«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
The “tick-of-the-box” nature of the transaction means in many instances that they do not have to comply with agent’s licensing regulations as they do not provide advice. Compulsory insurance reduces adverse selection (the tendency of the worst risks to apply for insurance). In theory, all of these benefits could be passed onto the client in the form of lower premiums. In practice, however, selling bundled products often results in abuse. In South Africa, 34 to 38 per cent of low-income clients at retail stores regularly pay for purchased items in monthly instalments and have bundled insurance. However, less than 8 per cent of those individuals are aware that they have insurance.5 In theory, regulators could improve the situation by compelling stores to (i) specifically inform customers that they have insurance and (ii) advise them that they can purchase the required coverage elsewhere. In practice, this may be difficult to enforce. Even if customers were aware of their options it might make little difference to their behaviour, for a number of reasons. Firstly, the most significant cost of the purchase is the item itself (plus interest costs).
Secondly conducting transactions in rural areas can be expensive and difficult for clients; they may not think it worthwhile to shop around for alternative insurance. Or given the dearth of alternative low-income insurance providers in such areas, there may also simply be no other option.
Bundled insurance linked to the product sold could in theory provide relatively cheap cover for some of the most important and costly assets that low-income clients purchase. In practice though, selling products in this manner is often abused; clients are either unaware that they have purchased insurance or have been sold very expensive insurance.
2.2 Bundled insurance unrelated to the product sold There are few instances of bundled microinsurance where the insurance product bears no relationship to the good or service sold. In India, the Sankat Haran Policy sold by Iffco-Tokio provides accidental death and disability cover. The cover is obtained when clients buy a 50-kg fertilizer bag of Iffco and Indian Potash brands. The receipt for the fertilizer bag acts as proof of payment and the policy document is printed on the fertilizer bag. The amount of cover is US$90 in the event of an accidental death and US$45 for certain categories of dismemberment and disability. The insured is the purchaser of the fertilizer bag and a single person can hold multiple policies up to a maximum of US$2,260 in cover. Claiming on the policy appears somewhat arduous as claimants must submit a variety of documents to IffcoTokio directly. This scheme, however, may well be the largest commercial microinsurance scheme in the world. By the end of 2005, the Indian newspaper The Hindu (Revathy, 2006), reported that it covered 25 million persons.
Essentially the scheme sells pre-paid insurance, in the sense that the retailer buys the fertilizer, including its insurance component, from a wholesaler.
The retailer pre-pays the insurance premium, so there is no need for the insurer to collect premiums from the client or, indeed, from the retailer.
On the face of it, in a competitive market for fertilizer and accidental death and dismemberment (AD&D) insurance, it is hard to imagine what value is offered to the consumer by this type of embedding. Any consumer who wanted either fertilizer or AD&D insurance could buy it separately in the required quantities without needing to buy the two together. However, the rural Indian market is not competitive and this may be the only means of distributing such insurance. It is also possible that the addition of AD&D insurance provides an incentive to purchase a particular brand of fertilizer (in much the same way some Visa cards come with similar coverage linked to travel). Another explanation for the existence of this scheme is the regulatory requirements in India, which stipulate that insurance companies must sell a percentage of their policies to socially disadvantaged clients and derive a percentage of total premiums from clients in rural areas.
The insurance is compulsory, which in theory should control adverse selection. With this particular configuration, however, this is not necessarily the case. A person with an extremely risky profession can buy a bag of fertilizer, keep the receipt and the policy document, repackage the fertilizer and sell it on to another farmer; although given the number of people buying insurance, adverse selection is not likely to become a problem.
Retailers as microinsurance distribution channels 445 This model is only appropriate for microinsurance products with single premium payments. In addition, it is unlikely that products offering anything other than minimal coverage could be sold in this fashion. If they were, it would increase the cost of the good or service to a point where a customer who did not want insurance might be disinclined to purchase that good or service.
2.3 Voluntary insurance linked to the product sold In many developed countries, when a durable good is sold it is quite common for the seller to offer insurance, usually in the form of an extended warranty on the item. A South African retailer, Makro, which sells consumer durables, also provides voluntary extended warranties. The premiums for some of these warranties are sufficiently low to appeal to the low-income market. For example, a two-year warranty extension costs R299 (US$47) for refrigerators priced below R6,000 (US$943). This kind of warranty could be beneficial for microenterprises. Many consumer durables purchased from retailers are used in informal household enterprises. Refrigerators in South Africa, for example, are commonly used to run informal catering businesses or to retail meat bought from wholesalers. It may be quite difficult for lowincome consumers to purchase independently offered extended warranties, and so the option of being able to purchase it with the product might be appreciated.
2.4 Voluntary insurance unrelated to the product sold The South African supermarket chain Shoprite targets low-income consumers. Inside each supermarket, there is a “Money Market Counter” where customers can carry out a variety of financial transactions. The counters are intended to increase shopping convenience, facilitate customer loyalty, and provide a range of transaction services, including payment for television licences and of utility bills, with approximately 220 third parties represented at the counters. During the 2004/05 financial year, the number of transactions conducted at “Money Market Counters” reached around 21 million per month.
The supermarket sells funeral insurance at the counters on behalf of the insurer HTG Life. HTG Life is a member of the HT Group, which also includes a funeral service business (Doves and Saffas funeral parlours). The policy covers specified nuclear families (policyholder, spouse and children).
The eligibility criteria and cover are given in Table 46.
446 Institutional options
sive” distribution model relying on customers approaching the counter and asking for the product. This differs from traditional broker/agent models where products are actively sold. There is also little incentive for the in-store Shoprite employees to sell the product.
South Africa provides another interesting example of using retailers to sell voluntary insurance. The clothing stores Jet and Edgars (both part of the Edcon group) provide insurance to low-income clients (though Edgars sells predominately to higher-income clients) for those who qualify for the store’s credit card. There are more than 280 Jet stores located across South Africa, while Edgars owns more than 150 South African stores (see Box 83).
Edcon and Hollard Insurance Ltd established a joint venture, Edcon Insurance Services, in June 2001. The two companies agreed that the Edcon group would sell a wide range of insurance policies underwritten by the Hollard’s life and non-life insurance companies. The insurance policies have store branding (i.e. not that of the insurer) to exploit high retailer brand awareness.
Both Edcon and Hollard Insurance were actively involved in the design of the products. All the products were designed to suit the needs of the average Edcon customer. Policies are sold over the counter. The sales personnel provide the insurance as a “tick box” offering and therefore do not need to fulfil the regulations that govern agents. Edcon Insurance Services is responsible for the marketing and sales of the policies, while the retailers collect the premiums and pass them on to Hollard. The insurance company manages the policy and claims administration and handles the actual payment of claims.
The rationale behind the store-card model, as used here, is that monthly premiums can be more easily collected if they are simply added to the store account balance. In other words, the monthly premium is paid together with the total monthly instalment due (which can be paid in cash). A drawback of this approach is that customers who do not qualify for the cards cannot purchase insurance. The model therefore excludes individuals who could potentially afford a small monthly insurance premium, but do not qualify for credit.
The scheme has proved highly profitable. During the 2004/05 financial year, a growth of 23.4 per cent in active insurance policies was experienced, increasing Edcon’s profit for insurance-related products from US$30.2 million to US$41.4 million.
actively discouraged permanent black settlement in large urban centres. The existence of these laws and other restrictive apartheid laws helped to create “urban slums in rural towns”. The population density of these areas created opportunities to establish retailers that might not exist in other rural areas of developing countries with more dispersed rural populations. Consequently, this delivery model for microinsurance might be more effective in reaching rural South Africans than the rural populations in other countries.
One advantage of selling voluntary products through a retailer, or other organization with many low-income customers or members, is that the distribution channel can use its significant client base to get discounts from insurers. This is in addition to any savings that they are able to pass on to consumers as a result of lower distribution costs. Indeed, in some developed countries, for example the United Kingdom, the cheapest life insurance policies are often sold by supermarkets.
Although not retailers, some trade unions have experience selling voluntary insurance. In the United States, the largest trade union federation, the AFL-CIO, has negotiated a set of discounts on a variety of consumer and financial products for its members (see Box 84). It is mentioned here because many retailers have membership clubs or loyalty schemes that can be tapped in a similar way to that in which the AFL-CIO has made use of its membership to sell insurance.
AFL/CIO’s Union Privilege SchemeBox 84
From 1986, “Union Privilege” has used the AFL/CIO’s vast membership to negotiate discounts on a range of products and services, including a variety of insurance products. The scheme promises to ensure the quality of insurance provision through careful selection of partner insurance companies and regular monitoring. It has also used its bargaining power to get additional riders to make the policies more attractive to members. For example, for one life insurance product, workers on union-sanctioned strikes, lockouts or involuntary lay-offs that last for more than 30 consecutive days do not have to pay premiums for 3 months during the industrial action. For the AD&D product, policyholders do not need to pay accident insurance premiums for the period of a union-sanctioned strike or lockout, up to a maximum of one year.
This gives value to the members it serves (they buy insurance at a cheaper price), it strengthens the unions by providing an additional reason for members to join, and it provides a new stream of income to participating unions – commission income.
Source: Adapted from Koven, 2006.
Retailers as microinsurance distribution channels 449 Another advantage for policyholders is that the distributor bears significant reputation risk. The distribution channel is the face of the policy. If policyholders are dissatisfied with the policy, they may terminate their relationship with the retailer or trade union.