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«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»

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– Tell them what you want: To get good products and processes from insurers at a decent price, MFIs need to know what they want and they have to sit in the driver’s seat in the negotiations. The larger they are, the more demanding they can be. Several MFIs, including Compartamos (Mexico) and some Opportunity International affiliates, have designed their own product specifications and then sent requests to insurers to bid on their proposed product.

– Know your stuff: MFIs need to speak with authority, using language that insurers understand backed up with compelling data. One advantage of an MFI is that it can often create useful actuarial data from its own experience of working with clients, to which the insurer otherwise would not have access.

For example, before it began negotiating with insurers, FINCA Uganda researched and documented its historical mortality experience.

– Do not be afraid to switch partners: MFIs do not have to be wedded to one insurance partner forever. If the insurer is not performing, the MFI can look for a new partner, although this should not be taken to extremes – ASA, an Indian MFI, changed insurance partners too frequently, which caused some confusion among clients and staff.

– Choose a trustworthy insurer: It is often preferable to work with a wellknown insurance company because it helps create trust and confidence in insurance. Without trust, clients will be unwilling to pay premiums today against the promise of a possible future benefit.

– Involve the insurer: The alternative to changing partners is to get existing partners to improve. Shepherd (India) found that it was useful to invite insurers into the field to enable them to understand the target market better 2 For advice on negotiating with insurance companies, see Churchill et al., 2003.

Microinsurance: Opportunities and pitfalls for microfinance institutions 455 and to begin to recognize the difference between insurance and microinsurance. This can be reinforced through an annual review meeting with the insurer.

Ask for training: A major challenge in introducing insurance is training the – MFI’s employees, particularly the frontline staff who are responsible for sales and service. Several MFIs have persuaded their insurance partners to train their employees in insurance in general and in the products in particular.

Manage claims: An efficient claims-processing system is one of the most – important points for negotiation. As described in Chapter 4.5, when the benefit amounts are small, MFIs should insist that they pay the claims (at least for life insurance), and then be reimbursed by the insurer, on the basis of documentation appropriate for their clients.

Create a review committee: Since claims processing tends to be one of the – most contentious issues, Shepherd formed a review committee, with representatives from the MFI, insurer and clients, which meets quarterly (or more often if necessary) to improve claims processes.

Eliminate exclusions: Strive to persuade insurers to drop as many exclusions – as possible, even if the MFI has to pay a higher price, because that simplifies the product and makes it easier to explain to customers. It also reduces claims rejections that could cause significant public relations problems for the MFI.

Maintain and analyse data: MFIs should maintain good information about – insurance performance, enabling them to develop expertise over time and to push insurance partners for better deals. An appropriate and “actuariallyapproved” MIS is crucial (see Chapter 3.5).

Determine the costs: MFIs need to conduct a costing analysis to determine – how much they need to earn in commission (or through a premium markup) to cover their administrative expenses.

Own the clients: Some entrepreneurial insurance companies might be inter ested in stealing the clients in the future. The MFI should always “own” the client. This can be done if the MFI is always the institution that sees the client.

Share the profits: Instead of receiving a commission, the Zambian MFI – Pulse has negotiated a profit-sharing arrangement with Madison Insurance (see Chapter 3.6), which corresponds more with the spirit of microinsurance, if the MFI is willing to take a bit of the risk.

–  –  –

ance for MFIs and members alike. As with the partner-agent model, this arrangement has the advantage of outsourcing the risk to formal insurers.

The advantage of the brokerage arrangement over the basic partner-agent model is that an organization affiliated to an MFI (or a group of MFIs) develops insurance expertise to negotiate the best deals on behalf of the MFIs and their members. The brokerage is not tied to any one insurance company, so it can explore various options on behalf of its two main customers, the MFIs and their clients. In addition, the brokerage is not limited to using MFIs as the distribution channels. Once it understands the needs of the low-income market, it can explore other strategies for extending insurance to poor households and businesses. As mentioned in Chapter 4.5, Opportunity International has recently launched such an initiative (the Micro Insurance Agency).

The insurance brokerage could also be seen as a first step towards creating an insurance company (described in more detail below), although that does not necessarily have to be the objective.

1.3 Going solo A third option is for MFIs to self-insure, in other words, to carry the risk themselves. There are compelling reasons why some microfinance institutions would want to self-insure, as well as some equally strong arguments against it.

Some MFIs do not want to work in partnership with an insurer for ideological reasons. Microfinance institutions with strong social missions may not believe that profit-making firms should provide financial services to the poor. MFIs with such ideological commitments will not be swayed by arguments that profit-making insurance companies could possibly provide cheaper and better insurance to their clients.3 Among the non-ideological reasons for self-insurance is a belief that the MFIs (or their customers) will have to pay extra for the insurer’s overhead.

For the most basic products, like credit life, that logic might be valid. However, basic credit-life insurance largely benefits the lender since it means the MFI does not have to solicit loan repayments from the deceased’s survivors.4 3 In some cases, ideological preferences can play an important role in partner selection. For example, Shepherd selected public insurance partners because it deemed it a national duty to work with the state insurer.

4 There is some debate about the usefulness of credit life insurance. Some MFIs feel that it is an unnecessarily complicated means of dealing with loan losses due to death, and they prefer to just write off the loan and provision accordingly. Such an argument might be valid for predictable loan losses due to death, but would not be appropriate if an MFI experiences a natural disaster or other covariant risks. The provisioning approach is also not relevant for small MFIs that cannot afford to write off loans or for MFIs granting larger loans, creating a concentration risk, or if the mortality rates are volatile or changing, as in an area with high incidence of HIV/AIDS.

Microinsurance: Opportunities and pitfalls for microfinance institutions 457 If the MFI really wants to reduce the vulnerability of its customers, more complicated products are required – products that an MFI probably cannot offer on its own.

Both TYM (Viet Nam) and CARD (Philippines) had negative experiences trying to enhance customer value on their own. They provided credit life on a self-insurance basis and generated significant surpluses. Consequently, they thought it would be a good idea to offer additional benefits, by including other family members or by covering additional risks. They added these benefits, however, without assessing the impact that they might have on claims.

As a result, CARD’s pension plan nearly bankrupted the company, and TYM’s hospitalization benefit threatens to do the same even though the benefit is extremely modest.

Another concern surrounding self-insurance is the extent to which an MFI will cope if it experiences catastrophic losses. This problem cannot be emphasized enough. The primary reason why MFIs should not self-insure – besides not having the expertise to price and design products appropriately – is because they will have difficulty meeting claims if many clients are affected by a peril at the same time. Since they are not formal insurers, they do not have access to reinsurance, which is how insurers cope with covariant risks.

Reinsurers essentially create a larger risk pool than an insurer can achieve on its own, by spreading risks across national boundaries, but only licensed insurers can access reinsurance (see Chapter 5.4).

VimoSEWA (India) learned this lesson the hard way. After several years of negative experiences with insurance partners, it began offering in-house health insurance in 1996, and then added asset insurance in 1998. Initially, VimoSEWA’s transition to self-insurance had positive financial and service benefits – claims were paid faster and not rejected, and VimoSEWA began building up some reserves. However, when the January 2001 earthquake struck Gujarat, over Rs. 3.4 million (US$75,000) was required to satisfy claims, causing a severe financial strain. Prior to the earthquake, annual payouts for asset protection were below Rs. 30,000 (US$662). This experience helped VimoSEWA appreciate the need for reinsurance, and led the organization back to the partner-agent approach.

While natural disasters like floods and earthquakes are usually used as examples to scare MFIs away from self-insurance, it was something more mundane – a truck accident in which several borrowers died – that convinced ASA to find an insurance partner. If MFIs start offering larger loans, they may find that the death of just a few borrowers can seriously drain a selfinsurance fund. Smaller MFIs are also more vulnerable if they self-insure because they have a small risk pool (although they are also in a weaker position to strike up an appropriate partnership with an insurer).

458 Institutional options The main point is that a self-insuring MFI must think carefully about how it will control covariant risks. It could exclude such risks to limit its exposure, which is what Spandana does, although such an approach leads to clients being abandoned when they need help most. Moreover, excluding cover does not help the MFI manage its credit risk in a disaster situation.

Alternatively, a self-insuring MFI could solve this problem by buying catastrophe cover with an insurance company, so the MFI covers idiosyncratic risks in-house while outsourcing covariant risks to an insurer.

A further argument against going solo is that in many countries it is illegal to offer insurance without a licence. Regulators generally do not bother with small microinsurance schemes. Some organizations manage to disguise their schemes by calling the service a member benefit instead of insurance. Insurance regulators may be willing to look the other way, or may not even realize that the scheme exists. However, once it achieves significant scale, it is bound to attract attention. In addition, regulated MFIs are probably not allowed to keep insurance liabilities on their balance sheets, so for them (or MFIs planning to transform), self-insurance may not be an option. Donors are also becoming increasingly wary of supporting organizations that are circumventing insurance regulations.

Some MFIs, like TYM, choose self-insurance because they want to retain the funds as a source of loan capital. The situation in Viet Nam is unique because the regulatory environment has prevented MFIs from accessing wholesale finance, except from donors who have become somewhat parsimonious. Consequently, TYM (and other Vietnamese MFIs) have had to be creative to satisfy their funding requirements. TYM’s insurance fund has been a source of loan capital, despite the fact that it is unwise to combine insurance and credit risks.

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