«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
364 Institutional options Claims processing Since timely claims payment is critical to the credibility of the institutions (not to mention to the needs of the beneficiaries), an agreement on service standards is imperative. In some of the early experiences with the partneragent model, insurers generally insisted that they pay claims, but often with very poor results. In ASA’s experiences with Life Insurance Corporation of India (LIC), claims regularly took three months or more to be paid, and even then a number were rejected because they were unable to prove the age of the deceased (some were never issued with a birth certificate) or because some of the required documentation used a nickname rather than the official name.
Some microinsurers had a backlog of claims, with some stretching beyond a year. This is unacceptable for any microinsurance programme.
To avoid these problems, many MFIs such as ASA and Kashf in Pakistan decided to settle claims directly. This can be a sensitive issue for insurers, but where it is done, beneficiaries profit from the practice. Common among the affiliates of Opportunity International, Leftley (2005) refers to this approach as an amended agency agreement. The MFI verifies that the claim is valid and, if so, pays the claim from the premiums collected but not yet submitted to the insurer. At the end of the month, the MFI submits the net premium schedule showing the total premium collected and the total claims paid, along with all claims documentation. In the event that the insurer identifies a claim that was paid in error, then the MFI is responsible for refunding the insurance company. This issue is further described in Chapter 4.5.
If the insurer insists on paying the claims, an innovative alternative has been a settlement guarantee, whereby the insurer agrees that claims (with proper documentation presented) will be settled within two weeks or it will pay a bonus of, for example, 25 per cent. This reduces the liability of the MFI and creates an incentive for the insurer to perform efficiently. Clearly, the extra step of getting documents to the insurer for payment back through the MFI is time-consuming, and those that pay directly have an advantage with their clients as long as controls are simple, clear and effective.
While it may be possible for the MFI to pay claims for life insurance, it is more difficult for other types of cover. Even making the distinction between natural and accidental death may be difficult for the MFI’s field staff. Health insurance is even more complicated. Among a variety of other controls, VimoSEWA (India) and UMSGF (Guinea) employ doctors to participate in claims committees to assess whether clinics are providing the correct treatment and following approved protocols. Generally, health insurance claims are too onerous for agents to manage.
The partner-agent model: Challenges and opportunities 365 With a different approach to claims verification, United India Insurance Company (UIIC) worked with Shepherd, a microfinance NGO, to create a review committee to address microinsurance implementation issues and decide upon questionable claims. This committee is composed of two representatives from UIIC, two from the policyholders, and one from Shepherd.
The committee permits effective responses to claims issues and supervision of product implementation, as well as enhancing the overall control of the programme.
2.4 Implementation As with other aspects of microinsurance delivery, efficiency in implementation is critical –and this is where a partner-agent relationship can prove its worth. In principle, the MFI’s staff frequently interact with their clients. The opportunities to cross-sell insurance are thus frequent and the incremental cost of this should be almost negligible. The idea is to use existing networks and relations of an MFI agent to add another product, which theoretically should lower acquisition and transaction costs, especially when compared to using specialized insurance agents to sell individual products.
Yet the theory of implementation has not matched the reality of dealing with MFIs. The simple cross-selling approach has not been successful in many institutions, primarily because microinsurance is not the agents’ core business. Typically, savings and credit are the core business of an MFI. Insurance may support the core business, for example by mitigating the credit risk of the agent as well as its clients, but when delinquency problems arise, there is little effort to market insurance. As the loan portfolio is the key asset and income generator for most MFIs, it is logical that when it is threatened, the attention of management and staff will shift to address this problem. This point is true of other delivery channels also and illustrates an important hurdle for advancing microinsurance. Offering microinsurance efficiently through other organizations will always result in second class treatment for such products compared to the delivery channel’s core business.
Even when things are going well, some potential microinsurance agents have no interest in insurance because core business growth takes up all available resources. ProCredit Bank in the Ukraine, for example, was marginally interested in microinsurance and began testing a partnership with a local insurance company. Before the test was even concluded, it became clear that, due to phenomenal growth in its core business, management would not divert its attention to a non-core product.
366 Institutional options The expectation that microinsurance could be seamlessly implemented into an MFI with essentially no additional cost has proved overly optimistic.
Several institutions have recognized the need to have someone within the agent institution to liaise between the insurer and the MFI. In some cases, the agent allocates someone to manage the relationship from its side, to oversee training, manage the reporting and communications with the insurers, answer questions from staff and generally act as the insurance product manager. In some cases, as with GLICO, the insurer will actually place one of its agents with the MFI to ensure proper sales and service.
The expectation that an MFI’s staff will cross-sell insurance has generally not been satisfied either. Demand and customer satisfaction studies have shown that microfinance clients often have little understanding of the insurance products they have purchased. This is especially true of mandatory products. When a product is mandatory, field staff see little reason to promote or even discuss the microinsurance product.
Commitment to keeping clients knowledgeable and informed is necessary for success in microinsurance. Without such a commitment, policyholders only see insurance as an additional cost to borrowing for mandatory products and voluntary products are likely to experience low renewal rates.
2.5 Financial arrangements with the agent Although MFI agents have generally limited their microinsurance offerings to products that directly relate to their loan portfolio protection needs, they also rightly expect a direct financial benefit from selling insurance for an
insurer. Three remuneration methods were identified in the case studies:
1. Commissions paid to the agent as a percentage of the premiums collected
2. Profit sharing with variable income/loss potential
3. Premium mark-ups where the MFI agent adds an additional amount to the premium charged by the insurer Commission-based remuneration The most common way for MFI agents to earn income from insurance is through commissions, which typically range from 5 to 20 per cent of premiums paid. Some of the more professional MFI agents track the costs of selling and servicing microinsurance products. It is critical for the agent to understand its insurance-related cost structure and to ascertain if it is at least breaking even on the activity. Some MFI managers argue that, because the activities are added to the existing infrastructure and delivered concurrently with credit or savings products, insurance effectively generates no additional cost.
The partner-agent model: Challenges and opportunities 367
Profit-sharing The second remuneration approach, profit-sharing, is a means of sharing the risks and profits to generate a potentially greater income (or loss) for the MFI agent. This method places some of the risk of insurance with the institutional agent. Typically, this potential liability is capped at the amount of premiums paid, so the MFI agent might possibly lose its investment in the costs of selling and servicing the products, but any additional loss is borne by the insurer.
Madison Insurance works with four institutional agents in Zambia. Three are paid a guaranteed commission of 10 per cent of premiums, while the fourth, Pulse Holdings, is paid on a profit- (and risk-) sharing basis. Table 40 shows some key results from the four MFIs.
In this case, the profit-sharing arrangement calls for Madison to pay the claims from the premium pool and then retain 35 per cent of the net premiums (after claims) to cover its costs. Any balance is then shared equally between the insurer and the MFI. This arrangement provided a greater return for Pulse Holdings over the two years – 16.6 per cent for 2003 and 18 per cent for 2004 – than the guaranteed 10 per cent return for the others, even though Pulse had a dramatically higher claims ratio. It is important to recognize that with a profit- and risk-sharing mechanism, the return could be zero. However, it appears that Pulse, and Madison itself, are protected by excessively high premiums. The claims ratio for Pulse in 2005, for example, would have had to be over 70 per cent for Pulse to make only the 10 per cent that the others earned. With the average aggregate claims ratio for the commission-based agents at only 16 per cent, it is clear that this product is seriously over-priced.5 Premium mark-ups The third option is premium mark-ups, such as those used by many MFIs in Uganda which impose a surcharge of up to 100 per cent on the premium. In other words, if the insurance cover costs 0.5 per cent of the loan amount, the MFI charges 1 per cent and keeps the other 0.5 per cent. In the case of AIG Uganda, the insurer does not pay any commission to the MFIs, but it does pay a 20 per cent commission to its own insurance agent. This results in an unconscionable level of administrative costs and premium levels, which are multiples of what would be reasonable. Additionally, it is likely that such mark-ups are illegal in countries where the insurance authorities officially approve premiums.
In the Philippines, Opportunity International steered its MFI affiliates towards this mark-up approach after it learned that it was common practice to increase the premium rate significantly if a commission is paid to the intermediary. For example, if a 20 per cent commission is required to cover the MFI’s costs, then it is common for the net rate without commission to be increased by over 100 per cent. On the basis of this observation, it was agreed that MFIs would pay the net rate to the insurer and receive no commission, but would instead load the rate charged to the clients with an administration fee. This resulted in a cheaper end-solution for the organizations’ clients.
2.6 Conclusion In implementing the partner-agent model, there are several areas of concern that should be worked out before the product is offered to potential policyholders. Each party must understand its role, and the roles should be allocated on the basis of where each institution’s comparative advantage lies. In developing the product and negotiating with the insurer, the MFI agent has a dual role: it must ensure that its own institutional requirements are met in terms of distribution, cost cover, and capacity requirements, but it must at the same time represent its clients and their needs. In some cases, especially in Asia, MFIs have done commendable work in representing their clients’ needs and negotiating products that respond to those needs. In most cases however, MFIs appear too focused on their portfolios and on generating significant earnings, resulting in products that neither reflect their clients’ needs, nor offer them real value.
3 The good and the bad The partner-agent model has not been for everyone. Many find that it fits their needs. Some, like VimaSEWA and ASA, began with the partner-agent model, moved to self-insurance, and then back to the partner-agent model.