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Another reason why MFIs might want to self-insure is that they do not want to share the insurance profits with another organization. Similarly, if going solo means lower overhead costs, the coverage could be cheaper for the clients. Consequently, some MFIs contend that they can provide greater customer value without involving an insurer. As shown in Table 47, using the claims ratio (the percentage of premiums returned to policyholders in the form of claims) as an indicator of customer value, the evidence suggests that self-insurance provides greater value, albeit from a very small sample of experiences.
Microinsurance: Opportunities and pitfalls for microfinance institutions 459 Does self-insurance provide greater client value?
In-house schemes should be more efficient. A lot of money is saved on administration and marketing because the product tends to be simple and generally there is one product for all. In addition, in-house schemes do not comply with technical rigour or insurance regulation, both of which are expensive. They also do not have to pay for the additional overhead and profit margin of an insurance company.
Besides costs, another aspect of customer value is the service standard for claims payments. For MFIs that have tried working with insurers and given up, problems with claims –including delays and rejections – are probably the number one reason for the divorce. If the MFI self-insures, it can pay claims quickly and impose less onerous documentation requirements on the beneficiaries. For example, when Spandana was collaborating with LIC, claims often took two to three months or more to be paid. The MFI moved the scheme in-house, and now 73 per cent of claims are settled within seven days.
Experts have mixed opinions on the topic of self-insurance. Leftley (2005) feels strongly that there are no good reasons why MFIs should take on insurance risk as long as there is existing underwriting capacity in the country.
Other experts are more open-minded about the issue, willing to concede that self-insurance might even be preferable to the partner-agent approach if certain conditions are met: 1) the MFI is large enough to pool risks (at least 10,000 members) and those risks are reasonably homogeneous, 2) the product is kept simple, 3) the MFI obtains catastrophe coverage from an insurance company, 4) the MFI makes use of appropriate technical assistance to help with product design, pricing, data management and performance monitoring and 5) regulators will allow it.
Finally, there are cases where an MFI chooses to go solo, despite an active insurance market, because it cannot entice insurance companies to provide the coverage sought by clients at an affordable price. Going solo under such conditions needs to be done with extreme caution. If the market is unwilling to provide a service for a particular price, there is often a good reason: it may not be viable.
460 Institutional options
1.4 Creating an insurance company The fourth option is for an MFI or an association of MFIs to create their own insurance company. For many years, in many countries, credit unions and cooperatives have satisfied their insurance needs through insurers owned by the association and its members. As discussed in Chapter 4.1, the typical approach has been for the credit unions to create a brokerage company that facilitates access to insurance for the CUs and members alike. Over time, the brokerage builds up sufficient expertise in underwriting, settling claims and managing data, and amasses sufficient funds to form a credit-union-owned insurance company.
In some jurisdictions, it might be appropriate for other types of MFIs or MFI associations to create their own insurance company. Indeed, CARD has done just that, creating a mutual benefit association that is “owned” by the members, but structured to meet the insurance needs of the MFI.
Some advantages of creating an insurance company over self-insurance are
– separates the credit and insurance risks into different organizations, – ensures that expertise is engaged in the management of the insurance business, – can collaborate with multiple distribution channels to extend insurance to the poor and hence reach many more people, – gives the microinsurer access to reinsurance.
Compared to the partner-agent approach, an MFI-owned insurance company allows the MFI greater influence on product design and service standards. Furthermore, it enables any profits to be redistributed to the policyholders. However, the management of the insurance company should be kept at arm’s length from the MFI so as not to jeopardize the soundness of its insurance decisions. In particular, careful consideration should be given to the investment strategy, since it is unwise to mix the credit and insurance risks by investing too great a proportion of premiums in the MFI’s loan portfolio (see Chapter 3.6).
The transformation of an informal insurance scheme into an insurance company is not without its challenges. In some jurisdictions, there may be significant start-up and reporting requirements that do not justify the effort.
For years, SEWA has had its sights set on creating an insurance company.
However, it has not been able to raise the minimum required capital and the Indian insurance regulators are not interested in making an exception for microinsurance.
Microinsurance: Opportunities and pitfalls for microfinance institutions 461 2 The type of insurance One of the key factors in deciding what type of insurance an MFI should offer is its motivation for doing so. In general, an MFI’s motivations fall into two categories: 1) organizations that want to offer insurance primarily to reduce their credit risks by being able to recover loans if borrowers die or are too ill to repay and 2) MFIs that are primarily motivated to assist their clients in managing risks and to cope with crises and economic stresses (see Box 85 for an example of the second category). Of course, many organizations may be motivated by both objectives, but their primary motivation will probably influence their choice of insurance services and the means of offering them.
Reducing the vulnerability of the poor: The case of Shepherd, India Box 85 Shepherd is very clear that its motivation for offering insurance is to reduce the vulnerability of the poor. In doing so, it has designed a comprehensive strategy for risk prevention and risk management that incorporates insurance
among a range of measures, including:
– Food security: Group members are requested to save a fistful of rice at each meeting; as this rice-saving accumulates, group members can either borrow from it or it can be donated to more needy community members.
– Income security through life insurance: Shepherd’s core business is the provision of savings and credit through self-help groups (SHGs), whereby loans are typically used to support income-generating activities. To protect the household from the death of a breadwinner, group members (and their spouses) can choose between four different life insurance schemes that Shepherd offers on behalf of insurance companies.
– Income security with livestock: For SHG members who take out loans for
cows and other livestock, Shepherd promotes a three-pronged strategy:
prevention, promotion and protection. Prevention is addressed through regular cattle-care camps that Shepherd organizes so that a veterinarian can identify and treat poor households’ main asset. For promotion, Shepherd has trained barefoot veterinarians to educate SHG members to properly care for their animals and to provide ongoing treatment if necessary. For protection, Shepherd offers voluntary livestock insurance on behalf of an insurance company covering the natural and accidental death of the animals.
– Health security: In 2003, Shepherd introduced UniMicro Health Insurance in partnership with United India Insurance Corporation (UIIC) to cover in-patient treatments (see Table 18 in Chapter 3.1). To complement the insurance product, Shepherd organizes regular medical camps to conInstitutional options duct check-ups for illness and disease. Shepherd also offers emergency loans that are primarily used for childbirth through its Sugam Fund (see Box 23 in Chapter 2.4).
– Asset security: A rider on the UIIC UniMicro product includes hut insurance that pays a benefit of US$100 if the policyholder’s house burns down.
Source: Adapted from Roth et al., 2005.
In general, it is easier for MFIs in the first category to meet their objectives than for those in the second category. Owing to its relative simplicity, basic, credit-linked insurance is more likely to be available to the MFI and more affordable to the client, and it is more likely that the MFI could offer it on its own, whereas comprehensive coverage – to protect the poor from the many risks that they really worry about – is very difficult for an MFI to offer on its own and may not be available from other sources.
If MFIs are motivated to offer insurance primarily because they want to help their clients manage risks, and if they are not already offering savings, then that should be their first priority (where the law allows them to accept deposits). As described in Chapter 1.2, the poor are vulnerable to a range of risks and economic stresses, many of which represent relatively small but nagging expenses for which insurance is not an appropriate solution. Insurance covers larger losses and is very risk-specific; for example, a life insurance policy cannot help someone whose valuables are stolen, or health insurance cannot help someone rebuild a destroyed house. Savings (and emergency loans) are more flexible and responsive than insurance in coping with risks.
The main difficulty with savings as a mechanism for coping with risk is that the funds are frequently insufficient to cover the loss and their use leaves the saver vulnerable to further risk.
MFIs with a broader development objective should also consider helping their clients to prevent or mitigate their risks, like Shepherd which offers health workshops and cattle-care camps. While an MFI might undertake prevention strategies to fulfil its social mission, such measures could have the additional advantage of reducing claims, having a positive and cost-effective impact on claims experience (see Chapter 3.9).
There appears to be a trade-off between reaching many people with a simple product and reaching fewer people with more complex, varied, and voluntary insurance. In general, it makes sense for MFIs to start with a simple life policy to learn about insurance. Simple products work best because they are easier to administer and easier for clients to understand. Once MFIs know how to manage insurance risks (either on their own or in partnership with an insurer), then they can move on and provide coverage that better Microinsurance: Opportunities and pitfalls for microfinance institutions 463 meets clients’ needs. Similarly, once the market better understands what insurance is, and begins to develop an insurance culture, clients will be more willing to pay for broader benefits.
In selecting insurance products, it is important for MFIs to recognize that they cannot cover all risks and clients cannot afford to buy numerous insurance products. Indeed, this might be a reason to avoid insurance altogether, since the MFI does not want clients to pay insurance premiums at the expense of loan repayments or savings deposits. If the MFI does decide to go ahead with insurance, the challenge is to figure out the most cost-effective solutions to their clients’ primary problems.
2.1 Integrated or stand-alone?
To offer insurance cost-effectively to the poor, one of the main strategies is to combine it with another financial service, i.e. with savings or loans, so that the transaction costs can be minimized. Since credit is the core business of most MFIs, the insurance and loan terms can coincide so clients can renew their loan and their insurance at the same time. By linking cover to the loan, the MFI can also make the premium easier to pay by adding it to the loan amount. However, as discussed in Chapter 2.3, not everyone wants a loan, and even people who want loans do not want them all the time, so creditlinked insurance provides incomplete coverage.