«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
To date, the majority of microinsurance has been distributed and administrated by MFIs. While these organizations provide the necessary scale to make insurance sustainable, the breadth and depth of products that can realistically be provided via MFIs is limited. If microinsurance is to achieve its full potential, then it needs to diversify distribution and administration to include other organizations that engage in financial transactions with the low-income market. Certainly, amended agency agreements are important in providing higher levels of customer service (e.g. speed of claims payment), but other administrative options should be explored in the future. For example, third-party administrators have demonstrated that they can significantly decrease transaction costs across all lines of business.
Of course, the major factor affecting the distribution and administration of microinsurance products is the small margins which can be earned. With premiums in the range of a few dollars, the remuneration received by a TPA or an insurance intermediary per policy is extremely small. This is a major reason for the lack of microinsurance agents. To significantly scale up the low-income market’s access to insurance, there is a strong case for donors teaming up with industry pioneers to find new ways to distribute and administer products, which will lead to a wider range of products being available to more low-income people.
4.6 Retailers as microinsurance distribution channels James Roth and Doubell Chamberlain1 The authors appreciate the insights and suggestions provided by Vijay Athreye (Tata-AIG), Jeremy Leach (FinMark Trust) and Marc Nabeth (consultant).
While much of the microinsurance discussion has focused on MFIs or cooperatives as distributors of microinsurance, some insurers have begun to explore new distribution channels to reach the low-income market. Many are turning their attention to retailers, companies that sell goods and services other than financial services to poor households. They include grocery stores, household goods shops, transport providers, funeral parlours, cell phone shops, post offices, petrol stations, agricultural input suppliers and estate agents selling low-cost housing. In some cases, the process is being led by retailers who want to add additional services to their product lines; in other cases, insurers (often compelled by legislation or more subtly persuaded by the state) are looking at ways to reach the poor.
This chapter begins by considering the preconditions that need to be in place, for the insurer and the retailer, for this model to be effective. It then considers the types of microinsurance distribution model/products combinations that have been offered by retailers, largely based on the experiences in South Africa. The experiences suggest that for particular products, retailers could be an effective distribution channel for the low-income market, but current models still face challenges in unlocking this potential.
1 Why retailers? Which retailers?
There are a variety of reasons why the distribution of microinsurance products through retailers is of interest. Retailers often have a more extensive distribution network than that of dedicated financial service providers. They can reach a larger market. People not interested in savings or loans may be interested in buying food, fertilizer or furniture. By (potentially) reaching a
larger market, this network can distribute products at a lower (shared) cost than dedicated financial service providers. Many retailers have established a visible and trusted presence among lower-income households, creating an opportunity for distributing other, possibly more complex, products such as insurance, for which trust is essential.
Evidence from models developing across the globe suggests that participating retailers and the insurance companies have to have a number of characteristics for retailer distribution to be successful:
– Retailers need to have regular transactions with low-income persons so that premium collection can be layered on top of an existing transaction. This requirement assumes that low-income persons are unlikely to make a special trip just to pay the premium.
– They need to have sufficiently sophisticated financial systems2 to account for premiums. While some retailers, especially chains such as supermarkets and petrol stations, may have adequate systems, informal retailers may struggle to account effectively.
– As microinsurance is a low-premium, high-volume business, a single retailer needs to be able to access a sufficient number of potential clients. Volume is needed to achieve economies of scale that can justify the start-up and administrative costs for the insurer. Consequently, it is advantageous for insurers to collaborate with a network of retailers rather than having to deal with individual stores. This tends to preclude the use of small informal stores unless the insurance is paid for in advance by the retailer, by being bundled with either the product sold or some other form of pre-paid insurance (as described in Section 2 below).
– In all insurance products, there needs to be trust in the benefits actually being paid. This is particularly important for microinsurance, as poor policyholders are unlikely to challenge the insurer through the courts and may not be sufficiently financially literate to understand the terms of the policy.
Owing to the low insurance usage in many developing countries, lowincome people are often unaware of the names of insurers. For example, in South Africa in 2005, a survey of brands conducted by a market research company found very limited recognition of insurance brands (fewer than 1 in 10 low-income consumers could name an insurance company), but extraordinarily high brand recognition of clothing and furniture retailers. A similar scenario exists in India where, as described in Chapter 3.2, clients of TataIn South Africa many retailers have a long history of providing credit to low-income consumers, thus building up the financial services competence of their staff. This is not a necessary condition for retailers to distribute microinsurance, but has undoubtedly helped.
Retailers as microinsurance distribution channels 441 AIG were on the whole aware of the Tata group and trusted it, but had not heard of one of the world’s largest insurers.
– Insurers need to have mechanisms to monitor the performance of the retailer, and be able to legally compel it to hand over premiums without defrauding them. While it is possible to introduce controls as a deterrent against such fraud, they can be costly, especially in relation to the premium amount.
– It goes without saying that the retailer must have incentives to carry out its role, but it is not always as simple as just paying a commission. When retailers sell goods together with insurance on those goods, there is a clear convergence of the retailer’s and insurer’s interests. In some cases, however, there may be a conflict of interest. Very poor clients paying an insurance premium may purchase less of whatever the retailer is selling.
– Finally, as mentioned in Chapter 3.4, in microinsurance it is particularly important to provide benefits quickly in a way that is accessible to the policyholder. This may require empowering the retailers to settle claims before being reimbursed by the insurer. However, not all retailers will be in a position to do this.
2 Microinsurance distribution/product combinations for retailers There are four primary ways in which microinsurance can be sold through
1. Bundled insurance linked to the product sold
2. Bundled insurance unrelated to the product sold
3. Voluntary insurance linked to the product sold
4. Voluntary insurance unrelated to the product sold The most common is to bundle insurance with another product. When the product is purchased, the insurance is automatically purchased. With some bundles, there is a direct link between the product and the insurance; however, with other bundles, this is not the case. The same applies to voluntary insurance products.
2.1 Bundled insurance linked to the product sold An example of bundled insurance that is linked to the product sold by the retailer comes from a South African furniture group (Ellerine Holdings)3
with 1,220 stores across the country. The stores are mostly targeted at lowerincome consumers and sell household goods (mostly furniture and electronic items). Insurance policies are bundled when goods are sold on hire purchase (a rent-to-own leasing agreement). A typical Ellerines policy contains four
main types of cover:
– Asset insurance provides for replacement or repair of a purchased item if it is damaged, lost or stolen. At the discretion of the insurer, the policyholder can also receive cash compensation.
– Loan insurance provides for the full repayment of the outstanding balance of the loan to the retailer if the policyholder dies, is injured and/or becomes unemployed.
– Life insurance provides a fixed funeral benefit of US$472 (R3,000) in the event of the death of the policyholder (i.e. does not cover family of policyholder). Any outstanding debt is deducted from the funeral benefit and the remainder is paid to the beneficiaries. An additional benefit of US$1,575 (R10,000) is paid in the case of accidental death. The full amount is paid to the beneficiaries and no deductions are made to cover outstanding debt.
– Health insurance provides antiretroviral treatment (for the period of the credit agreement) if the policyholder is accidentally exposed to the HIV/AIDS virus.
In South Africa, as in many countries, the purchaser/lessee is not compelled to take the retailer’s insurance. In practice though, few borrowers are aware of this right.
Claims are lodged with the insurer and the payment, except for life and health insurance, is made to the relevant store. All policy administration and claims management are handled by the relevant insurance company (in the case of Ellerine Holdings, the insurer is a member of the retailer group).
The four types of coverage contained in the policy overlap in a variety of ways, limiting the liability of the insurer and, by extension, the policyholder’s ultimate cover. Overlap, for example, occurs if a policyholder’s death is non-accidental. In this scenario, the outstanding balance on the policyholder’s account will be covered by the life insurance if the outstanding loan balance is less than the sum insured. If the outstanding debt, however, is greater than the defined funeral benefit, the excess of the debt over the defined funeral benefit will be covered by the loan insurance. For the coverage to be in force, the policyholder must not have fallen behind with monthly instalments.
Retailers as microinsurance distribution channels 443 The retailer’s management indicated that 95 per cent of all customers purchasing products on hire also buy its insurance product.4 In the 2004/05 financial year, only 6,400 claims emanated from its 500,000 credit-consumer base. Thus, for every 100 individuals that actually bought the policy at the retailer’s stores, only 1.28 claims were filed. This claims ratio could be interpreted as indicating that customers do not experience the contingencies covered by the policy. However, in the South African context of employment instability, high crime rates and high mortality due to HIV/AIDS, this is unlikely. The low claims ratio more probably indicates that few customers actually know that they purchased insurance and therefore do not file claims.
Selling de facto compulsory bundled policies has the very obvious advantage for retailers that they do not need to do any selling to the policyholder.