Introduction to Microinsurance

Craig ChurchillInternational Labour Organization

Overview of Presentation

1. Introduction to inclusive insurance2. Key differences between insurance and

microinsurance 3. Overview of the Microinsurance Innovation

Facility4. Examples of microinsurance innovations

1) Introduction to inclusive insurance: Microinsurance

ILO’s interest in microinsurance

The ILO is concerned about the promotion of decent work: more and better jobs• The availability of social protection for workers

and their families• The impact of financial polices on social justice,

i.e. toward more inclusive financial markets This reflects the two most common perspectives

on microinsurance…

The microinsurance continuum

Social Protection• Benefits are a human right (e.g. health, pension)

• Contains a redistributive element

New Market• 4 billion persons living on less than $2/day

• Product and distribution innovations can make the poor a viable market for insurers

Microinsurance is…

“…a mechanism to protect low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved”

Microinsurance is not…• Small insurance companies

• Just another product offered by MFIs

• Regular insurance products with smaller sums insured and premiums

• Savings, credit, risk prevention

Informal insurance

Insurable, without access

Uninsurable through market mechanisms

Formal insurance industry

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Who is insured by whom?

What risks are the poor concerned about?What risks are the poor concerned about?Country Priority risk

Uganda Illness, death, disability, property loss, risk of loan

Malawi Death, food insecurity, illness, education

Philippines Death, old age, illness

Viet Nam Illness, natural disaster, accidents, livestock disease

Indonesia Illness, children’s education, poor harvest

Lao P.D.R. Illness, livestock disease, death

Georgia Illness, business losses, theft, death, retirement income

Ukraine Illness, disability, theft

Bolivia Illness, death, property loss (including crop loss in rural areas)

Adapted from Cohen and Sebstad (2006)

Most common types of microinsurance products

• Credit life• Term life/Personal accident • Savings life• Property insurance• Endowment life• Health insurance• Agriculture

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2. Main differences between insurance and microinsurance

Characteristics of the insurable poor

• Vulnerable to risks• Often work in the informal economy• Irregular cash flows• Manage risks through myriad of informal

means, including social networks• Limited education, literacy• Limited familiarity with formal insurance• May not trust insurance companies

Illustrative differences between micro and conventional insurance

Continued…

Conventional Insurance Microinsurance

Premium collected mostly from deductions in bank account

Premium often collected in cash or associated with another financial transaction

Regular premium payments Premiums should be designed to accommodate customers’ irregular cash flows

Agents and brokers are primarily responsible for sales

Distribution channel may manage the entire customer relationship, perhaps including premium collection and claims payment

Market is largely familiar with insurance

Market is largely unfamiliar with insurance

Conventional Insurance Microinsurance

Screening requirements may include a medical examination

If there are any screening requirements, they would be limited to a declaration of good health

Limited eligibility with standard exclusions

Broadly inclusive, with few if any exclusions

Sold by licensed intermediaries Often sold by unlicensed intermediaries; maybe underwritten by unregulated risk carrier

Large sums insured Small sums insured

Priced based on age/specific risk Community or group pricing

Complex policy document Simple, easy to understand policy document

Illustrative differences between micro and conventional insurance (cont.)

Challenges for microinsurance

• Developing sustainable products that meet the needs of the market

• Reducing transactions costs (enhancing affordability)

• Creating an enabling regulatory environment

• Overcoming the market’s natural resistance and educational barriers

• Building microinsurance infrastructure (e.g. actuaries, TA providers, data management systems)

• Developing a microinsurance approach to claims• Distribution: getting products to market

Labour unionsSelf-help groups

Low-Income People

Cooperatives

On-line & ATM

Employers

BanksCredit unions

Smart cards Computer kiosks

Insurance companies

Service providers

MFIs NGOs

Cell phones

Retailers

Link to existing transactions for efficiency

Utility companies

Delivery ChannelsDelivery Channels

3) Microinsurance Innovation Facility

Innovation Grants

Technical assistance

Research Dissemin-ation

Microinsurance Innovation Facility

Four Pillars of Activities

Innovation Grants

• Grants: $20,000 to $600,000 for 2-3 years• Frequency: 5-10 issued every 6 months• Purpose: To test new products, models or approaches

to consumer education• Organizations eligible include insurance companies,

semi-formal microinsurers, employers’ associations, labour unions, cooperatives and other people’s organizations, and other distribution channels

Africa Latin America/Caribbean

Asia

Institutional models

SCC/CIC/NHIF (Kenya)

La Positiva (Peru)AMUCCS (Mexico)Seguros Argos (Mexico)

Health FINCA/Microcare (Uganda)UMSGF (Guinea)

Calcutta Kids (India)VimoSEWA (India)

Property / Agriculture

Hollard (South Africa)Planet Guarantee (Mali)

People Mutuals (India)DID/SICL (Sri Lanka)

Life /Accident UAB (Burkina Faso) AIC (Haiti) PICC (China)ICICI Prudential (India)Max New York Life (India)

Other Guy Carpenter (Latin America)

CIRM (India)

Research

• Key themes:– Demand– Supply– Client value and impact

• Methodologies:– Action research with innovation grantees– Small research grants– Thematic studies– Impact studies

4) Examples of innovations: - delivery channels - products

Partnerships between insurers and distribution agents like cooperatives and MFIs

• AIG and Ugandan MFIs

• Zurich Venezuela and BanGente

• Equidad and MFIs/Coops (Colombia)

Partnerships with utility companies or service providers• La Positiva (Peru) and

water associations• MAPFRE Seguros and

CODENSA, Colombia• Philam Life, and cell

phones (Philippines)

Cooperative Insurance Company, Kenya

• Developing Bima ya Jamii: “Basket” product covering life, disability and the National Health Insurance Fund (NHIF) coverage

• Selling through MFIs, SACCOs and other cooperatives

• Emphasizing training and consumer education for distribution channels and their members

• Collaborating with Swedish Cooperative Centre, NHIF, and Folksam Insurance (Sweden)

Hollard, South Africa

• Providing homeowners and content coverage for low-income households

• Selling through non-traditional distributors: retail shops, mobile phone air time vendors

• Testing inexpensive claims assessment strategies

• Providing replacement materials instead of cash payouts

• Learning about the demand for voluntary asset cover (most microinsurance is mandatory)

Insurance companies that target the low-income market through retailers

• Colseguros and Carrefour, Colombia

• Max New York Life, India

Union des Assurances du

Burkina Vie (UAB)

• Targeting informal sector entrepreneurs (e.g. market vendors)

• Distributing Cauri d’or, based on a contractual savings scheme that includes life and disability coverage

• Collecting clients’ contributions daily (as low as 150 francs CFA or 0.35 USD per day)

• Testing smart cards and collectors with hand-held terminals to improve efficiency and reduce fraud

Community-based schemes that pool funds, carry risk and manage a relationship with a healthcare provider (e.g. L’Union Technique de la Mutualité Malienne, Mali)

Health insurance

• Product for which there is the greatest demand

• Often coverage limited to hospitalization, or even a daily payment not linked to health care costs

• Straddles the gray area between social protection and commercial insurance

• Difficult to offer because:– Additional player involved

(health care provider)– Prone to moral hazard,

fraud, adverse selection and over-usage problems

– Skewed incentives – On a commercial basis,

can only be made affordable to the poor by severely limiting benefits

Products

• No evidence yet of sustainable agriculture insurance (for the poor), all heavily government subsidized

• Prone to moral hazard problems: farmers were less likely to pursue sound practices

• Recent innovations such as rain-fall index insurance show some potential to make agriculture insurance measurable, objective and viable...although most experiences are only in the pilot stage

Agriculture insurance

Products

Conclusion: Key product issues

1. Piggyback or standalone2. Mandatory or voluntary3. Group or individual4. Long or short term5. Inclusive vs. cherry picking risks6. Premium collection timing and mechanism7. Fast claims payments8. KISS

Products