«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
The main difference between the second and third categories is that, for the latter, the mutuals were created solely to provide insurance to their members, whereas for SACCOs, insurance is just an additional product, and often not even considered a core service. This chapter focuses on the second type – insurers for a cooperative network – which includes the institutions summarized in Table 36.
Case studies that correspond to the cooperative network model Table 36
1 This case study, ICMIF (2005), “Lessons learnt the hard way”, covers nine institutions in eight countries. Confidentiality agreements do not allow disclosure of the names.
2 This includes SACCOs and other cooperatives.
3 Cooperative societies in a wide range of businesses.
4 Pilot experience in Togo which if successful will be extended to SACCO networks in Burkina Faso, Benin, Mali and Senegal.
Affinity A cooperative is essentially an organizational instrument for enabling small producers and consumers to pool their resources to secure the economic advantages of scale – as individuals, they essentially have no voice, but collectively they can achieve significant results. This principle is particularly applicable to insurance, which is based on spreading risks over as large a number of insureds as possible.
Accessibility The cooperative organizational form covers many different sectors – including agricultural production, fisheries, marketing, processing, handicrafts, retailing, storage, transport, savings and loans, and home ownership. A cooperative insurer is in a position to cater for a wide range of basic needs and can reach farmers in remote rural areas as well as lower-income groups in towns and cities.
Affordability There are many reasons why cooperative insurers can reduce their total costs, and hence premium rates, below those of private insurers. A cooperative insurer can dispense with a special sales force and with commissions;
it may conduct a sales campaign for an entire village through an existing agricultural co-op, or direct-market various covers without agents through savings and credit cooperatives. Through use of the local society and network, premium collection and claims settlement procedures are simple and cost-effective.
Investment in community Cooperative insurance facilitates savings and accumulation of capital in the lower-income brackets, and channels a portion of these funds into the local trade and industry, helping to improve living standards.
Ownership Policyholders are also owners of cooperative insurance enterprises. The parliamentary structure stemming from cooperative principles offers them a real opportunity for direct control over decision-making. They have a special interest in health promotion and loss prevention, for their interest is not only in personal insurance but also in protecting the society’s assets they jointly own.
Source: Adapted from UNCTAD, 1977.
340 Institutional options The cooperative model takes this basic shape in most countries, developed and developing alike, where the cooperative movement has taken hold.
What is more, the model is self-adjusting, adapting to the standards and requirements of the membership of the SACCO network. In networks dominated by middle-class people (e.g. southern Brazil’s SICREDI), its products will tend to suit that market. If the network is rooted in low-income members, the insurance products will be adapted to that clientele. If the services are not adapted to its members’ insurance needs, failure can ensue. For example, at ALMAO, regulatory restrictions are imposing a higher cost structure, which in turn has encouraged the design of higher-margin, up-market products that moved the insurer away from its clientele; not surprisingly, the products are not selling very well.
Decades ago, cooperative and mutual insurance took root for low-income people in what are now developed countries. In Canada, following the Great Depression when insurance for low-income households was inaccessible and unaffordable, two separate cooperative insurance schemes emerged, each bringing together savings and credit cooperatives, marketing/supply and consumer cooperatives, farmers’ associations and trade unions. In many developing countries today, similar structures are emerging.
However, the model is not trouble-free. In some countries, a cooperative insurer may have the network’s second-tier representation on its board of directors, but its microinsurance is run in concert with the managements and boards of only a handful of primary cooperatives in the network. This is the case of ServiPerú and La Equidad. Both have microinsurance programmes that are sustained in effect not by broad participation of the network, but through direct dealings with only a few network members. Moreover, La Equidad’s sales of microinsurance through a non-cooperative MFI, Women’s World Forum, were more successful than those through the participating cooperatives. These irregularities are often related to the particular history of the supporting network or the circumstances under which the insurance affiliate was created. If the governance structure is weak, the result may be management entrenchment and an outcome less adapted to the needs of coop members.
The use of other distribution channels by a cooperative insurer may appear confusing and be perceived as a sign of independence from the cooperative network, but it is not so. It does not dilute the network’s ownership, just as the use of multiple distribution channels by a privately held insurer would not affect its shareholding. Besides, cooperative and mutual insurers’ forays into non-cooperative sectors usually involve affiliation with organizations that are like-minded and popularly based – operated with the interests of customers rather than those of shareholders at heart.
Cooperatives and insurance: The mutual advantage 341 2 What is a mutual insurer?
There are two basic types of insurance company: joint stock and mutual. A joint-stock company is owned by investors, among whom profit is shared through dividends. A mutual company is owned by its customers. After deductions for reserves, profits are distributed to customer-owners usually in proportion to the business they did with the company.
Mutual insurers can be classified into three types. The first one requires neither a premium nor an assessment of policies. In this type of organization, also called post-paid, claims are charged to members after the event. This form was common in the past, but is nearly extinct today because members must be sought out after each event and the fulfilment of obligations weakens as social ties loosen. The second type has premiums and assessable policies, while the third has premiums and non-assessable policies. In the latter, policyholders receive dividends, but additional assessments are not levied for losses (i.e. they share the surpluses, but not the losses). Not surprisingly, regulators require higher levels of retained earnings and reserves for the third type. The second and third types are quite frequent today. Most mutual insurers covered in this chapter are of the third type; mutuals covered in Chapter 4.3 tend to be of the second type, with the members sharing the risks and returns.
In countries with a strong self-help and cooperative tradition, an insurance company or society can be incorporated as a cooperative. While both are self-help, self-responsibility and self-governance institutions, the difference between mutuals and cooperatives lies in the ownership structure. A mutual insurer must be owned by its policyholders. However, a cooperative insurer may be owned either by its customers or by cooperatives (second-tier institutions) that may or may not be its customers. In other aspects, such as marketing, community involvement, staff participation and welfare, mutuals and cooperatives have the same ethos. In some cases, a “cooperative” insurer will actually be a joint-stock company for the strategic or regulatory reasons discussed in Section 6 of this chapter.
Insurance companies adhering to cooperative principles have different
roots in different countries, but share some characteristics:
– Affiliation of founding members and most policyholders to social, community or professional institutions – Promotion of health, safety and loss prevention to reduce the costs of insurance – Influence over the insurance industry and policymakers in the interest of policyholders 3 The cooperative difference How are these cooperative characteristics reflected in actual operations, and
what sets the insurers apart? Here is a look at five of the cases in Table 36:
1. ServiPerú Its microinsurance product, Previsión Familiar, provides funeral and health services to low-income households. Its benefits are in kind, in the form of a service (healthcare and funeral) through ServiPerú’s own medical centre and funeral company, instead of a payment or reimbursement of expenses. This approach overcomes some of the market’s inherent aversion to insurance, permits greater control over the quality of services, and helps accommodate specific characteristics of the microinsurance market. Besides door-to-door monthly premium collection to enhance accessibility, the cooperative has a service approach that treats the poor with respect. Low-income people who are used to being treated poorly in medical clinics are extremely appreciative of the consideration provided by staff at the Servisalud.
2. Seguros La Equidad, Colombia This mainstream insurer of more than 3 million people has two specialized products covering some 30,000 low-income persons. It operates under the supervision of the Superintendent of Banks and is registered under the Cooperative Law. La Equidad distributes its surplus to its members based on their use of the insurance services, not on the basis of their capital investment.
The Cooperative Law requires that 20 per cent of any surplus be dedicated to education. In 1990, the company set up the La Equidad Foundation for the Development of Solidarity to carry out its community responsibilities in four areas: a) cooperative leaders’ training, b) cooperative education, c) publications and d) social contributions. Cooperative leaders’ training, targeting the youth, is designed to ensure that in the future the cooperatives are well administered by people with high professional skills and social values. Cooperative education is especially for board members of the organizations associated with La Equidad, focusing primarily on improving their performance.
Cooperatives and insurance: The mutual advantage 343
3. Columna, Guatemala When this insurer was created by the SACCO federation and nine member cooperatives in 1994, the board decided that any surplus generated during the first five years would be added to retained earnings rather than paid back to shareholding cooperatives as dividends. This was a difficult decision, as the cooperatives were invited to invest in the venture as a business opportunity and did not fully appreciate that an insurance company requires a lot of capital to grow. They wanted a good return. Since 1999, 50 per cent of the net surplus each year has been added to the shareholders’ capital and the other half paid to them as dividends. This arrangement has strengthened the insurer while generating returns for its cooperative owners. Columna has also involved the sponsoring cooperatives in claims processing and product development.