«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
One concern with voluntary insurance products sold by non-specialized distributors is that the consumer is often buying an important product with life-changing consequences. Polices sold by retail stores are often sold through a “tick of the box”. The terms and conditions may be presented to the customer by a store attendant, or simply left hidden in a stack of other information. This approach may be inexpensive, but it may also be of poor value. In theory, the terms and conditions are on the policy document, but for microinsurance this is not an appropriate means of educating the customer, nor does this transaction method facilitate questioning by a potential client about the terms of policy.
3 Conclusions It is premature to draw firm conclusions from the few examples of retailers as distributors of microinsurance. What follows are some initial thoughts, many of which will need to be tested through further research.
Leaders and followers The driving force behind the development of retailer microinsurance distribution in these examples seems to be the initiative either from the retailers looking to expand their value offerings and increase client loyalty (as in the Shoprite case), and/or from insurers needing to fulfil regulatory requirements (as in the Indian and South African cases). In these few examples, retailers or regulators are leaders, and insurers are followers.
The advantages of retailers as microinsurance distribution agents – The trust in the retailer brand is one of the critical attractions of this distribution channel. It reduces the sales effort and, hence, the cost of delivery. However, retailers also need to consider the brand risk they would face if insurance did not meet clients’ expectations.
– A key advantage of this distribution mechanism is that it allows for cash premium collection and claims payment at places that are more conveniently located than the offices of the insurance company and its agents. In developing countries, this will ensure that the model does not simply cannibalize the existing insurance market (as may be the case with retailer distribution in the developed countries with saturated insurance markets), but actually expand the market to individuals who would not otherwise have access to insurance.
450 Institutional options However, not all retailers have fully exploited this opportunity (e.g.
Shoprite’s claims-payment procedure).
– An obvious advantage of retailer distribution is that it provides centralized access to the retailer’s client base, which would otherwise be very difficult for insurers to reach. In a number of cases, the retailer controls access to the client base, which means that the insurer cannot access it without continuing the relationship with the retailer (e.g. for retail account holders). This places retailers in a powerful negotiating position with insurers.
Key problem of voluntary insurance sold through retailers It is clear that retailers can reduce the costs of insurance distribution to the low-income market. There are even a few examples of voluntary insurance sold through retailers. The problem seems to be that retailers are not necessarily good at selling insurance. Staff need to be trained and motivated to sell voluntary insurance. This experience mirrors that of many microfinance institutions. As the Shoprite example demonstrates, it is unclear how successful this passive approach can be for a product that is famously “sold not bought”.
Bundled products: Problem of abuse – Although bundled insurance products simplify premium collection and ensure a better risk profile, it is not clear whether consumers necessarily benefit. Lower costs and risks are not always reflected in the premium.
– Given the low literacy rates associated with the target market, the risk of mis-selling products to clients, who may be unaware of their bundled purchase, is significant.
– Even if the relationship is not abused, embedding ultimately reduces the incentive of the insurer to ensure that its product meets the consumer’s needs.
Bundled products: Problem of ongoing protection Insurance bundled with consumer credit products has the same problems as some MFIs’ insurance products linked to loans, where the need for insurance coverage extends beyond the loan repayment period.
Bundled products: The limits of bundling insurance with an unrelated product Embedded insurance products that are unrelated to the primary good or service sold seem to be a means of marketing the primary good or service and tend to be quite basic in their cover and benefits. Any insurance product that offers significant value is likely to cost more and potentially push up the cost of the primary good or service to a point where it is no longer attractive.
Retailers as microinsurance distribution channels 451 “Tick-the-box” insurance: The pros and cons There is an inherent trade-off between product simplicity and lower costs on the one hand, and advice and education on the other. While retailers can reduce distribution costs by using simple products that are sold through a “tick-the-box” method, it is often low-income clients who need financial advice and education the most. However, these services increase the costs of policies and decrease affordability for clients. As a minimum, appropriate disclosure of product information is required to ensure that clients are aware of the features and conditions of the products they have purchased. This is not only in the business interest of the seller (increasing retention and building long-term clients), but also avoids mis-selling and the concomitant risk of costly regulatory intervention.
So what then is the potential of the retailer distribution model for microinsurance? The preceding discussion reaches conflicting conclusions on the potential and reality of distributing microinsurance through retailers.
Retailer distribution presents opportunities to overcome some of the key barriers to microinsurance distribution, which could benefit both providers and clients of insurers.
However, it is clear that this distribution method is still a relatively new and untested phenomenon in the low-income market. In particular, the evidence on the ability to sell voluntary insurance through retailers is less than positive and there are shortcomings in the current models that need to be addressed to ensure success. Critically, retailers need to find ways of replacing the market-making function of traditional insurance intermediaries without undermining their low-cost distribution advantages. Without this, it is unlikely that the voluntary models will achieve any scale in markets that are not familiar with the benefits of insurance.
Bundled insurance on the other hand has achieved much success for the retailers and insurers. In the examples reviewed, however, little benefit has been passed to the clients who are probably paying too much and are often unaware of their cover. If disclosure is improved, this model can provide valuable protection to clients who would otherwise not have access to such insurance. Critically, a shift has to be made to providing value to the client rather than using insurance simply to extract larger profits. This new opportunity comes with great potential for consumer abuse and will require active monitoring and regulation by consumer groups and authorities.
4.7 Microinsurance: Opportunities and pitfalls for microfinance institutions Craig Churchill and James Roth1 The authors appreciate the substantive comments and suggestions provided by Javier Fernandez Cueto (Compartamos), Lemmy Manje (ILO), Michael McCord (MicroInsurance Centre) and Constantin Tsereteli (Constanta Foundation).
As discussed in Chapter 4.2 and elsewhere, microfinance institutions represent an important distribution channel for extending insurance to the poor.
However, it is also important to turn the lens around and look at this issue from the MFI’s perspective.
To begin with, should an MFI get involved in offering insurance? When microfinance institutions are interested in insurance, their primary motivation is often to reduce their credit risk in the event that borrowers or their family members experience death, illness or other losses. If insurance can help protect the households in such circumstances, it will indirectly safeguard the MFI’s portfolio.
Another significant motivation behind the interest in insurance is to improve the welfare of their clients. MFIs typically have dual missions to alleviate poverty or promote economic development while generating a profit (or covering their costs). The social mission of improving the welfare of poor households can be enhanced through the protection provided by insurance.
There are also a number of legitimately commercial reasons why MFIs
might be interested in providing insurance, such as:
– Enhancing retention: Many MFIs realize that they need to offer a variety of products to enhance retention, so that even when clients do not want a loan, they may still appreciate a savings account, a wire transfer service or…insurance protection.
– Product profitability: A diverse product menu provides cross-selling opportunities and spreads the acquisition costs for a client across multiple products, enhancing product profitability.
1 The examples from Compartamos (Mexico) and Constanta (Georgia) were provided by the readers and were not drawn from the case studies.
Microinsurance: Opportunities and pitfalls for microfinance institutions 453 – Diversifying income streams: Microinsurance creates an additional source of income either from profit if the scheme is provided in-house (and wellmanaged), or from fees if done in partnership with an insurer. The latter situation is of particular interest to MFIs, which welcome opportunities to earn income without taking risks.
– Reach out to new markets: In heterogeneous low-income communities, there may be persons who are not interested in credit or savings, but are keen on insurance, although in reality, few MFIs have taken advantage of this benefit, since it would require having a delivery channel exclusively for insurance, which most MFIs have thus far avoided.
Of course, there are also disadvantages to offering insurance. It is a different business from savings or credit, requiring different expertise. Even offering insurance products in partnership with an insurer can be time-consuming and demanding. A number of organizations, like ProCredit Banks in Eastern Europe, have no interest in offering insurance, directly or indirectly, so they are not distracted from their core services. Furthermore, low-income households have finite resources. If an MFI offers insurance, some clients might have to choose between repaying a loan or making a deposit and paying an insurance premium.
If an MFI believes that there are more pros than cons, and decides that it wants to branch out into the brave new world of insurance, there are two key
questions it needs to consider when offering microinsurance:
1. Through what institutional arrangement should it offer insurance?
2. What types of cover should it offer?
1 Institutional arrangements If an MFI wants to offer insurance to its clients, there are four main ways to do so: a) in partnership with an insurance company, b) by creating its own insurance brokerage, c) by self-insuring or d) by creating its own insurance company.
an interested insurance partner is becoming increasingly less likely as more insurers seek opportunities to reach new markets. MFIs are also becoming more convincing, arming themselves with arguments and experiences to persuade insurers that this is indeed a valuable market opportunity for them.
In general, if an MFI cannot entice an insurer into a partnership, it is probably not effectively communicating what it has to offer. Many insurers are attracted to the prospect of accessing many new clients through a cheap distribution network.2 MFIs should recognize that insurers and bankers may have very different attitudes toward the masses of low-income people. For bankers, whose money is at risk when they lend, the poor are a risky market.
Insurers, however, tend to be interested in ways of reaching an expansive market cost-effectively. Volumes speak volumes.
To make the partner-agent work effectively for MFIs, the following recommendations emerge from the experiences of MFIs around the world: