«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Other variations are possible. When a new insurance law in Peru (1993) barred cooperative institutions from offering insurance, the insurance company of the Peruvian SACCO network, SEGUROSCOOP, transformed itself into ServiPerú, a cooperative offering social services (funeral and health protection services). It transferred the insurance portfolio to a joint-stock company and created a subsidiary insurance broker to distribute products that it helps design. Taking advantage of adversity, the insurance affiliate managed to keep the same line of business despite regulatory obstructions while expanding its product line (the social security services).
More recently in Ghana, when the regulator called into question the informal risk management programme of the savings and credit cooperatives, the apex formed a joint venture with a newly registered and licensed cooperative insurer, Unique Insurance Company Limited, owned and controlled by the trade union movement. The insurer, underwriting the cooperatives’ risk management programme, lent it the required compliance while gaining a new market segment. This was essentially a partner-agent arrangement. What made it cooperative was the venture’s ownership. The insurer and the cooperative apex opted for a 50/50 sharing of the venture’s expenses as well as profits, with a joint management group overseeing the programme. The savings and credit cooperative apex had stepped out of its umbrella cooperative network, and so had the trade-union-sponsored insurer, to create a distinct, microinsurance-led network of their own.
These variations illustrate the flexibility of the cooperative network model to adapt to a diversity of economic and regulatory environments, without changing its essence. The organizational design of a particular institution will depend on the history of the SACCO network, how the affiliate 350 Institutional options was created/acquired, regulatory restrictions and opportunities available in the marketplace.
The basic organizational structure of a network, regardless of cultural or economic context, replicates the governance features of a mutual at a second level. The executive structure comprises governance (general assembly and board of directors) and regulatory (supervisory committee) bodies. The executive structure (bureau) is responsible for implementing decisions and managing the procurement and delivery of inputs to members. In these structures, individual policyholders are removed from ownership, but are often assured of a voice through a dedicated channel in the democratic control structure. For example, a policyholder advisory committee brings together representative members to receive progress reports, provide input on specific matters and review forecasts on financial results and expected patronage dividends. In addition, some cooperative and mutual insurers may allocate a seat on the board for a policyholder representative.
The analysis of the dynamics of network formation in mutual institutions
has important policy implications:
– Attempting to create mutuals without supportive network structures can lead to mediocre results. Individual SACCOs would ordinarily be unable to raise capital to create an insurance company to serve its members. Thus, unless the SACCO is part of a network, the benefits described in this chapter are unachievable.
– When mutuals are created with an integration structure that supports their development, they have the potential to become impressive market players, covering larger numbers of people and thus expanding outreach. Furthermore, these support structures improve sustainability and reduce insolvency risk. For example, TUW SKOK’s deposit insurance benefits significantly from the fact that the national association of Polish credit unions closely monitors the performance of its members and has a stabilization fund to assist SACCOs experiencing difficulties.
– Mutuals and their network structures need an appropriate legal framework.
Indeed, many SACCO networks operate in unsuitable environments that hamper the development of mutuals and their networks, such as Argentina and Uruguay where the regulatory framework led to the destruction of the networks’ structures followed by a massive reduction in market share. Many of the difficulties encountered by ServiPerú’s predecessor in the 1990s are due to the unsuitable regulatory framework that emerged in the post-crisis reforms.
Cooperatives and insurance: The mutual advantage 351 7 Advantages and disadvantages of the model This section presents the main lessons relating to the delivery of microinsurance through the cooperative model. Mutual institutions have weaknesses.
There are literally hundreds of thousands of them in the world, and so there is bound to be more than just a few failing to deliver. However, most problems are remediable, if not avoidable.
Some of the most significant problem areas are:
1. The poorest of the poor may not always benefit (but often do).
This is a classic criticism of the cooperative model. Mutual institutions are the chosen financial intermediary of a very large range of social sectors, sometimes reaching quite high up the income ladder. However, mutual institutions are also found at the bottom of society and reach hundreds of millions of people who do not have access to other financial institutions, particularly in rural areas where even the most aggressive alternative institutions are often absent. This feature in fact allows mutuals to cater for poor segments of the population without necessarily compromising their own sustainability. The frontier of their outreach is defined by their ability to activate their members’ potential to help themselves.
2. Insurance products may be too limited as they tend to be tied to credit products.
This is largely true, particularly in networks that are relatively new, with a low level of integration, or few financial, human and technical resources available (e.g. Columna, MUSCCO, MAFUCECTO). As integration and trust among co-ops develop,6 financial resources and technical expertise accumulate, allowing the network to expand the range of financial products, including insurance. The range of products offered by La Equidad, for example, rivals that of commercial insurers in Colombia (although the case study only describes those products distributed to the low-income market).
3. Leaders may be inclined to squander member capital.
There is no direct evidence of this behaviour in the case studies, with the exception of the criticism advanced in Lessons learnt the hard way (ICMIF 2005). Indeed, it is not unusual for a SACCO network to have a frail
governance structure. This results in weak control of agents (managers) at the apex and they may thus engage in expansionist practices with little regard for protection of the members’ wealth.7
4. The success of a mutual insurer is tied in with the success of the cooperative network.
This is unavoidable, since the very raison d’être of the “functional subsidiaries” is to service the network. While it is not unusual for them to develop some business activity outside the network, it usually represents only a fraction of turnover. The bulk of business tends to remain within the network. ServiPerú is a case where the microinsurance service provider survived a severe crisis of its supporting network in the early 1990s.8
5. Risks may not always be properly separated (firewalls).
This can be a severe problem that must be addressed by regulators. In the absence of appropriate supervision, there may be a temptation to mix credit and insurance risk resulting in a high likelihood of failure. MUSCCO is a case where separation is weak and it could break down under stress.
6. Entering into dangerous business uninformed.
While not specific to networks of SACCOs, this must be prevented. If the network is small, it may not be able to raise the necessary funds to acquire the required skills, such as actuarial services. Company 4 (in ICMIF 2005), a “worst practice” example, was set up as a SACCO insurer, but ended in failure. MAFUCECTO has had a bumpy history, enduring several restructurings with international support. While the solution to this problem does not lie with regulators, they can play an important role. As in the previous problem area, the regulatory framework should ensure that insurers are created after consideration of all risks and under the leadership of qualified individuals.
However, the model does have some eminent advantages:
1. Low “hold up” risk for insured individuals.
Hold-up risk refers to the possibility that a contractual party may fail to meet its obligations. Poor people are particularly vulnerable to hold-up risk 7 This is known as “expense preferences” behaviour or “agency costs”. The severity of this phenomenon in mutual institutions – largely due to the high diffusion of ownership, and at the root of most failures – is well documented in the research literature.
8 This crisis resulted in the failure of the network’s central cooperative bank, other functional subsidiaries and several of the largest S&L co-ops. It led to a fall in assets in the networks of nearly 50 per cent.
Cooperatives and insurance: The mutual advantage 353 because of low social capital and the inability to defend their rights in courts.
The fundamental difference between an insurance contract offered by a jointstock company and that offered by a mutual institution is that in the latter, the insured is also the owner of the insurance enterprise. While investorowned insurance enterprises may stop offering services, engage in discrimination and even resist honouring claims when they see fit to do so for strategic reasons, these practices are limited in a mutual institution. It is not a matter of ethics, but of basic economic incentives (see Box 68). Ownership of the insurer by the insured serves to control the insurer’s actions so that they are aligned with the interests of the members/owners.
Management of lapses and claims: The mutual differenceBox 68
To illustrate the differences in incentives, consider the dilemmas facing Delta Life, an investor-owned insurer, and MAFUCECTO (and other mutuals).
According to McCord and Churchill (2005), Delta Life has an “ambivalent attitude” to lapses. While the company is committed to social objectives, it benefits financially from lapsed policies where there is no obligation to repay the accumulated savings. Furthermore, the lapse allows the company to screen periodically the insured customer by requiring a new certificate of health. Thus, owners and staff face the contradictory objectives of profits and customer service. Under financial stress, it is likely that the balance will tilt in favour of protecting shareholder returns at the expense of customer benefits.
MAFUCECTO prevents lapses through automatic deductions from members’ accounts. So do La Equidad (by debiting the loan or savings account, or through direct wage deposits) and TUW SKOK (debits to accounts). Obviously this is an advantage associated with the model of combining savings and credit with insurance products. However, even in the absence of this link, mutuals treat lapses differently. MHOs (covered in Chapter 4.3) do not use lapses to screen clients. Lapsed members may have to enter a new waiting period, so as to prevent opportunistic behaviour by members who may seek to manage lapses strategically, but they are not rescreened. In fact, lapses in an MHO, instead of procuring a financial advantage, represent a key instability factor.
The same is true of claims management. At Delta Life, when a death occurs, the beneficiary is responsible for notifying the insurer. In the case of MAFUCECTO, the SACCOs seek out beneficiaries to inform them of their rights and help them in the preparation of claims.