«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Finally, insurers who decide to withdraw from an entire class, line, territory or book of business may cede the entire portfolio to reinsurance, although in reality it is more likely to see a competing insurer take the market share over. This enables insurers to continue to service clients without breach of contract, while no longer assuming any financial exposure linked to this portfolio. This is called portfolio insurance.
The focus of this chapter is on the contribution of insurers and reinsurers to microinsurers. The chapter first considers the evidence from the case studies regarding relationships between insurers and reinsurers with microinsurance schemes, and then describes options to expand the range of opportunities for microinsurers to benefit from the value proposition of reinsurers.
2 Involvement of commercial insurers and reinsurers in microinsurance The case studies listed in Appendix 1 provide several examples of cooperation between commercial (re)insurance companies and microinsurance organizations, as described below.
1. The relationship between Spandana, an Indian microfinance institution, and the Life Insurance Corporation of India (LIC) was short-lived because LIC’s products and processes did not match the priorities of the target population. Instead, Spandana chose to design its own life insurance product based on the mortality data it had obtained from LIC. Interestingly, Spandana found that its own product generated excessive surplus, using the same mortality rates and the same premium as LIC had. Spandana, therefore, added more benefits without increasing the premium. Providing in-house insurance enabled significant improvements in claims settlement as well.
2. Spandana could not obtain reinsurance because it is not a licensed insurance institution. It chose to minimize the threat of covariant risk in two ways: excluding risks that could cause extremely high claims (e.g. deaths and damage caused by epidemics or natural disasters) and limiting benefits to a relatively low level. These measures reduced the attractiveness of the product and its usefulness for the insured; this loss of usefulness could have been avoided by reinsurance.
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3. VimoSEWA (India) has an agreement with two commercial insurers, Aviva and ICICI Lombard, under which it maintains responsibility for distribution, premium collection, record-keeping and claims payment. The commercial insurers set the premium and underwrite the risks. Responsibility for product design is shared through an informal consultative process between the insurers and VimoSEWA. This division of labour leaves VimoSEWA with certain functions that are not typically carried out by insurance agents. Additionally, VimoSEWA’s responsibility for keeping records and settling claims gives it access to more information than the typical agent would have. With some underwriting assistance, VimoSEWA could exercise more control over the pricing of the insurance products, with a view to verifying that the profit margins of the insurers are fair.
4. In 2001, Shepherd (India) entered a two-year partner-agent contract with insurance companies HDFC-Chubb and ICICI Prudential. Assuming that the low premium levels did not justify investment or involvement in this community, the insurance companies kept their contacts to a minimum.
However, claims processing, which was run from the head offices of the companies, brought to light that the insurers had gained insufficient understanding of the conditions and requirements of the insured: the procedures were too slow and too complicated for the policyholders and thus complaints and dissatisfaction followed. To remedy this unsatisfactory situation, Shepherd moved its commercial partnership to LIC. Representatives of LIC visited microinsurance policyholders repeatedly and discussed insurance products and processes. This greatly enhanced LIC’s knowledge of the market and created a higher level of acceptance and understanding of insurance among the community members. It also led to an agreement under which the role of Shepherd was enlarged to pay out claims in advance and get reimbursement from LIC. For this purpose, LIC provides Shepherd with a management information system that enables it to collect and analyse data more efficiently and reliably.
5. For health insurance, Shepherd has a second insurance partner, United India Insurance Company (UIIC). The relationship with UIIC is structured using a similar approach: Shepherd ensured that UIIC representatives met prospective clients before entering the partnership. During the meetings, UIIC gathered information on healthcare expenditure to be covered under the policy, the premiums members were willing to pay and the benefits that clients would expect or prefer to be included in the package. UIIC designed the UniMicro policy based on this information. However, certain decisions on exclusions from the policy based on the age of the insured or membership 530 The role of other stakeholders in Shepherd were entrusted to the microinsurance members, thus enhancing the relevance of the qualifying conditions and the community’s ownership for the scheme. Additionally, UIIC and Shepherd established an “Insurance Review Committee”, which is composed of representatives from UIIC, Shepherd and the insureds to monitor underwriting and claims processing practices, respond to complaints and solve problems.
6. ASA in India is another MFI that assumed an intermediary role between a commercial insurer and the clients. ASA moved its commercial relationship from UIIC to LIC in response to a supposedly better offer. However, it soon became clear that the move was not entirely without drawbacks. For instance, LIC did not cover death during childbirth, suicide or death caused by snakebite or drowning. LIC asserted that these exclusions were standard in the insurance industry, but this explanation did not satisfy ASA’s clients who knew that these benefits had previously been covered. Additionally, it took LIC a long time to process claims and it paid them by crossed cheque, which was of no use to many policyholders who did not have a bank account. In general, the daily management of the partnership with LIC became cumbersome and very bureaucratic. Hence, the expectation that the move to LIC would give ASA members a better deal was not fulfilled, due in part to insufficient interaction between the insurer and the community and possibly also to inflexibility in handling clients’ dissatisfaction.
7. In 2002, the Indian Insurance Regulatory and Development Authority (IRDA) issued regulations requiring all insurance companies to transact a certain percentage of their business with poor and rural clients. These regulations define microinsurance as traits of the products, rather than recognizing the unique role of non-profit organizations such as ASA in the business process. Unfortunately, the regulations limit the role of these organizations to serving as agents of commercial insurers. Using its experience in dealing with insurance companies, and as it could offer a large client-base, ASA solicited bids from insurance companies willing to enter a partnership. The main criterion ASA applied when reviewing the bids was that the companies should agree to pay benefits directly to ASA and allow it to verify claims.
Eventually, ASA chose to partner with three insurance companies (AMPSanmar, Bajaj-Allianz and Max New York) on equal terms and with identical products. ASA’s relationship with the insurers was driven in part by the fact that they could purchase reinsurance, a condition ASA considered essential, but which is available in India only to commercial insurance companies.
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8. In 1997, AIG Uganda entered the low-income market with purely commercial intentions to establish profitable operations. Today, AIG Uganda provides accidental death and disability coverage to more than 1.6 million persons in East Africa through 26 MFIs. AIG Uganda operated without competitors in the market and its success in market penetration has been due in part also to specialized AIG staff agents who are actively involved in information dissemination. These agents receive commissions from AIG Uganda based on the volume of business. Thus, the agents have an interest in generating more business, and as they are responsible for certain operational aspects, they have an interest in efficiency as well. The agents provide an initial briefing to the MFI loan officers appointed to sell the insurance product to the MFI’s clients. However, the loan officers generally have only limited knowledge and understanding of the product and do not need to meet any formal training requirements. The training they receive focuses on premium collection and an initial check of claim documents. Incidentally, AIG does not feel it requires reinsurance for this book of business.
9. The ALMAO scheme (Sri Lanka) has had reinsurance arrangements since
1992. First, it was reinsured with CUNA Mutual and then with the stateowned SLIC (privatized in 2003) on a quota share basis. After ALMAO’s registration as a commercial company in 2002, it reinsured its risk with NTUC Income (Singapore). These treaties were concluded on a commercial basis.
10. The Yasiru scheme (Sri Lanka), registered in 2000 and collaborates with the Rabobank Group (Netherlands). The collaboration includes financial support through the Rabobank Foundation, the provision of technical know-how and the necessary hardware, software and training. Rabobank’s reinsurance subsidiary, Interpolis N.V., has provided long-term reinsurance and technical assistance to Yasiru on concessionary terms. The cover offered by Interpolis is a 100 per cent quota share with a maximum of LKR 120,000 (US$1,200) per risk. The reinsurance premium payable to Interpolis for the annual contract is 20 per cent of the gross premium income of Yasiru. In reality, under the concessionary arrangement, Yasiru retains 95 per cent of the reinsurance premium as a no-claims commission, so that in fact Yasiru pays only 1 per cent of gross premiums to Interpolis for reinsurance. Needless to say, this kind of concessionary reinsurance agreement is usually unavailable in the market. In 2005, the partners started to align the reinsurance agreement with more market-based terms, but the arrangement is still favourable for Yasiru.
532 The role of other stakeholders
11. The International Cooperative and Mutual Insurance Federation (ICMIF)3 used to provide assistance and reinsurance intermediation to its members around the world. The mission of ICMIF Reinsurance Services (RS) is to encourage reinsurance placements between members of ICMIF, to advise members on their reinsurance requirements and assist them in obtaining suitable cover with secure reinsurers within or outside ICMIF. One of the main methods by which ICMIF promotes co-operation and understanding in reinsurance is its Meeting of Reinsurance Officials (MORO), held every two years for reinsurance managers from members around the world.
Such worldwide contacts give ICMIF’s members an advantage in facilitating treaty placement. RS also provides reinsurance training, with two interactive business simulations: 1) ReAction models the reinsurance negotiation process between insurers and reinsurers, and claims success in team building, decision-making, communication and negotiation; and 2) Morotania combines a financial planning model with an interactive map to simulate challenges encountered by new, developing companies. Finally, ICMIF has produced a practical guide on establishing a suitable reinsurance programme.
12. ICMIF supported the Columna scheme (Guatemala) in obtaining reinsurance. The primary goal was to achieve long-term stability through reinsurance of the whole portfolio (including microinsurance), while keeping the reinsurance premiums to a minimum. Towards the end of each year, ICMIF and Columna prepare information and statistical data required to develop a reinsurance programme for the following year.
13. La Equidad Seguros (Colombia), which has reinsurance for its non-micro policies, wanted to obtain reinsurance for its microinsurance business. This was impossible because its total financial risk was lower than the deductible determined by the reinsurance provider. Therefore, La Equidad Seguros could not obtain reinsurance for policies below CoP 10 million (US$4,100). Reinsurance is only provided for catastrophe cases exceeding CoP 150 million.