Innovating Microinsurance

Guest Post by: Craig Churchill - Head of the Microinsurance Innovation Facility, International Labour Organization (ILO)

 
MiBanco, Peru, and the insurance company it now owns, Protecta.

Craig Churchill is the head of the ILO's Microinsurance Innovation Facility, launched in 2008 with a grant from the Bill & Melinda Gates Foundation to promote better insurance products for more low-income households. In this post, he evaluates the pros and cons of implementing microinsurance policies, and offers specific guidelines that MFIs can follow to increase their leverage and negotiating power.

Many microfinance institutions (MFIs) are looking beyond credit to see what other financial services they can offer their clients, and in those discussions insurance invariably is raised as a possible option. But should an MFI get involved in offering insurance?

When microfinance institutions are interested in insurance, their primary motivation is often to reduce their credit risk in the event that borrowers or their family members experience death, illness or other losses. If insurance can help protect the households in such circumstances, it will indirectly safeguard the MFI’s portfolio.

Another significant motivation behind the interest in insurance is to improve the welfare of their clients. MFIs typically have dual missions to alleviate poverty or promote economic development while generating a profit (or covering their costs). The social mission of improving the welfare of poor households can be enhanced through the protection provided by insurance.

There are also a number of legitimately commercial reasons why MFIs might be interested in providing insurance, such as enhancing retention, improving product profitability, diversifying their income streams and reaching out to new markets.

Of course, there are also disadvantages to offering insurance. It is a different business from savings or credit, requiring different expertise. Even offering insurance products in partnership with an insurer can be time-consuming and demanding. Furthermore, low-income households have finite resources. If an MFI offers insurance, some clients might have to choose between repaying a loan or making a deposit and paying an insurance premium.

There are possible disadvantages to the client as well. The true costs of the insurance, which are often passed on to the client, are not always visible because they are buried in the interest rate or administration fees. While many insurance products have been beneficial, some credit life insurance products do not offer a good value for clients. For this reason, the Microinsurance Innovation Facility is focusing on raising awareness about this issue with insurers, MFIs and other delivery channels.

If an MFI wants to offer insurance to its clients, it often does so in partnership with an insurance company. The MFI provides the client base and the insurer carries the risk. This is generally a better approach than the MFI carrying the risk because it avoids regulatory problems, separates insurance and credit risk, and enables the MFI to focus on its core competency. Whether the MFI assumes an additional cost for the insurance or is able to garner the service at a lowered cost depends upon the negotiation the MFI can make with the insurance company. Often MFIs receive a commission from the insurer, perhaps 10-20% of the premiums, to cover its costs. Some new microinsurance brokerage companies have emerged, like MicroEnsure, First Microinsurance Agency and Planet Guarantee, who try to work with MFIs to negotiate better deals with insurers.

In the past, some MFIs have preferred to self insure because they said that insurers were not interested in their business, but the possibility of not being able to find an interested insurance partner is becoming increasingly less likely as more insurers seek opportunities to reach new markets. MFIs are also becoming more convincing, arming themselves with arguments and experiences to persuade insurers that this is indeed a valuable market opportunity for them.

In general, if an MFI cannot entice an insurer into a partnership, it is probably not effectively communicating what it has to offer. Many insurers are attracted to the prospect of accessing many new clients through a cheap distribution network. MFIs should recognize that insurers and bankers may have very different attitudes toward the masses of low-income people. For bankers, whose money is at risk when they lend, the poor are a risky market. Insurers, however, tend to be interested in ways of reaching an expansive market cost-effectively. Volumes speak volumes.

To make the partner-agent work effectively for MFIs, the following recommendations emerge from the experiences of MFIs around the world:
 
• Tell them what you want: To get good products and processes from insurers at a decent price, MFIs need to know what they want and they have to sit in the driver’s seat in the negotiations. The larger they are, the more demanding they can be. Several MFIs, including Compartamos (Mexico) and some Opportunity International affiliates, have designed their own product specifications and then sent requests to insurers to bid on their proposed product.

• Know your stuff: MFIs need to speak with authority, using language that insurers understand backed up with compelling data. One advantage of an MFI is that it can often create useful actuarial data from its own experience of working with clients, to which the insurer otherwise would not have access. For example, before it began negotiating with insurers, FINCA Uganda researched and documented its historical mortality experience.

• Do not be afraid to switch partners: MFIs do not have to be wedded to one insurance partner forever. If the insurer is not performing, the MFI can look for a new partner. Although this should not be taken to an extreme – ASA, an Indian MFI, changed insurance partners a bit too frequently, which caused some confusion among clients and staff.

• Choose a trustworthy insurer: It is often preferable to partner with a well known insurance company because it helps create trust and confidence in insurance. Without trust, clients will be unwilling to pay premiums today against the promise of a possible future benefit.

• Involve the insurer: The alternative to changing partners is to get existing partners to improve. Shepherd (India) found that it was useful to invite insurers into the field to enable them to understand the target market better and to begin to recognize the difference between insurance and microinsurance. This can be reinforced through an annual review meeting with the insurer.

• Ask for training: A major challenge in introducing insurance is training the MFI’s employees, particularly the frontline staff who are responsible for sales and service. Several MFIs have persuaded their insurance partners to train their employees in insurance in general and the products in particular.

• Manage claims: An efficient claims-processing system is one of the most important points for negotiation. When the benefit amounts are small, MFIs should insist that they pay the claims (at least for life insurance), and then be reimbursed by the insurer, on the basis of documentation that is appropriate for their clients.

• Eliminate exclusions: Strive to persuade insurers to drop as many exclusions as possible, even if the MFI has to pay a higher price, because that simplifies the product and makes it easier to explain to customers. It also reduces claims rejections that could cause significant public relations problems for the MFI.

• Maintain and analyse data: MFIs should maintain good information about insurance performance, enabling them to develop expertise over time and to push insurance partners for better deals. An appropriate and “actuarially-approved” MIS is crucial.

• Determine the costs: MFIs need to conduct a costing analysis to determine how much they need to earn in commission (or through a premium mark-up) to cover their administrative expenses.

• Own the clients: Some entrepreneurial insurance companies might be interested in stealing the clients in the future. The MFI should always “own” the client. This can be done if the MFI is always the institution that sees the client.

• Share the profits: Instead of receiving a commission, the Zambian MFI Pulse has negotiated a profit-sharing arrangement with Madison Insurance, which corresponds more with the spirit of microinsurance, if the MFI is willing to take a bit of the risk.

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ILO is currently receiving applications for its fourth round of innovation grants for MFIs to incorporate microinsurance programs. The application deadline is 2 March. From the first three rounds, we have nearly 40 grantees. For more details about our grantees, see the Grantee Community page on our website: www.ilo.org/microinsurance. The full chapter on microinsurance from which this article was drawn can be found at www.microinsurancecompendium.org 

Comments

[Cecelia Tanaka]

One of the big questions surrounding microinsurance is why more poor households don’t use insurance—even when access and cost are manageable. Researchers from Portfolios of the Poor ( http://portfoliosofthepoor.com/ ) attribute this dearth in take-up to the fungibility of savings and loans products, and the rigidity of insurance products. While a loan issued for one use can be applied elsewhere to cope with emergencies, an insurance premium will only be paid out against an insured event. One of the lessons from Portfolios was the recognition that an insurance product that does not insure against an entire problem can still serve an important role in the lives of poor families. For instance, insurance coverage attached to savings and loan products, as in credit-life insurance and life-endowment savings, may appeal to poor households more than a generous portfolio of policies insuring against each and every risk. Thus, the appropriate microinsurance company will serve as a strong partner to the MFI, and also offer appropriate insurance tools in accordance with the needs and capacities their service population. The Financial Access Initiative ( http://financialaccess.org/ ) published a brief that highlights the lessons in risk management from Portfolios of the Poor that may be helpful for your research on these issues ( http://financialaccess.org/sites/default/files/FAI_Brief_How%20do%20the%20Poor%20Deal%20with%20Risk_0.pdf ).

[Katherine Oglietti]

The ILO's Microinsurance Innovation Facility just published the most recent edition of its online newsletter, Innovation Flash. It features an article by Craig Churchill, the author of this post. It also contains information about the Innovation Grants that MFIs can apply for in order to incorporate health microinsurance component into their programming. Applications are due on March 2nd.

http://www.ilo.org/public/english/employment/mifacility/download/news/news5_en.pdf