«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
4. TUW SKOK, Poland This mutual insurer’s mission is to identify the insurance needs of its members – cooperative savings and credit unions and their members – and provide high- quality insurance products which meet such needs. TUW SKOK provides credit unions with deposit insurance and loan protection, fidelity bonding, and coverage for robbery and fire; the insurer also provides credit union members with a number of personal insurance products. Deposit insurance offered by an apex affiliate is an unusual arrangement, partly due to the regulatory environment found in Poland. SACCOs are required to buy deposit insurance from TUW SKOK, which gives the insurer a guaranteed stream of premiums with no acquisition costs. Most credit unions also source other corporate policies from the insurer. As a mutual insurance company, TUW SKOK is not allowed to declare dividends. Surpluses are generally used to build up capital and reserves, but are sometimes remitted to credit unions in the form of premium refunds. In 2003, for example, TUW SKOK’s board of directors, on behalf of its owners, decided to refund deposit insurance premiums to credit unions that had recorded satisfactory claims experience over the previous three years.
5. MUSSCO, Malawi SACCOs were promoted by the church and government in Malawi in the 1970s to serve people ignored by commercial banks. In 1980, a national association, MUSCCO, was formed to provide support services to them, including mandatory loan protection and life savings schemes. Both of these are credit-union-pay products, which makes MUSCCO’s system for premium collection effective. The premium for all eligible loans and savings balances for the 55,000 members is paid by the SACCOs quarterly in advance.
344 Institutional options Though credit-union-pay products like these overcome one of the most significant challenges of microinsurance – collecting premiums from lowincome people – MUSCCO has found that, in practice, collecting from even 57 corporate customers can be difficult. Only a third of the SACCOs can be described as disciplined customers; considerable time and effort has to be expended on chasing the remainder for payment. However, the insurance contract does provide for benefit payments to be withheld until the premium is paid.
4 Insurance development models and stages The cooperative model of insurance actually involves different institutional and regulatory arrangements. Based on the experience in a variety of countries, Reinmuth et al. (1990) describe an institutional development plan in which the insurance services offered through the network to the SACCOs and their members become increasingly formal and complex over time, as the organization builds up capacity and human and financial resources. They describe three institutional options: the agency model, the risk-bearing department and an insurance company, which often represent different stages of institutional development for insurers serving SACCO networks.
4.1 The agency model The SACCOs’ national federation or affiliated organization could create an insurance agency that it owns and controls. The agency retails insurance products, which are provided by a local underwriter (i.e. a risk-bearing insurance company) or several underwriters. The agency provides services to members in its name and is paid a commission by the underwriter. The principal advantage of the agency model is that the federation does not bear any risk. An example is the NUCS (National Union of Cooperative Societies) Cooperative Insurance Services launched in Jamaica in 1984 with share capital provided by the Jamaica Cooperative Credit Union League.
4.2 Risk-bearing department With experience as an agent for other insurers, it may make sense for the national federation to set up a department of its own to provide a group insurance scheme through member cooperatives. This step requires more capable staff, greater capital, cooperation with a reinsurer and, of course, acceptance of a degree of risk. However, with the risk comes the potential reward of a greater return. An example was the Mutual Protection Service of Cooperatives and insurance: The mutual advantage 345 FENACOAC, the national SACCO federation in Guatemala. This riskbearing department offered covers for loan protection, life savings, funeral expenses, group life for directors and employees, family life, and fidelity bonding and theft insurance. The department was the precursor of Columna.
MUSCCO’s insurance scheme is currently structured in this way.
4.3 Insurance company The services offered through a risk-bearing department tend to be quite basic. As the needs of SACCOs and their members evolve, however, they will probably require more complex coverage that can only be offered through a regulated insurance company. With an abiding commitment, financial means and realistic prospects of picking up business readily, a national federation may formalize this department by creating a fully fledged insurance company that meets all legal requirements, including minimum capital and approval of the superintendent of insurance.
For example, ALMAO’s origins are linked to the insurance department of the Sanasa movement and an insurance brokerage set up to serve the needs of the Sanasa societies and their members. Without donor support, the movement was able to mobilize sufficient funds and expertise to create a life insurance company in 2002 and a general insurance company in 2005.
5 Insurance products offered under the cooperative network model Mutual insurers offer practically every possible insurance product, but most of these multi-line insurers, like ICMIF members, do not focus on the lowincome market. Specific networks of mutuals serving the poor tend to offer only a few or perhaps even a single product. At that end of the spectrum, mutual health organizations (MHOs) specialize in health insurance, while at the other extreme, some mutuals may offer a product menu resembling that of an investor-owned insurance company.
In general, the range of products being offered to the low-income market through SACCOs is limited. The original intention of SACCO networks for creating insurance affiliates was to complement the range of financial services they offer, namely savings and loans. This implies that loan protection, or credit life (ensuring that “the debt dies with the debtor”), is almost always offered under this model (see Table 2). This product serves the risk needs of both individual members and the SACCOs themselves. Life savings coverage is another key product offered by SACCOs because it too corresponds with the co-ops’ core services.
346 Institutional options Another reason why the microinsurance product menu of some SACCO network insurers is limited is that these schemes were often seeded and supported by technical assistance providers, including CUNA Mutual, that chose to promote very basic and simple coverage. This choice made sense, particularly given the limited development of the SACCOs’ networks. In addition, offering the same basic products everywhere was an efficient replication strategy. Where the networks and its insurance affiliates have been able to build up the capacity to do more, such as in Colombia and Poland, the basic products serve as a foundation for more useful covers; whereas in Malawi, where capacity remains limited, the network has stayed with the basic package.
The evolution expanding the line of insurance services is important not just because the insurer is addressing a variety of different needs, but also because it can improve the relationship between the insurer and its distribution network. An interesting distinction exists in the cooperative insurance model between cover that is paid for by the SACCOs and member-pay products. Although SACCO-pay products such as loan protection and life savings are an extremely efficient way of providing protection to low-income households, some SACCOs come to see the premium as an expense that they would prefer not to pay – which may partly explain why many SACCOs in Malawi have delinquent premiums. Consequently, it is important for insurers to consider introducing member-pay products that can generate commission income for the SACCOs, which enhances the alignment between the interests of the insurer and the distribution channel.
The alignment of interests is particularly effective when the member-pay product supports a savings or credit product provided by the SACCO, such as the savings completion insurance provided by TUW SKOK (see Chapter 2.2). Not only does the SACCO earn income from insurance sales, but the insurance feature helps to market the savings product. In contrast, the only example of endowment products offered by the cooperative network model is ALMAO, and it is not particularly successful with these products. One explanation for the lack of success is that, with such a product, the insurer is essentially competing with the SACCOs for the members’ savings – a conflict of interests rather than an alignment.
A particular feature of the mutual model is the ongoing dialogue between the insurer and its distribution channels, which are also (often) its owners.
For example, Columna performs annual reviews of insurance sales by the SACCOs that provide an occasion for dialogue about new products and changes that could be introduced. Offering a variety of insurance products has a number of advantages for SACCOs: it encourages the cross-use of Cooperatives and insurance: The mutual advantage 347 products, increases fidelity and generates commission revenues (if it is a client-pay product for which the SACCO acts as a sales agent).
Insurance products offered by SACCO networks Table 37
6 Why mutuals develop networks and how they work Most mutual financial intermediaries (deposit or insurance) are associated with a macro or inter-mutual organization. Often they organize complex alliances capable of offering a range of financial products. These alliances are institutional devices to control the market risk facing the mutuals’ members.
Inter-mutual alliances are so vital that they may serve anywhere between a few thousand to a few million members and offer a surprisingly rich range of financial services. The size is very important for (i) the performance one can expect in terms of outreach and sustainability and (ii) the role of the legal and regulatory framework for inter-mutual alliances. Countries with large, successful networks are typically places with a supportive legal and regulatory environment.
Mutuals create alliances and form collectives (also called federations, unions, etc.) to give members a greater voice in and control over the uncertainty associated with accessing services. Without this collective effort, the members have limited bargaining power with suppliers, leaving them to face expensive and low-quality products and the risk of opportunistic behaviour on the part of the suppliers. Thus, they create a “supply alliance”.
Figure 24 provides an illustration of the institutional structure (where “S” represents a SACCO). The members of the cooperatives are owners of the entire structure. The cooperatives in turn form a federation to manage the pooling of resources and procurement of inputs required by the network. To accomplish this, the apex creates functional subsidiaries, such as an insurance company, designed to create products and services for members that are 348 Institutional options
The use of joint-stock ownership is becoming increasingly popular (e.g.
ALMAO, Columna). In fact, many “mutual” and “cooperative” insurance companies actually have joint-stock ownership, but are referred to as mutuals because their ultimate owners are not individual investors but mutual institutions. The joint-stock form is appealing because of its flexibility in raising capital and for engaging in mergers, acquisitions and joint ventures.
These transactions are all useful in expanding the range of products offered to members if the need arises. Also, the joint-stock option is sometimes the only ownership structure the regulatory framework allows (for example in Peru and, ironically, in China and Russia). The risk is that, as these companies grow, they may forget their roots and behave like normal stock companies. In doing so, they risk the loss of their comparative advantages of proximity and putting members/clients first. This sometimes poses a challenge in terms of governance and ensuring that the insurer remains committed to serving the specific needs of the SACCO network members.