, who charted its entry into insurance services in the early 1990s.
In Poland, other than the government’s social protection initiatives for healthcare and retirement, there are no specific efforts to extend insurance to the low-income market. As in most other countries, there is, however, a market niche below what is of interest to mainstream insurers, which is what TUW SKOK is targeting. How it was set up and has been steered holds lessons for those contemplating microinsurance elsewhere – in particular, two strategic decisions that made it virtually foolproof against failure.
The idea of getting into insurance came to the board of the credit unions’ apex body not long after the credit unions were re-established in the country and began collecting savings in the early 1990s. A life insurance company was set up with technical assistance and 90 per cent ownership from CUNA Mutual, a United States-based credit union insurance group. It offered three basic products: loan protection, life savings and funeral insurance.
Soon, a brokerage company was added to provide credit unions and their members with covers not available from the joint venture itself. The brokerage is regarded in the case study as one of the most significant steps in the evolution of insurance services for the credit union movement. From the vantage point of governance, however, the strategic decision of stature really came after the joint venture fell apart in 1997.
300 Microinsurance operations When CUNA Mutual bought out the local 10 per cent ownership and sold the company to a foreign investor interested in entering the Polish market, the credit union apex’s board could have gone ahead with business as usual by replacing the joint venture with a wholly owned operation of the same nature – a life insurer targeting individual members of credit unions.
Instead, it opted for a strategic re-evaluation. Based on this analysis, the apex body decided that the greatest priority and most immediate market potential lay in insuring the credit unions themselves rather than their individual members.
So, instead of remaining in life insurance, it chose to have a general (property and casualty) insurance company.
Then came the second key strategic decision: should a new company be launched, which requires business plans and licence approval procedures, or should an existing insurance company be purchased and then restructured to meet the needs of credit unions? The board again made what turned out to be the right choice: to go for an acquisition. Soon the right opportunity came in the form of TUW Praca, a failing mutual insurer under a two-week ultimatum from the regulator to find new capital or be liquidated. The apex convinced the regulator to let it inject new capital into the failing company and reorient it to the needs of credit unions, and TUW Praca became TUW SKOK (see Box 59).
Read the writing on the wallBox 59
TUW Praca’s reincarnation as TUW SKOK is not its only legacy – for its terminal illness was caused by a virus infecting many boards of directors – one that should serve as a warning as well as a lesson to microinsurers.
In the early 1990s, as unemployment in Poland began to rise, a group of trade unions launched an initiative intended to offer some protection to workers in state-owned enterprises targeted for restructuring. The idea was to create a mutual insurance company owned by trade unions and their members, which would offer unemployment insurance to workers.
Efforts to raise capital for the insurance company from trade unions did not come close to achieving their intended targets, which should have been a warning sign. Instead, the initiative’s backers turned their attention to the Ministry of Labour. The timing of their request was fortuitous because the Ministry had some additional resources and needed to be seen to be doing something about the growing unemployment problem. With US$500,000 from the Ministry’s Job Fund, amounting to 90 per cent of the share capital, the trade unions were able to get a licence to launch TUW Praca. Unfortunately, the effort was essentially stillborn. After a couple of years, the insurer had only 100 policyholders, operating costs had eaten away most of its capital, and regulators were threatening to close its doors.
Governance 301 In hindsight, it appears that TUW Praca’s sponsors had not done their homework. Market research would have shown that workers considered unemployment as government’s responsibility rather than the responsibility of individual workers. Consequently, trade union members were not interested in buying their own unemployment insurance because they believed that the government should provide that type of social protection.
Source: Adapted from Churchill and Pepler, 2004.
4.4 Clients’ interest is the key to results The role of the board of directors (or the supervisory board as it is known in some European countries) is to oversee the insurer’s operations and management. Its central purpose is to act on behalf of the shareholders/sponsors of the company and to direct the organization’s activities to attain its corporate objectives. To ensure focus, and checks and balances, the board delegates key tasks, such as audit, investment and executive matters, to its dedicated committees. In the case of mutuals more so than other corporate forms, a key responsibility of the board is to make sure that management’s use of funds and other operating decisions are not in conflict with the interests of stakeholders.
The responsibility for managing and looking after the day-to-day affairs and implementing policies rests with the executive management (or the board of executive directors). Serious problems and debilitating conflicts arise when the line between supportive and overseeing responsibilities and managing responsibilities is blurred. A microinsurer whose board of directors has done a notable job of keeping these lines clear is Tata-AIG in India.
India requires what some other countries only encourage: that each insurer have a percentage of its business in the low-income market, locally known as the rural and social sectors (see Chapter 5.2). To fulfil these regulatory obligations, Tata-AIG realized that microinsurance is not just normal insurance with lower premiums and benefits, but that the microinsurance customer base has its own distinct profile that requires creative approaches and new distribution mechanisms. It therefore established a specialized microinsurance department, called the rural and social team, and gave it autonomy as well as the needed support and resources to innovate. The important space the team occupies in the corporate structure is reflected in the organizational chart (see Figure 20).
As described in Chapter 4.5, one of the team’s innovations is a new distribution channel using people like the customers themselves to advise and serve them. A number of these “micro-agents” form a community rural 302 Microinsurance operations insurance group (CRIG), which operates as an insurance agency. The microagents are essentially handpicked low-income women from the communities they are assigned to serve. Initial results seem promising.
Having a microinsurance champion at board level made the difference.
4.5 Government in governance: Know when to loosen strings Karnataka, a state in southern India, is known for its software industry and biotechnology, but 75 per cent of its roughly 60 million people earn their income from farming and could be classed as poor. Since 2003, it has also attracted international attention as the home of an unusual and successful micro health insurance scheme that appears to be a model of collaboration among the cooperative sector, government and the private corporate sector.
The Yeshasvini Cooperative Farmers Health Care Trust was designed to enrol a large number of people for very low premiums, providing coverage for more than 1,600 operations provided by a network of mainly private hospitals throughout the state.
The state’s cooperative movement, dating back to the early 1900s, has some 31,000 societies in sectors ranging from silk production and textiles to animal husbandry, horticulture and agricultural credit. It is estimated that 78 per cent of the state’s adult population is connected to a cooperative in some way. Given its tremendous scope of outreach, especially to the rural poor, the cooperative movement was the natural choice for mobilizing the health scheme’s potential subscriber base.
The cooperative sector in Karnataka, and other states in India, is publicly sponsored, with the government providing capital, subsidies, loans and technical assistance to cooperative societies. Yeshasvini’s collaboration with the state-sponsored cooperative movement has been a mixed blessing, although overall it has been quite advantageous.
Yeshasvini Trust is governed by a 12-member board chaired by the Principal Secretary of the government’s Department of Cooperatives. Five other board members are also employees of the Department. Another five represent the network hospitals and are well-known health professionals. The 12th member is the director of the government’s Health Department. Representatives of the third-party administrator and the cooperative sector at the federation level may attend meetings, but are not board members. Governing the whole scheme, the board of trustees is responsible for its further development, monitoring performance, listing new hospitals, reimbursing claims and final decisions on claims.
Figure 20 Organizational chart of Tata-AIG