«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
2. Protecting individual policyholders, including prospective policyholders, from mis-selling and improper handling of claims, and ensuring that their grievances are redressed in a timely fashion.
3. Developing insurance markets by improving market efficiency and including persons who currently have no access to or are unable to afford insurance through appropriate product design and delivery mechanisms.
Insurance authorities do not attach equal importance to these three aims.
Much of their work is concentrated on the first two. Although improving market efficiency by correcting market imperfections is a classic task of supervisors, not all insurance authorities agree on a market development function. An analysis of the International Association of Insurance Supervisors (IAIS) database of national insurance regulations reveals that few member countries have an official development mandate. To fulfil this develop
ment function, authorities can mandate insurers to serve the low-income market, use moral suasion to impress upon insurers the need to widen their reach, or decide on a middle course. Supervisors increasingly realize that an enabling regulatory environment and better appreciation of the dynamics of the insurance market could help remove the perceived obstacles that normally discourage insurers from serving the low-income markets.
This chapter describes what supervisors have done, or can do, to support the growth of microinsurance by adapting their regulations. The chapter limits itself to the regulatory aspects of the insurance market.2 The first section provides some background information on the regulatory environment for microinsurance. Section 2 summarizes the main regulatory barriers, which vary depending on whether one is creating a microinsurance institution or distributing microinsurance products. The third section describes the experiences in India, South Africa and the Philippines, where insurance authorities and policymakers have tried to make insurance markets more inclusive, but have chosen very different solutions. The last section summarizes the major challenges and lessons learned, and suggest possible next steps.
1.1 Inclusive financial systems A key strategy for enhancing economic development and alleviating poverty is to make financial systems more inclusive, for example by improving access to savings and credit services for un- and under-served markets. In part, poverty stems from the fact that low-income households and markets do not have the same opportunities to finance investments, accumulate capital or protect assets (including human assets). The poor’s heavy reliance on informal financial services – such as moneylenders, under-the-mattress savings and mutual assistance societies – can be inefficient and expensive, and may even exacerbate poverty.
An inclusive financial system makes insurance available to low-income persons. However, many commercial insurers and policymakers believe that providing insurance to the poor is the responsibility of the state. Although many governments have social protection programmes, the targeting of these schemes is often ineffective. The poorest segments do not always benefit from
the subsidy, while people who can afford insurance often find ways to access these benefits. In general, governments have made little effort to shift the burden of risk-pooling to market-led schemes; and the private sector (commercial insurers) seems to have little incentive to seek out this market segment.
1.2 The informality of microinsurance In the absence of social protection and commercial insurance coverage, many informal microinsurance schemes have emerged, operating without an insurance licence. By staying small and keeping quiet, these informal providers hope that supervisors will not react. This has been the approach of many microfinance institutions that have provided insurance coverage to their members on a self-insurance basis. However, there are also large microinsurance schemes (see Box 90) outside the realm of prevailing insurance laws.
Another way to circumvent insurance regulations is to declare microinsurance services to be a non-pecuniary benefit. In many countries, healthcare facilities allow free or discounted access to healthcare in exchange for regular payments (premiums). Even though these schemes have a risk-pooling element, they are often called pre-payment schemes to disguise the fact that they are some form of insurance. Yet because the schemes are not licensed, the customers have little recourse if the hospital does not to keep its promises. Many credit unions or cooperatives also avoid insurance regulations by offering informal insurance as a member benefit.
Informal insurance in South AfricaBox 90
In South Africa, a number of schemes offer products that closely resemble life insurance. In the informal sector, there are an estimated 8 million members of informal burial societies contributing in excess of US$1 billion per annum in “premiums” towards coverage for the risk of death. Some of these schemes are quite large. The Great North Burial Society, a registered Friendly Society, has more than 20,000 lives covered, but has no access to reinsurance as it is not a licensed insurer.
As the Insurance Amendment Act (2003) prohibits the use of the words insurance, funeral, burial or derivatives thereof in the description and marketing of these products, they go under different names, such as “bereavement benefits” or “death benefit plans”. It seems that the Amendment Act was intended to prohibit the underwriting of funeral cover without a shortterm insurance licence, but legal loopholes continue to allow such informal insurance to be sold under different names.
Source: Adapted from Genesis Analytics, 2005.
An enabling regulatory environment for microinsurance 491 1.3 The implications of the lack of a regulatory framework Not having to comply with regulations has some advantages for microinsurers. Informal providers do not have to adhere to regulatory standards and do not have to comply with the supervisory burden (i.e. comprehensive reporting, internal controls and actuaries). They have more freedom to innovate and can potentially offer cheaper products, which may ultimately appear to benefit their clients.
However, the informal nature of these schemes also has serious drawbacks. The most obvious one is that it leaves policyholders unprotected against opportunistic behaviour. In the absence of supervision, customer protection is a serious concern. The long-term viability of these schemes is uncertain since their premiums may not have any actuarial basis, or their management may not be sufficiently skilled. Microinsurance schemes are also subject to greater covariant risk and are unlikely to have reinsurance protection. A catastrophe can pose a serious threat to the solvency of local microinsurance schemes. Finally, the growth of informal schemes can pose a threat to sustainability, e.g. when burial societies become larger, the effectiveness of the member-governance system is undermined and a separation is required between management and ownership. At this point, the burial society also accumulates substantial assets, which increases the risk of fraud or theft to a degree that member governance cannot control (Genesis Analytics, 2005).
The positive effects of providing microinsurance beyond the radar of insurance supervisors have to be weighed against its negative effects on institutions and markets, as well as on the economy. As far as the institutions are concerned, many microinsurance providers currently have no choice. If they could get a licence, they would have the chance to improve their operations, grow and attract investors. It is realistic to expect that many would opt to become a part of the formal insurance industry.3 As a result of regulatory barriers, existing and potential microinsurance providers have remained excluded. Consequently the market remains less developed – low-income segments are not protected, government budgets are not relieved, insurance markets are not inclusive, financial innovation is sluggish and deeper penetration of financial services does not take place.
However, formalization can also be accompanied by a number of problems for insurers targeting the low-income segment. One problem is that the social orientation of some microinsurers may fade away when they become licensed. This can create new problems, such as those experienced by ALMAO (see Box 91).
ALMAO in Sri Lanka, which uses credit unions as its main distribution channel, changed from an informal scheme to become a regulated insurer in
2002. When subjected to regulation as a fully-fledged insurer, the organization felt compelled to change its product line. Instead of continuing to focus on the funeral policies and other simple, low-cost products it offered as an informal insurer, ALMAO introduced endowment policies that have not sold well, perhaps because the premiums are much higher than the target market was used to, and the marketing of these more complicated products required better-educated and trained staff in the credit unions. It is also possible that the professional insurance management brought in to run the new insurance company unintentionally steered the organization away from its core market, or did not consider the priorities of the credit unions and their members. The general difficulty of committing credit union staff to insurance marketing may also have increased because ALMAO became a more distant, commercial and professional organization.
Source: Adapted from Enarrson and Wirén, 2006.
1.4 Insurance supervisors and microinsurance Some insurance supervisors are becoming more interested in and sensitive to the challenges and potential of microinsurance. In line with global efforts to increase the outreach of financial and insurance services, supervisors are increasingly mandated to facilitate their governments’ efforts to relieve themselves of funding insurance and social protection schemes through public budgets, and transferring part of the basic safety net for low-income populations to the private sector. As a result, some supervisors support initiatives to make the insurance market more inclusive, so that formal insurance companies can take advantage of this new market opportunity and informal schemes can integrate into the formal insurance sector, as illustrated below in Section 3.
However, in general supervisors lack information on and experience with microinsurance and are unaware of alternative legal and regulatory regimes that encourage insurance for the poor. In some cases, policymakers believe that poor people do not want insurance or cannot honour financial obligations,4 and that they must therefore be covered by the state or through social
security schemes. They do not as yet appreciate the role of microinsurance in financial sector development. Another widespread assumption is that existing insurance laws and regulations are non-discriminatory, which therefore ensures that low-income people have equal access to insurance – an assessment that does not stand up to scrutiny.
Even if supervisors have taken notice of microinsurance schemes, they do not see the necessity to react due to other priorities. They are often under pressure to focus on supervising commercial insurers that are a greater threat to the stability of the financial system, instead of licensing and supervising additional, often small, insurance providers that have a negligible market share, and which may require a completely different supervisory approach.
Also, supervisors often do not know how they can fulfil their developmental role because innovative regulatory solutions for microinsurance remain scarce. Last but not least, in many emerging markets supervisors are often not interested in microinsurance because the insurance industry itself is still in an infant stage and they are under heavy pressure to regulate and supervise that properly.