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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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This exceptional behaviour has little to do with business ethics and much to do with the fact that members own and govern the institution. The general assembly of the SACCO would not have condoned any other behaviour than that of seeking out the best interest of the owners. This interest implies 354 Institutional options not encouraging lapses, but preventing them, and not ignoring failed claims, but seeking them out. This duality of incentives is accentuated in poor communities where profit margins on individual policies offered by investorowned firms are very small, and where individuals have no means of enforcing contractual rights. In a mutual institution, even in poor communities, the member, as owner, is always right. The board of directors of MAFUCECTO is composed of members of the board of directors of the SACCOs (themselves members of the cooperative). Thus, throughout the governance structure, the interests of the members are protected (but see problem described under 3, on page 351).

2. Potential access to large numbers of people in a large variety of cultural and economic environments.

Often SACCO or other cooperative networks can be quite large, reaching from tens of thousands to millions of people through member co-ops.

Yeshasvini was able to reach 1.6 million clients in just a year! Furthermore, the presence of the model in every continent demonstrates its versatility in adapting to different cultural and economic environments. Owing to the large potential and “captive” customer base, insurance companies can exploit economies of scale (which was one of the main purposes of creating affiliated insurance companies), achieving break-even and becoming viable quickly.

3. Availability of risk capital for investment purposes.

Equity for the creation of insurance affiliates is from the members of SACCOs, financed either through a direct investment or by ceding capital to an apex, which in turn invests in the insurance affiliate. SACCOs tend to accumulate a surplus of liquidity and capital as they mature, particularly if they are operating in a healthy economy. Thus, these networks constitute an excellent source of risk capital to finance insurance and expand the range of services provided by the SACCOs. In eight out of the nine cases presented in Table 37 (Yeshasvini Health Care Trust, a foundation, is the exception), the start-up capital of the insurance affiliates was provided by SACCOs, with or without some external participation. On the other hand, mutuals cannot raise capital in the stock market. However, there is no restriction on joint ventures or the issue of bonds.9 9 This is a complex debate. A stand-alone mutual cannot issue stock, which limits the growth potential of mutual insurers. However, when the insurance enterprise is an affiliate of a SACCO network, its ownership structure can be adjusted to suit different financing options. Most networks have chosen not to list affiliates in the stock markets, but some have, thereby leveraging network-generated capital. Usually the network keeps a controlling share of the voting stock. Thus, joint ventures appear to be a more flexible form for leveraging capital from SACCO networks.

Cooperatives and insurance: The mutual advantage 355

4. Limited need for donor funding other than technical assistance.

In connection with the previous point, the SACCO network can often provide capital to create/acquire the insurance affiliate, provided the regulatory framework does not put the minimum capital requirements out of reach of the network. External funding in these cases may be welcome as a joint venture, especially if this comes with technical support, as was often the case with CUNA Mutual,10 but funding is not essential. However, donors can make a big difference by providing technical assistance to train staff in the complexities of managing an insurance enterprise. This has been the case of Columna, for example, where technical assistance from, and strategic partnerships with, SOCODEVI and AAC/MIS have been a key element in the company’s development, and MAFUCECTO where DID and CIF have played essentially the same role (see Chapter 5.5).

5. Investments have a development effect as income returns to the community.

Since the equity of the insurance affiliates is held by co-ops – either directly or indirectly through the apex – the funds generated by the insurance activity are eventually returned to their members. As the size of the portfolio of functional subsidiaries increases, so do the network’s assets. If these assets are managed prudently, the cash flows they generate will be used to benefit the network and its members. For example, because of regulatory restrictions, TUW SKOK cannot pay dividends to shareholders. Although some profits are remitted to the SACCOs in the form of premium refunds, the insurer has also built up sufficient capital to buy a life insurance company and thus expand the range of services to its members.

6. Access to reinsurance.

As described in Chapter 5.4, access to reinsurance is a serious constraint for many microinsurance providers. However, those that provide microinsurance through SACCO networks have the necessary know-how to access reinsurance through upstream alliances. ICMIF has played a central role in facilitating access to reinsurance for its member networks. Therefore, most mutual insurance structures are likely to have access to some reinsurance in international markets – usually, but not exclusively, with other mutual insurance firms in the world.





10 For example, in 1993, CUNA Mutual and the Foundation for Polish Credit Unions (FPCU) launched Benefit, a joint venture that provided loan protection, life savings and funeral insurance.

Along with technical assistance, CUNA Mutual provided 90 per cent of Benefit’s initial capital.

After four years of operations and moderate success, the partners decided to go their separate ways.

However, by then, the Polish credit unions were well on their way to developing the impressive portfolio of insurance products they offer today.

356 Institutional options 8 Conclusion Mutual insurance firms are ubiquitous and versatile institutions. This chapter focused on one type of mutual model, in which a network of savings and credit cooperatives creates its own insurance company (or agency, or a department of the network) to meet the insurance needs of the co-ops and their members.

The following features can be gleaned for insurers affiliated to mutual networks: i) the model appears frequently and in a wide variety of cultural and economic environments; ii) except for a few minor variations in organizational structure, often conditioned by local regulatory constraints, the examples present a constancy of operational characteristics and institutional arrangements; iii) by and large these structures work free of any subsidy; iv) institutions often have access to reinsurance, addressing a common problem for microinsurance providers; and v) while the examples are based on financial cooperatives, this model works similarly for other types of cooperatives as well.

Not only is the SACCO network model financially viable, but it is robust and potentially applicable to providing microinsurance services to poor people in a wide range of situations. Overall, the SACCO networks are versatile mechanisms for delivering various insurance products to relatively large numbers of people. However, individual structures tend to specialize in insurance products that complement the SACCOs’ savings and loans portfolios. This is one of the weaknesses of the model. Another risk is that large companies may forget their roots and behave like stock companies, losing their comparative advantage.

These conclusions suggest that this organizational form is suitable whenever there is a network of savings and loans cooperatives on which to build the insurance business. Given the potential of the model, it would make sense to exploit its strengths and minimize its limitations, for example by developing clear guidelines for business plans that include financing modes, enhancing governance arrangements (links between the network and the insurance business), creating firewalls and developing insurance products, capacity and reinsurance products, that would provide SACCOs with competitive advantages. This chapter touches on several of these points, but more work is needed in this domain.

4.2 The partner-agent model:

Challenges and opportunities Michael J. McCord1 The author would like to thank Lemmy Manje (ILO), Gaby Ramm (consultant), Jim Roth (MicroInsurance Centre) and Constantin Tsereteli (Constanta Foundation) for providing insightful

comments on this chapter.

For as long as there has been insurance, there have been agents to sell it. The agents selling “industrial insurance” at factory gates in American cities in the early 1900s made the Metropolitan Life Insurance Company the largest company – not just insurance company – in the world at that time. Industrial insurance was essentially the forerunner of today’s commercial microinsurance. The transition from collecting premiums at the factory gates to group policies significantly enhanced the cost-effectiveness of the coverage. To reach the historic target market, employers became key players in bundling premium payments for the insurer, and ultimately even providing the coverage as an employee benefit. However, for today’s microinsurance target market, workers in the informal economy, group policies have to find a new delivery channel.

Such an option emerged when microfinance institutions began to identify insurable needs among their clients, since MFIs have financial transactions with large volumes of low-income people. Some MFIs turned to insurers, offering to act as intermediaries, and thus allowing their clients efficient access to insurance products. Seeing this as a low-risk, cost-effective way to enter a new market, insurers have also shown interest, at least in terms of basic products. Thus, the partner-agent model is simply a logical extension of a business model that has been used by insurers for the past century.

This chapter reviews the challenges and opportunities of using this agency model to deliver microinsurance to low-income households efficiently. In many ways, the partner-agent model is similar to the cooperative model discussed in the previous chapter, with a regulated insurer offering products through an institutional agent. The key difference is the ownership structure of the insurance companies. Credit unions own the insurer, while with the

–  –  –

partner-agent model, the agents (frequently MFIs) are merely linked to the insurer in a contractual relationship.

The partner-agent model can be applied to different delivery channels. So far, it has most commonly been associated with MFIs, but more is being done to generate effective links with other channels such as retail shops, post offices, and even with prepaid phone cards. This chapter focuses generally on MFIs as agents and the experiences they have had with insurers. Chapter 4.6 describes partnerships between insurers and retailers as distribution agents.

1 Why a partner-agent model?

Critical components of successful microinsurance are efficient transactions and operations. If efficiency cannot be improved, the only way to reduce the premium costs to affordable levels is by reducing coverage. Providing a good product at an affordable price therefore requires efficient, yet controlled, processes. The key to efficient processes is the interface with the policyholder. This relationship defines the efficiency of sales, premium collection, information dissemination, and, in many cases, claims processing. The strength of the partner-agent model is that the agent, usually a microfinance institution, generally has an existing effective interface with the low-income market that can enhance efficiency.

Beginning as microcredit in the 1970s, microfinance became a global phenomenon in the 1990s once managers developed sufficient expertise to lend to the poor on a sustainable or profitable basis. Building on this firm foundation, managers began to express an interest in expanding their product lines.

One particularly common scenario for MFI managers was to see a client do well for the first few loan cycles, only to then fall back into financial trouble.



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