«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Reserves are particularly important for organizations that are unable to secure reinsurance. Even if reinsurance is available to an informal self-insurer, reserves are still needed because reinsurers will not offer coverage that guarantees a breakeven or profit. If the reinsurance is placed on a proportional basis (e.g. quota share or surplus treaty), then the treaty will be arranged so as to leave the primary risk carrier with some retained risk; otherwise a moral hazard problem arises whereby the primary insurer has no motivation to ensure the quality of the business or validity of claims. If the reinsurance is placed on a non-proportional basis (e.g. excess of loss treaty), then reserves will be required to cover the retention as well as the losses that exceed the treaty (see Chapter 5.4 for more details on reinsurance).4 1.2 Protected cell company The self-insuring option has some significant limitations; but there will be instances where a required product is simply not available from a regulated risk carrier.
Beyond MFIs and community-based models: Institutional alternatives 427 service is deemed to be lower than what the market expects, then a protected cell company (PCC) could be a viable option.
A PCC transacts insurance using the host insurance company’s capital and regulatory status. Policies are issued in the name of the insurance company. The contract drawn up between the host insurance company and the PCC’s owner stipulates, among other things, that a management fee will be paid to the host by the owner as a “rental” for the licence required to transact insurance.
The PCC’s owner is entitled to determine the terms and conditions of the insurance products that are provided to its clients. The owner can determine the pricing of any product as well as the service standard, for example the speed of claims payment. At the end of the year, any profit or loss is the responsibility of the owner. If the products are incorrectly priced then the protected cell company would end up having to fund the loss. In most cases, the host would help the owner to purchase stop-loss reinsurance so as to limit the financial cost of any underwriting loss.
To date there has been very limited evidence of microinsurers using PCCs as a method of carrying risk (see Box 81 for an example of an aborted attempt).
Zambuko Trust, ZimbabweBox 81
In April 2003, Zambuko Trust, a microfinance NGO in Zimbabwe, was seeking to develop a funeral insurance product with technical assistance from Opportunity International. The customer-needs analysis showed that clients expected claims to be paid within 24 hours. This requirement had arisen because many clients participate in informal burial societies, which often pay claims within hours.
While a range of regulated insurance companies were willing to provide a suitable funeral product for Zambuko’s clients; none of them could pay claims so quickly. The management of Zambuko believed that in order to compete with informal providers, claims payment within 24 hours was an essential product feature. The only alternative was to seek to gain control over the product and hence the service provided to clients.
After some negotiation, one insurance company was willing to host a “protected cell company” owned and managed by Zambuko Trust. Ultimately, however, the management of Zambuko decided that due to the economic situation and rapid inflation in Zimbabwe, pricing of the insurance products would be difficult and the risks associated with the venture were too high, so the initiative never got off the ground.
Source: Adapted from Leftley, 2005.
428 Institutional options The protective cell company is essentially a legal way of self-insuring. By writing policies on an insurer’s licence, it is also possible to tap into the expertise of a friendly insurance company that may assist in establishing reinsurance cover. Like self-insurance, the most significant downside is that any underwriting loss must be funded by the PCC’s owner. In addition, the owner must have access to insurance expertise on a regular basis to manage the PCC and establish suitable products and rates. Another disadvantage is that it may be difficult to set up unless the owner has a close and trusting relationship with a prospective host. Furthermore, if the product to be sold is already available from the insurance company then there will be little incentive for it to offer a PCC structure as it would be more profitable for the insurance company to utilize the owner as a distribution channel and carry the risk itself (i.e. the partner-agent model).
2 Administrative alternatives Typically the work load associated with the administration of insurance products can be broken down into two key stages: firstly, there is policy formation, where the client completes an application form and pays a premium and secondly, there is a claims process where details of a loss need to be recorded and the benefit paid to the claimant.
The procedures relating to premium collection (Chapter 3.3) and claims administration (Chapter 3.4) are covered elsewhere in this book; this section considers two alternatives for conducting this administration: amended agency agreements and third-party administrators. By way of comparison, it is broadly true that for those operating according to the partner-agent model, policy formation and premium collection are carried out by the agent (such as an MFI), and the claims administration is performed jointly, with the agent collecting the claims documentation and the partner (insurance carrier) verifying and paying the claim.
2.1 Amended agency agreements A crucial element of an insurance product for a low-income policyholder is the speed at which claims are paid. In the partner-agent model, while the agent may inform clients about the involvement of an insurance company, it is quite common for clients to blame the agent’s field staff when claims are delayed. Even when insurance companies take steps to reduce the waiting times for claims payment, it often takes a few weeks to process a claim. When this processing time is added to the time that it can take for a client to gather Beyond MFIs and community-based models: Institutional alternatives 429 the required claims documentation and for the MFI to perform its own administration, months may pass from the occurrence of the insured event to the claims settlement.
In many organizations, this delay has caused considerable client dissatisfaction. To overcome the problem, several MFI agents have sought to amend their agency agreements so that they assume responsibility for managing claims. While this is a modification to the standard partner-agent model and not an institutional alternative, it is worthy of mention as it shifts key tasks, namely verifying and paying claims, from the insurer to the MFI.
For example, CETZAM pioneered funeral microinsurance in Zambia by collaborating with NICO Insurance in 2001 to provide the Ntula Funeral Insurance product. By May 2002, it was clear from market research that claims payments were taking too long, and as a result NICO was asked to consider amending the agency agreement.
It was agreed that CETZAM would pay the claims it considered to be valid. The documents that supported the claims would be submitted along with the monthly premium report and premium payment (net claims paid) and NICO would check the documents to ensure that they agreed with the claims that had been paid. If CETZAM paid an unjustified claim, then NICO would demand repayment of the claim value; to date no claims have been refuted by NICO. The claims settlement period fell from two months to less than two weeks as a result of this agreement.
An amended agency agreement is a way to improve the partner-agent model. It is particularly appropriate for life insurance, since the applicable insured event is easy to verify and hard to fake. For other risks, additional training may be required for the agent’s field staff to know how to verify claims. For example, staff will have to learn how to distinguish between accidental and natural deaths if they result in different benefits. In India, VimoSEWA has developed such expertise in verifying claims that its insurance partners allow it to pay health and property claims (see Box 82).
VimoSEWA’s claims committee Box 82
VimoSEWA has an eight-person claims committee, consisting of head office staff, insurance field agents (Vimo Aagewans) and field workers (Aagewans) from SEWA’s health, union, childcare and bank teams. The committee meets three times a week and a doctor attends the committee if there are complicated health claims. He also assists the committee by imparting information on diseases and medical terms.
Representation of various Aagewans is essential for fair claim settlement practice. It helps the committee gain knowledge on insurance practices, and they carry the message of unbiased claim settlement to their members and teams. Occasionally, the insurers reject a claim that the committee feels should be paid, but VimoSEWA assumes the liability for these extra-contractual claims. The claims committee plays an important role in detecting fraud and moral hazard. The physician is particularly helpful in assessing which caregivers are providing expensive or unnecessary treatment.
Source: Adapted from Garand, 2005.
2.2 Outsourcing to TPAs It is common practice for insurance companies, particularly those involved in health insurance, to outsource the administrative work to a third-party administrator (TPA). There are, however, few instances of this outsourcing among microinsurance schemes, largely because simple products like credit life are relatively easy and cheap to administer, so they rarely motivate management to consider the costs and benefits of outsourcing some or all of the administration.
For health insurance, the case for outsourcing needs to be assessed.
Health insurance typically involves a relationship with a health service provider. This relationship, among other factors, introduces costs and new administrative burdens, such as ensuring that the health provider is not defrauding the scheme. Health insurance schemes often outsource part of their administrative operations to a professional TPA. By specializing, TPAs are often able to lower the overall administrative costs.
Third-party administrators are fairly common in South Africa where local insurance companies use them to administer funeral insurance – indeed some administrators have developed such large client bases that they themselves have become insurance companies. The TPAs purchase insurance cover in bulk from the insurance company and retail it to individual clients or groups of clients at a price that may be much higher than the price they paid to the insurance company (though it should be noted that the administrators are often able to provide access at a lower price than that charged by insurers through their normal distribution channels). The policies are issued Beyond MFIs and community-based models: Institutional alternatives 431 in the name of the insurance company. The TPA is authorized to verify and pay all claims on behalf of the insurance company without supervision from the insurance company, which can lead to extremes of either fraud or refusal to pay claims. As a result, a section of the TPA market in South Africa has an increasingly tarnished image with consumers, the insurance companies and regulators.
Yeshasvini Trust, a health microinsurance scheme in India, decided to outsource its administrative functions to a TPA. The Yeshasvini Trust offers insurance to cover high-cost, low-frequency surgery for as little as Rs. 120 (US$2.70) per year for a maximum cover (per person per year) of Rs. 200,000 (US$4,545). To help the scheme manage its 1.45 million members, Yeshasvini developed a relationship with a private TPA, the Family Health Plan Limited (FHPL), which also administers insurance schemes for the police in the
southern states of Karnataka and Andhra Pradesh. The TPA assumes the following tasks: