«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
There remains a gap between the risks that the poor really worry about – such as affordable healthcare and protection from natural disasters – and the insurance products that MFIs can realistically offer, even in partnership with an insurer. Microfinance institutions have to be realistic about what they can and cannot provide, and at what cost. Indeed some types of insurance for the poor, such as health insurance, may need to be subsidized, which might not make sense for an MFI with a commercial business model.
5 The role of other stakeholders 5.1 The role of donors Alexia Latortue The author appreciates the insights and suggestions provided by Frank Bakx (Rabobank Foundation), Jeremy Leach (FinMark Trust), Jeanette Thomas (CGAP) and Ellis Wohlner (consultant to SIDA). The author is particularly grateful to Aude de Montesquiou (CGAP) for her excellent research support and extensive feedback.
Poor people in developing countries enjoy limited protection against the numerous perils of life. Losers in the “lottery of geography”, they live in countries with large informal economies and weak institutions. Governments strapped for cash and with inefficient systems are often unable to provide adequate social protection. The private and formal sectors of these countries are typically tiny and closed to the majority of citizens. Insurance companies are no exception, and they often do not appreciate the market opportunity at the bottom of the pyramid. Exclusion from both social protection and formal insurance is thus the norm.
In this context, what is the role of international development aid? This is the central question the chapter addresses. Building on the aid effectiveness initiative of the Consultative Group to Assist the Poorest (CGAP), this chapter seeks to understand donor systems and to examine how they can hinder or foster the application of good practices. It also draws from the Preliminary donor guidelines for supporting microinsurance to suggest specific strategies donors may employ to support the expansion of microinsurance services.1 Microinsurance is growing in popularity among donors, perhaps because it addresses the core vulnerabilities of the poor. The objectives of microinsurance – helping low-income people manage risks and stopping the vicious cycle of poverty and vulnerability – respond to many donor priorities. Both faces of Janus described in Chapter 1.1 are highly relevant to donors.
Whether from a social protection point of view or within the context of a private sector/financial sector approach (or a combination of both), donors are interested in the contributions of insurance to the Millennium Development Goals. However, this donor enthusiasm is cause for both caution and optimism.
Acquiring a thorough understanding of the market at all three levels is an important first step for any donor considering a microinsurance intervention. The country context matters, as does the state of market development.
To enable microinsurance to flourish, it is essential to understand clients’ needs and to promote insurance literacy. A range of insurance providers (commercial insurance companies, cooperatives, mutuals, etc.) and delivery mechanisms are needed to serve people without access where they live and work. For these retail providers to be strong and transparent, they require access to a host of services from reinsurance and training to national information clearinghouses. Finally, the overall policy and regulatory environment is important for the protection of consumers, the reduction of barriers to entry and the promotion of competition.
2 Donor requirements to effectively support microinsurance Without the right knowledge and resources, overzealous donors may design ineffective programmes that never reach significant scale and waste money.
Worse, failed microinsurance schemes can breed distrust among clients who are often wary of insurance services to start with, and among insurance providers sceptical of this new market segment. Well-directed donor interventions, however, can create new focus, know-how, innovations and powerful demonstration effects in expanding poor people’s access to insurance services.
Much has been learned about what it takes for donors to manage effective programmes though CGAP’s work on the effectiveness of aid.3 Depicted as the Aid Effectiveness Star (Figure 35), five core elements provide a useful framework to discuss the donor prerequisites needed to successfully support insurance services for the poor. While all elements of the Aid Effectiveness Star are important, not all donors can be equally strong across the five.
Rather, donors should use the five elements to assess their internal systems and identify areas for improvement. They can use this analysis to determine
1) whether to intervene at all in microinsurance and 2) how to intervene using their comparative advantage.
2.1 Strategic clarity Does the donor possess a clear vision and understanding of what microinsurance is, how it contributes to the agency’s overall development goals, and what it takes for the agency to support microinsurance effectively?
Donors’ interest in microinsurance could stem from various entry points, including social protection, health, agriculture, risk management or financial services. So it is not surprising that microinsurance programmes can originate from several departments within the same donor agency. At the ILO, for example, the Social Finance Programme looks at the financial sector angle, while the STEP programme considers the social protection perspective. Few development agencies have dedicated insurance departments or units.
Opportunities for sharing information and making a real impact may be lost due to the scattered presence of microinsurance in donor agencies.
Donor staff often function in silos. Colleagues working on the same issue, though looking at it through different “lenses”, may not speak to each other or even know of each other’s activities.
There are few stand-alone microinsurance projects in donor agencies’ portfolios, but rather insurance is usually included as a component of larger projects. As such, microinsurance might not get the specialized attention it requires. Rarely does one part of the organization have mandatory vetting or quality-control authority.
474 The role of other stakeholders Strategic clarity also affects how donors interact with key stakeholders on the ground – the government, private sector and civil society. A strong penchant for one face of Janus over another (e.g. social protection versus private sector) will influence who donors engage with and the content of negotiations. Different policy issues will emerge as well. From the social protection face of Janus, a core question for donors may be “how far does promoting microinsurance let governments off the hook for providing social security?” With the private sector face, donors might ask “how appropriate is it to transfer donor subsidies to private sector companies?” Donors do not view the subject through neutral lenses. Strategic clarity affects how objectives are set, the expertise recruited, and the type of monitoring implemented. Decisions that appear operational in nature may actually have major strategic implications. For example, opting for group-based, as opposed to individual, policies generally results in far more inclusive and cost-effective insurance. Whatever the entry point, clients should be at the centre of all decisions made. In particular, donors should consider clients’ needs for risk-management strategies broadly – insurance might not always be the best response. Other services such as savings can be quite effective in helping clients manage risk.
2.2 Strong staff capacity Are there sufficient staff in the donor agency with insurance expertise relative to the size of the insurance portfolio? Even when the donor relies on outsourced expertise, a minimum level of “insurance literacy” is needed internally.
Involvement in this field requires a basic understanding of insurance principles and practices. In addition, depending on the type and level of intervention, donors may require specific technical expertise such as insurance management and accounting, actuarial sciences, underwriting and claims adjustment, or knowledge of insurance regulation.
However, insurance expertise is scarce among most donor agencies, with the lack of microinsurance knowledge even more acute. This problem is compounded by an overall trend for donor staff to become generalists. The lack of specialization of staff has serious consequences for the quality of programmes. While it is not realistic to expect all agencies to have in-house microinsurance expertise, staff managing projects that include insurance should have a minimum level of “insurance literacy” to outsource intelligently and know the right questions to ask.
Role of donors 475 Unfortunately, in the case of microinsurance, there is even a dearth of readily available expertise available for contracting. Several donor agencies rely on the same, limited number of microinsurance consultants. Donor networks in some of the specialized areas required for insurance, for example actuarial science and underwriting, are small or non-existent.
Besides having some in-house expertise in insurance, effective donors should possess local market knowledge. Decentralized donors with staff based in countries/regions may have an advantage in this regard. Without an understanding of the local environment, donors cannot properly judge whether implementing partners are assessing the priority needs of the target population, the types of risks they face, existing risk-management mechanisms and the additional protection they need.
2.3 Appropriate instruments Does the donor agency have instruments appropriate for innovative pilot programmes? Can the donor deploy small amounts of funding flexibly, with a long-term perspective? Can the donor work directly with the private sector?
The range of donor instruments available includes technical assistance, grants, loans, equity, guarantees and policy support. Since microinsurance is still in an experimental stage, donors should adopt a patient and cautious approach, providing small amounts of funding, perhaps for longer periods of time. Asking for co-funding from partners is one way to test real, long-term commitment. From the beginning, plans for reaching sustainability should be discussed.
Insurance is a highly specialized activity. Thus, whenever possible, donors should seek to work with existing institutions that already have this expertise, such as insurance companies or perhaps health mutuals (mutuelles de santé). Working with formal insurers raises the question of the appropriateness of providing public subsidies to privately-owned companies. Most development agencies enthusiastically support private sector development and public-private partnerships. Yet, many donor staff feel uncomfortable about granting scarce donor funds to private players. Furthermore, much remains to be learned about how to structure this support and how to plan for exit (see Box 86).
476 The role of other stakeholders Unleashing the catalytic role of the private sector with public subsidy4 Box 86 Donor subsidy, when well-targeted and time-bound, can incite the private sector to help address gaps and overcome market failures. The following are
some principles for the provision of subsidies to the private sector:
In markets where private-sector insurers indicate an interest in the lowincome market (e.g. India, South Africa), donors can play a catalytic role in drawing them in and linking them to institutions able to fulfil front office functions. In such cases, money is less important than knowledge, tools and networking.
However, the reality of certain countries is that formal insurers are years away from entering the low-income market. In these countries, various types of non-specialized institutions offer insurance, ranging from credit unions to health mutuals. Donor funding may be usefully deployed in this approach, especially technical assistance and grants. Technical assistance can help improve market research, product development, training and client education. Grants may be used to defray the purchase of fixed assets or to cover operating losses. To avoid creating disincentives for good management and efficiency, donors should only cover operating losses in the first few years when the client base is small and premiums do not yet fully cover costs.