Premium Collection: Minimizing Transaction Costs and Maximizing Customer Service (Microinsurance in Focus No. 3)

Publication Date: Nov 2007
Published by: CGAP Working Group on Microinsurance
Document Type: Other (PDF)

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This note discusses the modes of microinsurance premium collection.

This note highlights unique challenges of collecting insurance premiums in a low-income market, and suggests ways to bring down the transaction costs.

The note states that:

• The most common ways of collecting premiums are loan-linked, debit order, fixed deposits, link with another financial transaction and door-to-door collection.
• Collection at the point of loan disbursement incurs minimum cost, but has the following disadvantages:
  • Lack of transparency;
  • Clients’ lack of awareness about cover;
  • Protection limited to loan term.
• A debit order lowers transaction costs and minimizes insurers’ vulnerability to fraud; however, its over-reliance on automation might alienate low-income clientele who do not have the funds to have a savings account.
• One of the simplest modes of collection is the fixed deposit approach, in which clients receive “semi-permanent” insurance coverage without additional transactions.
• Customers can also pay their premium when they make another financial transaction.
• This linkage creates efficiencies and builds on existing cash collection infrastructure.
• Premiums can also be collected physically by going door-to-door.
• However, physical transactions increase transaction costs and carry the risk of fraud.

The note states that to help expand the reach of microinsurance and to make existing schemes more viable, microinsurance providers should:

• Strive to assist policy holders to finance their premiums;
• Allow for a certain number of losses due to lapses or non-renewals;
• Help low-income people boost their income by indirectly helping them access microfinance.

The note concludes with information about controls that help minimize fraud and errors in premium collection.