Workshop report from microfinance and rural finance expert François Doligez, IRAM (Applied Research for new approaches for development). The following article is an edited version of his report of the workshop "Microinsurance and Reducing Vulnerability in Rural Areas" for the French microfinance newsletter BIM (Bulletin d’Information du Mardi).
The workshop Microinsurance and Reducing Vulnerability in Rural Areas in Latin America was held in May 2007 in Mexico with more than 120 people, mostly professionals from the formal financial sector, from different countries like Bolivia, Costa Rica, El Salvador, Guatemala, Germany, Canada, France and Switzerland. It was organised by the Mexican Association of Social Sector Credit Unions (AMUCSS), with support from Mexican public partners (Agroasemex, Financiera rural, FIRA), the Latin American Forum for rural finance (FOROLAC) and expert partners in the insurance sector (Grupo SEP, Zurich).
The agenda focused on a series of case studies on rural insurance in Latin America, highlighting the role of public policy and with illustrations from examples from other regions. Here are some of the most interesting conclusions from the presentations and discussions during this workshop.
Rural Vulnerability
Mexico has numerous programmes aimed at reducing rural vulnerability, which are implemented by various institutions stemming from the Ministry of Social Development, the Ministry of Agriculture, and the various levels of government and communities making up the Federation, etc. However, the goals and targeting criteria of these social programmes are sometimes contradictory and ill suited to the changes in rural dynamics, not to mention the controversial adverse effects on the labour market and the patronage involved in their management, which were stressed by certain participants.
Also, despite overall growth in the country, the degree of social and economic marginalisation of the most disadvantaged rural municipalities has worsened over the last 15 years; half of all Mexican international migrants originate from isolated, under-populated rural areas (less than 25,000 inhabitants) and nearly two thirds of the beneficiaries of a massive poverty-reduction programme (Oportunidades, with nearly 3.4 million beneficiaries) are families with no access to land ownership, which prompts us to revise the criteria and strategies used for rural poverty.
Various contributions provided typologies of risks and protection mechanisms and, in this framework, stressed the importance of broadening access to diversified financial services that are adapted to the most vulnerable rural populations (various forms of credit, savings and migrant remittance services, and, of course, insurance).
However, many of the participants pointed to the importance of a broader analytical framework including modes of economic growth, demographic dynamics and territorial differentiations, in order to truly comprehend rural vulnerability. Furthermore, in terms of protection, the relationships between community solidarity, the constitution of individual and family assets of different natures and the social role of public policy were also explained and illustrated by the participants.
Several presentations cited research suggesting that health risks were the foremost risks felt by rural populations, due to their impact on the family, but also to their frequency; thus, protection against these risks still constitutes, in many situations, a major challenge to be met.
Actors and Innovative Experiences
The case studies presented on insurance and social protection highlighted the existence of numerous experiences and actors in Latin America; some with decades of experience or very significant coverage rates (for instance, in Guatemala, some insurances companies handle over 800,000 policies, corresponding to a coverage rate of nearly 20% of the total population of the country, based on members of cooperatives and then, in the framework of enlarged partnerships, other institutions, NGOs, etc.).
The most experienced actors come from the public sector (i.e. Mexico) or from various cooperative movements (Guatemala, Peru), but other actors have also been involved in the field, such as certain professional associations (Central America, Mexico). Many of them have built partnerships with international institutions with strong experience and skills in insurance, such as Socodevi and Desjardins (the Desjardins movement has its own specialised insurance company with 7,500 employees) or Zurich, which is present in more than 120 countries and has a department specialising in microinsurance.
The system of reference in terms of supplying insurance services is extremely diversified. It covers traditional areas such as life, invalidity, medical care and property; but it is also open to numerous innovations:
- After a financial bankruptcy due to its linkage with the Development Bank in the 1980s, agricultural insurance in Mexico was totally reformed, in the relatively “high-tech” farming areas (mechanisation, input use, irrigation) and rebuilt on the basis of a partnership with self-insurance funds managed by producers’ organisations, which helped considerably reduce moral risks on insurance policies at the local level.
- In Bolivia, since 2003, a professional microfinance association has conducted a study on the demand for insurance services and built up a programme to support partnerships between microfinance institutions and insurance companies. Following a call for tenders, 25 projects have been submitted and are currently undergoing evaluation.
- In Mexico, various partnerships (Grupo SEP, Amucss, etc.) have made it possible to develop insurance covering repatriation and compensation for families of migrants, including illegal migrants, to the United States.
- The Central American professional microfinance association undertook an ambitious retirement insurance project for its members in 2006, and is expected to start up a pilot experience within the next year.
- New agricultural insurance systems of a parametric or indicial nature are currently being experimented with in Mexico and Central America.
Several lessons can be learned from these case studies and innovations in insurance:
- Access to a critical mass of beneficiaries and management of the information required for insurance services development and financial viability can only be ensured through stronger partnerships with the microfinance institutions present in the field, even if other intermediaries may come in at a later stage (producers’ organisations, migrants’ clubs, etc.);
- Compared to “traditional standards”, microinsurance entails considerable work simplifying and adapting classical insurance approaches and schemes; in this sense, microinsurance is not just “smaller-scale insurance”, but rather a whole new insurance practice, or a whole new field in its own right;
- Distribution of insurance products involves considerable work informing and training the beneficiaries, particularly in relation to their reciprocal nature. Many subscribers to life insurance, which is often linked to the granting of a loan, ask to be reimbursed once their loan has been paid off;
- In light of the complexity of managing insurance schemes (and particularly the creation of actuarial reserves to face up to risks), it is necessary to ensure transparency surrounding the equitable distribution of surpluses between the insured and the insurers;
- In order to help achieve a critical mass of policies and a more diversified and client-tailored product range, and to reduce the financial impact of claims, networks and reinsurance often need to be organised to enable the development of insurance services. For example, to cover credit risks linked to borrower death or invalidity, many institutions in Latin America directly reinsure their credit portfolio with insurance companies. Similarly, the organisation of networks sometimes goes beyond the national level, as illustrated by the experiences of Redcamif in Central America or those, in West Africa, of the Centre d’Innovations Financières (CIF) carried out with the support of Desjardins and ADA-Luxembourg.
Another presentation (Servi-Peru) outlined an additional series of practical recommendations (Good Practices) based on an experience in Peru.
On the other hand, in terms of evaluation and particularly of evaluation of the impact of financial services or social protection schemes on the reduction of rural vulnerability, two approaches that are traditionally contrasted (statistical models and the natural systems perspective, both with control groups) were presented with interesting conclusions, but with no real possibility of more closely examining the choice of variables and assumptions in terms of attribution. In Mexico, according to the experience of Oportunidades, they are part of a growing effort to ensure transparency (accountability) and external evaluation of the social policies implemented by public institutions and governed by a National Council for the Evaluation of Public Policy, even if these studies, their relevancy and their modalities were the subject of heated debate, both nationally and internationally.
The agenda and presentations, in Spanish, can be downloaded from http://www.microseguros.org
Source: François Doligez, IRAM/Rennes 1 University, 17 January 2008, BIM
(February 2008)
Interview with Craig Churchill, microinsurance expert, ILO and Chairman of the CGAP Working Group on Microinsurance about the potential growth of microinsurance in Latin America. This interview was published by Business News Americas on October 5, 2007.
With 205mn people living in poverty in Latin America, or 39% of the population, the region seems an obvious market for microinsurance. As the topic gains more and more attention, countries like Peru - and soon to be followed by Mexico - have decided to establish a regulatory framework for microinsurance.
Selling affordable insurance products to low-income households can be seen as a win-win formula. While helping the poor to maintain a sense of financial confidence, microinsurance significantly broadens the scope of insurers' potential clients, creating a range of business opportunities. To know how insurance for the poor can grow in Latin America, BNamericas interviewed Craig Churchill, a microfinance expert at the UN's International Labour Organization (ILO) and chairman of the World Bank's Consultative Group to Assist the Poor (CGAP) working group on microinsurance.
Churchill has traveled around the world looking at a number of microinsurance projects and is the editor of "Protecting the poor: A microinsurance compendium," a volume covering many aspects of microinsurance including product design, marketing, premium collection and governance.
BNamericas: We're using the word microinsurance as if it's something new. But a number of executives have told me their companies have been selling for years what is now called microinsurance. Have insurers been selling microinsurance in the region?
Churchill: Many insurers in Latin America are essentially doing what I would call microinsurance, but they have been calling it other things like popular insurance.
The organizations that tend to get the attention and are documented and analyzed are often organizations that somehow are connected through donors' organizations. We know about them because they got money from the US or wherever.
What you don't find is information on purely private initiatives where there's no donor money coming in. They're just doing their business and don't like to have people snooping around and analyzing what they are doing. So nobody really documents their experiences. But if someone did, they would find that there is quite a lot of microinsurance taking place in Latin America already, it's just that it hasn't been called that.
It would be quite useful to do a more careful analysis of organizations in the private sector that are serving the low-income market on their own without any encouragement from policymakers or donors.
BNamericas: Is there a difference between what is called popular insurance and microinsurance?
Churchill: I think the main difference between what we call microinsurance and what we call popular insurance is that microinsurance has some element of a social orientation, while popular insurance may not have any social orientation.
I think that, rather than looking for examples of microinsurance, if you look for examples of popular insurance in the region, you will find that notion to be very widespread and quite common.
BNamericas: One of the key issues when selling microinsurance is to find delivery channels that reach low-income earners. In Latin America, it seems as if microfinance institutions are one of the optimal distribution channels. Do you agree?
Churchill: You are right to say that delivery channels are really the key. It's quite difficult for insurers to serve the low-income market directly. There's too big a gap in terms of the perspective, the attitude, the understanding of the market, the level of trust that they may have. So really in order to get to those markets you need to have a delivery channel that does have that trust and that access to the low-income market that insurers wouldn't ordinarily have. So partnerships make sense.
The problem when you involve another party is that it has other organization costs involved in the process that makes it difficult for the product to be affordable or profitable, depending on your perspective. One of the keys is trying to identify ways of having group covers so that everybody in the group has access to this product. And by having group covers you are able to limit any average selection risk that might be there and also to significantly improve efficiency.
You mentioned microfinance institutions, it could be also credit unions, any place where a group of low-income people ideally have an existing financial transaction or mechanism. You can make it much more cost effective than if you have to create a whole new infrastructure to collect money or to pay out claims.
BNamericas: So ideally microinsurance would be one of the products a financial provider offers. Otherwise it would be too costly?
Churchill: That would be my guess. There are a few examples of where microinsurance is being done on a stand-alone basis. One in India, and other one in Bangladesh. But I'm not sure whether the policyholders in those circumstances are getting particularly good value for their money.
Where you are able to link it with an existing mechanism, ideally savings products, then you are able to create efficiencies that can make it possible to add value.
BNamericas: There have been identified as many as 78mn people worldwide covered by microinsurance, health, life, property. A third of the total is credit life insurance, which some say there is no great value to clients, although moneylenders indicate there is great value. What's your view on this?
Churchill: You can look at credit life from a couple of different perspectives. I totally agree the value to policyholders is quite limited because they need to die in order to get any benefit and the benefits they do get are more in the interest of the lender or the bank than the family [of the policyholder]. The lender doesn't want to have to go to a house because the borrower died and say, "Oh, by the way, you also owe us this money." Or they don't want to take the collateral because the family couldn't repay the loan. That creates a whole public relations nightmare and is not what lenders want to be seen doing. So it's not just about the money.
When credit life starts to become valuable is when you use it as a mechanism to start adding other benefits. So yes, you cover the loan, but also if the borrower dies, the family gets a funeral benefit. Or other family members are also included in the package. So it becomes "credit life plus" and there are benefits that accrue to either the policyholder or family members of the policyholder. Then what you are doing is taking an existing financial transaction and using it as a way to provide insurance coverage to benefit low-income markets, not just to protect financial institutions.
Savings would be a better mechanism than credit, because people don't want to be borrowing all the time. So if they stop borrowing for a period of time and the loan is the primary connection point to insurance, then there is a period of time when they don't have insurance coverage. Whereas for savings, you can link insurance to the savings account and they can have coverage on an ongoing basis. So I'm much more enthusiastic about having savings products linked to insurance coverage than credit linked to insurance coverage.
BNamericas: The problem is that in a number of Latin American countries microfinance institutions are not authorized to take deposits from the public, so they are unable to link savings products with microinsurance.
Churchill: Yes, it's too bad. It's not just in Latin America, it's a problem in many countries. In countries like Peru and Bolivia, where the regulatory environment for microfinance allows for creating regulated financial institutions that are able to mobilize deposits, it becomes possible. But there are still a number of places where a typical microfinance institution is not allowed to intermediate between savings and loans and in which case they can't provide what I think is the most beneficial approach to insurance, the savings link.
BNamericas: What would be the optimal approach for microinsurance to achieve its potential and overcome its limitations?
Churchill: We're still analyzing what would be ideal, either encouraging existing insurance companies to go down market - or reduce the obstacles that may prohibit them from going down market - or assist in the formalization of existing informal schemes, like creating a middle category for insurers, just the way they did for these microfinance institutions and microfinance banks in Peru and Bolivia. Doing something like that also makes sense for insurance.
We don't know the answer yet. Besides Peru, the places that have considered microinsurance in their regulatory environments include South Africa, India and the Philippines. I think Brazil is also a place to look at. There are some experiences there in trying to remove some of the tax obstacles that might be in place.
BNamericas: In terms of the regulatory environment, what obstacles need to be addressed?
Churchill: Many countries don't allow a category for mutual and cooperative insurers. They have a preference for companies that are owned by shareholders rather than by members. A general feeling is that where insurers are serving the low-income market, they are charging a lot and making a lot of profits and not a lot of claims get back to the beneficiaries. And that's a snapshot opinion that needs to be analyzed in more detail.
For mutual insurers, because they are owned by the policyholders, there is a much more natural fit when serving the low-income market. In countries where such an option doesn't exist that would be one of the things, that would be ideal to make it possible.
In Latin America what you see is federations of cooperatives or federations of credit unions that create their own insurance companies. Those would be the best examples in Latin America as they provide greater value to the customers than a commercial insurer. The one getting more attention is La Equidad Seguros in Colombia.
BNamericas: What about retailers as a distribution channel for selling microinsurance policies?
Churchill: That's a distribution channel that needs more analysis. On one hand, it is a very efficient way of getting insurance to low-income people. But on the other hand, I'm not sure whether people get good value for money through that distribution channel.
Based on the experiences I've seen in South Africa, my impression is that they don't get good value for money. I think it's a distribution channel that has potential but I think we have to be careful and look at it with a critical eye.
BNamericas: Why do you say clients don't get good value for their money?
Churchill: A lot of the time, what you find is that insurance is automatically linked to some other transaction. If you buy your refrigerator on credit you automatically have to buy theses insurance products. When you find these situations of people automatically getting coverage, 80% of the time they don't even know they have coverage or they didn't read the fine print to realize they didn't have to buy coverage from this particular source, they could have shopped around and received a better deal somewhere else. But because it was all bounded together, they just bought it from the retailer. But they didn't make a purchasing decision about insurance, they made a purchasing decision about a refrigerator.
When you see extremely low ratios with these types of products, it indicates that people don't know about claims or maybe they don't know how to file a claim. It's definitely a warning sign there.
By Maria Alejandra Moreno
(November 2007)
Interview with William Bojórquez Córdoba, General Manager of SERVIPERU, a microinsurance cooperative in Peru about their Family Life Insurance policy and the role of individual insurance vs. group insurance from a client's perspective.
This policy includes medical care, hospital and funeral services for family groups up to five members (one policyholder and four dependants). It is backed by an insurance policy issued by La Positiva Seguros y Reaseguros.
Who can access the Family Life Insurance policy?
As SERVIPERU is a cooperative, all those taking out the policy will automatically become members. Membership benefits will be available both for the policy holder and his/her dependants, as long as they are under 65 years of age and in good health, in accordance with the statement provided upon applying for the service.
They may continue enjoying these benefits with no age restrictions as long as payments are made promptly. An exception to the above is the Hospital Care benefit which terminates on the user's 67th birthday (from next January onwards, the age limit will be 70 years of age).
Dependants are defined as the member's close family, that is, his/her spouse and children, as well as parents and siblings or even domestic who depend financially on the member.
Although Family Life Insurance is a policy taken out with an insurance company - under a corporate policy - SERVIPERU is marketing the policy for individuals. Individual placement of the policy is justified by the lack of an association for persons carrying out independent work (micro-business people, travelling sales people, housewives, etc.). When the policyholder belongs to an organisation, such as public passenger transport companies, cooperatives or other labour institutions, SERVIPERU will reach an agreement with such organisations so that they charge the premiums themselves.
Nonetheless, the applicable premium is identical for all members, and it is calculated on the basis of an average age and in accordance with statistics based on our experience, which are reviewed from time to time.
What are for you the advantages for the client of individual vs. group insurance?
This depends on several factors. If group insurance policy involves the application of an identical premium to all policyholders in the same group on the basis of an average age, those whose age is greater than this average age would benefit from a lower rate than if they were to take out the policy individually. However, younger policyholders will take on the premium at a greater expense, as the usual applicable rate for their age would be lower.
The advantage of applying an identical premium when marketing a product for individuals is that older persons may thus access certain coverage scenarios thanks to the solidarity principle the policy is based on.
However, factors such as lower acquisition and administration costs as well as easy collection, as a general rule, make group insurance policies cheaper than those taken out individually. Marketing and administration of group policies is simpler, considering that negotiations are held with a single client and only one policy is issued.
Individual policies require greater administrative control, among other reasons because one application is submitted to the insurance company for each policy, a policy is issued for each individual application, and also bearing in mind payment and renewal costs for individual policies. All of the above involves greater administrative costs.
When associations allow defined groups to be identified, group insurance policies are the best option. If this were not the case, the method to associate individuals would be the policy itself, but on an individual basis as we explained beforehand. The creation of a large policyholder community, integrated in the policy individually, will allow premiums to be kept low in accordance with the policyholders' financial capabilities.
How can you reach a lower premium for an individual product?
The fundamental condition to establish a lower premium for an individual micro-policy is treating it as a group policy charging an identical premium to all the individuals making up the group.
After the characteristics of the target potential market are known, the average age of a representative segment of the market the product is targeted at must be ascertained, with the aim of determining the risk premium. Surveys and other methods allowing the discovery of this variable may be used.
Secondly, the product will be designed in accordance with the minimum coverage needs and the population’s financial capabilities, and the premium, as far as possible, should be divided into instalments allowing payments to be made at the same time as individuals’ income arrives. Likewise, two or three insurance plans with different premiums should be formulated to adapt to the family group and its financial capabilities.
How can you make individual policy feasible?
Individual policies are made feasible by reaching a significant number of policyholders, in accordance with the expectations of the product, thus achieving homogenisation of risks, a basic characteristic of group insurance. Individual insurance grouping and constant monitoring of results makes it possible to adjust the product's premium in accordance with the average age of individuals insured and claim experience, allowing us to sustain reasonable and sufficient premiums.
In the case of Family Life Insurance, the pure or risk premium is assessed every two years, on the basis of cost statistics on the various items covered by the product: Medical Consultation, Diagnosis Assistance Examinations, Medical Emergency Services, and Hospital Care. In the case of the Burial Service, the average age of the group is assessed. In addition, other cost components are considered, such as marketing, maintenance and administration, as well as a safety margin to establish a general monthly premium to be charged for all the benefits covered by the product.
(October 2007)
Vimo Sewa is an integrated insurance programme aiming to provide social protection for SEWA members to cover their life cycle needs and the various risks they face in their lives, through an insurance organisation in which they themselves are users, owners and managers of all services. Mirai Chatterjee, Coordinator, explains the programme's packages and the difficulties when implementing them.
Vimo SEWA offers two different integrated insurance packages, which include coverage for death, sickness and loss of assets. The two packages have varying levels of premium and corresponding sums insured and aim at providing a form of social protection to its women clients.
Both annual premium payment members and fixed-deposit linked premium payment members are offered the following product mix: Natural Death, Mediclaim, Asset Loss, Accidental Death and Accidental Death (spouse). Special benefits are available for Fixed Premium Members (Eligible after completing one year of Vimo SEWA membership) like Maternity Benefits, Dentures and Hearing Aids.
On designing the packages
At the time of designing the package, the foremost consideration was that of the main needs for risk coverage by our members. Due to our association with members over a period of time we were aware of the risks faced by them and hence the idea of offering a comprehensive package was felt. But at the same time we had to keep a balance between the needs and the costs. For us it was important to oversee that the package being offered was in line with the needs of our members and the affordability factor. Offering a package with high cost would not have been accepted by the group that we were catering to.
Keeping this in mind we also had to match SEWA’s insurance product with what was available in the market i.e. the existing products available with the insurance companies. Above all, we had to design the product in a way that would be simple to understand and implement.
On fix deposits
Women usually leave their fix deposit till the age of 70 (but life coverage is till 65 years only at present). Thus, women get continuous protection. They do not have to worry about their renewal every year since the renewal is automatic. In this case they also do not have to worry about arranging money to pay for insurance every year. From the organisational point of view, it leads to a decrease in costs for procuring insurance as renewal is automatic.
Main difficulties when implementing these packages
One of the biggest challenges in implementing the programme was with regards to understanding of insurance amongst our members (or the lack of awareness). Since they had never invested in a risk mitigation strategy such as insurance ever before, it took a lot of time and effort to convey the importance of insurance to our members i.e. convincing them to invest in an unforeseen situation. This task was ably done by a team of 200 union leaders called "aagewans" who made house-to-house visits, organized small and large meetings, screened our film and elicited the support of elected community leaders. They are grass root-level insurance promoters. Our members now understand the importance of insurance much better than before.
The cost of reaching out to members is high as they are scattered geographically. So reaching out to all members, especially the poorest members and the ones located in the remote areas, was difficult. In order to address the issue of scattered membership, we are focusing on deepening our membership in some areas and having higher membership concentration so that the costs will be reduced.
The role of the government and social protection
There is no widespread health insurance or social insurance in India for workers in the unorganized sector. There are only a few schemes which hardly reach the poor. Workers in the unorganized sector can avail of the public health system, which has limited resources and is of highly variable quality. SEWA health works closely with the public health system by encouraging use of public health facilities in its health insurance programme. In this sense it is complementary to the public health care system and not a substitute.
(July 2007)
Tripati Mishra, Programme Director of The People’s Rural Education Movement (PREM) in India, talks about the challenges of providing health insurance in areas with bad health-care infrastructure and the importance of community involvement.
Orissa is a one of the poorest states in India and the lack of health care facilities is a serious issue for the people living here. This is why PREM pilots its “People’s Rural Health Promotion Scheme” (PRHPS), a micro-health insurance scheme, in this region and that in about 500 villages simultaneously.
Since the tribal communities of this area have a culture of sharing and caring, the philosophy of health insurance really clicked with them. The scheme was discussed in detail with the population in village meetings. The fact that the communities were involved from the beginning in the development of the scheme and that they took the responsibility of collecting premiums through self-help groups, brought about a positive attitude and acceptance from everyone.
The Health Care Services at village level, for example the distribution of medicines and First Aid Care, are provided by selected community members. These village volunteers are selected by the community itself, looking at their understanding and empathy rather then their qualifications. PREM give them an exhaustive training and orientations to keep them abreast with the day-to-day developments.
PRHPS Procedures
The scheme covers health-care facilities up to Rs.3,600 and is provided following a three-level procedure that takes into account the seriousness of the patient’s health condition:
1. Level: First aid treatment at village level
Each village has a village pharmacy that holds medication for basic and common diseases. This pharmacy is managed by a trained voluntary health worker, who is also member of a self- help group in the same village. She also keeps a patient register.
2. Level: Treatment at the Public Health Centre (PHC) level
Each PHC covers around 100,000 people and provides treatments to patients recommended by the self-help group that are democratic units where the decisions are taken by mutual consent. When the decision is difficult they vote for the majority and then give recommendations, which works in most of the cases.
3. Level: Referral cases at district level
The critical and serious cases are referred by the PHC’s doctor to the District Health Care Hospital and the Medical College Hospital at Berhampur.
PREM only facilitates and monitors the scheme. There is a manager at the institutional level, who controls the scheme. Two technicians are in charge of supervising that effective treatment is provided by the hospital.
Community Scheme and Trust
Pharmacies should have a medicine depot supplied with medicines by submitted demand of the voluntary health worker that keeps a stock register and at PCH level, a co-ordinator supervises the medicine suppliers that provide medication to patients. Non-stop service drugstores located near to the hospital provide medicines at district level. The scheme only supplies treatment packages.
The basic plan is that community members manage the scheme and take ownership. Capacity building is crucial for its success even if the work is done on a voluntary basis. The outlook is to constitute a Trust (registered society act) managed by community.
(June 2007)
Dale Lampe, who was formerly the Organisational Project Officer at The Small Enterprise Foundation (SEF) in South Africa, talks about the importance of MIS for efficient microinsurance. During his almost four years there he was responsible for research and development related to operational efficiency and efficacy, new product research and design, including insurance, impact management and client service and satisfaction.
Prior to SEF, Dale served for two years as a Peace Corps Volunteer working as an SME and Community Development Advisor in Vaik, Armenia. He also has more than 8 years experience as head of operations and development within the private sector financial services industry working with unit trusts, ETFs and a variety of retirement products.
Don’t Forget the MIS
Most organisations looking to offer their clients microinsurance in form of, for example, credit life, funeral cover or health, conduct extensive research into market demand, product design and development, operational delivery systems, marketing and educational support and staff training. Although these areas are all important, one area that often does not receive adequate attention is the management information system.
While many MFIs, particularly microcredit institutions began and/or still operate with relatively manual or simple processing systems, one should not assume that this would be sufficient for insurance. The microcredit MFI, where I worked, was a Grameen model based organisation, where data related to initials, surnames, ID numbers, loan type and amount, business type, poverty score and various impact management indicators like food and housing scores or ROSCA contributions was collected. This data was then aggregated on group level and repayments were collected fortnightly or monthly at centre meetings. As long as the member information, loan amount and repayments were correctly input, typos or transpositions of numbers on IDs were of no operational consequence. In addition, many microcredit organisations begin as a start-up and do not require immediate and robust data processing capabilities. These usually develop as the organisation grows.
The MFI organisation chose a voluntary, funeral or term-life product offered in conjunction with an outside underwriter i.e. partner/agent model. The product was limited to clients and their families and former clients who met certain requirements. Had the product been compulsory, the operational requirements would have been minimal as the premiums would have been included in the loan repayments.
Voluntary insurance, however, has its own unique requirements and more permutations and complexities than many loan programmes. Therefore, do not assume that insurance processing can be done in the same way as existing microcredit operations or using the same level of technology. The requirements will be dictated by a number of factors, and depend on the organisation’s choice of product and its complexity; goals, existing MIS if currently engaged in other microfinance activities, level of comfort and in-house expertise with MIS applications, and target market.
There are three primary reasons why insurance systems are generally different from what a credit focused MFI may currently be using: The amount of data and sensitivity to errors; the need to interface with and meet the demands of other departments or outside partners; and the financial realities of the income vs. cost dynamic.
Sensitivity to Errors and Quality Control
Rather than having five persons per loan application, each individual within an insurance policy might have coverage for an additional four to ten persons depending on their family size and whether extended family options are available, plus the beneficiary information. This is a substantial additional amount of data that was required for each insurance member to be entered and maintained in the data base. The policies we offered were individual and for his/her family in three coverage amounts and a total of five different premiums.
Had extended family coverage been offered, the number of permutations would have been almost inexhaustible. Unlike loan repayments, the monthly premiums could also vary based on the addition or deletion of family members to the coverage. This would necessitate manual intervention into any automated payment tracking system, where a specific amount was expected each month.
As previously mentioned, most of the client profile data was not sensitive to manual input errors. For this reason, the loan administration had very few quality assurance measures in place to identify and correct such errors.
In insurance, if a name is incorrectly spelled or an ID number is incorrect, or a record has not been properly sent to the underwriter, changes can not be made after the fact. The spouses, for example, need to be listed on the application. Any mistakes can result in delays or outright denial of claims payments.
Therefore, we needed to implement various checks and verifications that would reduce the likelihood of manual errors. For instance ID numbers were cross-referenced to an outside data source for verification and checked against birth dates (the first six digits of this particular ID number correlates to the day of birth). In addition, a family policy without spousal information would need to be identified or disallowed so as to obtain the information prior to forwarding to the underwriter or to determine if the wrong policy had been sold. One error could cost a significant portion of a month’s income if it were found at fault.
Use of Data and Need to Interface
Most MFIs process data for internal use, except where they are required to report to regulatory agencies or credit bureaus. Insurance will require compatibility not only with internal systems, but also with the underwriter. For instance, we had numerous types of systems. Some client records were on an Access based system, some on Excel, and others such as repayment were on Quattro Pro. The financial reporting was on Paxsel. Depending on the MFI, the new system will need to “talk” to numerous systems, on numerous platforms and require different field types or identifiers. The underwriter for instance does not want internal codes or other information that are specific to the MFI. The operations however required enhanced capabilities above what it needed for loan processing. Field officers generally generated the repayment schedules by hand for each group and centre. To require them to do this for individual loans would have resulted in work over-load and a plethora of errors. Therefore the system needed to generate payment schedules by centre, by group and by individual which were distributed on a monthly basis.
Cost implications and Scale
Finally, there are the cost implications for running the back office. Insurance is a “game of numbers” relying on volume and low operating costs to be sustainable. Since the greatest cost was personnel, the higher the level of automation the better. The margins on insurance are generally much lower than that earned on loans, so there is very little leeway from a cost perspective. We encountered difficulties with rolling out the MIS at the time of the product launch and rather than delay the launch we used a manual Excel system as a stop gap measure. Even the processing of only a hundred or so applications became onerous, subject to error and required extensive quality assurance review and manual reconciliations for payments. Do not go live unless the MIS is in place.
This leads to the final dynamic of the third point. Since most microcredit organisations grow organically, they begin with a small number of loans and gradually learn and adapt as the volume and complexity of the loans increases. This is not a luxury generally available when launching an insurance product. In order to negotiate pricing, justify the time and expense of registrations and licensing, etc. most initiatives will begin at some level of scale (thousands of members, not hundreds). Therefore a fully functional and robust system needs to be in place at the outset. One can not “grow into it.”
My old boss used to say that a financial firm’s two greatest resources were its people and its systems (of course clients as well) and to take good care of your team members and especially your IS person.
This axiom definitely holds true for microinsurance: The best and greatest product, pricing, sales and marketing teams will mean nothing if you don’t have a good management information system.
(May 2007)
Mrs. Mukteshwari Kaushik Bosco, Secretary General of Healing Fields Foundation, talks about the challenges of providing health insurance to low-income households.
The Healing Fields Foundation is a not for profit organisation that partners with health insurance companies to develop affordable and accessible health insurance to people in India. HFF is also actively involved in the promotion of health awareness and well being programmes along with other NGOs.
On assessing the demand for microinsurance...
To obtain the demographic, economic, saving and health profiles and hospital utilization pattern of the target populations, Healing Fields has done a Health Assessment Survey with Self-Help Group (SHG) members.
This was a cross sectional stratified study conducted in a rural/urban setting. The SHG members were interviewed individually using a Needs Assessment questionnaire to collect the relevant data. The willingness to pay for health-insurance and their capability was also investigated during the surveys.
Pooling in this case is considered a way of realising social justice, because it is based on solidarity and cooperation between the well and ill, the rich and the poor.
Health expenditures are known to follow a skewed distribution where expenditures are zero or very small for most people and large for very few people. Pooling also helps to avoid large financial risks, as well as help people access health care that would otherwise be unaffordable.
On technical and cultural aspects for designing the microinsurance product...
From the Needs Assessment Survey, we have drawn up disease profiles of different areas and came up with a list of 43 diseases. We then surveyed different hospitals and collected the charges for these illnesses. We developed a Diagnostic Related Group (DRG) Model; a payment system based on the diagnosis of the patient, which proved to be a useful method to control health care costs. This model uses the average cost of hospitalization in a period and the incidence of a particular disease in that period. The provider is paid a fixed amount for a diagnosis irrespective of the actual expenses incurred or length of stay.
The 43 conditions have been divided into Surgical and Medical conditions under DRG model, and for easy processing, our network hospitals follow the DRG model at the time of patient’s admission. This allows us to avoid any kind of moral hazards from either the SHG member or the hospital.
To prevent the poor from taking loans to meet healthcare expenditures and spiraling down the vicious cycle of poverty, a cashless model was designed rather than the more common reimbursement model.
An analysis of feedback by beneficiaries reveals that 95% of the Healing Fields health insurance policy holders are fully satisfied with the product.
On challenges in providing microinsurance...
The lack of awareness of insurance in general and health-insurance in particular caused confusion among the target population. Members find it hard to differentiate between life insurance, health-insurance, savings etc. Health-Insurance not having a tangible benefit (money back) and also being expensive, is a less popular product.
The insurers faced irrational increase in claims for unnecessary procedures, often fake claims being filed; the hospitals faced a problem of rejection of claims due to deficiency in documentation, unclear rules and regulations and so on.
On overcoming these challenges...
Healing Fields organised several workshops for NGOs, hospitals and insurers to spread awareness of each other’s needs. The staff of Healing Fields participated in various meetings, conferences and created awareness on health-insurance for the poor, hospital’s networking, and outreach for insurers.
Preventive and promotative measures are constantly taken to keep claims low.
Awareness workshops and seminars were organized for the NGOs on the changing health care scenario and empowerment of communities to take up preventive health care in the rural, semi-urban segments. Our DRG model has minimized the possibility of irrational and unnecessary claims.
On how to control moral hazard...
Moral hazards are the main risk area of any insurance scheme. We have three-fold mechanism for controlling moral hazards in our scheme:
- The facilitator based in the network hospital ensures the legitimacy of the insured members before extending the service (ID verifications & Pre-Authorization);
- The scheme includes contemporary cost-containment design elements such as a 25% co-insurance;
- A second medical opinion is taken by the medical management team at Healing Fields.
Recommendations for MFIs planning to provide microinsurance...
If the target groups cannot effectively utilise a health care service, then there is no point in providing insurance for health. With regards to the product design, we can share following lessons:
- High premium products should be avoided;
- Reimbursement models are not recommended since the members would have to take a loan for hospitalization and this would dilute our purpose;
- Voluntary products with low enrollment should be avoided.
(March 2007)