«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
A large insurance company in Canada, Confederation Life, failed mainly due to the high proportion of its funds invested in illiquid property. By 1990, Confederation Life was one of the largest life insurance companies in Canada. Its over-investment in property led to problems however, when the booming real estate market began to fall, resulting in large losses in value for Confederation Life. Even more importantly, it generated a liquidity crisis.
On 12 August 1994, the regulators declared the company insolvent. Many years later, the bankruptcy administrators were able to pay all outstanding obligations of the insurer after they had had sufficient time to sell the company’s property assets.
3 Efficiency and client value As mentioned above, good product value is one of the most important catalysts for the participation rate and for the programme to remain viable. Good value, however, can only be achieved with a low expense ratio, which is the proportion of the premium earned in a given period consumed by incurred operating expenses in the same period.
Expense ratio = Incurred operating expenses / earned premium
By definition, microinsurance premiums are small and are usually collected in frequent instalments. The result is a very large number of transactions relative to premium amounts, which makes it difficult to maintain a low expense ratio. Because of this, viability can usually be achieved only if an existing collection system is utilized (see Chapter 3.3). The best example is a microinsurance programme linked to an MFI, where premiums are collected together with the microfinance loan repayments. Another example is Yeshasvini (India), which collaborates with milk-producer cooperatives by collecting directly from the co-ops, which then deduct the premiums from the proceeds that the farmers earn from daily milk deliveries. Voluntary products aimed at the wider community also require some mechanism to reach large numbers of participants efficiently, such as using savings and credit groups.
330 Microinsurance operations As a rule of thumb, to be effective in microinsurance the target expense ratio should be below 30 per cent in the early years of the scheme, but with a trend towards 20 per cent or less after the programme has stabilized. CARD MBA achieves an expense ratio well below 20 per cent by riding on the collection system of the associated MFI. This target is much more difficult to achieve for schemes like Delta Life, which offers individual life products with premium collection carried out by field staff going door-to-door.
A good complement for this indicator is the incurred claims ratio, defined as total incurred claims divided by earned premium in a given period.
Good product value requires that as much of the premium as possible be returned to the members in the form of benefits. Maintaining a high claims ratio while at the same remaining viable is the crux of the microinsurance challenge. Clearly this can only be achieved with maximum operational efficiency resulting in a low expense ratio and by maximizing the investment returns on the scheme’s reserve funds (see Table 34).
Incurred claims ratio = incurred claims / earned premium
Even though CARD MBA has an expense ratio below 20 per cent, its claims ratio for credit life is approximately 16 per cent which is very low. If this low claims ratio is maintained over time, many members may question the value of the insurance programme. The MBA should consider either lowering the credit life rates or providing some additional benefits since both dividend payouts and cross-subsidization of products are not permitted for an MBA.
Delta Life with its high expense ratio of over 40 per cent and a very low claims ratio calls into question the value of providing endowment products to the low-income markets – perhaps individual endowment products may not be the best savings vehicles for the poor (see Chapter 2.2).
Another measure in this category is the time to payout – how many days it takes for a client to receive a payment after the occurrence of an event. Paying claims promptly is an important aspect of service and good value. Health microinsurance models using a cashless system provide immediate relief to the client, and such systems would score highly on this indicator.
Performance indicators and benchmarking 331 Expense and claims ratios for selected schemes Table 34
4 Investment management As discussed in Chapter 3.6, whenever there is an accumulation of funds, investment management needs to be such that it optimizes value. The incorrect management of assets is a major reason for the failure of commercial insurance companies. Microinsurers offering long-term asset accumulation products have to be extremely vigilant in managing their assets professionally.
Asset diversification and quality are the best ways to protect an investment portfolio and therefore both are important indicators for measuring sustainability. The asset diversification measure should reflect the amount invested in a particular asset including a related organization, whereas the asset quality measure should reflect the overall quality of the portfolio. For example, as a general rule no more than 10 per cent of assets should be in any one investment or in a related organization. Over-exposure to property is another danger since this will ultimately impair liquidity and make it difficult for the scheme to meet its claims and expense obligations in a timely manner.
CARD MBA and VimoSEWA recently had a high concentration of investments in a related organization, the loan portfolio of the parent MFI.5 This is a well-known danger, and both microinsurers are rated low in this category. Most of the case studies have very little information on asset diversification, asset quality and investments in general.
If the organization has given long-term guarantees, then it must have the capacity to carry out asset-liability matching (ALM). This process requires projections of liability streams (claims, expenses, maturities, etc.) and the capability to periodically shuffle investments to ensure that the required investment returns are timed to coincide with future cash flow obligations.
Failure to manage a portfolio with long-term guarantees in this manner can easily result in bankruptcy. If the scheme does not have the capacity, it should outsource investment management to a professional firm. Investment management performance should be monitored by means of qualitative indicators.
A microinsurer offering long-term interest rate guarantees must have ready access to quality investment instruments with matching term and interest rates to cover payment of the guarantees. In general, it should not offer long-term rate guarantees without ensuring that they are linked to actual portfolio performance (see Chapter 3.6). Indicators should be developed to monitor these practices.
5 Conclusions Performance benchmarking is an important way for microinsurance providers to assess their development or for donors to understand their
development requirements. Some of the more important indicators for preliminary assessment of a microinsurer’s operations and practices are:
The aim of these indicators is to point to key areas that require management attention. Once a deficiency is found, further research is required to understand the source of the problem and to develop solutions that will improve results for future years of operation.
Besides these four categories, additional important indicators should also be developed in the areas of risk management, legal and organizational structure, operations management, community outreach and health insurance. The latter category should address some of the special challenges involved in offering health.
The authors have devised a fairly comprehensive preliminary set of 40 indicators over nine categories and the associated scoring mechanisms. Some of the well-known microinsurers discussed in this book were evaluated on a test basis using this set – the information was extracted from the CGAP case studies.
In the illustration below, each indicator was assigned a potential score in order to give it a weighting in the overall score. The total potential score for a microinsurer is the sum of the individual potential scores for those indicators relevant to or measurable for the microinsurer. Since not all indicators are applicable to or measurable for a microinsurer, the total potential score can vary. For example, a qualitative indicator measuring whether or not tariffs for services are negotiated with health service providers is only applicable to a health microinsurer – for microinsurers without a health product both potential and actual score for this indicator were set to 0. Similarly, in cases 334 Microinsurance operations where data was insufficient for the evaluation of a particular indicator, both potential and actual scores for the indicator were set to zero.
Without going into the methodology of scoring and the scoring formulae used, the ratings for the microinsurers in the case studies are summarized in Table 35.
Rating of microinsurance schemes – An illustration Table 35
Karen Schwartz shaped parts of this chapter with ideas and suggestions gleaned from years of international development experience in the cooperative movement. The authors acknowledge her contribution. They would also like to thank Jean-Bernard Fournier and Catherine Tremblay (DID), Sabbir Pattel (ICMIF), Ralf Radermacher (University of Cologne) and Igor Vocatch-Boldyrev (ILO) for reviewing this chapter and providing insights and comments that helped put the many facets of mutuality in the proper perspective.
1 IntroductionThe majority of microinsurance providers in the world are mutual institutions of some sort. Mutual institutions are owned by their member-users and respect the “one-member, one-vote” principle.1 Mutual institutions come in
several varieties, including three that emerge from the case studies:
1. Stand-alone mutual (or cooperative) insurance companies: These are mostly large mutual insurance companies not affiliated to any network of mutual institutions. CARD MBA in the Philippines and Yasiru Mutual Provident Fund in Sri Lanka are examples of stand-alone mutuals.
2. Insurance as a business affiliated to a network of financial cooperatives (savings and credit cooperatives or SACCOs):2 An insurance company is affiliated to a network of co-ops, usually savings and credit co-ops, and provides insurance services to members of the network.3 Most large networks of SACCOs also deliver insurance services to their members through such a sponsored insurer. Many of these insurers are members of the International Cooperative and Mutual Insurance Federation (ICMIF). This model is referred to as the cooperative or SACCO network.
1 The expressions “mutual institution” and “mutuality” used in this chapter refer to both “cooperatives” and “mutual associations”. The technical differences between both these specific forms are discussed in Section 2.
2 This chapter uses the term SACCO, which is more generic than “credit union”. The term “financial cooperative” is not used since it often represents both savings and credit and insurance cooperatives.
3 The term “network” applies to apex structures that bind many independent institutions by a long-term contract or alliance to pool resources. For example, SANASA (owner of ALMAO), one of the largest alliances in the world, is composed of 8,500 legally independent savings and credit associations.
Cooperatives and insurance: The mutual advantage 337
3. Networks of mutual insurance associations: The network is composed of mutual insurance associations that create apex structures, such as Union Technique de la Mutualité Malienne (UTM); friendly societies associations also operate in this way. This model is also referred to as the community-based approach, which is discussed in detail in Chapter 4.3.