IntoAction 1 - Microinsurance

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From 18 to 20 October 2005, the Munich Re Foundation held the Microinsurance Conference 2005 "Making Insurance Work for the Poor: Current Practices and Lessons Learnt". In cooperation with the CGAP [Consultative Group to Assist the Poor] Working Group on Microinsurance, around a hundred selected experts from international organisations, non-government organisations, development-aid organisations and the insurance industry discussed experiences and challenges of insuring people with low incomes.

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<ul><li><p>IntoActionMicroinsuranceMaking insurance work for the poor</p><p>1January 2006</p><p>Munich ReFoundationFrom Knowledge to Action</p><p>Of the four billion peopleon earth today who live onless than two dollars a day,fewer than ten millioncurrently have access toinsurance.</p><p>In cooperation withPublished by</p><p>InternationalLabourOfficeGeneva</p><p>Report SummaryMicroinsurance Conference</p><p>Schloss HohenkammerMunich, 1820 October 2005</p><p>By Craig Churchill, Dirk Reinhardand Zahid Qureshi</p></li><li><p>Only by pulling together, Dr. Schin-zler said, will we the insuranceindustry, local NGOs, developmentagencies as well as regulatory author-ities be able to provide appropriatesolutions. Munich Re has thereforetaken an important step in identifyingmicroinsurance as a strategic topic forits innovation teams.</p><p>Thomas Loster, Chairman of theMunich Re Foundation, also touchedon the long-term, results-orientedapproach: For us this is not a one-day business that will be taken care ofby hosting a conference. To helpimprove living conditions for thosewho do not have access to financialservices, a concerted effort is neededto find solutions to problems and thenturn these solutions into action, stepby step. The Munich Re Foundationwill be a reliable partner in facilitatingthis process.</p><p>As a key initial step, the conferencelived up to its billing: Making Insurance Work for the Poor CurrentPractices and Lessons Learnt. DirkReinhard, Deputy Chairman of theMunich Re Foundation, worked withCraig Churchill of the ILOs SocialFinance Programme (InternationalLabour Organization), who serves asChairman of the CGAP WorkingGroup on Microinsurance, to organisethe event.</p><p>CGAP (the Consultative Group toAssist the Poor), a consortium ofdonors including the World Bank, isbased in Washington DC. Its WorkingGroup on Microinsurance, set up fouryears ago, comprises consultants andexperts as well as representatives of donor agencies and organisationscommitted to extending insuranceprotection to low-income people.</p><p>In its quest to be more useful at asmaller cost to more poor people,microinsurance got a macro boostwhen about a hundred experts fromaround the world gathered to thrashout obstacles and opportunities atthe conference facility of Munich Rein Germany from 18 to 20 October2005.</p><p>The challenges of microinsurance are many, delegates were reminded inthe welcoming address by Dr. Hans-Jrgen Schinzler, Chairman of theSupervisory Board of Munich Re andChairman of the Board of Trustees ofthe Munich Re Foundation, whichhosted the conference jointly with theCGAP Working Group on Micro-insurance. Premium income is low,administrative costs are relativelyhigh, and infrastructure for insuranceis lacking; thats why commercialinsurers have not taken more interestin this market.</p><p>Cooperation is key</p><p>Reaching poor people, many of whom are illiterate and make a livingin the informal economy, is difficult,he added, and the benefit of insuranceis often misinterpreted since the low-income markets do not understandwhy the premium is not reimbursed ifno claims are made.</p><p>How can the cost of handling a large number of small contracts bereduced, he asked, and is there legislation to facilitate the insuranceof poor people and to protect themagainst fraud?</p><p>Aside from preparing microinsuranceguidelines for donors and having anumber of sub-groups look in depthat topics ranging from demand toregulations, the CGAP Working Groupon Microinsurance has carried outsome 20 case studies of existingmicroinsurance programmes in different countries (e.g., Benin,Bangladesh and Peru) to identify goodand bad practices. The case studieswere funded by SIDA (Swedish Inter-national Development CooperationAgency), GTZ (Deutsche Gesellschaftfr Technische Zusammenarbeit,Germany), DFID (Department forInternational Development, UK) andthe ILO.</p><p>Learning from experience</p><p>The focus of the conference was toanalyse the findings of these casestudies and fine-tune the emergingsolutions: what has worked, in whichsettings, how does it benefit the poor,and is it likely to be a model for otherprogrammes in the years ahead?</p><p>Craig Churchill defined micro-insurance as the protection of low-income people against specific perilsin exchange for regular premium payments proportionate to the likeli-hood and cost of the risk involved. It has the potential of providing a new market for the private sectorwhile complementing the publicsectors efforts towards social security for workers in the informal economy, he said. </p><p>IntoAction 1 / Microinsurance Page 2</p><p>Microfinance is a way to extend the samerights and services to low-income house-holds that are available to everyone else.</p><p>It protects people against shocks, and allows the majority of the populationto become part of a countrys economicactivity.</p><p>It can help to build markets, and showthat profits and principles can reinforceeach other.</p><p>Kofi Annan, UN Secretary General,10 October 2005</p></li><li><p>IntoAction 1 / Microinsurance</p><p>There are government policies andprogrammes to reduce poverty andvulnerability by diminishing peoplesexposure to risks and enhancing their capacity to protect themselves,he added, but in most developingcountries these programmes are not particularly effective.</p><p>The main obstacles are: no mechanisms to systematically reachinformal workers; no employer contributions; the poor cannot affordthe full cost; insufficient governmentresources to cover recurring expen-ses; and inadequate infrastructure toprovide appropriate services. </p><p>In six plenary and 18 parallel sessions, participants discussed ways of overcoming these challengesby considering the role of clients,insurers, reinsurers, technical assistance providers, regulators andgovernments as well as analysingbread-and-butter functions such asunderwriting, premium collection and claims payment, product design,marketing and distribution channels,and financial management and governance to develop strategies forsustainability.</p><p>The conference sessions wereplanned and designed to enableparticipants to serve as a soundingboard for the CGAP Working Groupon Microinsurance, which will synthesise the results of its work in a comprehensive book to bepublished by the ILO and Munich ReFoundation in 2006. </p><p>This publication will be acompendium involving some 30authors, a seminal work that isexpected to shape the developmentand growth of microinsurance inyears to come.</p><p>Institutional options</p><p>A key element is how entrepreneurs micro or macro, individuals or groups,private or public have gone aboutsetting up and operating microinsur-ance programmes. The case studiespoint to four institutional options:</p><p> Partneragent model</p><p> Credit unions and cooperative/mutual insurers</p><p> Direct sales model</p><p> Community-based model</p><p>Partneragent model</p><p>The partner-agent model involves an established insurance companyworking with a distribution channel a microfinance institution (MFI) or other that is actively serving low-income clients. The insurancecompany maintains the reserves, setspremiums, supervises claims andmanages compliance with regulatoryrequirements. The agent institutionfacilitates the rational transfer of risk,resources and expertise between theinformal and formal sectors.</p><p>It is a win-win-win arrangement; for the insurer which is able to reach a market (through the MFI) that it cannot reach on its own; for the MFI that can provide members withbetter services at lower risk; and for low-income households which get valuable protection that otherwisewould not be accessible to them. An often-cited example of this modelis AIG Uganda which started itsmicroinsurance programme eightyears ago. It now covers 1.6 millionlives through 26 MFIs, with an estimated US$ 800,000 in premiumsfor 2004. </p><p>Page 3</p><p>Why insurers shy away from insuring low-income people:</p><p> Premiums small Costs high Infrastructure lacking</p><p>Why microinsurance can be good business:</p><p> Vast new segment for insurers whoseown markets are saturating</p><p> Todays low-income customers aretomorrows high-end clients</p><p>The study, however, takes exceptionto its profit level of around 20% on the premium as excessive and takesboth AIG Uganda and its partner institutions to task for not upgradingthe product and claims paymentprocesses and for neglecting clienteducation as a key part of marketing.</p><p>The need for more or better trainingfor field staff in the MFIs so they can do a better job of explaininginsurance to their clients is alsorecommended by a case study inZambia. There, Madison Insurance,with both life and non-life licences,partners up with four MFIs to insureroughly 100,000 lives. Notable in thiscase: one MFI has a profit-sharingarrangement with Madison instead of a commission; and the availabilityof insurance seems to have increasedacceptance among borrowers of members suspected of being HIV-positive.</p><p>For MFIs a key priority, as agents of partnerinsurers, should be trainingstaff to explain insurancein ways the illiterate poorcan understand.</p><p>While the partnership model eliminates most regulatory complica-tions, often the distribution channelmust still be licensed as an agent. A point made at the conference was that, where warranted, some flexibility by regulators and super-visors could facilitate partneragentrelationships.</p></li><li><p>Credit unions and coopera-tive/mutual insurers</p><p>Savings and credit cooperatives, or credit unions as they are called inmany countries, often offer loanprotection insurance usuallyreferred to as credit life to ensurethat the debt dies with the debtor,so that an unpaid loan balance does not adversely affect either thesurviving family or the institution that granted the loan. Credit unionsalso offer life-savings coverage tostimulate saving, and some providehousing or funeral insurance,disability, health and in a few caseseven casualty insurance. These products are added onto existingcredit and savings services. Many are provided informally although in some countries they are legallyrecognised as member-benefit products.</p><p>In addition to savings and loans cooperatives, microinsurance services under this model may also be provided by insurance companiesthat are stand-alone enterprises. In fact, some 140 cooperative andmutual insurers in 70 countriesserving low-income as well as higher-end segments of their marketsare members of a global associationcalled ICMIF (International Cooperative and Mutual InsuranceFederation). </p><p>The mutuality model is inline with the advice offormer World Bank Presi-dent James Wolfensohnthat development must not be done to the poorbut by them.</p><p>La Equidad, created 35 years ago as a cooperative in Colombia to serveother cooperatives and theirmembers, exemplifies the main difference between the partneragentand cooperative insurance models.Besides a broad range of products forthe general market, it now offers two group-based micro life insuranceproducts through two partners: an MFI called Womens World Foun-dation (WWF), and a group of its ownaffiliated cooperatives. More than10,000 of WWFs microcreditcustomers and 18,000 of coopera-tives members have so far taken upthis insurance.</p><p>IntoAction 1 / Microinsurance Page 4</p><p>The case of ServiPer, however,demonstrates that affiliation with amovement can be a double-edgedsword. This insurer lived by thissword for some 30 years, but almostdied by it in the early 90s when spon-soring cooperatives, along with thecountrys economy, took a nose-dive.It restructured as a provider of healthand funeral services, and created asubsidiary brokerage to manage itsinsurance portfolio. Even now, itsmicro health insurance product haslittle support from cooperatives, withtheir members accounting for only10% of the insured. Not every countryhas cooperative soil fertile enough formicroinsurance.</p><p>Nevertheless, that the seeminglysmall way in which cooperative insurance differs from the partneragent model the agents stake in theinsurer has in practice made a bigdifference in complying with the spiritof microinsurance. The ownershipstake gives the agent institution a say in the design and running of notonly the insurance programme butalso in the democratically operatedpartner insurer itself, ensuring that it remains responsive to clientsneeds and interest. A point made in a plenary session was that thecooperative/mutual insurance model demonstrates what JamesWolfensohn, former president of theWorld Bank, regarded as important in the fight against poverty thatdevelopment must not be done to thepoor but by them, and that theyshould have a say in the design andrunning of programmes. </p><p>Direct sales model</p><p>Insurance companies can also servelow-income policyholders directlythrough individual agents that are on salary or commission or both.The conference paid close attention to the joint venture TataAIG in India,which has introduced so-calledmicroagents as a new deliverychannel. India requires what someother countries only encourage: thateach insurer have a set percentage of its business coming from the rural and social sectors. To achieve (and surpass) its quota, TataAIG is innovating with a direct marketingapproach that involves assistinghand-picked low-income women toform insurance agencies.</p><p>A prime example of the direct salesmodel is the 15-year-old Delta Life ofBangladesh, serving the low-incomemarket on its own without donorsupport or technical assistance. A for-profit company listed on theDhaka Stock Exchange, it is regardedas the Grameen Bank of micro-insurance, having pioneered a policythat pinpoints specific needs of thepoor for credit as well as savings andinsurance, all in a 10- or 15-year termendowment package. Delta nowserves more than a million persons.</p><p>Direct sales can overcomesome of the control problems of partneragentand cooperative/mutualmodels.</p><p>The popularity of endowment policiesthat help the poor gradually build up assets is something Delta has incommon with TataAIG, which offers separate term policies as well.Interestingly and unlike developedmarkets, it is TataAIGs endowmentpolicies that seem to be in muchgreater demand.</p><p>The two cases demonstrate that insurance companies can reach thelow-income market directly, at least in Bangladesh and India. Directselling helps overcome some of theproblems in the partneragent andcredit union models, where someinsurers may not have good controlover their distribution channels and may be separated from themarket segment. Nevertheless, thisadvantage to an insurer comes with the higher costs of a newdelivery structure that only serves aninsurance function (whereas the other models involve building on a delivery structure that already existsfor savings and credit, so additionaltransaction costs for insurance areminimal).</p></li><li><p>IntoAction 1 / Microinsurance Page 5</p><p>Community-based model</p><p>In sub-Saharan African countries,where up to 90% of working peoplehave informal employment lackingeven the most basic social protection,communities of poor people havebeen banding together to create micro health insurance schemes. Theschemes are non-profit in characterand have a voluntary membership.Policyholders prepay premiums into afund and are entitled to specifiedbenefits. Th...</p></li></ul>

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