«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Consequently, a link between savings and insurance not only provides more continuous coverage than the credit-insurance link, but it can also significantly reduce the transaction costs. For the life savings product, for example, there are no transaction costs for clients since they do not have to pay a premium (they accept a lower interest rate on their savings instead). For other savings-linked insurance products, premiums can be also be paid by automatically deducting the amount from the savings, although there is a public relations risk that depositors may not be aware that the money is being deducted (see Chapter 3.3).
From an MFI’s perspective, the insurance products that make the most sense are integrated into or linked to the organization’s core services of credit and possibly savings. Not only do integrated products enhance efficiency, but also they bolster the MFI’s core products. Property insurance, for example, makes the most sense when linked to assets purchased with a loan from the MFI, such as a house, business equipment or livestock.
Still, there may be justification for considering stand-alone insurance.
Although the main examples from the case studies of stand-alone insurance offered through MFIs were the credit unions, other types of MFIs might see this as a possible growth area. One of the biggest challenges would be the 464 Institutional options staffing structure, since the sale of stand-alone insurance would require greater expertise of field staff (see Chapter 3.7).
The strongest argument in favour of offering stand-alone insurance products is to retain policyholders who want to stop borrowing. MFIs that offer loan-linked insurance should seriously consider a continuation policy that enables clients to retain insurance cover between loans. As long as the MFI has a premium-collection method that is independent from a loan, this is a fairly low-risk product because it does not require additional screening.
A second reason to offer stand-alone insurance is to expand the MFI’s market, reaching people it cannot serve through savings and loans. If the MFI does adopt that approach and it sells microinsurance to non-members, the organization (or its insurance partners) is vulnerable to adverse selection risks. To control this risk, insurance should only be offered to persons who have joined a group for purposes other than accessing insurance, or increase benefits gradually over time (see Chapter 3.1).
2.2 Issues with long- and short-term insurance Short-term insurance is easier for MFIs to offer than longer-term coverage. It is easier to predict whether an insured event will occur in the next year than over the next five or ten years. If an insurer makes errors in the pricing, it is only committed to those mistakes for a short period of time, after which it can make adjustments. It is strongly recommended that microfinance institutions do not get involved in long-term insurance on their own.
Furthermore, many MFIs are not in a position to offer long-term insurance in partnership with an insurance company, because their delivery systems typically revolve around short-term loans. In India, Tata-AIG (an insurer) and the Bridge Foundation (an MFI) linked up to sell a long-term life insurance product that required premiums to be collected over many years. The pilot proved unsuccessful because the loan term and the insurance term did not coincide. When clients decided to stop borrowing, the MFI did not have a mechanism for them to continue to pay their premiums, resulting in many lapsed policies.
An MFI that uses a savings account as a delivery mechanism could theoretically offer long-term insurance. Yet microfinance institutions may see long-term insurance offered on behalf of an insurance company as competition for the MFI’s own savings products.
Microinsurance: Opportunities and pitfalls for microfinance institutions 465
2.3 Health insurance Health insurance is a difficult product for MFIs to offer, but there are some examples – including BRAC and Grameen in Bangladesh, SEWA and Shepherd in India, AssEF in Benin, MFIs collaborating with Microcare in Uganda, and TYM in Vietnam – that provide insights and lessons for other MFIs.
The link between the MFI’s core services and health insurance is not particularly strong, and therefore most MFIs tend to steer clear of such a complex and expensive insurance product.
Yet two compelling arguments may entice MFIs into the choppy waters of health insurance. First, MFIs with a strong social agenda may see themselves as much more than just a microfinance institution, which is certainly the case with the MFIs that provide health insurance in Bangladesh and India.
The second argument is that health expenses, for borrowers and family members, could adversely affect an MFI’s loan portfolio. This was a motivation behind FINCA Uganda’s initial relationship with Microcare. AssEF had a similar motivation. Its market research determined that, without protection against the financial risk associated with illness, AssEF’s members often used their income-generating loans to pay for health expenses, and then had difficulty repaying the loan. Their other options of covering health costs – withdrawing from their savings accounts, borrowing from moneylenders or selling productive equipment – all had negative effects on the microenterprise, and consequently the MFI’s loan portfolio. AssEF sought to address the root cause of this problem by providing health insurance.
Based on the experiences of MFIs offering health insurance, there are
three possible models:
1. Health provider model Both BRAC’s Micro Health Insurance Programme and Grameen Kalyan are built around their own healthcare clinics, which provide the vast majority of the healthcare services. In BRAC’s case, the clinics and the insurance scheme are managed separately; in both cases, the clinics and the health insurance scheme are independent from their parent company’s microfinance operations. The only link is that microfinance members get a premium discount, and the microfinance staff members are informally involved in marketing.
VimoSEWA) are not involved in product design, data management or claims payments, nor are they involved in the provision of healthcare.
3. Self-insurance Both AssEF and TYM provide the insurance on their own, including designing the product and carrying the risk. In TYM’s case, it offers a hospitalization benefit of VND 200,000 (US$13) payable only once a lifetime, so it is both simple and of limited value. AssEF, however, provides very comprehensive coverage, including 70 per cent of many healthcare expenses as long as they are performed by contracted healthcare providers. The MFI’s insurance department pays the claims directly to the clinics and hospitals.
MFIs interested in offering health insurance would be wise to keep the scheme at arm’s length from their microfinance activities. Unlike life insurance, where it is advantageous for the MFI to manage claims, with health insurance the MFI should steer clear of the administrative burden of claims processing. In addition, as discussed in Chapter 2.1, it is difficult for health microinsurance to be self-sustaining. Consequently, MFIs need to ensure that any insurance losses do not adversely affect their microfinance operations.
Ironically, AssEF has experienced the opposite problem: the microinsurance scheme has been suffering because of the poor performance of the loan portfolio. Since microinsurance was integrated as an additional voluntary service for microfinance members, the insurance initially reaped the benefits of the members’ confidence. However, due to increasing competition among microlenders, the MFI experienced high delinquency and drop-out rates.
These difficulties led to loss of staff motivation and a distraction away from premium collection to loan recovery.
2.4 Insurance for MFIs?
Besides considering what insurance products to offer their clients, microfinance institutions also need to consider their own insurance needs. Interestingly, AIG’s involvement in microinsurance in Uganda began during negotiations on commercial coverage for FINCA. MFIs working in partnership with an insurance company should consider packaging their entire insurance needs – those of the MFI and its clients – into the discussions to achieve a better deal. In addition, if staff are covered by some of the policies that they also sell to the MFI’s clients, it helps ensure that staff understand the policy.
If they do not like the product, there is a strong likelihood that the MFI’s clients will not like it either.
Microinsurance: Opportunities and pitfalls for microfinance institutions 467 In general, MFIs should assess whether they need the following types of
– Life and health insurance for employees: MFIs should be concerned with protecting their most valuable assets, their employees. Modest investments in life and health cover for employees and their families can reap significant returns in the form of staff retention, high productivity and fewer working days lost to illness.
– Fidelity insurance: Bonds guarantee a payment or a reimbursement of financial losses resulting from dishonesty, failure to perform and other acts. One type of bond is fidelity insurance, which protects the MFI from losses incurred due to fraudulent acts perpetrated by specified types of staff.
– Money storage and handling: Any MFI that stores or transports cash is vulnerable to theft. As the amount of cash in the safes or being transported to banks increases, MFIs would be wise to supplement their internal control and security policies with insurance coverage.
– Property loss or damage: Many microfinance institutions have a lot of money invested in their branch and head office infrastructure, and those offices are often located in high-risk communities. Certainly, protection against fire, vandalism and other property loss is worth considering.
– Deposit insurance: In many countries, deposit insurance is a public service provided by or in association with the central bank for regulated deposit taking institutions. However, such an arrangement could be delegated to an insurance company that has better information about the health of certain financial institutions than the central bank. For example in Poland, TUW SKOK provides deposit insurance on all savings accounts in credit unions up to €20,000 (US$25,000).
3 Conclusions There are no reasons why an MFI has to offer insurance. Indeed, most MFIs should focus on improving the effectiveness of their lending activities and introducing savings facilities before they distract themselves with insurance.
If an MFI decides to offer insurance, it needs to recognize that it cannot address all risks for everyone; it needs to determine the most cost-effective way to help clients solve their primary problems without undermining the organization’s core business. It also should consider if it has sufficient skills to provide insurance, either on its own or with an insurance company. Insurance training for microfinance managers will strengthen their ability to negotiate appropriate products on behalf of their clients.
468 Institutional options Microfinance institutions that are keen to offer insurance to protect themselves, their clients, or both, should explore the potential for partnerships with insurance companies. Where such partnerships are possible, they should adapt the products and systems to accommodate the characteristics and preferences of the low-income market. Where the regulatory environment allows, MFIs or associations of MFIs could also consider creating brokerage firms or even their own insurance companies, although these need to be managed at arm’s length to ensure that credit policies do not influence insurance policies, and vice versa.
When determining what products to offer, and through what channels, an important consideration is how an MFI can best create an insurance culture in its target market. For example, what can the MFI do in terms of product design, service standards and customer education to create conditions in which low-income households appreciate insurance and are willing to pay for additional benefits?