«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Where microinsurers offer long-term policies, the prescribed commission structure may not be appropriate. For example, the commissions approved by the Insurance Board of Sri Lanka (IBSL) pay 30 per cent in the first year, but drop off to 5 per cent after Year 4. In an environment where banking or postal payment systems are not widely used, the agent is responsible for collecting premiums, often by going door-to-door. Given the required commission structure, Enarrson and Wirén (2006) argue that the retention rate is likely to go down drastically when the agent’s commission is reduced since it is much more attractive to recruit new clients than to collect premiums from old ones. Therefore, one can expect a high lapse rate that will undermine the credibility of insurance among the low-income market.
Another product-related regulatory barrier is the fact that insurance companies cannot underwrite composite business, even though it might be an appropriate product structure for the low-income market.9 In many jurisdictions, licensing requirements do not allow the formation of composite insurance companies, but require separate companies for life (long-term) and nonlife (short-term) business. The protection achieved by not mixing long-term and short-term liabilities is justified for commercial lines of insurance or for policies with large sums insured. However, the same logic does not apply to microinsurance, where policies generally do not go beyond five-year terms, and the vast majority are for one year or less (see Box 95).
AIG UgandaBox 95
AIG Uganda covers many microfinance borrowers, but with a non-life licence, it can only provide accidental death and disability insurance. However, the poor do not differentiate between different types of death. It does not matter whether one dies in a car accident, or from malaria or a heart attack.
These microfinance clients want protection regardless of the cause of death.
AIG Uganda cannot legally provide life coverage even though most terms are only four or six months (corresponding to the MFIs’ loan terms).
Source: Adapted from McCord et al., 2005a.
As regards suitable types of products for low-income segments, it appears that group products are the most appropriate. It is unclear whether endowment policies should be recommended for microinsurance clients at all. Endowment policies require a savings discipline that low-income segments often do not have due to fluctuations in their household cash flow, 9 Arguments for and against composite or basket covers are presented in Chapter 3.1.
An enabling regulatory environment for microinsurance 499 which leads to high lapse rates (see Chapter 2.2). Furthermore, endowments may actually be a poor form of savings for these households due to the insurer’s high cost structure and taxation requirements.10 Policy wording requirements are sometimes unsuitable for low-income clients, who are often illiterate (even educated people cannot understand most insurance contracts!). Insurance policies for the poor should be written in very simple language without legalese, so as to ensure that the terms and conditions are easily understood.
In jurisdictions where a tariff regime is in vogue, the rates, policies, terms and conditions are standardized either through industry practice or regulation. Although such a regime may appear to have several advantages, it can also hamper innovation and competition, which are particularly important for microinsurance.
2.3 Macro-level barriers There are other barriers related to policy and legal framework, the implications of which are not yet properly understood, but which are nevertheless worth identifying. Firstly, some jurisdictions may face over-regulation of the insurance sector in general. For example, some countries restrict foreign investments in the insurance industry, which makes it difficult to transfer know-how to make delivery of microinsurance products and services more effective and efficient. Furthermore, protectionist policies may require the purchase of over-priced and/or low-quality domestic reinsurance.
Secondly, overlapping regulations can create complications for microinsurance design and delivery. For example, in South Africa, a large burial society needs to have a legal personality (registered with the Department of Trade and Industry), be registered as an insurer (financial services regulator), may be supervised by an apex or self-regulatory body,11 and if providing an in-kind benefit (funeral services), be regulated by the Department of Health.
Thirdly, when governments maintain or launch subsidized insurance schemes, they do not usually consider whether these schemes could be offered via market mechanisms. An analysis of whether these schemes could be maintained without a subsidy is not carried out. Instead of popularizing the existing schemes, such government action undermines microinsurance
providers as policyholders migrate to the subsidized scheme. As a result, the strains on budgetary resources remain and the subsidies are often not employed or targeted properly.
3 Country experiences – preliminary insights Despite the wide-ranging and complicated regulatory barriers, there are solutions, some of which are actually being implemented. Several countries have adapted their regulatory frameworks to microinsurance.12 This section describes the experiences in India, South Africa and the Philippines, which employ different strategies to overcome regulatory obstacles to the expansion of microinsurance.
3.1 India India’s Insurance Regulatory and Development Authority (IRDA) has taken a proactive approach in promoting microinsurance by obliging insurance companies to serve the poor in the hope that this forced familiarity will help insurers see the potential of the low-income market. In what is essentially a quota system, all insurance companies are obliged to underwrite business in pre-defined rural areas13 and in the social sectors.14 The evidence from these quota requirements is mixed. Failure to attain the targets has resulted in financial penalties for some insurers, and repeated violations could cause an insurer to lose its licence. Some insurers perceive the requirements as a cost of doing business and dump poorly-serviced policies on the market. Other insurers like ICICI-Lombard and Tata-AIG now consider the poor to be a viable market opportunity and have voluntarily exceeded their quotas, so the forced familiarity approach could be paying off.
The extent to which this quota system is replicable in other countries remains doubtful since it is not in line with market-led policies for financial systems development.
12 India, Morocco, Trinidad & Tobago, the Philippines and Japan are among the few countries where regulations have been adapted to microinsurance. South Africa has adaptations in progress.
13 Rural areas are defined by the Census of India as places which simultaneously satisfy or are expected to satisfy the following criteria: (i) a minimum population of 5,000, (ii) at least 25 per cent of the male working population engaged in agricultural economic pursuits and (iii) a population density of at least 400 per square kilometre (1,000 per square mile). In these areas, life insurance must account for 5 per cent of total policies in Year 1, rising to 16 per cent from Year 5 onwards and general insurance must be 2 per cent of total gross premium written in Year 1, rising to 5 per cent from Year 3 onwards (IRDA, 2002).
14 The social sectors are defined as “unorganized workers, economically vulnerable or backward classes in urban and rural areas”. Here, each insurer has to maintain at least 5,000 policies in Year 1 rising to 20,000 in Year 5, for both life and general insurance. This is regardless of the size of operations (IRDA, 2002).
An enabling regulatory environment for microinsurance 501
government that the capital requirements for health insurance be reduced by half to increase the number of health microinsurance operators.
The new microinsurance regulations show one path to enhancing distribution efficiency, by a partial relaxation of training and remuneration norms and by the bundling of products, without compromising the risk-taking ability of a commercial insurer.
3.2 South Africa (SA) Microinsurance in SA has been undertaken for many years, just not under that name. The most common form of microinsurance is funeral insurance (often offered under an Assistance Business Licence in SA), which is “a life policy in respect of which the aggregate value of the policy benefits, other than an annuity, to be provided….does not exceed R10,000 (US$1,500)16 or another maximum amount prescribed by the Minister”. The Assistance Business Licence then allows uncapped commissions. The Friendly Society Act allows for cover up to R5,000 (US$750). All other funeral insurance providers have to register under the Long-Term Insurance Act, which requires minimum capital of ZAR 10 million (US$1.5 million). They can offer funeral insurance for any sum assured, but their commissions are capped (Genesis Analytics, 2005).
Most microinsurance in South Africa is generated by the funeral industry, which has been in the low-income market for some time, but the market is still under-served. The question is how to expand funeral services in a sustainable manner. In this regard, the SA Financial Services Board (FSB), the nonbank regulator and supervisor, faces a significant dilemma. A large proportion of funeral insurance is effectively unregulated since the main providers – burial societies and funeral parlours – are registered under the Friendly Societies Act. The supervisor is concerned about the continued viability and sustainability of this model, and the ability of existing providers to manage their risks in the future.17 In the event of failure, the insurance supervisor, as well as the insurance industry, would face a reputation risk and market confidence could be devastated. Instead of being reactive, the supervisor, the government and the existing industry are considering proactive steps.
South African supervisors have not intervened as directly as their India counterparts to legalize and promote microinsurance. Rather, they rely on 16 US$1 = R6.65 (South African Rand) 17 Besides revealing the significant scale of burial societies in South Africa (see Box 90), the FinScope Africa surveys of financial services (www.finscopeafrica.com) indicate that informal mechanisms are not ideal: 9 per cent run out of money to pay claims and 4 per cent suffer from fraud. Default rates at these levels among formal insurers may be seen by regulators as a systemic problem, particularly because of the large numbers of people affected (Genesis Analytics, 2005).
An enabling regulatory environment for microinsurance 503 the Financial Sector Charter,18 whereby all financial service providers have agreed to voluntarily serve the low-income market. Consequently, the SA insurance industry has experienced a huge wave of innovation as insurers experiment with new delivery channels to reach the poor, including joint ventures and partnerships with retailers (see Chapter 4.6). It is too early to assess whether the new wave of innovation will succeed. At present, less than 1 per cent of SA’s poorest 60 per cent have short-term insurance (i.e. nonlife), which has to be raised to 6 per cent if the Charter’s targets are to be met.
To assist companies in meeting the targets, the FSB is responsible for promoting consumer education. Therefore, the FSB has a massive role to play in terms of facilitating, funding, monitoring and coordinating better consumer education.
At present, there is an initiative to create a more level playing field and to remove burial societies and funeral parlours from the Friendly Societies Act to a parallel Cooperatives Act which is more suitable in the SA context. The development of this new tier will comprise a dedicated funeral insurance licence available to all players in the market, with reduced entry and compliance requirements. The new tier should be accessible to both member-based and commercial insurers. Small, member-based burial societies should come under the new Cooperative Bill.