«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Governments can play different roles when trying to fulfil this responsibility. Firstly, as discussed in Chapter 1.3, governments can provide social protection, such as universal healthcare, workers’ disability benefits and oldage pensions. However, the fiscal income of governments is constrained. In many developing nations, no more than 20 per cent of the active population is usually included in regular social security systems (ILO, 2000). Many governments are currently unable to provide these fundamental services to the vast majority of their citizens.
Secondly, governments are responsible for regulating and supervising the insurance industry, which provides valuable protection to the country’s businesses and citizens, especially to those able to pay for it. If the government is unable to provide an appropriate degree of social protection itself, it should at least create an environment in which the market can extend protection systems to under-served segments. As described in the previous chapter, adjustments to insurance law and regulations may do much to enable commercial insurers to serve the low-income market.
However, even in a regulatory environment conducive to microinsurance development, market forces alone will not solve the problem of insufficient social protection coverage. On a purely commercial basis, microinsurance – with its small transactions, low premium income, relatively high administrative costs and hard-to-reach target market – is not particularly attractive to most insurance companies. Where coverage and quality of formal social security schemes are limited, and where insurance companies are not extending services to the poor, governments need to explore other options to increase social protection coverage.
The promotional role of governments 509 This leads to a third approach, where governments play the role of facilitators to help overcome market imperfections by promoting microinsurance through a variety of institutional options. In this promotional role, governments could even use their finite resources to promote additional investments from the private sector to provide protection. This chapter describes this third function and illustrates ways in which governments can promote microinsurance.
1 Policy-making, participation and consensus-building If a government considers social protection a policy priority and if it feels microinsurance can supplement other aspects of a comprehensive social protection scheme, it may decide to actively promote this approach. Before doing so, it is likely to weigh the potential of microinsurance against its limitations. Governments should involve all key stakeholders at an early stage in this process of discussing and formulating policies.
Microinsurance is neither the only, nor necessarily the best possible alternative to protect the target population against the most significant risks.
Most schemes reach only a fraction of the population and do not solve the problem of access for the poorest and most vulnerable groups, who cannot afford contributions and have protection needs beyond what microinsurance can offer. It would, therefore, be unrealistic to assume that microinsurance could cover everyone not covered by existing formal schemes. Yet it can play a contributing role; what exactly that role is will depend on the political process.
Decisions on public policies – particularly in the context of social matters – are essentially political, as they involve a number of fundamental, yet subjective questions that need to be explicitly addressed in a comprehensive public policy on social protection. What is, for example, the desired level of solidarity? A first step in the formulation of a policy on microinsurance is for the government to facilitate a participatory process that assesses whether the nation’s social goals may be effectively and sustainably pursued through microinsurance. In this context, the extent of a government’s commitment to its social objectives is important in determining whether and how it should become involved in microinsurance. A national policy framework should define the role of microinsurers in the larger context as well as the particular roles of the government and other stakeholders.
It is crucial to involve all key stakeholders in the process of formulating policies if they are to be widely accepted and broadly supported by the majority of the population. The stakeholders include civil society groups (e.g. religious bodies, NGOs), cooperative-type self-help organizations and 510 The role of other stakeholders their apex bodies, and commercial domestic and international insurers. Other important players in microinsurance include employers’ and workers’ organizations, service providers, professional associations and bi- and multilateral development partners.
Success in promoting microinsurance depends on close partnerships between all stakeholders; however, certain activities can only be provided by the state, such as the creation of legal frameworks and the provision of services that no commercial player would be able or willing to offer. Publicprivate partnerships (PPPs) may have particular relevance where national resources and know-how are limited. For example, one of the largest insurance companies in the world, Allianz AG, has teamed up with GTZ and UNDP to develop microinsurance products in India and Indonesia.
The overall process of participatory policy-making needs to be facilitated by the government, which requires the political will to do so. In this context, a technical problem can be that workers in the informal economy are often too insufficiently organized to communicate their needs to the government (Carrin, 2002). Politically, it may be difficult to arrive at a consensus on the degree of solidarity and redistribution required to extend social protection coverage to the whole population. It takes a lot of political will to extend coverage to the poorest since the issue of reducing their vulnerability competes with other priorities.
Among the key issues to be decided by stakeholders is the definition of the microinsurance concept, for which there is a range of options. For example, which delivery model(s) should be given priority – cooperative-type self-help organizations, partner-agent models, community-based insurance schemes, direct sales models or a mixture of some or all models? Other questions are those relating to compulsory or voluntary membership, the degree of co-financing or premium subsidization, and the admission of index-based risk management schemes or derivates (e.g. weather-index-based insurance schemes).
Depending on the specific circumstances in a country and after consultations with major stakeholders, the government needs to choose the most feasible options for the promotion of microinsurance. Careful evaluation allows the prioritization of possible instruments and ensures the selection of those with the highest potential impact on the nation’s social objectives relative to
their cost. The various tools or options at the government’s disposal include:
(a) creating an enabling environment, (b) strengthening institutions and (c) providing financial assistance.
The promotional role of governments 511 2 Creating an enabling environment Although often associated with the legal and regulatory framework, an enabling environment actually encompasses a broad range of areas. In fact, virtually every government activity, from law-making to the provision of public services (e.g. basic health, basic education, physical security and labour market policies that promote decent work) could be seen as contributing to an enabling environment. By identifying possible environmental or infrastructure obstacles that impede the development and expansion of microinsurance, governments may be able to make adjustments through limited investments that could significantly increase the availability and quality of insurance to the poor.
2.1 Legal and regulatory framework Many microinsurance providers operate outside the insurance laws where neither the interests nor the funds of consumers receive adequate protection.
As described in the previous chapter, a well-designed regulatory framework is a major factor in the effective and efficient provision of microinsurance services.
Apart from a specific law for microinsurance institutions, a number of additional legal regulations influence the creation, operation and expansion
of microinsurance schemes:
– The regulatory framework for microfinance institutions (MFIs) that may act as brokers or delivery channels – Laws for other types of institution such as cooperatives – The entire legal framework for the insurance market including reinsurance – Government accounting regulations aimed at preventing fiscal irregularities – Tax laws
to mention just a few.
Policymakers have to ensure the consistency of policies, laws and regulations relating to microinsurance. Thus, a systemic approach to policy-making is required.
The regulatory framework determines, for example, whether non-profit organizations, cooperatives and community-based microinsurers are formally allowed to enter the market. Moreover, it defines the scope for private initiative, e.g. whether commercial insurers are given additional, mandatory responsibilities through a quota system for the poor as in India. As an alterThe role of other stakeholders native to forcing insurers to enter the low-income market, they could be encouraged to do so through incentives, for example by offering tax advantages to private-sector insurers that offer products to the poor. In such a situation, it is important to recognize that the low-income market may require a different type of consumer protection (see Box 96). In addition, it may be necessary to explore ways of extending consumer protection to policyholders in informal insurance schemes.
The Insurance Ombudsman Sri LankaBox 96
The new office of the Insurance Ombudsman in Sri Lanka was opened on 1 February 2005. The positive experiences from the Financial Ombudsman Scheme in Sri Lanka led to the establishment of this new office. The objective of the Insurance Ombudsman is the satisfactory settlement of complaints by and disputes with policyholders of insurance companies covered by the scheme, which include ALMAO (All Lanka Mutual Assurance Organization) now that it is a regulated insurance company. The Ombudsman has the power to make monetary awards that are binding for the participating insurance institutions.
Apart from the primary function of attending to complaints, the Ombudsman engages in efforts to create greater awareness about insurance among people in Sri Lanka. Given ALMAO’s outreach to the low-income market, both the social marketing and the complaint-processing approaches will need to be adapted to the characteristics of ALMAO’s policyholders.
Source: Adapted from Enarrson and Wirén, 2006.
2.2 Risk prevention and social marketing Governments can play a key role in risk prevention and reduction. At a macro level, preventive policies to mitigate the impact of events such as economic crises, natural disasters and social conflicts can create a stable environment in which microinsurance schemes can thrive. In addition, risk-reduction activities such as improved flood protection systems, improved sanitation, preventive healthcare and effective monitoring of communicable diseases can significantly lower risk and, therefore, claims expenses, thus reducing insurance premiums and making insurance products more affordable for the poor (see Chapter 3.9). Naturally, these are initiatives that governments would want to initiate for citizens in general, not just to bolster microinsurance schemes.
The promotional role of governments 513 Moreover, governments can also move towards more equitable and inclusive labour markets. Since labour is often poor people’s main or only asset, equitable access to decent work is one of the most important aspects of risk reduction. Furthermore, the speed and quality of economic growth needs to be optimized, while increasing employment elasticity and the share of formal work in total employment; both will facilitate the ability of governments to mobilize compulsory funding for universal coverage (WHO, 2004). Lastly, the more the formal sector expands, the less alternative insurance mechanisms are needed, since formal sector workers are easier to provide with adequate formal social security coverage.