«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
14. Delta Life (Bangladesh) experienced the same problem. As it is registered as a commercial insurance company, it has reinsurance treaties with SwissRe and Munich Re. However, these treaties do not include Delta’s microinsurance businesses, because the deductible required is higher than the total amount of microinsurance risk. The high minimum premium reflects the low benefit amount and large number of insureds, and the concern of the reinsurer that many of the members will claim the maximum benefit.
3 Information on ICMIF has been obtained from its website: www.icmif.org The role of insurers and reinsurers 533 In conclusion, the case studies contain few references to symbiotic business relationships between microinsurers and commercial (re)insurers. Setting aside for a moment the “partner-agent” relationship (which is covered in Chapter 4.2), some of the examples can be defined as simplified versions of underwriting assistance. There are very few examples of reinsurance being used to prevent catastrophes. Interpolis Re, through its cooperation with its microinsurer partner, Yasiru, provides the only adaptation of the professional modus operandi to the specific prevailing conditions.
3 What part of this value proposition can insurers and reinsurers deliver?
The few timid contacts between commercial players and microinsurers are based on a relatively rigid scope of products. There are a few examples where the negotiations between microinsurer and commercial insurer have led to a slightly better fit between what each partner expects from the relationship.
However, most insurers and reinsurers do not have a clear strategy for servicing microinsurers, and therefore do not invest in acquiring knowledge of how to do it.
Microinsurers need large insurers only to the extent that those insurers enable them to a) sell a variety of products at low premiums and b) remain solvent. The first issue is directly linked to the fact that if the low-net-worth market is to pay a premium, insurers must ensure that they sell relevant insurance products at affordable prices. The second issue is linked to the legitimate concern of poor people that the companies they deal with will be there when the time comes for them to pay benefits. Large insurers seem to underestimate the long-term potential of this market segment and their need to work closely with a local partner if they are to conclude many small transactions. The evolution of business relationships between commercial reinsurance companies and microinsurers is largely contingent on delivering more variety at a lower per-contract cost.
What can insurers and reinsurers actually do now? They can make efforts to develop innovative ways of selling their services to the low-income market. The entry of insurers and reinsurers into business with microinsurers can be seen as an investment aimed at developing a business model for selling insurance in small portions so that these sales can aggregate to significant financial volume over time. This would be the equivalent of what was done in mobile phone business: the huge upfront investments in infrastructure are justified by large market penetration in the low-income segment.
Insurers and reinsurers can also provide services to microinsurers. For instance, when a microinsurance scheme wishes to increase its client base, it needs the financial capacity to underwrite many contracts in one line of busiThe role of other stakeholders ness (premium capacity). Reinsurance could easily satisfy this need with existing tools, although it may have to content itself with lower margins. The barrier is neither conceptual nor technical, but created by an unwillingness to underwrite the small volume of business. The anecdotes that some microinsurance schemes have not been able to obtain reinsurance because the total value of their portfolios was lower than the reinsurer’s deductible are indicative of the gap between the two parties.
There is at least one example showing that such business relations are possible: the Interpolis Re model. This Dutch reinsurer has “adopted” a Sri Lankan microinsurance scheme and initially provided technical assistance to help the microinsurer to quantify and present its underwriting exposure.
Interpolis also agreed to reinsure some of the risk, but with a higher than average “no claims commission” as a means of reducing the reinsurance premium to the bare minimum. It could be said that Interpolis absorbs excess risk of Yasiru, if it were to occur, with caps that are relatively low for the large reinsurer, but sufficiently large for the microinsurer.
Although details of how much this “hand-holding” costs are not available, it seems safe to assume that the amounts in question are probably quite modest. The arrangement can certainly not be considered as charity, as the main focus is on establishing the correct contractual basis for a business relationship between the microinsurance scheme and the reinsurer. This is why one can view the cost of the “hand-holding” as an investment in helping the micro scheme to professionalize its activity as an insurer. This creates a basis for the enlargement of commercial relationships (including a less concessionary reinsurance premium) when the revenue stream and the knowledge base of the micro scheme allow such a move. It is indeed noteworthy that, from inception, the relationship between Interpolis and Yasiru has been based on remunerated (but probably not for-profit) services.
Can this arrangement be scaled up to many more microinsurance units?
Such a development is contingent on structuring the transition from privileged relationships to normal commercial interactions. Some hold the view that it is risky to start with subsidized reinsurance premiums because clients may resist premium increases later and because it deters insurers and reinsurers from entering such markets. Hence, it is necessary to consider ways in which the insurance and reinsurance industry can widely offer its value
proposition to microinsurance schemes. Two courses of action seem particularly opportune:
the role of agents. This is particularly important in product types where the potential for conflict of interest between the agent (representing the insurance underwriter) and the microinsurance scheme (representing the clients) is acute.
2. Create a reinsurance facility that would service this market segment until it becomes sufficiently attractive for commercial insurers to manifest more interest, possibly with some public funding.
3.1 Capacity-building as a first step to professionalizing microinsurance operations It is estimated that some 35 to 40 million persons are covered by microinsurance schemes worldwide, of which more than five million are covered by health microinsurance schemes in India alone (ILO/STEP, 2005a). There is a growing body of evidence that microinsurance schemes make a difference in improving the financial protection of clients through various types of insurance (e.g. Dercon, 2005; Morduch, 2006; Jütting, 2003; Dror/Soriano et al.,
2005) and it is widely claimed that an information-intensive industry such as insurance cannot find sufficient technical knowledge at the community level (e.g. Brown et al., 2000; Schinzler, 2005). However, insurance must rely on comprehensive and solid data and sound underwriting expertise to be financially sustainable. Developing appropriate data collection processes and training the management is one of the key steps microinsurance providers must take to grow and attract commercial insurance and reinsurance. Existing training facilities are unable to rise to the challenge of training sufficient numbers of people to carry out technical roles. Consequently, the logical response is to create the institutional structure for more, better and faster training in skills directly related to the operations of microinsurance schemes.
The insurance industry, which is likely to benefit from such training, could make a tangible contribution to the development of training programmes, both in cash and in kind. Since public-private partnerships (PPP) are the preferred modus operandi of many development agencies, the insurance industry could enter into a PPP for capacity-building. The funds that the insurance industry would need to devote are very modest and can be complemented by funds from public sources. In addition, such modest contributions can facilitate the involvement of the industry in curriculum decisions and in supplying trainers.
536 The role of other stakeholders The important role of commercial insurers and reinsurers today, and their strong interest in the development of the insurance sector notably at the micro level, implies carrying a share of the responsibility to create the missing “industrial infrastructure” for (micro)insurance, which they can assume by supporting institutionalization of training structures. It is noteworthy that for the time being, there is not a single dedicated institute anywhere in the world that focuses on capacity-building for microinsurance operations.
There are a few initiatives to create resource centres for microinsurance;4 however, none has established a systematic approach to rolling out capacitybuilding at the grassroots level. Therefore, establishing a “Microinsurance Academy” that would focus on such capacity-building in domain knowledge is neither premature, nor a luxury, nor the sole responsibility of public authorities or the microinsurance schemes themselves.
Microinsurance requires different products and a different business model, which places some of the essential functions of the insurance valuechain with the community.5 Several examples from the case studies suggest the need to revise the classical training of insurance agents because the role of microinsurance schemes – even under the partner/agent model – goes beyond the classical agency role. For example, microinsurers sometimes operate front-office functions; communities sometimes play a pivotal role in securing broad-based affiliation and renewal, thus reducing the risks of adverse selection and free-riding, and communities can reduce moral hazard by using information freely available within the community to monitor utilization. Other roles for the community include involving the clients in benefit-package design and encouraging a higher willingness to pay through a better fit between products and client needs.
Creating one or more dedicated competence centres for microinsurance fits in with the wider development agenda that considers insurance and microinsurance not as ends in themselves but as vehicles for achieving higher socio-economic development goals. The Millennium Development Goals (MDGs) enjoy the widest recognition; they focus on poverty reduction and prioritize several main areas, of which health is one. It has been recognized that attaining the health-related MDGs requires new ideas to overcome systems constraints to delivering effective intervention.6 One of the key issues 4 For example, USAID has funded an initiative to create the MIRC (Micro Insurance Resource Centre) in India; a similar effort is being pursued by CARE India in collaboration with Bajaj Allianz.
The Canadian Cooperative Association has also created a resource centre in the Philippines and in West Africa there are periodic meetings, organized by ILO-STEP, for mutual health insurance schemes to exchange information.
5 Several studies have concluded that the involvement of the community in the management of the microinsurance scheme is a critical factor for its success. For an overview of these studies see Jakab and Krishnan, 2004.
The role of insurers and reinsurers 537 is health financing, where the divide between knowledge and production (the “know-do” gap) is still wide at all levels, but particularly large at the grassroots level, hence the need to offer training so that community members can carry out the business processes and add value to outcomes. In this context, the contribution of commercial insurers and reinsurers to the MDGs could well be made tangible by their support for the establishment or an institutional training structure.
3.2 Creating reinsurance capacity that is accessible to microinsurance units As stated earlier, reinsurance offers insurance companies many advantages, including stabilization of losses and surplus relief. Indeed, it is impossible to imagine today’s insurance industry foregoing its commercial relations with reinsurers. The situation of microinsurers is, however, completely different.