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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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In mature insurance industries, for example, rating agencies and regulators use key insurance ratios to monitor and flag companies that are at risk of failing. This permits timely intervention that may save the insurance company. Similarly, many insurance companies use industry performance benchmarks to compare themselves to their competitors, and this helps them understand areas that require improvement. A relevant set of indicators paired with industry-accepted benchmark values (standards of performance) can be a signpost for management, boards and other stakeholders, helping them to ensure that the company remains solvent and that performance continues to improve.

Developing key performance indicators for microinsurance and periodically publishing the performance of all participating microinsurance schemes relative to an established set of benchmarks should be a priority, as this contributes to the development of a robust, transparent and sizable microinsurance market. Performance standards are operational goals that help a microinsurer achieve viability, while indicators are used to measure the extent to which the established standards are achieved. These indicators, both qualitative and quantitative, should be primarily focused on key financial measures since these provide a rapid assessment of the organization. They should cover the entire range of operations, including marketing and distri

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bution, investments and risk management. Managers should measure the performance of their operations and compare it to that of similar organizations at least annually. Donors may also want to evaluate the current position of a partner relative to others in the industry.

The main objective of this chapter is to discuss some of the more important indicators that should be included. In addition, the chapter touches on why these selected indicators are useful in evaluating the general health of a microinsurance programme and highlights areas that may require further development. For these to be useful and manageable, there should only be five to twelve initial key indicators. If major concerns are identified, then managers can drill down to more detailed indicators designed to isolate more specific issues.

Since microinsurance implementation varies greatly between countries, cultures and affiliated sectors, the indicators reviewed here are intended to cover most situations and apply to microinsurance as a whole – that is, a scheme consisting of one or more of the following players: a delivery agent of an insurance company, a service provider, a third-party administrator, an insurance company or a stand-alone risk-bearing microinsurance organization.

The basic assumption is that an organization promoting microinsurance has an interest in understanding all aspects of the insurance programme and is aiming for its long-term sustainability. This chapter covers indicators in four key areas: 1) marketing and distribution, 2) financial management and viability, 3) efficiency and client value and 4) investment management.

1 Marketing and distribution Marketing and distribution effectiveness is one of the most important requirements for the long-term sustainability of a microinsurance scheme.

Without successful marketing, the organization is unlikely to reach or retain the critical mass that it needs to survive. Successful marketing in turn largely depends on the client’s satisfaction with the services and perceived value of the products. In this category, there are three key ratios: participation, renewal and persistency.

As an indicator of marketing effectiveness, the participation rate refers to the proportion of eligible members of a target population participating in the microinsurance programme at a given point in time.

Participation rate = total number of members/eligible members of the target population Performance indicators and benchmarking 323 The ideal situation is when a very large proportion of a target population voluntarily participates in a microinsurance programme, which generally indicates that the population has accepted the concept of pooling risks and resources. It is also likely that these participants have a good understanding of the benefits package and know how to access the benefits.

In Rwanda, Bungwe health microinsurance scheme, launched in 2001, achieved a 24 per cent participation rate in its first year of operation. This rate has increased each year and in 2005 a remarkable 95 per cent of the community was participating. This scheme was viable in its first year of operation. The success of the programme may be due to clients understanding the solidarity aspect and seeing great value in the scheme since it provides access to the village’s health centre and ambulance services, and to the developers of the scheme being well-attuned to the needs of the population.

Conversely, at TUW SKOK in Poland, just 10 per cent of targeted credit union members enrol in the insurer’s voluntary services. This low participation rate may indicate that the product lines are not attractive to most members or that members consider the company’s products and services offer poor value, or possibly that the marketing skills of the distribution channel are ineffective. In any case, management should take notice of the low value of this indicator and aim to understand why it is unable to attract a greater percentage of their target market.





One way to attain a high participation rate is to make cover compulsory.

This is only possible in certain cases, such as for the borrowers of an MFI or when cooperative members vote for mandatory coverage at their general membership meeting, but it is virtually impossible to enforce in a community scheme. CARD in the Philippines requires all its eligible borrowers to join the mutual benefits association (CARD MBA). Similarly, TYM and Dong Trieu in Viet Nam require that their microfinance borrowers participate in the microinsurance scheme.

Mandatory coverage does not mean that the microinsurer can become lax in its marketing efforts. These products and services must be continuously sold and good value maintained, otherwise resistance to the compulsory participation will escalate. CARD appears to be successful at this, with many MBA members stating that the insurance products are their principal reason for joining CARD (see Box 65). Furthermore, in 2004, Dong Trieu clients in focus group discussions expressed satisfaction with the microinsurance programme despite its limited benefits, mainly because the clients felt honoured to contribute to a fund that may someday help fellow clients facing difficulties. In both cases, the organizations successfully implemented microinsurance programmes with compulsory participation.

324 Microinsurance operations

Great value placed on insuranceBox 65

In a 2002 qualitative survey conducted by Freedom from Hunger, 12 out of 27 focus groups interviewed named MBA insurance as the most valuable aspect of the entire CARD product portfolio. Such a result runs contrary to experience with similar arrangements in other countries where mandatory insurance is never rated highest on a scale of product value for an institution that offers savings and credit facilities, often because of its intangible nature.

Source: Adapted from McCord and Buczkowski, 2004.

The renewal rate is a related indicator but applies specifically to term products (products with a fixed term of coverage such as one year). It is defined as the percentage of clients who had coverage in the previous year and are still eligible for renewal, who are renewing their term coverage. It reflects (among other things) the satisfaction of the client once the term product has been purchased.

Renewal rate = (number of clients from Year X continuing coverage in Year X + 1) (number of clients in Year X) A more general measure is the persistency rate, which refers to the number of clients from a cohort continuing their coverage at a later date divided by the number of clients from the same cohort with coverage in Year X. It is more general than the renewal rate since it applies to both term and continuous coverage.

For schemes with voluntary participation, low renewal and persistency rates are often indicative of client dissatisfaction, possibly due to poor communication, unacceptable product value, unsatisfactory claims payment, and so on.

Operationally, high participation and persistency rates help to reduce administrative expenses. This adds value to the product since a larger proportion of the premium can be returned as benefits, which in turn encourages even wider and longer-term participation (see Figure 22). For example, in Guinea, UMSGF’s relatively high renewal rate of 81 per cent and a 30 per cent participation rate among the targeted population helps achieve a low expense ratio of just 18 to 20 per cent of gross premium. This low expense ratio enables the scheme to offer more attractive benefits and may be a reason for the high rate of renewals.

Performance indicators and benchmarking 325

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Unfortunately, in some environments low persistency rates may actually result in higher profits for the company. For example, the commercial preneed industry in the Philippines (offering mainly education, pension and prepaid burial plans) profits greatly from the low cash value payouts upon surrender of pre-need policies.2 The strategy of some unscrupulous companies is to offer very high commission rates to individual agents in the initial policy years, but then drastically reduce the commissions in the third and subsequent years of a five- or 10-year plan. This results in very aggressive selling, often to reluctant buyers who then cancel their policies or allow them to lapse in droves in the third and fourth policy years when the agents turn their attention elsewhere. The company then profits from the early cancellations since the surrender payout requirement is very low.

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Obviously, these sales practices run counter to the spirit of microinsurance. In some countries, the low-income market has exposure to dishonest insurance schemes and, as a result, real microinsurers have to work extra hard to demonstrate that they are indeed different.

2 Financial management and viability One of the most important indicators is the microinsurer’s net financial result or net income since this reflects performance in all activities in the period reviewed (see Table 33). It should be computed net of subsidies and grants received. To measure net income, an accurate profit and loss statement on an accrual accounting3 basis has to be produced, which takes account of all costs of administering the scheme, depreciation of equipment, reserve increases, and so on.

Net income (prior to non-permanent subsidies) = Earned premium + investment income – claims incurred – operating expenses – reserve increases.

Producing accurate financial statements is an important management function of a microinsurance scheme. Results should be shown by product line to make it clear where the programme is losing or making money. This requires proper allocation of expenses on an accrual basis and by product line, as well as correct calculation of actuarial reserves since reserve increases must be recognized as an expense. The ability to produce a profit and loss statement, a balance sheet, and a cash flow statement by product line should be a standard requirement for all microinsurance schemes and it should be possible to monitor this ability using qualitative indicators.

Some products such as credit life are usually profitable within the first year if implemented properly, while others such as health insurance may take several years to reach profitability. Obviously a positive net income over several years suggests viability of the microinsurance scheme, at least in the short term, while an organization with significant and consecutive negative net incomes will have difficulty surviving for very long since its capital and surplus will be eroded to a point where it becomes insolvent.

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What doomed Confederation Life of Canada?

Box 66 For developed insurance companies, a classic reason for failure is illiquidity.



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