«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
However, clients’ trust in the organization that carries out the actual sales process is of even greater importance, and while insurance companies lack this relationship of trust, agents (in the form of local organizations like NGOs) usually have more respectability and thus ability to reach potential clients. Community-based schemes, as their name implies, are in constant contact with their members and are likely to have far greater levels of trust and access to them than many other organizations. As a result, the cost of informing members about the benefits of health insurance decreases, and the likelihood of a sale increases.
2.3 Product servicing: Managing the flow of information On the whole, the interests of the different insurers are aligned in the servicing area. All would like an efficient system that would keep costs down and reduce fraud. A cashless system is usually best for achieving these goals, and has the added advantage for the insured of not having to advance money to get treatment. In the partner-agent and community-based model, a cashless system has the additional benefit of enabling the risk carrier to negotiate with healthcare suppliers to bring costs down. Not surprisingly, this negotiation does not take place in the provider-driven model, which effectively limits competition and could result in higher prices or lower service quality.
Institutional options for delivering health microinsurance 419 However, many insurance companies are unable or unwilling to negotiate and set up a relationship with a tight network of rural doctors or hospitals as they find it difficult to control the appropriateness of services rendered and claims filed. To obtain the information they require for verifying a claim without having to negotiate with an additional party (the provider), some insurance companies settle claims on a reimbursement basis only. This arrangement places a heavy burden on poor households. Due to complicated and inappropriate paper work, exclusions, and procedures required by the insurance companies, reimbursement is often delayed, sometimes for months.
Provider-driven insurers, community-based schemes and most charitable insurers are better placed in this respect. Due to their local presence, they can offer benefits in kind more easily – especially in a provider scheme. Their claim verification process is usually better adapted to local circumstances as well. This helps to keep clients satisfied and thus results in higher renewal rates and increased willingness to pay, and probably promotes equity.
2.4 Securing long-term sustainability Just as the insured pay little attention to probabilities, they also tend to discount other technical aspects related to the provision of insurance, such as the need to pool risks (law of large numbers), the need to invest for the future, or the effects of a particularly high claim load in a current year on premiums (or even insurance availability altogether) for a future year.
Nonetheless, the insured expect the insurance provider to meet all its liabilities and constantly reduce their losses.
This conflict poses considerable difficulties for all insurers, but it is a particular challenge for community-based schemes for two main reasons. Firstly, members are likely to exercise greater control over scheme decisions in a community-based model than in any other model. Therefore, in a year with relatively few claims, members might attempt to force the scheme to redistribute unused reserves or to increase benefits, which would pose a danger for long-term sustainability. Secondly, community-based schemes might not have the risk management expertise on hand, and are more likely to assess the actuarial risk incorrectly. While reinsurance can help resolve both of these problems, the fact remains that a stand-alone community-based model is likely to be most vulnerable as regards long-term sustainability (besides the charitable model which relies on indefinite subsidies).
3 Conclusion This chapter reviews a basic typology of health microinsurance providers based on an examination of their primary motives and underlying business processes. One interesting issue can be highlighted by asking a simple question: whose interest is served if an insured (client) claims benefits? Obviously, the individual claiming can be assumed to gain, but what about the different insurance providers?
It can be argued that charitable organizations, and to an extent providerdriven organizations, would see a utilization of health services as a positive outcome. However, under the partner-agent model, the partner would have an incentive to discourage claims (ideally through good health, although complex claim requirements could be an alternative). Indeed, in schemes where insureds only receive benefits if they are sick (or rather, when they claim successfully), the incentive structure could be seen as encouraging false or unnecessary claims. The partner-agent is the primary example of this incentive conflict, and this additional risk therefore needs to be considered when designing business processes.
Other models would also, from an insurance business perspective, prefer to have fewer individuals claiming, but (and this is an important nuance) the primary focus would be on the good health of the clients, at least in theory.
In practice, in community-based schemes, more powerful members may try to exert influence on the benefit package design or try to persuade other members not to claim in order to keep claim costs low. Inequalities in the social structure of communities have to be closely examined and taken into account.
Another important point is whether the scheme operates under a forprofit or non-profit paradigm. In the provider-driven model, for example, if the hospital is running a for-profit scheme, then it would share many of the characteristics of the partner-agent model and would have an interest in fewer claims and more profits. However, if the provider is running a nonprofit insurance scheme, whereby surpluses remain within the scheme, then it would have an interest in increasing utilization, which would in turn increase consumption of its own health services (and thereby its “profitability”), up to a certain level of utilization. Once demand for services exceeds the provider’s capacity, it would also have an incentive to reduce consumption, usually through a long waiting period for insured events (which may be shortened or eliminated in cases where the insured is willing to pay extra for the service).
Institutional options for delivering health microinsurance 423 The community-based model reverses this incentive structure by keeping the unclaimed sums at the disposal of the group. Furthermore, through judicious use of social capital (particularly through peer monitoring in member selection and claims processing), the community-based model reduces adverse selection and moral hazard – but only if it is truly participatory and members take over ownership. Therefore, if its long-term sustainability can be assured, it seems that the community-based model has a number of advantages in health microinsurance provision, as it has better information on (and contact with) its clients, far less scope for conflicts of interest, and better mechanisms to mitigate adverse selection and moral hazard.
It would be naive to assume that one model combines all advantages and no disadvantages. All models need to learn from each other to achieve an optimal business process. The partner-agent-model, for instance, is strengthened considerably when it integrates features of the community-based scheme, such as involving the target group in designing the benefit package, or introducing a profit-sharing arrangement in good years. In a similar vein, the community-based model can learn from professional insurers, notably on how to resolve technical and sustainability problems (including access to reinsurance, which would not only add to financial stability, but can help in acquiring the technical resources necessary for running a viable business).
Health microinsurance is a different animal from insurance for the formal sector, and what works well for high-net-worth clients is not easily replicable for informal and rural communities. While health microinsurance holds much promise, the question of appropriate institutional options and channels for its delivery will need to be looked at closely by academics and practitioners. If this question is overlooked, then the very concept of health microinsurance could be tainted as inefficient due to inadequate provision models.
4.5 Beyond MFIs and community-based models:
Institutional alternatives Richard Leftley and James Roth1 The authors wish to thank Vijay Athreye (Tata-AIG), Doubell Chamberlain (Genesis) and Jeremy Leach (FinMark Trust) for their useful comments and suggestions.
For the most part, insurance for the low-income market is a high-volume, low-premium business. There are instances where microinsurance clients are more concerned about quality than price, for example funeral insurance in South Africa, but on the whole the low-income market is deeply price-sensitive. Keeping costs low is therefore a necessary requirement to attract customers and make the business sustainable.
As discussed in the previous chapters, in many circumstances the partneragent, the cooperative or the community-based models will provide suitable solutions. The partner-agent and co-op models build on established distribution networks (e.g. an MFI or credit union) that already provide financial services to the poor, so insurance is simply added to an existing channel for a marginal cost. With the community-based model, which is managed by the policyholders themselves, costs are minimized by the reliance on volunteer labour and leveraging social capital to control insurance risks. These are not, however, the only microinsurance models.
This chapter explores other institutional options for the provision of insurance to the poor. In an insurance structure, someone has to 1) carry the risk, 2) administer the product and 3) handle the distribution (see Figure 31).
These functions could all be performed by one organization (e.g. the direct sales approach at Delta Life in Bangladesh), or they each could be managed by different organizations, or some combination of the above. By using this framework to break provision down into three definable segments – risk carrier, administrator and distributor – this chapter considers the range of alternative arrangements for providing microinsurance. The chapter looks at where the various options are appropriate and how they would decrease cost and/or enhance the product quality.
have tried self-insurance, but have ultimately reverted to the partner-agent approach, including SEWA and ASA in India.
Self-insurance is often outside the legal framework. While many insurance supervisors are willing to look the other way, the schemes usually operate in a grey area, vulnerable to political changes. Most self-insurers do not have access to the actuarial expertise required to calculate premiums or reserves. As unregulated insurers, these organizations are unable to purchase reinsurance to reduce their potential losses in the event of catastrophes.
Indeed, as discussed in Chapter 4.7, if organizations want to self-insure, one of the preconditions will be some way of dealing with covariant risks other than just excluding them.
Self-insuring organizations often offer poorly priced products that either provide poor value for money to clients or lose money for the organization selling it. Organizations that do manage to calculate a rate that generates a profit are often unable to avoid the temptation of raiding the pot at the end of the financial year. The result is that no reserve is built up for “incurred but not reported” (IBNR) losses or to cover potential future losses arising from catastrophes, such as natural disasters or disease epidemics.