bank indonesia jl. mh. thamrin no deutsche gesellschaft für technische zusammenarbeit (gtz) gmbh...

Publisher: Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH Promotion Small Financial Institution (ProFI) Bank Indonesia Menara Radius Prawiro, 2nd Floor Jl. MH. Thamrin No.2 Jakarta 10350 / Indonesia T: +62 (0) 386 6384 F: +62 (0) 235 49156 E: [email protected] I: www.profi.or.id Author: Daniel Weiss 1.edition Jakarta, May 2007

Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 1

Table of Content:

TABLE OF FIGURES: 2

ACRONYMS AND ABBREVIATIONS 3

US DOLLAR/ INDONESIAN RUPIAH EXCHANGE RATE 3

1. BACKGROUND AND OBJECTIVE OF THE PAPER 4

2. PUBLIC-PRIVATE-PARTNERSHIP ON MICROINSURANCE 5

2.1 BACKGROUND, SET-UP, AND ROLES OF GTZ GMBH AND ALLIANZ SE 5 2.2 STUDY ON DEMAND AND PROSPECTS 6 2.3 CREDIT LIFE PLUS ADDITIONAL BENEFIT 8

3. FEATURES OF THE MICROINSURANCE PRODUCT 10

3.1 THE PARTNER-AGENT MODEL AS A DELIVERY CHANNEL 10 3.2 INSURANCE COVERAGE 13 3.3 PROTECTING AGAINST ADVERSE SELECTION, MORAL HAZARD AND FRAUD 14 3.4 PREMIUM PAYMENTS 15 3.5 CLAIMS MANAGEMENT 16 3.6 MARKET EDUCATION AND MARKETING 17

4. EFFECTIVENESS OF “PAYUNG KELUARGA” 18

5. NEXT STEPS 20

5.1 INCREASE OUTREACH – ESTABLISH A DISTRIBUTION NETWORK 20 5.1.1 BPR AND LPD 20 5.1.2 REQUIREMENTS FOR FUTURE DISTRIBUTION PARTNERS 22 5.2 DIVERSIFICATION OF PRODUCT RANGE 23 5.2.1 ADAPTATIONS TO “PAYUNG KELUARGA” 23 5.2.2 EDUCATION ENDOWMENT INSURANCE 25

6. LESSONS LEARNED 27

7. ANNEXES 29

ANNEX 1: INSURANCE DENSITY AND PENETRATION FOR SELECTED ASIAN 29 COUNTRIES 2003 29 ANNEX 2: THE MINIMUM REQUIREMENTS FOR MFIS WITH 30 INSURANCE OPERATIONS 30


8. BIBLIOGRAPHY 32

Table of Figures: Figure 1: The five most perilous risks in Indonesia............................................................ 7 Figure 2: GTZ ProFI’s goal in microinsurance................................................................... 9 Figure 3: The Partner-Agent-Model ................................................................................. 10


Acronyms and Abbreviations

English Indonesian

ASCA Accumulating Savings and Credit Club

BPR People’s Credit Bank Bank Perkreditan Rakyat

CGAP Consultative Group for Assisting the Poor

CU Credit Union

DIMAN Dian Mandiri foundation

GTZ ProFI

GTZ supported microfinance program. The program aims to address the unmet demand for microfinance services in Indonesia using a financial systems development approach.

LPD Village Credit Institution Lembaga Perkreditan Desa

NGO Non-governmental Organization

PPP Public-Private-Partnership

ROSCA Rotating Savings and Credit Club

US Dollar/ Indonesian Rupiah Exchange Rate

1 US Dollar (USD) = 9,115.77 Indonesian Rupiah (IDR)

Source: Oanda - the currency site (Internet), http://www.oanda.com/convert/classic, 01.02.2007


1. Background and objective of the paper

Since 2004, GTZ GmbH and Allianz SE are cooperating in order to develop and provide safety net mechanisms to the poor through microinsurance. The project described in this paper is a Public-Private-Partnership which has been appraised by the German Federal Ministry of Economic Cooperation and Development1. This cooperation is based on and is part of the joint initiative “Measuring Microinsurance Demand and Prospects: Providing Safety Net Mechanisms to Poor People” which is a strategic cooperation between UNDP, Allianz SE and GTZ GmbH.

Within that framework microinsurance products are being developed and pilot tested in Indonesia and India. In Indonesia the project is being implemented by Allianz Life Indonesia and the GTZ-supported program ProFI. Allianz Life Indonesia provides its expertise in private insurance markets and GTZ ProFI supports the project through its experience in development assistance and microfinance. Both partners have introduced a “Credit life plus additional benefit” microinsurance product to the low-income market in Indonesia recently. At the time of writing the microinsurance product is being pilot tested for four months and sold through a single distribution partner. This publication covers the product design and the pilot testing phase in Indonesia.

The two main objectives of this publication are to highlight the technical “lessons learned” of the Public-Private-Partnership on Microinsurance and to scrutinize the suitability of the microinsurance product for poor clients. As the target group of microinsurance are vulnerable low-income households it is necessary to maintain a clear focus on whether microinsurance can effectively reduce their vulnerability.

The study provides practical experiences of the Public-Private-Partnership on microinsurance in Indonesia. The following chapters two and three illustrate the set-up of the Public-Private-Partnership, the responsibilities of each partner and the product features of the “Credit life plus additional benefit” product itself. It highlights the experience gained during the product design phase and the first months of implementation. These sections elaborate the specific insurance needs of low-income households. By means of practical experience it highlights how insurance processes have to be designed to make a credit life insurance product (with additional benefit) work. It is necessary to understand why microinsurance has to be implemented with a special focus on client needs. Chapter four then systematically scrutinizes the effectiveness and suitability of the microinsurance product developed by GTZ GmbH and Allianz SE in reducing economic risks associated with death for poor clients. It provides an insight into the appropriateness of microinsurance as an additional risk management strategy to existing informal strategies. Chapter five then looks into the future of the Public-Private-Partnership and lays out the next steps necessary to extend protection for low-income households. Finally, chapter six provides practical “lessons learned” which are drawn from experiences during the product design and the pilot testing phase.

1 Public-Private-Partnerships is an initiative of above mentioned German Federal Ministry to promote a project-based cooperation of the private and the public sector in order to combine economic with developmental objectives.


2. Public-Private-Partnership on microinsurance

2.1 Background, set-up, and roles of GTZ GmbH and Allianz SE

The framework for the cooperation on microinsurance between Allianz SE and GTZ GmbH is a Public-Private-Partnership. The objective of the partnership is to develop and provide a safety net mechanism (microinsurance) for the poor. The objective of GTZ is to provide low-income households with an additional risk management strategy. Microinsurance, as the provision of insurance to low-income households, has the potential to complement the existing strategies of poor and vulnerable households. Micro-credit and micro-savings have played an active role in reducing the inability to deal with losses or costs which result from the occurrence of natural calamities but also more regular events such as illness and accidents. Still these events translate into crisis for many poor households and erode the economic gains they have made. Credit and savings services are inadequate when households are exposed to risks which cause losses that are beyond their means. Insurance can serve as a promising response to such client needs.

In order to attain the objective of providing low-income households with a safety net mechanism both partners have to combine their respective strengths and professional experience. Each partner would not achieve this objective alone as GTZ GmbH is lacking the required insurance experience and Allianz SE is lacking the link to the low-income market.

The first joint activity within the PPP was the facilitation of studies on microinsurance demand and prospects in India, Laos and Indonesia. The studies combined an in-depth analysis of the framework conditions (e.g. insurance regulation, structure of the insurance industry), the existing microinsurance market with a client needs assessment (based on focus group discussions). The studies also provided a first appraisal of possible marketing strategies and recommendations for product development. After reviewing the findings the partners agreed upon developing a microinsurance product in Indonesia and India.

In Indonesia the project is being implemented by Allianz Life Indonesia and the GTZ supported project ProFI. Both parties carry out the project jointly while focusing on their respective expertise.

GTZ ProFI contributes its experience in development assistance in general as well as technical expertise in microfinance and a profound knowledge of and links to the microfinance sector in Indonesia. Concrete contributions in this respect are:

to contribute its microfinance experience by o providing, processing and analysing financial as well as organizational

data o pre-selecting potential distribution partners

to act as a matchmaker o between Allianz and its distribution partners, associations, second-tier

institutions (training institutes)


o towards central and provincial government authorities e.g. promoting Bank Indonesia regulation for an enabling environment

o towards associations o to an international microinsurance network

to assist in product design through o emphasizing the development and social aspect of microinsurance o incepting initiatives for innovative and more comprehensive products o facilitating UNDP-GTZ-Allianz microinsurance market study

The role of Allianz Life Indonesia is to contribute its insurance expertise. Concisely, its contributions to the project are:

to develop a microinsurance product including activities such as o actuarial calculation o establishment of administrative procedures o official registration with Ministry of Finance o producing marketing materials

to establish partnership with distribution partners by o negotiating partnership agreements with distribution partners o conducting focus group discussions with clients o contracting distribution partners o training and educating the sales staff of distribution partners on

insurance principles product features administrative procedures e.g. premium collection, claim handling and

claim payment to conduct administrative insurance activities such as

o claim verifying o financial monitoring and supervision

This categorization intends to highlight the respective competencies of both partners and is not exhaustive. Chapter three describes the features of the product as well as the contributions of GTZ ProFI and Allianz Life Indonesia in further detail. Prior to that it is important to understand how GTZ ProFI and Allianz Life Indonesia arrived at the decision to develop a “Credit Life plus additional benefit” product.

2.2 Study on demand and prospects

As a first joint project activity GTZ GmbH, Allianz SE and UNDP conducted a study on the demand and prospect of microinsurance in Indonesia in 2005.2 The study was conducted by internationally experienced microinsurance experts and revealed that the potential microinsurance market in Indonesia comprises the poor and the informal sector. This market segment consists of approximately 114 million people in Indonesia. The insurable population between 20 and 59 years are about 62 million people. The authors estimate that approximately 20% or 12 million people could become future microinsurance clients by 2015. Suggestions from other sources estimate 25 to 35 million insurable persons. At the beginning growth will be slow and will depend largely on the availability of microinsurance products, marketing mechanisms and distribution

2 McCord/Ramm/McGuinness, Microinsurance Demand and Prospect Indonesia, 2005


partners. But once clients and distribution partners recognize the value of microinsurance growth will be faster.

Today, insurers are still reluctant to move into the low-income market due to low profitability, high risk of fraud, high transaction costs, uneducated sales personnel, lack of appropriate MIS systems etc. On the other hand there is an unmet demand for insurance services among Indonesia’s poor. Conventional insurance services in Indonesia are available only for the middle and upper market segments. Individual insurance policies like health, education endowment, life, or motorcycle policies are accessible only to those who are able to pay the premiums.3 Group insurance products, for example health insurance which is provided by the employer is accessible only to people who work in a formal sector job. Striking evidence is the very low insurance penetration4 in Indonesia (1.49% of GDP). The level is by far lower than in Malaysia (3.45%) or Thailand (5.35%) and similar to countries like Vietnam and the Philippines. In addition, the insurance density5 is low as well with a yearly per capita insurance premium of around 15$. Malaysia and Thailand have higher densities of 227$ and 80$ respectively. The Indonesian level is similar to the levels of India or the Philippines.

The main objective of the study though was to find out which insurance product low-income households need most. Therefore, it was crucial to understand what risks poor households regard as most pressing and endangering. Several focus group discussions were conducted in order to assess which risks cause the greatest loss to low-income households. Participants of the focus group discussions identified 22 different risks. The following five risks were perceived as most perilous.

Figure 1: The five most perilous risks in Indonesia

Identified Risk

1. Serious Illness

2. Education of Children

3. Poor Harvest

4. Death of a Relative

5. Accidents

Source: Own elaboration adapted from McCord/Ramm/McGuinness, Microinsurance Demand and Prospects Indonesia, 2005, p. 24

Thus, microinsurance products should primarily provide protection against serious illnesses and mechanisms to lower the irregularity of educational expenses. The reasons

3 Allianz’ usual premium rates of at least IDR 100,000 (USD 10.50) per month are beyond these customers’ reach. 4 Insurance penetration measures the amount of insurance premiums as a percentage of GDP 5 Insurance density measures the value of insurance premiums per capita. Figures are derived from McCord/Ramm/McGuinness, Microinsurance Demand and Prospect Indonesia, 2005, p. 3 For further information please see the graphic Annex 1


why GTZ ProFI and Allianz Life Indonesia decided to develop a product against the risk “death of a relative” will be given in the following chapter.

2.3 Credit Life Plus Additional Benefit

The study on demand and prospects of microinsurance in Indonesia in 2005 also revealed that the risks that need to be addressed most urgently are serious illness, educational expenses and poor harvest. The focus group participants perceived the risk of death only as the 4th most perilous risk. Nevertheless, Allianz Life Indonesia and GTZ ProFI decided to develop a simple credit life product with additional benefits first, due to the following reasons:

it is one of the most affordable products the insurance administration is extremely cost-efficient and simple it acts as an entry point for increasing coverage through product adaptations

and more complex products.

The resulting product is a compulsory group credit life insurance with additional benefits for loan clients called “Payung Keluarga” which literally means “Family Umbrella”. The product benefits both the creditor and the debtor. Upon death of the insured person (the loan taker) the insurance benefits

the creditor and the dependants of the insured as it immediately repays the outstanding loan. Thus, MFIs do not have to write off the loan and the family does not have to repay the loan

the dependants of the debtor with an additional benefit (twice the original loan amount)

Thus, the product enlarges the effectiveness of a single credit life insurance product. It now benefits both the loan taker and the creditor. The product benefits both MFI clients as well MFIs themselves.

In implementing the microinsurance product, GTZ GmbH as well as the GTZ-supported project ProFI focus on two main goals both with the ultimate objective of achieving sustainable poverty reduction; to contribute to sustainable poverty reduction through the benefits derived directly from the product by individuals and through strengthening of the MFI-sector. The impact chain of “Payung Keluarga” for individual clients (left chain) and MFIs (right chain) can be seen in figure 2.


Figure 2: GTZ ProFI’s goal in microinsurance

Source: Own Elaboration, based on a presentation of M. Hamp, Microinsurance Press Trip, 2007

As the insurance product is closely linked to credit services, the insurance duration matches exactly the loan term. The premium is deducted from the loan pay-out at the beginning of the loan term. The maximum insurable loan size is IDR 10,000,000 with a maximum duration of two years. Average loan size of the microfinance clients ranges from IDR 1,000,000 to IDR 4,000,000. The person covered is the loan taker. Every cause of death is being covered even death due to catastrophic risks like bird flu and earthquakes.

Since 01.09.2007 the PPP is in its pilot testing phase and the credit life plus additional benefit microinsurance product “Payung Keluarga” is available to debtors of one MFI in the South Jakarta District and Badung District, Bali. To date more than 7,000 debtors are life insured and the first preliminary financial assessment indicates that the product may become financially sustainable in the future. The future commitment towards microinsurance of Allianz Life Indonesia depends on the sustainability of this pilot product. The objective of Allianz Life Indonesia is not to create a highly profitable product, rather the focus is on creating a financially sustainable product which can be offered to sections of the population that were previously without access to insurance.

As already mentioned the crucial point in product design was to design a financially sustainable (or “non-loss”) credit life product which is suitable towards the insurance needs of low-income households. The following section on product features provides a rationale for the product design. Beyond, it highlights advantages and limitations of the product features including first experiences of the pilot testing phase.

Risk distribution over a large pool +additional funds after risk event

Individual vulnera-bility is reduced

Better planning for the future is made possible

Sustainable poverty reduction is achieved

1. Sustainable Poverty reduction

2. Strengthening the MFI-sector

Loan repayment if loan taker dies

Improved loan portfolio and soundness

Improved access to funds and more loans

Greater outreach to reduce poverty


3. Features of the microinsurance product

3.1 The partner-agent model as a delivery channel

During product design the question arose how to bring a future microinsurance product to the market. As mentioned above neither Allianz Life Indonesia nor GTZ ProFI have direct access to the low-income market. Allianz Life Indonesia’s usual premium rates of at least IRD 100,000 are far beyond these customers’ reach. GTZ ProFI cooperates with and supports micro-, meso- and macrolevel institutions but has only limited direct access to potential microinsurance clients. Therefore, a third party had to be involved and both decided to rely on the partner-agent-model as an efficient retailing channel.

Within that model the partner (insurer) and the agent (MFIs, Cooperatives, NGOs) split responsibilities and provide the services they have the most experience with. Within the Public-Private-Partnership Allianz Life Indonesia (partner) is mainly responsible for product manufacturing whereas the distribution partner (agent) is responsible for product sales and servicing and acts as the direct intermediary towards the low-income market. The partner-agent-model is shown graphically in the figure below.

Figure 3: The Partner-Agent-Model

Source: Brown/Churchill, Insurance Provision in Low-income Communities, 2000, p. 24

Currently, the microinsurance product is being distributed via a savings and credit cooperative. Its name is Dian Mandiri Foundation (DIMAN) and its head office is located in Tangerang south of Jakarta. DIMAN offers credit services to its customers and conducts social projects. DIMAN has 13 branches mostly located on the outskirts of Jakarta and in Banten Province. DIMAN’s target beneficiaries are low-income, unemployed and poorly educated urban people (e.g. street vendors) as well as rural women. DIMAN serves approximately 17,000 loan clients but being a foundation is not allowed to take deposits from its clients. DIMAN's credit strategy is a group lending program called Trust Bank. DIMAN provides small business loans of up to IDR 1,000,000 to groups of 15 to 30 poor entrepreneurs. The Trust Bank program provides a graduation mechanism. Upon successful loan repayment clients can apply for larger credits in ever smaller groups. Finally, they are allowed to take individual credits. About 86% of DIMAN’s clients are women. The members of the group co-guarantee each


Roles of DIMAN and Allianz Life Indonesia

The role of DIMAN as an agent is to sell and provide service for the insurance products. Within that course DIMAN

handles insurance subscription, collecting client data conducts client education upfront loan disbursement is responsible for premium collection (deduction at loan disbursement) as

well as claim processing and even claim payment forwards premium surpluses monthly is to regularly forward premiums and report to Allianz Life Indonesia.

The role of Allianz Life Indonesia as the partner is to:

develop, calculate and provide the microinsurance product train DIMAN field staff extensively on general insurance principles as well

as specific products features to initially assist DIMAN in technical matters (reporting) provide financial assistance if claims exceed premium payments and/or

reserves.

other's loan repayment.6 In the text box below you can find the responsibilities of DIMAN and Allianz Life Indonesia.

GTZ ProFI and Allianz Life Indonesia decided to rely on the partner-agent-model because it is a cost- and resource-efficient way to approach customers and it enables many MFIs to introduce insurance products complementing their product range. Under current regulation People’s Credit Banks (BPRs) as well as many other MFIs are not allowed to develop and run insurance services on their own. Allianz Life Indonesia takes over the financial risk and even provides (indirect) access to reinsurance.

Besides, the administration of the products within the partner-agent model is very cost-effective. The small premiums of “Payung Keluarga” (in average around IDR 6,000) do not allow any space for unnecessary administrative complexity. With the partner-agent model the transaction costs for customers, MFIs and Allianz Life Indonesia can be kept to a minimum and this provides a real value for the policyholder.

GTZ ProFI and Allianz Life Indonesia agreed to rely on the existing distribution channels of MFIs because MFIs are in a unique position to reach the low-income market. They have extensive networks, work efficiently and additionally their proximity to and experience in serving the poor are advantageous. In the future the project will focus on the cooperation with savings and credit cooperatives, People’s Credit Banks (BPRs) and Village Credit Institutions (LPD). Via their networks Allianz Life Indonesia can reach out 6 DIMAN also offers a graduation program for the clients who need more capital. Then the credit groups consist of only 3 - 5 debtors with more developed businesses and a reliable credit history (max. loan size IDR 5,000,000) Beyond that DIMAN also offers collateralized individual loans (max. loan size IDR 10,000,000). The average loan size is around IDR 1,150,000 (as of March 2006).


to a large number of reliable customers as these MFIs already have an established credit history with their clients.

The advantage for the current distribution partner DIMAN on the other hand is that it widens its product range and is insured against loan default due to death. Due to field experience many MFIs in Indonesia simply write off loans after the death of the debtor. Admittedly, this advantage is not decisive for MFIs as the debtor’s family usually continues to repay the loan.7 Thus, the MFIs that have been contacted yet support the additional benefit for their clients.

But on the other hand there are also limitations of the partner-agent-model. One is for example that MFIs may not be able to negotiate favorable partnership conditions with insurance companies. This assumption may be true for less well established MFIs but the experience in partner selection to date reveals the opposite. BPRs and LPDs are aware of their own risk situation and their clients’ needs. Thus, GTZ ProFI and Allianz Life Indonesia are rather in a sales position and have to make a valuable offer for MFIs.

A sensitive issue that arose during product design was the suitability of the distribution partner. As insurance is an intangible service it relies heavily on its distribution to market its benefits. For Allianz SE in general and Allianz Life Indonesia specifically it is important that their image as a successful and reputable insurance company is not distorted. Thus, professionalism of the management and financial sustainability have to be ensured when selecting distribution partners. The issue will become even more important in the future in case the PPP partners develop and provide more complex microinsurance products. In contrast to direct sales through insurance companies the partner-agent-model increases the risk of fraud and abuse as there is a second source of potential manipulation. But as fraud in life insurance with a fixed duration is difficult it seemed appropriate for Allianz Life Indonesia and GTZ ProFI to start with the partner-agent-model.

Another limitation of this model arises in case administrative arrangements are complex. In consequence, claim processing and payment may be long-winded. It is most crucial to ensure that pay-outs can be managed very timely. Besides, also insurance application and data exchange has to be implemented in a simple and cost-efficient way.

Finally, one question is unanswered. What is the advantage for the debtor? DIMAN’s clients for example do benefit from the model as they are offered well calculated products at affordable premiums. Secondly, the product improves the financial situation of DIMAN’s clients. They may be willing to take larger credits in the future as the product reduces the risk loan repayment upon death. Besides, the debtor’s transaction costs of purchasing and handling the microinsurance product are minimal as they can purchase the microinsurance product at a well-known and nearby MFI.

As we have seen the partner-agent-model has some vital advantages. Both parties can split responsibilities and use their comparative advantages through concentrating on their core businesses. Thus, the partner-agent model minimizes transaction costs for them as well as for the customer. Still, there are limitations that have to be addressed to make the partnership effective. The administrative procedures (especially claim payment) have to be cost-effective and insurers as well as MFIs must be able to verify that they deal with reliable partners.

7 There is a religious belief in Java and Bali that the soul can not enter heaven while being indebted.


3.2 Insurance coverage The critical issue with insurance coverage is to find a balance between the interest of the insurers and the effectiveness of the product for the policyholder. With the microinsurance product of GTZ ProFI and Allianz Life Indonesia another issue was to ensure affordability of the product. GTZ ProFI and Allianz Life Indonesia decided on a simple but rigid product design in order to make the premium affordable and to keep administration simple. The product “Payung Keluarga” provides coverage for the event of death due to any circumstances. Thus, death due to accidents, HIV/AIDS and even suicide is covered. The reason is that any investigation on the cause of death would be more expensive than covering the additional risk. Besides, covering death due to any cause avoids the risk of claim rejection which can entail dissatisfaction among customers. In addition, the insurance has no exclusions (e.g. medical tests) for application in order to reduce transaction costs. Rather, mandatory group insurance is used, providing a mechanism to reduce the insurer’s risk that many high-risk individuals join the scheme. Clients benefit from group insurance products in the form of lower premiums and less strict application processes. “Payung Keluarga” is provided to members of group loan schemes on a mandatory basis. The insured groups are (mostly female) credit customers of MFIs. The insurance product is based on the group-lending approach of the distributing MFIs. Thus, with one credit disbursement immediately 15 to 30 persons are life insured for the length of the loan term. In the first place mandatory group insurance benefits the insurer and the client as operational costs of group contracts are considerably less complex, less costly than individual insurance contracts. Group insurance contracts for example, reduce distribution and administrative costs (e.g. claim management) as there is only one contract for many policyholders. A limitation of the group insurance design of “Payung Keluarga” is that only clients who currently are members of a lending group can obtain insurance protection. Customers who currently do not have a credit can not obtain insurance coverage. Besides, only active members of lending groups can be insured. During interviews with credit groups in Java Tengah it became clear that not all group members take loans at the same time. In consequence, only those members who apply for loans can be insured. Members who pause go uninsured until they apply for another loan. Besides, long-term protection can not be provided yet as the covered term is consistent with the loan term. Thus, clients have insurance coverage only in times when they are indebted. This is a clear limitation as coverage is not available for clients who currently have no loan, savers or persons without a financial relation with a MFI. Another limitation is that until now the insured person is only the debtor but none of his/her family members. Thus, the insurance product can not provide comprehensive coverage yet. Beyond, the insurance term is always congruent with the loan term. Thus, coverage after loan repayment is not possible and “Payung Keluarga” can not provide any long-term protection.


As we have seen the product can not provide comprehensive coverage yet as it provides only short-term coverage and is restricted to small target group. The gender aspect of microinsurance is critical here as most of DIMAN’s clients are women. Thus, their families are protected but the women are left alone in case their husband dies as most men go uninsured. But the credit life product is only a first step on the road toward comprehensive insurance for the low-income market . In order to gain the first experiences it is important to start with a small and simple step. Here, mandatory coverage facilitates a large customer number with an average risk portfolio.

3.3 Protecting against adverse selection, moral hazard and fraud

Microinsurance providers have to find a balance between the affordability of their products for poor clients and the financial risk of excessive claims. Two main sources of excessive claims are adverse selection and moral hazard. Adverse selection describes the risk for an insurer that a disproportional part of high-risk individuals become members of an insurance scheme. Moral hazard describes the situation when a person engages in risky behavior especially because the person knows insurance coverage exists.

The primary financial risk for insurers is excessive claims. These can distort its financial viability and in consequence can endanger customer protection. Both adverse selection and moral hazard can entail excessive claims. The crucial point for Allianz Life Indonesia and GTZ ProFI was to find the balance between the financial risk and the costs of measures to avoid this risk. The primary measure to prevent both is underwriting. Ultimately, underwriting measures would make the product unaffordable for clients. The necessary underwriting measures that are applied by Allianz Life Indonesia can be summarized as follows:

The measures to avoid adverse selection are o mandatory insurance (all high- and low-risk individuals will join the

insurance) and o age limitation (people over 60 can not apply for insurance any more)

There are no medical check-ups, surcharges, premium loadings etc. There are no instruments in place to prevent moral hazard as their

implementation would be too expensive (and the risk of moral hazard with life insurance products is generally very low)

Thus, the product covers co-variant risks such as death due to epidemics e.g. avian flue or natural disasters. Just imagine the costs to verify the cause of death either through an on-site visit or a medical report - especially with regard to the small premiums. Another measure to reduce transaction costs is to not apply any upfront medical check-ups. As mentioned above, it is cheaper to add a risk margin to the product than to undergo expensive upfront examinations.

The need for measures against fraud is minimal as the covered event – death – is hard to pretend. Allianz Life Indonesia requires the death certificate with signatures of local authorities (village or sub-district head). Additionally, the beneficiaries have to hand in the claim form. The claim form has to be signed by several authorities (e.g. head of the credit group, loan officer and others). Thus, it is hard to fake. Besides, there is no fraud on the pay-out side as benefits are determined through the loan size (determined at credit disbursement).


The limitations of the product can be seen clearly. No person older than 60 years can join the insurance and people are obliged to purchase the insurance even if they do not want to receive it. These limitations weigh heavily on the microinsurance product. But these two instruments are the absolute minimum of measures to ensure financial viability of the product. Without applying these two measures the premium would increase dramatically or Allianz Life Indonesia would not be willing to provide the product. Thus, it is a compromise between risk limitation for the insurer and client orientation.

In general it is important that measures of underwriting and against fraud are used with prudence as not to deliberately exclude the ones who are in need of insurance and not to limit insurance benefits. It is very crucial to ensure that the product is of value for the client and at the same time reduces transaction costs. Thus, it is more suitable to clearly restrict coverage than to apply exclusions or check-ups as these finally make premiums more expensive. The measures taken by Allianz Life Indonesia represent the absolute minimum procedures.

3.4 Premium payments

There is a clear correlation between the socioeconomic level and the ability to purchase insurance. Setting premiums is therefore one of the most crucial issues in providing microinsurance successfully. On the one hand premiums have to be set high enough to secure sufficient coverage, cover operational costs and ensure a profit for the insurer. But most importantly premiums have to be affordable for the targeted low-income clients.

The insurance premium of “Payung Keluarga” is based mainly on assumed claim ratio, the administrative expenses and a certain profit margin for Allianz Life Indonesia and the distribution partners. The premium was discussed with existing group credit clients of DIMAN through focus group discussions during the design phase. Asked how much the premium for the product should be most clients stated higher premiums. Additionally, the customer satisfaction with premium levels will be re-evaluated at the end of the pilot phase.

The insurance premium of “Payung Keluarga” is being paid as a one-time deduction at the beginning of the loan term. DIMAN deducts a certain percentage of the loan size at loan disbursement. This premium payment mechanism is the most cost-effective for Allianz Life Indonesia. The advantage for clients is that they do not have to use their own funds and do not have to make continuous payments. Regardless, of their income situation at loan disbursement clients are covered by life insurance for the loan term. Still, clients are burdened as the loan amount he or she receives is smaller than without the insurance premium.

Allianz Life Indonesia designed the handling of the premium in a way that minimizes administrative costs and builds upon mutual trust with the distribution partner. DIMAN is entitled to keep the premium of new insurance customers for one month. At the end of the month DIMAN transfer the total premium less the amount of pay-outs towards Allianz Life Indonesia. In case the pay-outs exceed premiums Allianz Life Indonesia will transfer additional funds to DIMAN. As the product is mandatory Allianz Life Indonesia does not pay any commissions for DIMAN but engages in profit-sharing in order to cover DIMAN’s expenses.


The credit life product has also some limitations. Our experience shows that, some MFIs are not interested in insuring their credit portfolio as this can be done more effectively by adding a risk margin on interest rates. Secondly, some MFIs are willing to accept credit life insurance but are not interested in the additional benefit. The argumentation is that the premium for the additional benefit is too expensive for debtors and besides, does not bring any value for the MFI.

A critical aspect of premium payment in general is that premium payment schedules should be designed in accordance with the volatile income flows of a MFI’s clients. Fixed annual premium schedules may be most economical and manageable for insurers8 but are not always appropriate for the low-income market - especially for the urban poor. But for farmers on the other hand, an annual premium payment after harvest may be perfectly suitable.

For credit life insurance the premium payment can be easily designed as a single deduction at loan disbursement without burdening the debtor too much. In addition, administration of premiums for credit life should be in the hands of the distribution partner – when relying on a partner-agent model. For other types of insurance e.g. endowment insurance or health plans insurers have to find a way to ensure payment schedules that are economical and manageable for the insurer but most important - suitable for clients.

3.5 Claims management

Two aspects have to be considered with claims management. At first claims are the biggest single bulk of costs for the insurer and their amount is uncertain. This imposes a threat to the financial performance of the insurer. Secondly, claim processing is a key factor regarding usefulness of and client satisfaction with microinsurance products. Microinsurance providers have to ensure a claim verification process that reduces the risk of fraudulent claims while guaranteeing that pay-outs are delivered quickly.

Allianz Life Indonesia and GTZ ProFI decided to design the claim handling process in a way that gives most responsibilities to the distribution partners. Currently, DIMAN is responsible for claim verification as well as for claim payment.

DIMAN front office staff is to compile the necessary claim documents (death certificate of the village or sub-district head, claim form) and to verify the identity of its clients. This may be a tricky task in Indonesia since many people have two or three identification cards. So far there are no experiences that client identification imposes a problem for microinsurance operations. Besides, its primary function as a watchdog DIMAN’s role is also to ensure that clients actually do claim and to assist them in making valid claims for example in gathering all necessary signatures of local authorities.

After claim verification DIMAN is entitled to pay-out the benefits to their clients directly. Concerning the timing of benefit payment literature usually stresses the need of poor clients for timely pay-outs. GTZ ProFI and Allianz Life implemented this idea. DIMAN is entitled to make instant payouts once the claim has been verified. To date DIMAN may keep all premiums paid in their own account. Only at the end of each month DIMAN 8 Annual premium schedules reduce complexity for pricing and allows maximum time for investments as one-time payments are usually paid at the beginning of the insurance term.


transfers the balance between paid premiums and paid claims towards Allianz Life Indonesia. Allianz Life Indonesia will only get a monthly report including copies (or scans if sent via E-Mail) of the claim documents. Allianz Life Indonesia will not reject any claims unless there is educated guess for fraud for example if the death certificate is missing.

But although instant claim pay-out is possible GTZ ProFI and Allianz Life Indonesia decided to not pay-out the additional benefit directly towards the client. During focus group discussions with DIMAN clients prior to product inception it became clear that about 50% of the insurance pay-out would be used to enlarge and upgrade burial and commemoration ceremonies. But the developmental objective of the PPP emphasizes the productive use of pay-outs. Benefits should be used as starting capital for a new livelihood or to cover educational costs for children. Therefore, the claim payout is done at earliest eight days after the death becomes known to DIMAN. Then, the most important burial ceremony (called “selamatan”) has already taken place.

A limitation of this approach is that Allianz Life Indonesia lacks control mechanisms but rather has to trust its distribution partners. For example, claims may be paid out earlier than after the 8th day. But Allianz Life Indonesia can check this only ex-post. One counter-measure is that the pay-out form has to be signed by several persons including local authorities. It is rather unlikely that DIMAN’s loan officers may manipulate the form. Besides, it takes some days to issue the death certificate.

With microinsurance it is crucial to simplify administrative procedures so that transaction costs can be minimized. Furthermore, existing perceptions on client needs should be reviewed. One way of promoting the productive use of insurance benefits is to introduce a specific waiting period after death reducing the probability of consumptive use of benefits for example to finance lavish funeral ceremonies.

3.6 Market education and marketing

In Indonesia there is a gap between the high demand and insufficient supply for insurance services among the poor. The situation is aggravated by the fact that insurance services face an uneducated market, with many uneducated poor lacking the understanding of and acceptance for insurance schemes. Due to the intangibility of insurance services there is a dire need to educate clients on the basic principles of (micro-) insurance. The crucial point is to create willingness to pay for uncertain benefits.

To date the microinsurance product developed within the PPP insures DIMAN’s group loan clients on a mandatory basis. Every member of a loan group has to pay the insurance premium when taking a loan. This product feature was crucial for Allianz Life Indonesia to set foot into the microinsurance market. This top-down approach, however, benefits in the first place the insurer.

As the mandatory insurance product does not allow demand articulation by the market it is most important to monitor customer satisfaction and to obtain feedback. That is why GTZ ProFI and Allianz Life Indonesia estimated client satisfaction during focus group discussion with DIMAN clients prior to the product launch. At the end of the pilot phase focus group discussions will be conducted a second time. These surveys are of utmost importance as DIMAN clients have no other way to express satisfaction or dissatisfaction


because they can not opt out of the insurance scheme. Unsatisfied clients could only opt to not renew their credits and to apply with other financial institutions instead.

An important focus for GTZ ProFI and Allianz Life Indonesia during the pilot phase is to ensure that clients do understand and accept the insurance product. The objective of the PPP here is that all group clients receive sufficient and correct product explanation through the sales staff. The most vital measure in the context of a partner-agent-model is to properly educate the sales staff of DIMAN and future distribution partners. Both PPP partners developed training materials for loan officers and administrative staff at DIMAN’s head office. The training – conducted by staff of Allianz Life Indonesia - takes about three to four hours. It explains insurance principles as well as product specifications. Beyond that, the staff training explains the processes of insurance application as well as claim handling. GTZ ProFI and Allianz Life Indonesia require DIMAN sales staff to be able to:

• inform clients about the insurance benefits, premiums;

• to answer clients’ questions (also about insurance principles) and;

• to guide them through the application and claim process.

Through irregular on-site visits Allianz Life Indonesia monitors (ex-post) that field staff explains the product properly and that every customer receives the product brochure.

But the insurance education measures to date are limited to DIMAN’s group loan clients. There have been no activities to educate the public yet although Allianz Life Indonesia and GTZ ProFI raised awareness at provider level and at meso-level organizations e.g. the association of People’s Credit Banks (BPR).

Mandatory insurance may be a valuable tool to ensure the sustainability of a microinsurance scheme. But this top-down approach does not give a voice to the customer. Thus, it is of utmost importance to have a look at client satisfaction and client demand. In addition, there is a strongly felt need for educating clients on insurance basics. But it remains to be explored how knowledge can be provided on the large scale, also to non-customers.

4. Effectiveness of “Payung Keluarga”

Until now we got to know the objectives of Allianz SE and GTZ GmbH concerning microinsurance, the product details, the distribution approach and the advantages and limitations of “Payung Keluarga”. But one final question remains. How do low-income households in Indonesia benefit from this product? As we have seen before, low-income households protect themselves against risks and cope with shocks mostly by drawing upon informal strategies. What is then the advantage of microinsurance over saving, lending money or selling livestock?

Based on the concept developed by Sebstad/Cohen9 this section compares the effectiveness of informal individual (saving, buying assets, diversifying income etc.) and

9 See ILO and MunichRe Foundation, Protecting the poor: A microinsurance compendium, 2006, pp. 25


group-based mitigation strategies (reciprocal relationships, ROSCAs) with microinsurance. Informal individual strategies can be to save money or livestock to anticipate losses after risk events. Besides, diversifying income sources is a strategy to limit risks. Group-based strategies comprise reciprocal relationships (lending money, assets) and ROSCAs (Rotating Savings and Credit Association). In Indonesia ROSCAs - called Arisan - is a very popular strategy of mitigating risks. These strategies are compared to microinsurance in terms of:

Coverage What amount of funds can they access after a loss?

Accessibility Can they apply a certain strategy or not?

Timeliness How can they build up reserves (does it suit their income pattern) How fast can they access finances after a loss?

Secondary impacts What is the consequence of a certain mitigation strategy?

In contrast to informal mechanisms “Payung Keluarga” is advantageous for low-income households in terms of coverage. Relatively small installments of a large number of policyholders cover the losses of the minority. A premium of IDR 6,000 or 12,000 provides DIMAN’s group clients with the security to receive a pay-out of at least IDR 1,000,000 or 2,000,000 during a loan term of one year, in case the risk occurs. Thus, the insurance clients are provided with the possibility of a greater pay-out than their premium. Informal individual strategies instead cannot provide protection against “risks resulting in a loss greater than what a household can save”10, lend or repay (when taking credits or pawning assets). Group-based strategies like Arisans can provide enlarged coverage as the savings of several members are pooled.

One drawback of the currently available “Payung Keluarga” product is that it provides benefits only against one specific risk. The credit life insurance premium can not be used as a security against accidents, disability or severe illnesses. Thus, the premiums are a “negative investment” in case the risk does not occur and can not provide multi-coverage against several risks. But nevertheless, and although the risk of death is not the most perilous risk for poor Indonesians, the risk and fund pooling mechanisms of “Payung Keluarga” permit low-income households to insure themselves against specific risks the consequences of which would otherwise exceed their financial capacity.

In contrast to informal strategies “Payung Keluarga” is less advantageous for low-income households in terms of accessibility. Premiums, although low and conveniently deducted from the loan at loan disbursement may be too expensive for low-income households. To date several MFIs suggested lowering the premium by restricting benefits. Price sensitive clients would apply for credits at MFIs without insurance if premiums are too expensive.11

Furthermore, “Payung Keluarga” can only provide protection in areas with available distribution partners. To date this is only the case in Tangerang. Informal mechanisms e.g. saving and even ROSCAs are available everywhere in Indonesia, also in hard-to-serve rural areas.

10 Brown/Churchill, Providing Insurance to Low-Income Households, 1999, p. 14 11 Please note that the MFIs suggested lowering the additional benefit. The premium for covering the outstanding loan is not perceived as too expensive.


In addition, the product does not provide any coverage for people older than 60 years whereas poor people can still save, lend and join Arisans. Finally, the complexity of application and claim processes (although kept to a minimum) may prevent poor people from purchasing microinsurance. The overall acceptance of insurance is still low in Indonesia.

In terms of timeliness “Payung Keluarga” is less advantageous for low-income households than informal strategies, too. Premium payments and pay-outs follow strict schedules. This is especially true for providing insurance benefits. “Payung Keluarga” provides financial assistance at the earliest eight days after death. During this time poor people have to deal with financial obligations themselves or with community assistance. On the other hand timeliness is not a problem for premium payment. As the premium for the credit life product is deducted from the loan size no income is required to purchase the insurance.

The unique advantage of microinsurance in general and of “Payung Keluarga” in particular is its low-stress secondary impacts. Clients of Payung Keluarga do not face future commitment when they make a claim. They receive two financial benefits without any future financial or social obligation neither towards the insurer nor their credit group. Rather the deceased’s beneficiaries can use the additional benefit to invest in their businesses or the education of their children. Thus, they do not loose their capacity to deal with future risks as is the case with traditional risk mitigation strategies. When relying on informal strategies households have to either deplete their savings or assets or indebt themselves by lending money. When low-income households can draw on microinsurance instead they can recover from losses without having to sell assets or taking emergency credits and this is a clear reduction in vulnerability.

5. Next steps

We had a look at the set-up of the Public-Private-Partnership, the product details and the product effectiveness. Now it is time to look into the future. What are the next steps for GTZ ProFI and Allianz Life Indonesia to make this initial venture into the microinsurance market a sustainable, long-term success? The objective of the PPP is to extend protection for the poor in two ways. At first, both partners will increase the number of distribution partners until the end of the pilot phase. In case the pilot phase proves to be successful the product may need adaptation because every MFI and also its customers have different needs.

5.1 Increase outreach – establish a distribution network

5.1.1 BPR and LPD

The outreach of the microfinance sector in Indonesia is vast. There are abundant MFIs, NGOs and cooperatives serving the low-income sector. In urban areas of Java and Bali there is already competition among these institutions. In addition, even commercial banks (e.g. Bank Danamon) reach out to the low-income market and further increase


competition. They try to attract groups with ever smaller incomes as their customers. The situation is different on islands other than Bali/Java as well as in rural and remote areas.

The GTZ-supported project ProFI and Allianz Life Indonesia try to increase the outreach in the first place via the People’s Credit Bank (BPR) and the Village Credit Unions (LPD). ProFI supports both organizations via their associations and their regulators and can facilitate their contact with Allianz Life Indonesia. Both MFIs possess a large network of branches and can be seen as micro-banks with rather professional operations (well-established credit business, MIS system etc.). BPRs and LPDs have about 2.5 million and 360,000 credit customers, respectively. Thus, they offer a large and reliable customer base for insurance companies moving into the microinsurance market. To date Allianz Life Indonesia and GTZ ProFI conducted field visits in Central Java and Bali where three BPRs and three LPDs have been visited. But besides these rather established micro-banks, GTZ ProFI and Allianz Life Indonesia will also distribute “Payung Keluarga” via NGOs although it is more difficult to verify adequate business partners. Another task for the future will be to provide coverage among member-based organizations such as cooperatives or credit unions which are providing financial services.

The challenges in general are to reach out to even lower income groups and to cooperate with less well established institutions than the above mentioned micro-finance banks. BPRs and LPDs can sometimes have a quite sophisticated customer base as they also serve customers of the commercial banking and insurance sector. Sometimes BPRs are already credit life insured with local and even international insurers. But our experience to date is that small and micro-credits are usually not included in such contracts but only credits with higher volume. Besides, MFIs in rural or remote areas are usually less well established. Thus, after initial experiences during the pilot phase GTZ ProFI and Allianz Life Indonesia will try to cooperate with these organizations. The requirements MFIs have to fulfill to be adequate distribution partners will be discussed in the next section. Before we proceed, please find a short profile of BPR Parasahabat which can become a distribution partner in the future.

Distribution partner profile: BPR Parasahabat One additional institution that has been approached by Allianz Life Indonesia and GTZ ProFI is BPR Parasahabat, situated in Bekasi a suburb on the outskirts of Jakarta. As all 1.880 BPRs in Indonesia BPR Parasahabat is regulated and supervised by Bank Indonesia, the Indonesian Central Bank. BPR Parasahabat serves more than 40,000 savings and credit customers. Loan customers are mostly female and comprise the urban poor as well as more affluent clients. For customers with loans larger than IDR 5,000,000 BPR Parasahabat already has a mandatory credit life product in place. BPR Parasahabet acts as an insurance agent for the Indonesian mutual insurer Bumiputera. Yet it does not offer any products to micro-loan customers. Until now the institution simply writes off micro-credits and builds up reserves through a safety margin on interest rates. Insuring this BPR branch offers the potential to attract further distribution partners as BPR Parasahabat is integrated into a network of five independent BPRs (in Java) with an additional 40,000 members.


5.1.2 Requirements for future distribution partners

As already mentioned the success of a microinsurance scheme based on the partner-agent model depends largely on the capabilities of the partner and the agent. The partner or insurer has to secure sound product manufacturing and the agent is responsible for efficient sales and servicing processes. For Allianz Life Indonesia and GTZ ProFI it is therefore crucial to assess the institutional capacity as well as the customer base of future distribution partners.

Identifying institutions that are appropriate for distributing microinsurance products can be a daunting task. The CGAP working group on microinsurance12 assessed several MFIs that have been both successful and unsuccessful in providing microinsurance products to their clients. Based on this assessment the following eleven key elements have been identified as crucial: 1) environmental factors, 2) ownership and governance, 3) culture, 4) capacity, 5) outreach, 6) structures, 7) client-appropriate products, 8) appropriate operating systems, 9) quality of services, 10) claims services, and finally 11) financial performance. 13 MFIs should fulfill the following basic requirements to be deemed suitable as microinsurance distribution partners. MFIs must

have a sufficient number of customers (ideally more than 10,000) have the capacity to significantly grow in the future use a computerized system to track client transactions comply with existing regulations e.g. through legal registration as MFI regularly and periodically obtain its client/member opinions

As mentioned before there are different possible distribution channels (MFIs, NGOs or cooperatives) available in Indonesia. As every institution has different capabilities the primary task for GTZ ProFI and Allianz Life Indonesia is to ensure that the distribution partners

• have access to the low-income market

• are able to implement the microinsurance product

Allianz Life Indonesia and GTZ ProFI agreed upon a minimum list of requirements that MFIs who want to offer the credit life product have to fulfill. The requirements are kept to a minimum as to not exclude possible distribution partners. Within the selection process Allianz Life Indonesia and GTZ ProFI screen at first whether possible agents fulfill the minimum requirements. If this is the case then additional criteria apply but these are no knock-out criteria any more.

Ownership and governance: Regular external audit / rating Client-appropriate products: Loan terms of micro-credits not longer than 24

months Outreach: Client number of at least 3,000 (or prospect to

achieve this number in the near future) Operating Systems: Computerized IT System with internet connection

and computerized client data

12 See CGAP Working Group on Microinsurance, Preliminary Donor Guidelines, 2003 13 Please see Annex 2 on what a MFI “must have, should have and optimally have” to qualify as a microinsurance distribution partners


Financial performance: Non-Performing-Loan Rate <= 10% In a second stage an in-depth telephone interview is being conducted to further clarify the demand of clients and the MFI and its capabilities. Please note that the field experience to date shows that MFIs are in a position to choose whether they want to cooperate with GTZ ProFI and Allianz Life Indonesia and not the other way around. Only those MFIs who benefit from “Payung Keluarga” are willing to implement the product. As a third stage an on-site visit is being conducted. Allianz Life Indonesia will visit interested distribution partners for contract closing combined with the training of MFI staff. As on-site visits are expensive they will be kept to a minimum. The upfront partner selection process must be lean and strictly standardized. In the future, partner selection and training of MFI staff can also be outsourced to Indonesian organizations such as Business Service Providers or associations of cooperatives. Thus, we have seen that increasing outreach is an important way in providing more comprehensive coverage to the low-income market. To date an initial microinsurance product is developed but still lacks outreach. One way to increase outreach efficiently is a lean, low-cost partner selection process which contributes to the affordability of the product. A possibility for Allianz Life Indonesia and GTZ in the future is to outsource this activity to local stakeholders.

5.2 Diversification of product range

At the time of writing Allianz Life Indonesia and GTZ ProFI have four months of experience running the credit life product. This preliminary assessment indicates that the product may become financially sustainable in the near future. Thus, there is need to prepare the next step which is to develop a broader product range after the pilot phase. This can be achieved through product adaptations as well as through designing a second microinsurance product.

5.2.1 Adaptations to “Payung Keluarga”

The input for adapting the existing product came mostly from managers of BPRs and LPDs. During the first two field visits to Java and Bali it was found that the product in its current design does not fit the demand of every distribution partner and its clients. The product design of “Payung Keluarga” should be more flexible in the future, as a “one-size-fits-all” microinsurance product is not appropriate for the Indonesian low-income market.

The long-term objective of GTZ ProFI is to provide increasingly comprehensive protection for low income customers and to strengthen the distribution providers. With these objectives in mind the following product adaptation should be implemented in the future:

Insure individual credit clients


Design different benefit packages Extend the insurance term Cover additional family members (spouse and own children) Include a disability rider14

The first step in adaptation should be to make “Payung Keluarga” available also to clients of individual lending. Many BPRs for example focus on individual loan takers and LPDs in Bali exclusively serve individual clients. Technically this product adaptation is simple to implement and administration is easy. The product will be made mandatory also for individual loan takers. Thus, there is no risk of adverse selection. One drawback is that there will be an additional workload for MFI staff as the product has to be explained to every single client. Secondly, several BPRs and LPDs stated that the product would be too expensive for their clients. Thus, they rather prefer to lower or even eradicate the additional benefit and consequently lower premiums for their clients. Therefore, variable benefits should be offered. For example, the additional benefit could be reduced to one time of the loan amount. A risk here is that the developmental or promotional value of a credit life product without an additional benefit is heavily reduced. The debtor is being relieved of repaying the loan but has no additional funds to cover e.g. income loss or future educational expenses. The product then benefits the MFI more than the debtor. The third product adaptation could be to prolong the term covered. Until now the insurance term exactly matches the loan term. The maximum insurable loan term is restricted by the product specification to two years. As BPRs and LPDs offer loan terms that usually run longer than two years it would be necessary to enlarge the insurance term. As a first suggestion it should be sufficient to provide coverage for three years as the majority of micro loans (up to IDR 10 million) have a maximum maturity of three years. Covering additional family members will make protection even more comprehensive. But this requires that insurance coverage is available for individual clients. Secondly, insurance coverage has to be available on a voluntary basis and Allianz Life Indonesia has to deal with the risk of adverse selection. Thus, this adaptation should not be implemented without some experience in providing individual insurance. Covering the spouse of a loan taker is administratively similar as the same premium applies. But in order to insure children a review of the actuarial premium calculation needs to be done. Another product specification could be to introduce a disability rider to the product. In case of total disability the insurance could provide the same benefits as for the death of the policyholder. This benefit was requested also by one possible future distribution partner. Limitations are that the benefits are difficult to price and increased complexity (client education, claim handling etc.) for Allianz Life Indonesia. Beyond, this rider inherits the risk of customer dissatisfaction as a clear definition of total disability is necessary. Clear risk definitions like “arm cut off” or “eyesight lost” may scare prospects away. Moreover, the risk is high that at the time of claim these clear criteria are not exactly met, a claim is rejected and client dissatisfaction runs high. This could create a

14 A rider is an additional insurance attached to a (life) insurance policy. It adds specified events and contingencies to those insured under the policy and is subject to the terms and conditions of the policy.


negative image of insurance business which is contrary to the goals of GTZ ProFI and Allianz Life Indonesia. Thus, it is a long way to develop a sound disability rider.

5.2.2 Education Endowment Insurance

As it is recommendable to gain some experiences with the adaptations of the credit life product at first, the following description is a preliminary reflection on the design of endowment insurance microinsurance product.

Endowment life insurance combines features of both term and permanent life insurance. With endowment life insurance the policyholder builds up a cash value like with permanent life insurance. The cash value consists of the policyholder’s contributions (premiums) plus earned interest less a charge for covering the costs of providing insurance. However, endowment life policies provide protection only for a fixed term (e.g. several years). Thus, endowment policies are a mixture between term life and permanent life insurance policies.

An education endowment product is made up of an individual savings plan topped with a life insurance policy. The Public-Private-Partnership can achieve two objectives with an endowment microinsurance product. It provides security of education in the case of death of the policyholder (most often the family’s “bread-winner”) and it enables a purposive savings plan. Thus, it can provide the following benefits (pre-determined at insurance inception):

During the policy term towards policyholder: Regular pay-outs coinciding with educational fees

In case of death of the policyholder towards the beneficiary: Continuous pay-outs coinciding with educational fees until the end of insurance term (according to plan)

At maturity of the policy term towards the policyholder: Final payout (according to plan) of savings including earned interest

A very important aspect is to continue with pay-outs after the death of the policyholder “according to plan”. It ensures that the money (most probably) is used for educational fees. A lump-sum pay-out may induce the beneficiary to spend the money on consumptive purposes.

Client demand for this product seems to be strong as the participants of focus group discussions for the “demand and prospect study” were strongly interested in education endowment insurance. Especially for families with children below 18 years of age education endowment is useful (the younger the children, the more useful). For parents it seems that continuous education is perceived equally important as their childrens’ health status. Beyond, several respondents stated that they already have education insurances. This indicates that the market might not be untapped any more but that competition is already existing. Another positive aspect is the connection with saving services. Marketing an education endowment product is easier compared to a Credit Life product because customers do not perceive to be “losing” money. Even in the case that the risk does not occur and without getting the insurance benefit clients still get a return on their savings.

The existing and targeted distribution partners of the Credit Life plus additional benefit product can serve as distribution partner for this product as well. The policyholder pays


the contributions (savings + insurance premium) regularly towards the MFI (e.g. DIMAN, BPRs). The MFI is then in charge of managing the savings installments. It forwards the insurance premium to Allianz Life Indonesia who is responsible for handling the insurance business. Thus, every institution sticks to what it is best at. The relation between MFIs and Allianz Life Indonesia will basically be the same as with the existing credit life insurance product. The procedures for claim verification and claim payment need not to be altered but can still be handled by the distribution partner.

As with “Payung Keluarga” it is recommendable to start with a clear and simple policy. Limit the coverage at first to the policyholder. The term of the insurance policy should run between three and twelve years so that savings can be made for primary and secondary education at least. It is important to apply as few exclusions and underwriting procedures as possible bearing in mind that the policy is to be sold individually. One feature that should be transferred is to cover death due to any circumstance. The increase in claims and consequently premiums is still smaller than the burden to all parties (insurer, distribution partner and client) that would result from exhaustive examinations on the reason of death.

Limitations of education endowment insurance are that endowment plans may not be sufficient to cover all educational expenditures especially as pay-outs are granted only at major educational milestones. During the years in between policyholders have to finance education on their own. Affordability of the contributions (including savings element and premium) is an issue especially for poorer policyholders. It has to be secured that clients are able to continue with regular payments. That’s why different levels of contributions are necessary. Beyond, the mechanisms of existing group-savings schemes could be used. Maybe members of group-savings schemes can reciprocally guarantee the payment of contributions. Extended actuarial review of the product is necessary as the insurance terms are longer and the mortality rate changes over time. Customers may want to borrow against their savings or withdraw part of it. This would increase complexity and innovative solutions have to be found first. Besides, partner selection has to be done even more carefully as the insurance term is extended. Distribution partners must be sound and profitable as to exist also in 10, 15 or even 20 years. Small MFIs and MFIs without sound operations will not qualify and thus, the availability of distribution partners will diminish.

The second component (in addition to increased outreach) in providing comprehensive coverage through microinsurance is to diversify the product range. This process is a step-by-step process starting with small product adaptations for example developing flexible benefits or extending the insurance term. The basis for successful diversification is to prove the sustainability of existing product (features) and to then develop further products. The next step for GTZ ProFI and Allianz Indonesia can be to develop an education endowment product. In the long run it is important to develop products that provide coverage against other types of risk than death.


6. Lessons Learned

The roles of GTZ, Allianz and MFIs • The role of GTZ ProFI within the PPP focuses on initiating and monitoring the

scheme, match-making towards distribution partners, associations and government authorities;

• The role of Allianz Life Indonesia within the PPP is to provide its insurance (especially actuarial) expertise and to finally run the insurance business with the distribution partners;

• The partner-agent model was found to be most appropriate for the cooperation with an insurance company;

o Thus, each party concentrates on its core business. Allianz is responsible for product manufacturing and DIMAN provides the contact to customers;

o It is recommendable to reduce administrative procedures and to grant a high degree of authority to the distribution partners (e.g. claims management). Hence, the credit life scheme minimizes transaction costs for DIMAN and its customers;

• In the future the match-making as well as the training activities can be outsourced to local organizations such as business service providers and associations of cooperatives. The role of GTZ will then focus more on policy and regulatory aspects

Insurance Coverage and Benefits

• Start with small and simple steps; o It is useful to start with life insurance as the risk event is clearly

determinable and understandable. Thus, fraud is hardly possible; o Mandatory coverage facilitates large customer numbers with an average

risk portfolio and lowers administrative costs; • At the beginning no long term coverage is possible and it is practical to restrict

coverage strictly (spouse, elderly people excluded etc.);

Protecting against adverse selection, moral hazard and fraud

• Insurance is made transparent and understandable through o clearly defining covered event and benefits; o applying as few exclusions as possible; o not using or only applying necessary underwriting procedures and

measures against fraud; • It is suitable to limit benefits and to initially calculate products conservatively;


Premium payments • One-time deduction of the loan is an appropriate premium payment mechanism;

Clients are not burdened while insurance and distribution partner have the least administrative effort;

• For other types of insurance e.g. endowment insurance or health plans insurers have to ensure payment schedules that suit their clients’ income pattern;

Market research and education

• It is crucial to assess client demand on the type and amount of benefit, premium payment schedules etc. prior to product development;

• There is a dire need for educating clients on (micro-)insurance principles as well as the specific product details;

• It is of importance to evaluate client satisfaction relating to benefits, premiums, claim handling and product education upfront, during and after being insured.

• Existing perceptions on client needs should be reviewed. In case of life insurance it may not always be the most productive way to provide pay-outs immediately after death.

Finally, it is to say that microinsurance as one of several microfinance services can supplement the financial product range for low-income households. Microinsurance can be an improved risk management tool for low-income households in Indonesia in addition to existing informal strategies. Microinsurance can increase the degree of (financial) security for low-income households and eases people’s burden after a risk event. Microinsurance clients receive financial assistance without having any future obligation towards the insurance company. But despite these positive aspects microinsurance faces two severe limitations. It is less accessible for low-income clients and it is less timely strategy concerning premium payments and benefit pay-outs. Usually it takes several days or weeks until insurance companies provide pay-outs. These disadvantages have to be addressed through a client oriented product design. Microinsurance can only be effective as a risk management tool if it is implemented with a clear focus on the needs of low-income households.

With the credit life product “Payung Keluarga” Allianz Life Indonesia and GTZ ProFI have done the first step into the microinsurance market. The product provides coverage against the specific risk of death while being indebted. In this it is an effective tool but “Payung Keluarga” can not secure the livelihood of low-income households in general. Although there are limitations in coverage the product is a pioneering step towards providing comprehensive coverage. Allianz Life Indonesia and GTZ GmbH will continue their partnership in order to increase both outreach of microinsurance to low-income households and coverage against death risks and possibly other risk categories. Both efforts are necessary to provide low-income households with comprehensive coverage in the future.


7. Annexes

Annex 1: Insurance density and penetration for selected Asian

countries 2003

Source: McCord/Ramm/McGuinness, Microinsurance Demand and Prospects Indonesia, 2005, p. 4

Insurance Density and Penetration for Selected Asian Countries

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

0 50 100 150 200 250 300 350 400 450 500

Insurance Density (insurance premiums per capita - USD)

Insu

ranc

e Pe

netr

atio

n (in

sura

nce

prem

ium

s as

% o

f GD

P)

Malaysia

ThailandPR China

India

World

Indonesia and Philippines

VietnamPakistan

Total Asia


Annex 2: The minimum requirements for MFIs with

insurance operations

Key issues (MFIs) Must have Should have Optimum

Qualitative demand research conducted and utilized

Appropriate cost, and basic coverage

Affordable cost structure with demanded coverage beyond simple coverage

Exceptionally low cost-to-coverage ratios due to large volumes

More than just a credit life product

Linkages to other microfinance products

Savings-based where premiums are automatically paid from savings

Policy document Clear and understandable policy document

Clear and understandable policy document on one page

Client-appropriate products

Market’s basic needs met Market’s broader needs met

Flexibility to quickly adjust to satisfy future needs

Basic transaction controls developed and implemented

Annual external audit Internal and external audits

Allocated internal auditor and external audits by insurance-savvy auditor Appropriate

operating systems

Ability to reliably track transactions with insurer

Reliable computerized tracking systems for transactions with insurer

Reliable integrated computer tracking systems generating insurer transactions and paperwork

Annual assessment of customer satisfaction

Regular programme of customer satisfaction assessment

Ongoing and periodic research on customer satisfaction processed through an established feedback loop.

Quality of services

Annual reviews of relationship between MFI and insurer

Continual monitoring of relationship between insurer and MFI

Continual monitoring and quarterly meetings between insurer and MFI

Ability to track and convey claims documents

Ability to track and convey claims documents within one day of receipt

One-day response to claims, upfront payment for claims to be reimbursed by insurer-partner, and automatic payment to life insurance beneficiary

Tracking of claims Claims tracking organized for use in later negotiations

Claims services

Ability to conduct basic claims verification

Ability to efficiently conduct basic claims verification

Claims verification by staff or subcontractor empowered to make immediate benefits payments


Key issues (MFIs) Must have Should have Optimum

Strength to meet basic sustainability requirements of the institution

Improving sustainability of institution through growth in commission income

Improving sustainability of institution through growth in commission income as well as new clients due to demand Financial

performance

Basic costing activities in place

Costing sufficient to assess the cost of microinsurance delivery by MFI

ABC costing that isolates specific costs of microinsurance

Source: CGAP Working Group on Microinsurance, Preliminary Donor Guidelines, 2003, p. 17


8. Bibliography

Brown, W./Churchill, C.F. (2000):

Insurance Provision in Low-Income Communities; Part II: Initial Lessons from Micro-Insurance Experiments for the Poor, Washington, D.C., USA, 2000

Brown, W./Green, C./Lindquist, G. (2000):

A Cautionary Note for Microfinance Institutions and Donors considering Developing Microinsurance Products, Washington, D.C., USA, 2000

Cohen, M., Sebstad, J. (2005):

Reducing vulnerability: The demand for microinsurance, in Journal for International Development, Vol. 17, Issue 3, pp. 397–474, 2005

Consultative Group to Assist the Poor (2003):

Preliminary Donor Guidelines for Supporting Microinsurance, Consultative Group to Assist the Poor (CGAP) Working Group on Microinsurance,

http://microfinancegateway.org/files/13836_Draft_Donor_Guidelines.pdf

as of 06.02.2006, 2003

Holzmann, R. (2001):

Risk and Vulnerability: The forward looking role of social protection in a globalizing world, Washington D.C., 2001

ILO and MunichRe Foundation (2006):

Protecting the poor: A microinsurance compendium, ILO and MunichRe Foundation, Edited by Craig Churchill, 2006

Matin, I./Hulme, D./ Rutherford, S. (1999):

Financial Services For The Poor And Poorest: Deepening Understanding to Improve Provision, Manchester, 1999

McCord, M. J./Ramm, G./McGuinness E. (2005):

Microinsurance Demand and Prospect Indonesia,

http://www.profi.or.id/engl/downloads/Study/MicroInsurance_Indonesia_28Aug06.pdf

as of 02.02.2007, Jakarta, 2005


Pritchett L./ Suryahadi, A./Sumarto, S. (2000):

Quantifying Vulnerability to Poverty: A Proposed Measure with Application to Indonesia, Revised, Jakarta, 2000

Sebstad, J./ Cohen, M. (n.d.):

Microinsurance Centre Briefing Note # 3: Making Microinsurance Work for Clients, www.microsinsurancecenter.org, no date

Suryahadi, A./Sumarto, S. (2001):

The Chronic Poor, The Transient Poor, And the Vulnerable Before and After the Crisis, Jakarta, 2001

Wright, G.A.N., et. al (2001):

Looking Before You Leap – Key Questions That Should Precede Starting New Product Development, MicroSafe Nairobi, 2001

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