«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Research showed that when clients were having difficulty repaying their loans, it was often because of idiosyncratic financial risks such as a death or illness in the family. For organizations that used group-lending methodologies, a personal crisis affecting one member could undermine the cohesion of the group and contaminate the quality of several loans.
Several MFI managers recognized that insurance might reduce the impact of these problems. Some MFIs focused on protecting their portfolio through insurance; others also wanted to aid their clients and their families in difficult times. The decision then was to find a mechanism to insure their clients without distracting management and staff from their core products.
While some organizations decided to self-insure, for most, the choice was easy: turn to commercial insurers who already have mechanisms to address The partner-agent model: Challenges and opportunities 359 these issues.2 As many have found since, this model is usually the simplest, cheapest and quickest way for an MFI to start offering risk-management services outside traditional credit and savings products to its clients. As a bonus, this can be done with little additional risk for the MFI. An expanded product line, a source of fee-based income, protection for the MFI and its clients, little risk and virtually no financial input – how could it get any better?
Insurers in these arrangements get instant access to potentially tens, even hundreds of thousands of low-income policyholders, usually through a single group policy. Though some were reluctant at first, in many places insurers now actually compete to serve MFIs and their clients. Indeed, when Compartamos in Mexico was looking for an insurance partner, its three finalists were all major international insurers who fought hard for the business.
This model is also beneficial for low-income policyholders. They gain access to professionally-managed insurance products, to which they would otherwise have had very limited access. For clients of large MFIs, sheer numbers should allow the clients some control over product design, and the premiums should be more favourable. Finally, if there are disputes, the MFI is there to support them, rather than the low-income policyholders having to pursue the insurer to enforce the policy coverage.
This model clearly has the potential to be beneficial to all parties and can indeed provide a win-win-win situation. However, in many partnerships, there are still issues that need to be addressed to optimize the benefits for all parties, especially clients. Indeed, there are situations where clients could gain far more from this model, yet it is insurers and agents that are benefiting.
The next sections will look at how the model is implemented and where some of the problems with it lie.
2 How the partner-agent model works
2.1 Selecting the partner Unlike traditional agents, who are provided with a set of products developed by the insurer to sell to the unsuspecting public, MFIs have usually identified a need among their clients, translated that into a prototype insurance product, and approached insurers. The product concept often proposed to insurers includes a price range that clients would be willing to pay, and insurers are left to review the possibility of offering the product.
The bidding process used by CARE in Ghana (as in Box 69) has proved to be an effective way for an MFI to get the product that it wants under the 2 See Chapter 4.7 for a summary of the advantages and disadvantages of self-insurance for MFIs.
360 Institutional options most appropriate conditions. ASA in India also used the tender method, and sought insurers that would allow ASA to conduct the claims verification and pay clients directly, since the MFI had experienced significant problems with late and rejected claims with previous insurance partners. It sent out an invitation letter to a dozen insurance companies and received bids from almost all of them, perhaps because the letter said, in bold, “we have about 45,000 clients”. Interestingly, ASA chose to work with three insurers with nearly identical products, each covering a different geographical area. Although managing the three relationships involved more work, ASA preferred this solution because it created competition among the insurers. If one was underperforming, the MFI could seamlessly phase it out and transfer those clients to one of its other insurance partners.
Selling an insurance concept in GhanaBox 69
CARE conducted supply and demand research into offering microinsurance through rural banks in Ghana. It then brought all interested rural banks and insurers together for a one-day workshop to explain the results and the product concept itself. After this, CARE sent a tender offer out to all insurers.
The interested insurers responded with their premium rates for the products demanded (as well as other specific requirements). CARE then used an assessment grid to select their ultimate choice – Gemini Life Insurance of Ghana (GLICO). The process generated much interest from the insurers – 12 insurers and brokers attended the original meeting and eight submitted responses to the tender offers – and certainly provided better results for CARE.
Source: Adapted from McCord, 2004.
Designing the product and the processes in this manner helped CARE and ASA obtain just what they wanted. Since their product concept directly reflected their clients’ needs, the clients were well served.
Many have argued that insurers will not accept a product concept that is developed by an institutional agent like an MFI. Certainly there are some insurers that are not interested in microfinance institutions or low-income clients, but these represent a minority. The experience of many MFIs has shown that if an insurance company is presented with compelling market research and an argument based on a sound understanding of insurance, then a specialized product will be accepted. Of course, the insurer evaluates and sets the premium, and may adjust the product to address specific institutional issues, but ultimately the product must respond to market demand as The partner-agent model: Challenges and opportunities 361 represented by the agent. This is a common mode of operation for insurers working with insurance brokers.
2.2 Selecting the agent Five years ago, the most common way for these relationships to emerge was for an MFI to approach insurers with a product concept. Today, however, some insurance companies are recognizing that this is a market that can be served, and they have proactively sought out potential delivery channels, including MFIs and other organizations that have financial transactions with the low-income market.
For insurers, finding an appropriate agent is also critical to success. Since the agent is the face of the product, its role in convincing prospective policyholders to purchase insurance is pivotal. Poor selection of agents can lead to serious delays in growth, bad public perception and dramatically higher costs.
Insurers want delivery channels with many clients, potential for growth, a strong reputation for customer satisfaction and a commitment to insurance at the board and management levels. Partnerships are more successful if the agent has a computerized MIS and a strong training function. Certainly, insurers are happiest when they can offer group products through one master policy for the institutional agent such as an MFI, a labour union or other large group of low-income people, and when the product is mandatory.
When initiating the search for an appropriate agent, the insurer must remember that its own ability to recognize poor households as a separate market requiring distinct products is crucial to success. Insurers need to be willing to alter their standard products – or better still, develop new products from scratch – to suit the characteristics of the low-income market.
In some jurisdictions, insurance agents need to be licensed; in some cases, agents cannot be organizations, but must be individuals. The licensing process may involve a certain number of hours of training and/or passing an exam.
These requirements are often not conducive to officially registering an MFI or selected staff members as agents, and therefore an appropriate means of complying with insurance regulations needs to be explored (see Chapter 5.2).
smoother working relationship and form the foundation for governing relationships.
In developing the agreement, each party must understand the various components of insurance delivery and agree on where the responsibilities lie.
Some of the elements clearly fall to one party or the other. Regulatory reporting lies with the insurer, just as premium collection lies with the agent MFI. Other elements might not be as clear. Key responsibilities that must be addressed within an agreement are described below.3 Underwriting To maximize the efficiencies of this model, underwriting is typically carried out in the course of the claims verification process. In this case, a sort of underwriting takes place simply by virtue of a policyholder’s ability to conform to the policies and requirements of the organization through which it purchases the insurance. For example, AIG Uganda takes every policyholder provided by the MFIs. There are no restrictions to entry other than the ability of a person to join one of the many MFIs in Uganda. One of the main advantages for insurers to collaborate with an MFI, as opposed to an organization that does not lend, is that its credit screening can be a substitute for life insurance underwriting. Chapter 3.4 discusses in more detail the importance of shifting underwriting from the initial application phase to the claims end of the process.
Staff training Generally, the agent’s frontline staff members require training in insurance principles, insurance marketing and the details of the particular product. This training can be provided directly by the insurer. Alternatively, the insurer can help develop the training materials for the MFI’s training staff to deliver. La Equidad in Colombia, for example, has developed a special programme to train the credit analysts of its agent Women’s World Foundation (WWF).
WWF invests an average of two days on insurance out of 45 days of training for new credit analysts using the programme designed by La Equidad. Other staff need training and guidance on such issues as scheme administration and MIS applications.
Premium collection and remittance As highlighted in Box 70, the premium collection process is extremely detailed. This process must be documented so that each party is clear on the 3 A comprehensive list of insurance activities that should be part of a partner-agent agreement can be found in Churchill et al., 2003.
The partner-agent model: Challenges and opportunities 363 timing and its role in the process. Efficiency is critical. Since MFIs already have financial transactions with their clients, it is relatively easy for them to collect premiums as part of loan payments or from policyholder savings.
Partner-agent premium collection checklist Box 70
The exchange of policyholder information relating to premium payments must also be carefully assessed. What information is really needed by the insurer relating to premium payments? AIG Uganda, for example, requires MFIs to pay aggregate premiums on a monthly basis – which is efficient – but the payment must be accompanied by a physical list of all those covered under the group policy. One MFI submitted close to a ream of paper each month to satisfy this requirement. This process requires significant effort, supplies and even storage space. It is clearly not efficient.
Alternatively, Aldagi in Georgia, with its MFI agent Constanta Foundation, uses an electronic system that downloads relevant data automatically on a daily basis. There is virtually no human intervention in this process. Other MFIs with savings capabilities, like K-Rep Bank in Kenya and the rural banks of Ghana, require the insurer to retain the premiums in an account in their banks. This simple arrangement assists the microfinance banks with liquidity management.
Any partner-agent agreement should ensure that as much as possible is done electronically. The use of computers and electronic communications is an important way to reduce the cost and effort of managing microinsurance, as well as of collecting the necessary client demographic data.