an introduction to microinsurances

Microinsurances: From Vulnerabilities to Business Models?

Martin Herrndorfoikos PhD Fellow, Universität St.GallenInstitute of Managementmartin.herrndorf@unisg.ch+41(0)76 263 2601 | +49(0)163 431 1374

SeminarSummer School “Entwicklungspolitik” 31 August – 5 September 2009University of CologneTeaching and Research Center Latin America

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Seminar Microinsurances

Thursday: Ideas, Principles and Actors• Presentation 1: Ideas and principles

• Group Session 1: Case studies – selected projects

• Presentation 2: Actors and networks

• Group Session 2: Micro-insurance actors in focus

Friday: Actors and Networks on the country level

• Group Session 3: Country research ‘Colombia’

• Presentation 3: Jenny Hennig, GTZ

• Group Session 4: Strategies for microinsurances

• Final presentations

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Introduction Seminar Microinsurances

Presentation 1:

Microinsurances: Ideas and Principles

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Introduction Seminar Microinsurances

Vulnerabilities and the demand for microinsurances

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Poverty as a dynamic challenge

always poor| Usually poor| Churning poor| Occasionally poor | Never poor

Always poor

Usually poor

Churning poor

Occasionally poor

Never poor

Present Status

Sta

tus 1

0 Y

ears

Ag

o

Situationunchanged

Improvement of situation Poverty Reduction

Worsening of situation

No cases

Hulme, D, and A Shepherd. 2003. “Conceptualizing Chronic Poverty”. World Development 31:403-23.

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Poverty as a dynamic challenge

Hulme, D, and A Shepherd. 2003. “Conceptualizing Chronic Poverty”. World Development 31:403-23.

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The cause of poverty dynamics

Income gained

Hulme, D, and A Shepherd. 2003. “Conceptualizing Chronic Poverty”. World Development 31:403-23.

Income lost

Formal employment

RemittancesChildren have (urban) income

InheritancePublic subsidies

Death of household head

Long sicknessBusinessstart-up

Bad investment

House burned down

Landwashed away

Drug addiction

always poor| Usually poor| Churning poor| Occasionally poor | Never poor

Always poor

Usually poor

Churning poor

Occasionally poor

Never poor

Present Status

Sta

tus 1

0 Y

ears

Ag

o

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Microinsurances as a protection mechanism

Churchill, Craig, ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re

Foundation.

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Different social security mechanisms

Churchill, Craig, ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re

Foundation.

Self-insurance

Informal group-based mechanisms

Formal (micro-)insurance

Socialprotection

Money lenders(Family) savings

Welfare AssociationsFuneral AssociationsRotating Savings and Credit Associations (ROSCAs)

Partnerships between insurers and MFIs

Public provision / pensions

In case of „death“:

Diversifying income sourcesBuilding social capitalEx-ante reduction of vulnerability

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Feasibility of microinsurances

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Lives affected

Diffi-culty

Risk

Life insurance An ideal and simple risk to insure, with proven demand and impact, easy to scale

***** ** *

Accidental death and dismemberment insurance

A simple risk, with proxy health elements, but providing incomplete protection

***** *** **

Healthcare cost indemnity insurance

Long-term, risky, complex, subject to abuse and fraud, historically many failures

*-*****

***** ****

Health savings vehicles

Support and financial discipline for routine expenses, no help for major events

*-*****

* *

Defined benefit health (major medical, hospital, critical illness)

Contribution towards healthcare costs or associated losses for major healthcare events

*-*****

**** ***

Agricultural (property) insurance

Risk management is a crucial component of agricultural development

***** **** ***Roth, Jim, Michael J. McCord, and Dominic Liber. 2007. The Landscape of Microinsurance in the World’s 100 Poorest Countries. Appleton, WI: The MicroInsurance Centre, LLC.

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Consumer demand for microinsurances

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Effects – health micro-insurance

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Adapted from Blanchard-Horan, 2006, In: Roth, Jim, Michael J. McCord, and Dominic Liber. 2007. The Landscape of Microinsurance in the World’s 100 Poorest Countries. Appleton, WI: The MicroInsurance Centre, LLC.

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Introduction Seminar Microinsurances

Definitions and Principles

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Microinsurances - definition

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„Microinsurance is the protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved”

Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation.

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Microinsurances - principles

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• Same general principle as ‘normal’ insurance

• But different target group: The poor!• Double benefit:

• New, untapped market for businesses• Protection of the poor against risks:

Vulnerability• Different operational principles

Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance CompendiumInternational Labour Office (ILO), Munich Re Foundation.

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Microinsurance principles

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Principles Key Question

Relevant to the risks of low-income households

What do we know about the risks the poor face?

As inclusive as possible

How can we reach the greatest number of poor people?

Affordable premiums

How much can the poor pay, when, in which form?

Grouping for efficiencies

How can we overcome transaction costs in rural and dispersed markets?

Clearly defined and simple rules and restrictions

How can everybody (even illiterates) understand the product offer?

Easily accessible claims documentation requirements

How can the poor claim insurance payments quickly?

Strategies to overcome the wariness of customers

How can ignorance of insurance as a principle be overcome?

Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance CompendiumInternational Labour Office (ILO), Munich Re Foundation.

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Introduction Seminar Microinsurances

Supply of Microinsurances

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Access to financial services

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Number of microinsurance providers

Roth, Jim, Michael J. McCord, and Dominic Liber. 2007. The Landscape of Microinsurance in the World’s 100 Poorest Countries. Appleton, WI: The MicroInsurance Centre, LLC.

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Microinsurances – total lives covered

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Region Life HealthAccident

& Disability

Property & Index

Americas 7,545,057 445,876 105,000 600

Africa 2,036,141 3,053,778 1,603,000 1,600,000

Asia54,158,33

231,697,038

39,180,508

34,557,434

Total63,739,53

035196692 40888508 36158034

Roth, Jim, Michael J. McCord, and Dominic Liber. 2007. The Landscape of Microinsurance in the World’s 100 Poorest Countries. Appleton, WI: The MicroInsurance Centre, LLC.

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Access to microinsurances in Latin America

Roth, Jim, Michael J. McCord, and Dominic Liber. 2007. The Landscape of Microinsurance in the World’s 100 Poorest Countries. Appleton, WI: The MicroInsurance Centre, LLC.

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The context for microinsurances

Roth, Jim, Michael J. McCord, and Dominic Liber. 2007. The Landscape of Microinsurance in the World’s 100 Poorest Countries. Appleton, WI: The

MicroInsurance Centre, LLC.

Macro | The Enabling Environment

Meso | Financial Infrastructure

Micro | Business Models

Commercial & mutual

insurers, agents,

brokers, intermediaries

Actuaries, auditors, technical support,

adjusters, insurance

claims register,

information technology

Policy, legislation, regulation, supervision

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Market development for microinsurances

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Qureshi, Zahid, and Dirk Reinhard. 2008. “Making Insurance Work for the Poor”. 4th International Microinsurance Conference 2008

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Introduction Seminar Microinsurances

Presentation 2:

Microinsurances: Actors and Networks

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Introduction Seminar Microinsurances

The Micro-Insurance Value Chain

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Value chain for insurances

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Changes in the value chain

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Qureshi, Zahid, and Dirk Reinhard. 2008. “Making Insurance Work for the Poor”. 4th International Microinsurance Conference 2008

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Work distribution – a pyramid model

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Reinsurer

Insurer Insurer Insurer

Channel Channel Channel

Client Client Client

Covered Life

Covered Life

Covered Life

‚A few‘

‚Dozens‘

‚Thousands‘

‚Millions‘

‚Millions more‘

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Work distribution

Qureshi, Zahid, and Dirk Reinhard. 2008. “Making Insurance Work for the Poor”. 4th International Microinsurance Conference 2008

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Microinsurances – product design tasks

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Micro-Insurance Product Design (Example: Health)

Product manufacturing•Define benefit package •Identify providers•Pricing for sustainability•Controls for fraud, moral hazard, adverse selection

Product sales•Information provision•Underwriting

Product servicing•Assistance with claims •Manage relationship with care providers•Long-term relationship with clients

Product servicing•Maintenance of long-term stability•Financial management•Risk monitoring & management (reinsurance)

Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance CompendiumInternational Labour Office (ILO), Munich Re Foundation.

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Value creation through local education

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Michael Anthony, Allianz SE, Presentation at Utopia Conference, Berlin

Explain insurances

and risks covered to the heads of village.

To raise understanding and awareness

about micro-insurances,

mass rallies are being held by

Care and local NGO.

Village officials explain and discuss the concept of

insurance with members of the village.

During these awareness campaigns a puppet theatre and microinsurance song are shown to explain insurance.

1 2

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Introduction Seminar Microinsurances

Actors and Approaches

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Key differences between the actors in the field

Financial Performance

Social Mission

Large & Global

Small & Local

Weak / distanced

Strong / embedded

Primary interest / logic

Scope of operations

Outreach to the poor

High /standardised

Low / informal

Operational & financial capacity

High / stable

Low / instable

Risk-pooling capacity / reserves

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Introduction Seminar Microinsurances

Actors and Approaches

Insurance Companies

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Base of the Pyramid – A new paradigm

Poor / extremely poor‘Base of the Pyramid’= 4 billion customers?

Traditional business focus

Neglected markets

Middle class

Highincome

Inclusive business?

Anwara Begum, Grameen 'telephone lady' (Credit: Nurjahan Chaklader)

Based on Prahalad, C. K., and Allen L. Hammond. 2002. “What Works: Serving the Poor, Profitably”. Harvard Business Review 4-11.

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Why poverty markets? Reasons for insurers

Internal factors External factors• Corporate social

responsibility • Risk diversification • Securing or growing

revenue• Push for new markets

and innovative products

• Growing competition in traditional markets

• Shrinking margins in traditional markets

• Regulatory requirements • Political and activist pressure • Liberalization of previously

closed markets

Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance CompendiumInternational Labour Office (ILO), Munich Re Foundation.

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How? Agent vs. reinsurance-modell

Insurance company

Micro-finance

Coopera-tive

Insurance company

Micro-finance

Coopera-tive

„Agent“ „Reinsurance“General

• Insurer develop products and carry the risk

• Microfinance Institutions or cooperatives serve as distribution channels

• Claim settlement often through distribution partners

• Typical of life insurances

• Microfinance Institute or cooperative develop products

• Part of the risk is shifted to insurance company

• Claim settlement through distribution partners

• Typical of health insurances

Re-insurer

Insurer

Distribution channel

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Introduction Seminar Microinsurances

Actors and Approaches

(Agro-)Cooperatives

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Cooperatives - principles

The insurer is owned by the insured

•Incentive to keep premiums low and claims regulation high•Local control between the insured to reduce moral hazard

•Wide variation in terms of members• From a dozen to several millions

•As a consequence, similar variation in modes of operation

•Insurance often based on established service models:• Credit cooperatives Credit-life insurance• Health cooperatives Health insurance• Farmer cooperatives Crop / livestock insurance

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Kooperativen - Beispiele

Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance CompendiumInternational Labour Office (ILO), Munich Re Foundation.

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Introduction Seminar Microinsurances

Actors and Approaches

Micro-Finance Institutions

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From micro-credit to micro-insurance

Core business: Micro credit (and partly social services)

Credit protection through credit life insuranceDouble goal: More attractive credit products and improved risk profile of portfolio

Connection of savings and insuranceSavings similar to insurance („pay now, get back later“)High demand for savings products from target group

More insurance productsHealth, property, crop, livestock

1. Closer to customer demand (health!)

2. Rising complexity and risk

3. Danger of cross-subsidising and financial stability

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Micro-Finance 1: Local embeddedness

Muhammad YunusFounder Grameen Bank

• Not-for-profit / low-profit companies

• Financially sustainable• The goal is to create “social

businesses”

• Locally adapted• Long-term learning

processes• More socialisation then

training

• Alliances with profit oriented businesses in clearly-defined joint venture structures

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Micro-Finance 2: Standardisation

icrofinance?

Vikram Akula Founder

SKS Microfinance

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Micro-Finance 1: Local embeddedness

Akula, Vikram. 2008. Business Basics At the Base of the Pyramid. Harvard Business Review 86:53-57.

Akula / SKS approach

Traditionally

Adopt a profit-oriented approach in order to access

commercial capital.

• Not-for-profit / low-profit organisations• Financially self-sustaining• Establish “social businesses” (Yunus)

Standardise products, training

and other processes in order

to boost capacity — like „Starbucks and

McDonalds“.

• Locally adapted, learn on the ground• Process of socialisation, recruit officers

from former clients• Average training time: 4-6 months (2

months at SKS)

Use technology to reduce costs and

limit errors.

• Paper-based bookkeeping, local technology

• SKS: Handhelds, internet-linked, special software

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Step-wise development of business models?

Source : http://www.symbiotics.ch/en/microfinance-institutions.asp, Darius Capital Partners

Difficulty with microinsurances:

•Risk pooling requires a big and widely-distributed portfolio

•Lumpy investments into insurance knowledge, systems and accreditation

Starting microinsurance incrementally is difficult!

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How many people do different providers reach?

Roth, Jim, Michael J. McCord, and Dominic Liber. 2007. The Landscape of Microinsurance in the World’s 100 Poorest Countries. Appleton, WI: The MicroInsurance Centre, LLC.

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Which services do different providers offer?

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Roth, Jim, Michael J. McCord, and Dominic Liber. 2007. The Landscape of Microinsurance in the World’s 100 Poorest Countries. Appleton, WI: The MicroInsurance Centre, LLC.

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Thanks for your attention!

Martin Herrndorf

martin.herrndorf@unisg.chskype: herrndorfmobil ch: +41(0)76 2632601Mobil de: +49(0)163 4311374www.facebook.com/herrndorf