«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Source: Adapted from Radermacher et al., 2005a.
3.3 Facilitating linkages with commercial insurers In some countries, important microinsurance providers might include employers’ and workers’ organizations, service providers, professional associations, civil society groups and cooperatives. In particular, microfinance institutions that already have financial transactions with low-income households can play a key role in also providing insurance. All of these organizations may extend insurance to the poor, either on their own, in partnership with formal insurance companies, or within the framework of public-private partnerships.
As discussed in Chapter 4.2, the partner-agent model is a viable way to expand microinsurance. It links a commercial insurance company with an appropriate distribution channel to reach the poor, to the advantage of the insurer, the agent and the client. Given the mutually beneficial results of such a model, governments could help facilitate links between insurers and potential delivery agents.
Besides facilitating links, governments need to develop a legal framework conducive to such collaboration. For example, the Indian Insurance Regulatory and Development Authority (IRDA) has relaxed the licensing standards for microinsurance agents (see Chapter 5.2). It is also important to recognize that such relationships are not always mutually beneficial, especially when the delivery agents do not have a strong grasp of insurance concepts and therefore do not negotiate good deals for their clients. Consequently, governments also must ensure that consumers’ rights are respected and quality standards are met.
The promotional role of governments 519 4 Providing financial assistance Where microinsurance can be delivered purely on a market basis, financial support from the government is not needed. However, there are numerous situations in which purely market-driven microinsurance is not possible. For example, it can take several years for new insurance operations to be sustainable, except for the partner-agent model, which utilizes existing infrastructure. Market-based microinsurance is unlikely ever to reach the poorest and most destitute members of society, and therefore financial assistance might be required to extend the outreach of microinsurance schemes (i.e. serve poorer people). Subsidies may also be required for research and development, such as creating new products, enhancing benefits or experimenting with technology. Furthermore, apex structures may require financial assistance, at least until there are sufficient members to achieve economies of scale. Given the potential need for financial assistance, governments have to decide if they are going to make such investments, and if so, how they can be designed most effectively (see Boxes 99 and 100).
4.1 Targeted transfer payments To help deepen the penetration of microinsurance schemes, governments could include the provision of transfer payments to the poorest citizens unable to pay (in full or in part) for insurance (Dror and Preker, 2002). Targeted transfers to the poor have an important welfare impact. In this context, a political decision needs to be taken relating to the subsidy recipients: what are the selection criteria, and how can reliable statistical data be obtained on the poor and the poorest, their incomes and where they live?
In reality, many microinsurance operations depend on continuing access to some form of external subsidy. For example, VimoSEWA, which has been involved in microinsurance in India for more than a decade, experienced a loss ratio of 176 per cent in 2004 and a (projected) loss ratio of 154 per cent in 2005 based on the high claims for its health insurance benefits (the other product lines now provide a positive contribution).
As discussed in Chapter 5.1, subsidizing premiums may not be the most appropriate form of public intervention. Indeed, subsidizing health insurance schemes in places with restricted supply may lead healthcare providers to be less inclined to provide services to non-members, who are perceived as more likely to default on payment (Bennett, 2004).
Where the fiscal impact of subsidizing too many individuals would be unsustainable, the limited resources need to be targeted at the most vulnerable. In addition, most systems require some form of co-payment. The intenThe role of other stakeholders tion is to limit the cost to the public budget, but also to counteract opportunistic consumer behaviour (moral hazard). Another purpose of public transfer payments may be to close the recovery gap, which occurs when there is a systematic excess of expenditure on benefits over the income of a microinsurance unit.
Overall, based on a country’s needs, administrative capacity, banking system and political priorities, transfer payments can be:
– given directly to individuals to acquire insurance;
– provided to support new schemes (see Box 100);
– given to the social or community-financed microinsurance schemes (either regularly or during financial crises, both of which are likely to improve their financial viability);
– paid into a financial pool (through mechanisms including reinsurance);
– given to providers to cover investments or uninsurable services or – provided in the form of tied transfers (direct and indirect), i.e. as subsidies that encourage the use of preventive care, primary care and essential pharmaceuticals.
In reality, a balanced mixture of these options has to be found. Considering the many market imperfections, it could be argued that subsidies would be used more efficiently if channelled through government providers or tied to certain goods or activities. At present, however, there is insufficient data to suggest that one type of subsidy is superior to others (Ranson and Bennett, 2002).
In providing subsidies for microinsurance, governments need to understand the effects on non-members as well as on members, and analyse whether overall governmental objectives are being optimally met given the chosen combinations. In general, it should be noted that subsidies do not guarantee social fairness or improved access for the poor – how the money for subsidies is raised and how it is spent are both important factors (Busse, 2002).
(US$795,454) in the second year. However, the state’s assistance goes beyond mere financial support.
Since Indian cooperatives are somewhat dependent on the government, the Department of Cooperatives can influence their involvement. The decision to allow members to simply deduct the insurance premium from their business income generated with the cooperative society was a major incentive for new members to join. The cooperatives are Yeshasvini’s key to large numbers of insureds, covering 1.6 million members in the first year, and growing to 2.2 million in the second year. However, as the subsidies were phased out, the premium had to be increased to Rs. 120 (US$2.73), which significantly undermined renewals. In the third year, only 1.45 million members subscribed, illustrating the disadvantage of subsidizing the premiums.
Source: Adapted from Radermacher et al., 2005b.
4.2 Reinsurance Reinsurance is another way in which public intervention could contribute to the viability of microinsurance schemes. As microinsurance is often used by a targeted population living in close proximity, the risk pool is not well diversified by location or occupation. Social reinsurance techniques could be used to improve the viability of small risk pools typical of informal microinsurance schemes (Dror and Preker, 2002).
However, just as the poor have no access to insurance, microinsurance providers typically have no access to reinsurance (see Chapter 5.4). If the market-based reinsurance options of microinsurance schemes are insufficient, and in the absence of feasible reciprocal arrangements, the government may
encourage and support the development of reinsurance mechanisms by either:
– reinsuring microinsurance schemes directly against certain covariate risks (the government may both establish a fund and make financial contributions to the pooled resources, i.e. a combination of reinsurance and subsidy) or – subsidizing the premium microinsurers would have to pay for reinsurance.
Some observers argue that this approach is not sustainable, may create negative incentives and could perpetuate poor microinsurance designs (Newbrander and Brenzel, 2002). Given the limited practical experience in this area, it is not clear what financial resources, managerial capacity or institutional features a government would need to reinsure successfully. An alternative approach would be to facilitate links between microinsurers and government-sponsored reinsurers (see Box 101).
522 The role of other stakeholders
Africa ReBox 101
The African Reinsurance Corporation (Africa Re) was established in 1976 by the 36 member states of the Organization of African Unity with the aim of reducing the outflow of foreign exchange from the continent by retaining a substantial proportion of the reinsurance premiums generated. Its members are national governments, the private sector and the African Development Bank.
The purpose of Africa Re is to foster the development of the insurance and reinsurance industry in Africa, to promote the growth of the national,
regional and sub-regional underwriting and retention capacities, and to support African economic development. To achieve its purpose, it:
Africa Re is exempted from all taxation. It also can transfer its funds freely and has the freedom to open convertible bank accounts. These privileges have enabled it to grow without major regulatory hindrance. Africa Re’s first experience in microinsurance was with the Kenyan MHO Mediplus and it now reinsures Microcare in Uganda.
Source: Adapted from Africa Re, 2003.
5 Concluding remarks Microinsurance is not designed to become the main pillar of a country’s social protection system, but it provides a complementary strategy that might be applied within a larger framework. As a first step, the government needs to facilitate a participatory process with key stakeholders to weigh the pros and cons of microinsurance and assess whether this approach would contribute to the country’s overall social policy objectives. If it is decided to include it in a broader social protection framework, the government may facilitate the formulation of an explicit policy on microinsurance, consistent The promotional role of governments 523 with all other relevant policies, which will be helpful in creating an environment conducive to building confidence in microinsurers.
Subsequently, governments can assist in the creation, replication and development of microinsurance through a variety of instruments. In this context, the government’s first responsibility is to create a favourable climate for its development, beginning with regulatory adaptations that are directly and indirectly related to microinsurance. The creation of an enabling environment also involves the promotion of loss-prevention campaigns, cultivating an insurance culture, and the reduction or elimination of corruption and fraud. Other important instruments include research on microinsurance, as well as the dissemination of research findings and lessons learned.
The government’s options for the active promotion of microinsurance include institutional support and financial assistance. Institutional support mainly involves the promotion of microinsurance networks and sound apex structures, linking microinsurance schemes to donors and international funds, and facilitating links between potential delivery agents and commercial insurers.
Financial support appears to be critical if governments wish to extend coverage to the poorest population groups. This could be provided through targeted transfer payments to ensure a high level of participation by the poorest and most vulnerable people, to improve the financial viability of microinsurance schemes, to cover certain socially important investments by providers or uninsurable services, or to encourage the use of preventive care, primary care and essential pharmaceuticals. Financial assistance also includes the government’s role in reinsuring microinsurance providers against covariant risks.