Knowledge All Insurance

Acknowledgements

The Author would like to extend his appreciation to those that have kindly provided information including Dr Ma’sum Billah (IIU), Per-Olof Granstedt (NTUC INCOME), Gunvall Grip (Folksam), Zahid Qureshi (ICMIF), Kulmie Samantar (FNMF), Aloysius Teo (NTUC INCOME), John Wipf (CCA), Kevin Vogt (Nationwide), Ellis Wohlner (Folksam) and ICMIF Reinsurance Services. Additionally, a special thanks to Samuel Maimbo (The World Bank) for guiding the structure of the paper and the Institute for Development Policy and Management at the University of Manchester for the use of their resources and expertise.

The study would not be complete without the invaluable contribution and feedback of those that kindly reviewed the document and provided their ideas and suggestions namely Hans Dahlberg (ICMIF), Birgitta Lindström Thordarson (ACME) and Lars Erik Lundqvist (ICMIF Reinsurance services).

The conclusions of this study are solely the personal views of the author.

Co-operative insurers are less likely to manipulate the poor and participate in underhand selling tactics such as over-pricing, misleading advertisements and excessive management costs. There is less likelihood of the manager taking advantage of asymmetric information and failing to enforce obligations as the policyholder is the owner and henceforth the employer of the manager (IDB 1977, Spear 2000b). The ownership of co-operatives by consumers, workers or suppliers mean that it is easier for them to monitor the performance of the company and its employees on a regular basis. Co-operatives involve their members not only in corporate governance but also in the day to day running of the scheme (Ledbeater & Christie 2000).

3.3.4. - Education

Co-operatives and mutuals have a long-standing affiliation with the poor and have the expertise and means of communicating the needs and benefits of insurance (Vogt 1999). The nature of insurance is based on the concept of mutuality, risks is shared by the many to protect the few, the poor are used to this concept as they are familiar with traditional mutual self-help mechanisms (Creese & Bennett 1997, ACME 2000). As members are owners of the scheme and ultimate beneficiaries of its success they have a strong incentive to educate themselves and learn about their own business (IDB 1977).

3.3.5. - Empowerment

Co-operatives empower individuals by providing them with the opportunity to participate in decisions that impact their livelihoods. It gives the poor a voice, gives them a choice, and a chance to find solutions to their specific social and economic needs (ICA 1995b, IDB 1977). Policyholders have representations on special advisory committees dealing with company performance, products and claims, enabling members to take direct control over decision making and on the quality, type and delivery of service. The co-operative structure allows the poor to have more bargaining power, benefit from economies of scale and negotiate better deals for themselves (IDB 1977, Ullrich 1997). Success of the insurance scheme would enable the co-operative to reduce the inequality and disadvantage of members, staff and the wider community (Spear 2000b, IDB 1977).

3.3.6. - Costs and price

Co-operatives do not operate under a profit motive, surpluses are reinvested or paid back to members, keeping costs and premiums down (IDB 1977, ICA 1995b). Community involvement reduces the costs of labour and resources needed for information collecting, educating, marketing and monitoring policyholders (World Bank 2000). The Co-operative structure enables lower costs by offering insurance to large affiliated groups, many farmers in developing countries belong to at least one co-operative society that provides them with credit, marketing, equipment or farming methods. These societies are a natural and cost-effective distribution channel for insurance particularly in remote areas and lower income groups in towns and cities (IDB 1977, Birkmaier 1999). Co-operatives make more effective use of the resources of their members and the economic-efficiency of the organisation as surpluses are returned to the members in the form of dividends, lower premiums, loss prevention activities or additional coverage (Spear 2000a, Birkmaier 1999).

3.4. - Weaknesses in the co-operative structure

3.4.1. - Capital

Mutuals principally rely on retained earnings to expand their capital base, they are unable to raise capital by issuing equity. This restricts their ability to undertake large and long term investments, preventing them from entering into new lines of business, regions or making acquisitions (Birkmaier 1999, Ledbeater & Christie 2000, Ullrich 1997). At or near the subsistence level, the poor have little available for saving and whilst these can be mobilised, to depend on them to provide the required capital is unrealistic in the short term (ILO 1974).

3.4.2. - Accountability

Offering insurance through co-operatives or credit unions as member benefit schemes surpasses regulatory requirements. Without the legal requirement of audited financial statements and performance reports, there is a greater need for internal mechanisms and transparency to ensure sufficient controls and checks are in place. Additionally, without the incentive of stock options to guide managers’ objectives and insufficient board control and expertise there is a greater possibility of fraudulent activity by company officers. Lack of control on managers also leads to members needs being ignored in product development and a lack of motivation to open membership to other groups. The co-operative can become an inward looking and stagnant organisation, it can also become a tool for government manipulation and propaganda (Hulme & Mosley 1996). Access to services requires permission from group leaders, who may abuse their privileged position to favour certain parties, be tempted to steal funds and exclude the poorest in the community. Mutuals, therefore, tend to concentrate more on lines of business that require limited management discretion and with less underwriting risks which may be to the detriment of the needs of the policyholder (Birkmaier 1999, Brown & Churchill 2000, Birkmaier 1999, Ledbeater & Christie 2000, McCord 2001).

3.4.3. - Technical expertise

Group leaders are not insurance professionals or managers and are unable to manage the scheme effectively and efficiently (McCord 2001). Managerial salaries in co-operatives tend to be lower than in the private sector and therefore cannot attract qualified personnel and modern technology (IDB 1977, Ullrich 1997). Limited experience in collecting and analysing data makes it difficult to design suitable coverage, establish premiums and set up adequate claims reserves (IDB 1977). There is an overwhelming need by co-operatives in developing countries for technical assistance and financial support to enable them to manage their insurance schemes (Rutherford 1999b, ILO 1974).

3.4.4. - Size

As the organisation grows it tends to lose its co-operative identity and also its closeness with its members needs (Ullrich 1997). Conversely, the organisation can also become inward looking and become an exclusive group, which prohibits new members and stifles innovation and progress (Ledbeater & Christie 2000).

3.5. - Established and successful co-operative insurance companies

Many observers say that the advantages of the co-operative structure in servicing the poor diminish as the organisation grows larger. Solidarity, member participation, member driven services, flexibility and concern for the community are not evident once the organisation expands beyond the local village. Additionally, the co-operative structure is seen as prohibiting the growth of the organisation due to its lack of access to technical and financial resources. However, the membership of the International Co-operative and Mutual Insurance Federation (ICMIF) show that co-operative insurance companies are successful and competitive in developing and developed countries. The ICMIF has 122 member companies operating in 65 countries, serving sectors from farming, fishing, trade unions, teachers, civil servants, doctors, credit unions and co-operatives. The size of the members range from some of the world’s largest international insurance organisations to small start up operations serving a small niche in local markets (ICMIF 2001a). Whilst maintaining certain co-operative principles becomes more difficult as the organisation grows it is definitely not impossible as demonstrated by ICMIF members (Appendix Five).

Despite the conventional premise that starting up insurance operations require a huge financial commitment and access to capital, many have started without share-capitals and have developed with a low net worth (Ripoll 1996). The German, Japanese and Korean insurance systems originated in small schemes of employed people (Creese & Bennett 1997). In 1997 six of the ten largest insurance companies in the world and almost half of the top fifty were mutuals, overall global market share by mutuals was around 40% (Birkmaier 1999). The growth of these large co-operatives and mutuals and their adherence to their co-operative principles mean they can give the socially excluded a greater voice in government policies and practices. As well as achieving size many large co-operatives have been able to use their structure to give them a competitive advantage. In its study of 97 companies in 11 countries in Europe, ACME[33] found that mutuals were showing to be more successful in market performance than their plc competitors during the late 1990s. They paid higher claims ratios (i.e. paid more back to the members) and maintained lower costs ratios, demonstrating their continued drive for efficiency of operations and value for members (ACME 2000).

Co-operatives have succeeded in providing insurance products and maintaining its social objectives by adhering to the following principles:

1. Good corporate governance.

2. Proper form of accounting and transparency

3. Practising an open, voluntary and non-discriminating membership.

4. A high degree of autonomy and self-reliance.

5. Clear focus or objective to hold members together, such as access to affordable insurance products.

6. Ensure that everybody has access to and can afford to join the co-operative.

(Blomqvist & Böök 2000, Ledbeater & Christie 2000, Ullrich 1997).

3.6 - Islamic Insurance

World-wide the Muslim population in 2001 stood at 1,433.71 million or 23 percent of the total population, of which 1,385.45 million are based in Asia and Africa. Muslims account for 47% of the population in Africa, 27% in Asia, 7% in Europe and 2% in North America (Felahi 2001).

The well-being of the Muslim population

Continent	Muslim population (%) 2001	World- wide Muslim population (%) 2001	HDI § value 1998	GDP per capita (PPP US$) 1998	GDI¨ Value 1998	Population without access		Under-weight children under age five (%) 1990-98
						To safe water (%) 1990-98	To sani-tation (%) 1990-98
South Asia	36	38	0.56	16,765	0.542	18	65	49
South Asia (excluding India)	84	28	0.55	25,314	0.533	15	49	41
Arab countries	94	18	0.635	4,140	0.612	17	23	19
Sub-Saharan Africa	36	16	0.464	1,607	0.459	46	52	31
South East Asia and Pacific	40	14	0.691	13,111	0.688	29	-	-
East Asia	3	3	0.716	20,987	0.710	32	-	-
East Asia (excluding China)	0	0	0.849	17,719	0.846	8	-	-

§HDI (Human development index) – composite index based on life expectancy, educational attainment and standard of living. A HDI value equal to or more than 0.800 has high human development, 0.500-0.799 HDI has medium human development and a HDI below 0.500 reflects low human development and well being.

¨GDI (Gender-related development index) – composite index using same variables as HDI but adjusted in accordance with the disparity in achievement between women and men. A GDI of less than 0.500 show that women in these countries suffer the double deprivation of low overall achievement in human development than men.

Source: UNDP (2000), Felahi (2001)

There is a comparatively very low ratio of Muslims in developed countries, the majority reside in medium to low human development countries. From the 35 low human development countries as defined by the Human Development Report 2000, eighteen have a majority Muslim population ( >50 percent) and a further five have a Muslim population of over 20 percent (Appendix Six). Muslims around the world are commonly faced with low-income levels, and lack access to social security systems, healthcare, education, sanitation and employment opportunities. There is growing inequality in Islamic countries even in the rich Arab nations, due to increasing populations and a wave of cheap immigrant labour[34]. It is therefore important that some risk protection mechanism is available to lower the vulnerability of the Muslim population.

“Takaful is the second most important social institution in the Islamic community to counter poverty and deprivation[35]” (Fisher 1999)

Whilst conventional insurance companies do operate in Islamic countries these are limited to commercial needs and to the elite sector of the population. Insurance penetration in Islamic countries is low (Appendix Six), this is because conventional insurance contains elements contradictory to Islamic principles, namely uncertainty (Gharar), gambling (maisir) and interest (riba) (Sigma 2001, Bhatty 2001). However, insurance in Islam has existed since the early second century of the Islamic era when Muslim Arabs expanding trade into Asia mutually agreed to contribute to a fund to cover mishaps or robberies along the numerous sea voyages. Muslim jurists concluded that insurance in Islam should be based on principles of mutuality and co-operation and encompass the elements of shared responsibility, joint indemnity, common interest and solidarity (Yusof 1999, Shakir 1999).

Takaful is the form of insurance deemed permissible for Muslims under Shariah Law (Islamic Law). The fundamental philosophy of Takaful is the same as that of the co-operative, with added restrictions on investments and more flexibility on capital formation. The takaful is operated as an enterprise providing services on a self sustaining model rather than as a charity (Fisher 1999). Since the first takaful insurer, the Islamic Insurance Company of Sudan, was established in 1979, there are now almost 50 takaful companies around the world. However the growth of the Takaful movement has not been profound, in 2000 takaful premiums represented approximately 0.02 percent of world insurance premiums[36].

Estimated figures of Takaful business in 2000

Country/region	Takaful premium 2000 (US$ million)	% of total Takaful market
Malaysia	143	27
Other Asia Pacific	50	9
Europe, USA	6	1
Arab countries	340	63
Total	538	100

Source: Bhatty (2001)

In addition to the problems outlined earlier in providing insurance to the poor there are a number of specific issues obstructing the spread of takaful to the Muslim population. Firstly, there is a shortage of adequately trained and qualified insurance personnel in Islamic countries and on the takaful concept. Secondly, there is a lack of knowledge on the principles of takaful by the general public and scepticism on its permissibility (particularly on life insurance). Thirdly, there is no existing insurance culture in Islamic countries, in fact there is an indifference towards risks reflected by their low insurance density and penetration (Appendix Six). Fourth, there are no regulatory models in place that governments can use to monitor and encourage takafuls[37]. Fifth, the demand for takaful products, both life and non-life has been huge, however takaful providers have had difficulty in managing the explosive growth and are unable to fulfil its potential[38]. The lack of distribution channels is a major difficulty in ensuring that access can be provided to the needy. With so few players and with such small capital bases there is also a lack of available reinsurance from within the takaful movement, limiting the coverage available to policyholders. Finally, there are no concrete moves or motivation to expand the takaful movement globally or an international takaful body to facilitate this (Bhatty 2001).

The high growth of takaful in Malaysia

Year	Family takaful USD millions	% increase	General Takaful USD millions	% increase	Total takaful USD millions	% increase
1998	55.0		36.6		91.6
1999	70.0	27%	42.7	17%	112.7	23%
2000	93.2	33%	49.8	17%	143.0	27%

Source: Bhatty (2001)

As the takaful and co-operative concepts are so similar, there is no real obstacle for the more established co-operative movement to assist the takaful movement in providing insurance products to poor Muslims across the world[39]. Over the last year, ICMIF has held discussions with key players in the takaful movement and proposed support by providing; technical expertise, partnership with existing co-operatives, co-operative reinsurance cover[40] and assist establishing a global presence to harmonise and promote the takaful concept. With no existing insurance schemes available, takaful products in Islamic countries will protect the middle and working classes from falling into poverty in the event of a large loss. Establishing ‘microtakaful’ schemes enables insurance to become much more acceptable and accessible to the poor whilst still maintaining the benefits and principles of a co-operative.

3.7. - Summary

In developing countries the provision of insurance products to the poor has been done with a certain degree of success through co-operatives, credit unions and other community or group based saving mechanisms. The co-operative structure is also appropriate for accessing the Muslim population in developing and even developed countries. However, the scope of protection and extent of coverage to the poor is limited to the risk bearing capabilities of the entity, which is very small. It has been estimated that low-income households can only protect themselves up to 40 percent of losses through informal risk coping mechanisms (Brown & Churchill 1999). To enable a higher coverage over a wider range of risks to the poor on a sustainable and viable basis there are a number of challenges that the micro-insurance provider still has to overcome.

· Technical expertise - co-operatives do not possess the necessary insurance expertise to provide a wider range of products on a prudent and sustainable basis.

· Regulations - high capital requirements mean that insurance schemes remain in the informal sector. Operating illegitimately, the rights of the policyholder and the operating practices of the provider remain outside the control of regulatory bodies. Without a license, insurance schemes are unable to obtain reinsurance cover and are limited to the coverage they provide.

· Globalisation - the liberalisation of insurance markets in developing countries is threatening the existence of small domestic niche players serving the interests of the poor. The influence of multinationals on government policy to raise capital requirements and force small players to merge is making it more difficult for informal mechanisms to succeed and grow.

Chapter Four – Some possibilities for the future

4.1. - Accessing technical expertise

It is important to accumulate experience and expertise in providing insurance over a period of time, micro-insurance providers should begin with simple products and limited coverage (Brown & Churchill 2000). Co-operatives succeed when they combine members know how and loyalty with outside expert knowledge and innovation (Ledbeater & Christie 2000). However the costs of external consultants or qualified insurance staff is beyond the means of the micro-insurance provider. Training of co-operative leaders in insurance knowledge is also a costly process as well as time-consuming. The failures of micro-insurance programs to grow is a testament to the complexity of insurance as compared to credit or savings, therefore the need of adequate underwriting, actuarial and business planning expertise cannot be avoided if the insurance scheme is to becomee adequate, affordable and sustainable.

The most appropriate method to overcome this need is for the micro-insurance provider to become an agent for an existing and established insurance company, this arrangement benefits all parties concerned. The micro-insurance provider receives a no risk fee for administrating the business and is able to access the technical expertise, reinsurance and capital capacity of the partner. The partner is ultimately responsible for maintaining reserves, setting the price, paying claims, dealing with external service providers and complying with legal requirements. The policyholder benefits by increased access to a wider range of products with increased coverage and greater sustainability. The partner has access into a new market without taking extensive marketing, distribution and administration costs (Brown & Churchill 2000, Brown & McCord 2000, Ford Foundation 2000, Women’s World Banking et al 2000, Havers 2001). More importantly the partner-agent model facilitates the pooling of risks between the formal and informal sectors. There are some issues that still need to be considered, including the limited availability of partners, the reluctance from them to cover more complex risks, difficulties in ensuring rapid payment of claims and negotiating an equal partnership (Brown et al 2000). The ICMIF has 122 established co-operative insurance organisations in 65 countries that can form partnerships with micro-insurance programs and reinforce co-operative principles (Appendix Seven).

The Partner-agent model of insurance delivery

Source: Brown and Churchill (2000).

Where a partnership cannot be formed then the micro-insurance provider should approach donor agencies to sponsor training programs or provide insurance experts to overcome their technical deficiencies and develop local competence. ICMIF as well providing potential partnerships with members, can be a training partner for the micro-insurance provider. Since 1963, the development function of ICMIF has a long and successful history of providing technical assistance and supporting popularly based organisations to set up their own insurance programs in Asia, Africa and Latin America. There are numerous experts available from member organisations who can provide advice through short-term and long-term assignments and moderate educational workshops. The diversified range of members enables the micro-insurance provider at any stage of development to benefit from advice on solutions to overcome problems in pricing, operational structure, distribution, marketing and payments. The federation also facilitates study visits and staff exchange amongst members. Additionally a number of the federation’s established members provide assistance to micro-insurance programs directly:

ICMIF Members working with microfinance organisations in developing countries

ICMIF Member	Country	Countries provided with expertise and support
Folksam	Sweden	Latvia, Paraguay, Uruguay and Guatemala
FNMF	France	Mali, Senegal, Morocco, Lebanon, Poland and Hungary
MACIF	France	Cameroon, Tunisia and Senegal
NTUC INCOME	Singapore	China, Taiwan and Philippines
Développement international Desjardins	Canada	Mali, Vietnam, Senegal, Ivory Coast and Burkina Faso

Source: ICMIF (2001b).

ICMIF also provides a number of services that can support the micro-insurance provider to grow into a fully-fledged insurance company and maintain its co-operative identity. Management training can be provided through the use of specially developed simulation games in the areas of insurance and reinsurance. The ICMIF co-operative management course trains participants in the roles and responsibilities of a co-operative manager and board member, it tackles the issues of corporate governance and how co-operative and mutual principles can positively impact business results and policyholder welfare. Recently implemented in Ghana and the Philippines is a software program to facilitate accounting, claims processing, reserving, life insurance and reinsurance accounting, as well as providing an information database. This specifically tackles the information needs of a micro-insurer and is easily adaptable to any scheme or environment.

Professional networking groups, made up of experts from various ICMIF member organizations meet regularly to discuss, analyze and understand current trends and issues. The networks encompass the field of investments, IT, pensions, marketing, distribution, customer satisfaction, assistance and outsourcing. They provide an opportunity for smaller members to access experts for knowledge to apply within their own business environment. For example, the ICMIF Investment Network has put forward its best performing mutual funds and investment managers’ expertise to enable other member organisations to cross invest in foreign markets. Even the smallest insurers can now gain access to a well-managed international portfolio of mutual funds and investment advice to maximize the return on their surplus.

4.2. - Overcoming Regulation

A proper insurance program safeguarding the interests of policyholders and ensuring the financial integrity of the industry must be backed by a minimum amount of capital as prescribed by regulators. In developing countries accumulated small premiums from low-income households are insufficient to satisfy capital requirements, subsequently microfinance providers predominantly remain in the informal sector.

Regulatory requirements for insurance licenses in developing countries

Country	Minimum required Life USD	Minimum required Non-life USD	Total USD
Honduras	1,600,000	1,600,000	3,200,00
Argentina	N/a*	750,000 – 2,250,000	%
Barbados	N/a	500,000 – 1,500,000	2,500,000
Puerto Rico	300,000 - 1,000,000	500,000 – 750,000	1,500,000
Colombia			4,500,000
Dominican Republic	500,000	500,000	N/a
Guatemala	380,000	380,000	1,200,000

*Figures not provided.

Source: Information provided by ICMIF member organisations as at August 2001

Whilst providing financial services through the informal sector is the most appropriate manner in accessing and serving the poor, this causes difficulties in providing adequate and sustainable insurance products. Informal insurance providers cannot access necessary capital and technical resources to develop products and pay claims effectively. Operations in the informal sector escape government monitoring, coupled with the inherent complexity of insurance products, the lack of accountability and transparency can endanger the sustainability of the scheme. Policyholders have no legal recourse if the provider becomes insolvent and is unable to pay claims, this also opens up the possibility of manipulation of the poor by rogue individuals and organisations. Additionally, the capacity of the organisation to absorb risks is imperative to the success of the insurance scheme, informal insurance providers do not have access to the reinsurance market and therefore can only provide minimal protection to the poor.

There are a number of possible ways that a micro-insurance provider may formalise its operations. Some aid agencies as well as subsidising premiums are also donating capital to micro-insurance providers to become legal entities, however these opportunities are few and far between. Many co-operative based insurers have raised the necessary capital from their members by collecting small amounts of contributions over a number of years. Partnerships between established and informal providers on a national and regional basis through fronting arrangements and partner-agent models have been discussed earlier. Collaboration between national micro-insurance schemes under a common holding structure can also achieve the necessary scale required (Appendix Eight).

Whilst some micro-insurance schemes have managed to achieve formal status through these means, there is still a need for more enabling legislation to be in place to allow more micro-insurance providers into the formal sector. Lowering of capital requirements is something that governments do not favour, mainly due to the lack of importance of the poor and the influence of large multinationals to limit the number of players in the industry. In most developing countries capital requirements are actually increasing. More effective lobbying needs to take place by international aid organisations such as the World Bank and the IMF, as they have the greatest influence with self-serving politicians. Practical solutions also need to be investigated to how the sustainability of the insurance provider can be maintained whilst lowering capital requirements. Experts from organisations such as ICMIF and its members should actively discuss and lobby with insurance regulators on how an appropriate form of “micro-regulation” could be structured which would protect the rights of the consumer and support the industry. This type of “micro-regulation” or rules should be implemented into existing informal schemes to show regulators that schemes can maintain their financial integrity with lower capital bases. An example of such a set of rules has been developed for credit unions by the WOCCU[41] who also are active on the International Basle Committee. Additionally, governments should encourage microinsurance providers to partner with established insurance companies nationally and globally as a means to provide the excluded with more protection (Appendix Seven).

4.3. – Obtaining reinsurance

‘Reinsurance is the shifting of part or all of the insurance originally written by one insurer to another insurer” (Brown & Churchill 1999)

Once insurance operations have become formalised and there is adequate training of staff, the immediate need for the micro-insurance provider is to obtain reinsurance cover. Reinsurance enables companies to grow beyond the restrictions of their reserves, it stabilises financial results against unexpected claims, protects against catastrophic losses, facilitates access to new technologies and provides increased risk cover to the policyholder. In the first few years of operations the solvency of the micro-insurer is at its most vulnerable, reinsurance allows claims to be paid quickly and underwriting experience to be achieved, whilst still maintaining premium levels and enhancing the credibility of the scheme (Ripoll 1996, Brown & Churchill 1999, Brown & Churchill 2000).

Many developing countries require reinsurance to be placed with local reinsurers due to political considerations and foreign exchange policies, however, domestic players are able to provide minimal retention capacity[42] (Outreville 1996, Matringe 1997, IDB 1977). The absence of futures markets and reinsurance companies would normally leave the state responsible to bear the risk (Matringe 1997). Unfortunately in developing countries the government does not have the capacity to compensate for a natural disaster. Consequently, they have to rely on external aid and post disaster funding to cope with the consequences of these events, but these sources are also becoming limited in supply against growing demand (Pollner 2001). There is a need to transfer this risk onto the international insurance and reinsurance markets. International reinsurers are more diversified than local reinsurers, but here too the frequency of global catastrophes[43] mean that available reinsurance is also short in supply and quite expensive[44] (Pollner 2001, Outreville 1996). Consequently, many newly established (formalised) micro-insurers are finding it very difficult to obtain adequate and affordable cover locally and internationally (Matringe 1997). Even when a reinsurance company provides the cover, the lack of adequate profits may mean terms so strict that the cover is uneconomical for the insurer. There is a need for the reinsurers to be supportive and specific to the growth and environment of a micro-insurer.

Co-operative insurers in developing countries can obtain favourable coverage from co-operative reinsurers in developed countries due to the principle of collaboration for mutual advantage (IDB 1977). ICMIF has been facilitating reinsurance cover between its members since 1949. As well as assisting larger members ICMIF has been instrumental in providing flexible and affordable “micro-reinsurance” for a number of newly registered and small start-up companies in developing countries. The unique spirit of co-operation of ICMIF members has enabled cover to be provided to these companies where non-was available from the market. Staff at ICMIF also provide consultancy on accounting techniques, business planning, product development and training on reinsurance provision to ensure liabilities and solvency requirements can be met in the future. The growth of the Co-operators General Insurance company in Barbados and Co-op Seguros in Dominican republic are two examples of how reinsurance through ICMIF and the spirit of co-operation has provided for the needs of the poor (Appendix Eight).

Reinsurance appears not an important consideration for microinsurance providers as the probability of them reaching formal status is limited. However, an understanding of reinsurance is imperative to ensure they limit the type of policies and size of coverage they offer without reinsurance. Another option for the independent informal provider is to self-insure, this can be achieved by obtaining or accumulating sufficient capital from current insurance operations, donor agencies or from affiliated organisations. There have also been discussions on providing access to reinsurance for informal providers by using the concept of risk sharing. A model originally put forward by Michael Gudger is based on the principles of co-operation and collaboration between micro-finance institutions to achieve the necessary scale and diversification to make it feasible for reinsurance. This model can also be extended on a regional and an international basis and is being investigated by ICMIF and its experts (Appendix Nine).

4.4. – Embracing globalisation

Increasing mergers and acquisitions mean that the operations of smaller players are being diluted into the strategies of larger established insurance companies. Changing insurance legislation and liberalisation of markets have increased foreign interests in previously closed markets. Globalisation means that developed markets are quickly being saturated and hungry multinationals are looking to tap into developing countries. Foreign companies have

formed partnerships with domestic players, trading their technical expertise, technological advancement and financial strength for entry into the local market. These new entries instantly target the cream of the market, once the profitable market is captured they then focus on middle and low-income communities as a means of increasing market share. Multinationals are influencing governments to raise capital requirements and force players to merge, many providers to low income communities have lost their insurance license as a result (Vogt 1999).

One of the ways for smaller insurers to survive and to continue serving the interests of the poor is to form strategic alliances with like-minded organisations. Strategic alliances can be formed through different areas of business such as underwriting, actuarial, product development, distribution and risk management. Strategic alliances can improve flexibility, reduce risk and costs, and increase efficiency, competitiveness and technical capacity. The benefits of a strategic alliance have to be balanced with the loss of independence, limited governance, sharing of profits and disclosure of competitive information. It is therefore important that the partner chosen is one that has the same philosophy and principles. To facilitate strategic partnerships between microfinance institutions there is a responsibility on international associations that provide services to the poor to build relationships between projects and members at a national and regional level. Many aid agencies work in the same country and can work together to provide a comprehensive range of microfinance products. The existing collaboration between the various functions of the ICA of agriculture, health, housing, banking and insurance have provided numerous benefits to the poor. A similar collaboration between ICMIF and WOCCU would increase credit unions providing micro-insurance to their members. ICMIF membership itself enables alliances to take place between members on a national, regional or international basis, either informally through the exchange of information, reinsurance and technical expertise or formally by establishing joint venture operations to mutually benefit both parties.

Chapter Five - Concluding remarks and recommendations

‘The United Nations Conference on Trade and Development (UNCTAD) endorses that co-operative insurance, complimenting other forms of insurance, has a special role to play in the over-all development process.’

UNCTAD (1977)

5.1. - The Importance of insurance to poverty alleviation

The conditions for growth and the degree of inequality are two key factors that determine the extent of poverty reduction from per capita economic growth. The lower the inequality levels the more positive effect economic growth has on poverty levels[45]. The link between economic prosperity and human development is dependent on the effectiveness of countries to convert income into better lives for all their citizens (UNDP 2000)[46]. The international development target of halving the proportion of people living in extreme poverty by 2015 can be attained by low-inequality countries without any change in their growth pattern and with lower growth rates. However, high-inequality countries will only reach the target if growth is pro-poor and significantly higher than in the past (twice that of low-inequality countries). If all countries belonged to the low-inequality group then a forecasted growth of four percent per annum would realise the target as early as 2005 (Hanmer et al 2000).

Projected poverty in 2015 for high and low-inequality countries

	Poverty incidence 2015 as % of 1990 level		Annual per capita growth needed to halve poverty by 2015
	No change, past growth	Pro-poor, Higher growth	With no change	With pro-poor conditions
High in-equality countries	68	49	7.1	3.7
Low-inequality countries	47	33	3.7	1.5

(Bolded figures reflect where poverty target is achieved)

Source: Hanmer et al (2000).

Poverty in 1990 and future projections of poverty in 2015

Poverty (% under $1 a day at 1985 purchasing parity price)
	1990	2015 No change in conditions		2015 Pro-poor higher growth rate
		A	B
Sub-Saharan Africa	44	42	36	25
Middle East & North Africa	3	2	1.6	1
East Africa and Pacific	31	12	12	9
South Asia	47	30	24	16
Latin America & Caribbean	28	19	17	12
Eastern Europe & Central Asia	9	5	4	3
Developing countries	36	22	18	13

A - No change in main conditions of growth and economic growth rates remain the same as between 1965 and 1997.

B – No change in main conditions but assumes forecast (usually higher) growth rates.

(Bolded figures reflect where poverty target is achieved)

Source: Hanmer et al (2000).

Whilst growth of average household incomes of the poor is necessary to achieve sustained long-term poverty reductions, growth in overall per capita income is of no benefit if there is increasing inequality (McKay 1997). Gender inequality, in particular, is one of the largest constraints on growth and poverty reduction, an increase in number of girls in school and female literacy will reduce poverty, reduce fertility and improve child survival (Hanmer et al 2000).

Evaluating the impact on poverty of any program is difficult to measure, as poverty itself is not precise. Attention in the past has focused on income, expenditure, consumption and assets. More recently, focus has been on social indicators such as educational status, nutritional levels, access to health services and empowerment of the individual, measuring empowerment requires a greater level of skill and complexity of calculations (Hulme 1999). Insurance can assist in achieving greater equality and empowerment of the poor by protecting them against unforeseen losses and giving them the courage to improve their productivity and livelihood through access to education, health and labour. For many years MFIs focusing on providing loans and savings were ignored, there was a perception that the poor could not and would not save. The popularity of these schemes have shown that the poor do have a propensity to save and to repay loans, with numerous successful and sustainable credit and savings program in place around the world. However, the number of people in poverty and the rate of inequality is still rising. Savings and loans are not sufficient on their own to prevent people from falling back into the viscous circle of poverty in times of crisis or severe loss. Providing insurance can ensure that the foundations on which poverty alleviation is built is strong enough to keep the individual out of poverty. Products such as loan protection, life savings and health insurance should be introduced at an early stage into the services of a microfinance program instead of a ‘nice to have’ much further down the line. The role of insurance needs to be given equal importance to that of loans and savings, indeed the success of loan and savings schemes depends on the availability of complimentary insurance products.

Improved access to financial services does not necessarily mean that the material and social welfare of the poor will be improved. Provision of insurance does not provide cures for diseases, food, clean water, shelter, schools, law and order or even the basic rights of human beings, the poor are continuously ‘kept in place’ by corrupt regimes and greedy multinationals. So the question is how can insurance empower people when their day to day necessities are restricted? Insurance enables the poor to dedicate more time and resources to obtaining these necessary services, it gives them confidence to confront risks and gives them peace of mind in an uncertain environment, benefits which cannot be measured. Insurance protects the disposable income of the poor, it enables them to invest in their business, their children’s education, accommodation, and access adequate sanitation and clothing, providing a better chance to pursue and achieve a better standard of living. Protection against the costs of health services enables the poor to participate more and derive benefits from new economic activity, and access new technologies. In developing countries money talks, if you have the funds you are able to find the means, improved welfare of the poor will enable greater rights and a voice that will demand to be heard. Schemes such as the SEWA Insurance scheme in India is a prime example of how insurance can also support gender equality and empower the woman to achieve a better standard of livelihood. Insurance with other microfinance products enables the poor to come together to defeat the common foe of poverty and overcome the challenges that continuously try and keep them down.

The poorest of the poor are excluded from accessing microfinance programmes due to their lack of income. Microinsurance is only appropriate for those that have an income and therefore is limited to what it can do for the poorest. This does not mean that the needs of the poorest should be ignored and they should only be provided with short-term measures such as food rations, water and shelter. The quest is to make people self-sufficient, to give them the confidence and the means to achieve a better standard of living. The poor themselves are the most determined to escape from their situation, they are very proud people and have the greatest concern for their families welfare, particularly women, but are prevented by factors which are outside of their control. Aid in the form of food, water and sanitation should be provided to the very poor, but there should be an investigation into the effects on long-term livelihood and moral if they were provided access to selected insurance products whose premiums were paid for (or subsidised) in the initial years. Subsidised savings and loans while useful can and are used for other means, whilst insurance is designed to protect against a certain loss or event occurring and therefore is less open to misuse.

Providing insurance products successfully can also become an important income stream for the microfinance institute and protect its loan portfolio. The Grameen bank is reported to be experiencing high delinquency rates on its loan portfolio[47] due to the effects of floods in Bangladesh in 1998, inadequate provisioning, and competition from other lending institutes (Pearl and Phillips 2001). Whilst cover against the frequent flooding in Bangladesh may not be available, the low take up of Grameen’s microinsurance scheme (around 30,000 policyholders) means that the majority of Grameen lenders are vulnerable to other more frequent perils. This has the effect of weakening even further their ability to survive a catastrophic event such as flooding. A successful microfinance institute will benefit the local community in the form of more efficient and effective services, and also additional income if the institute is a co-operative. The benefits of protection and better financial services to a micro-enterprise can increase potential household income, leading to greater household security, better morbidity and mortality of household members and eventually improved education, and social and economic opportunities.

Insurance is not the be all or end all of poverty alleviation, it is not the ‘magic’ solution to problems of the poor but if appropriately provided it can play an important role in ensuring sustainable development and poverty alleviation. The full benefits of insurance cannot be realised in the unique environment of a developing country. There does need to be more resources put towards: improving access to capital, pro-poor social expenditure, employment opportunities, illnesses prevention, population control, regulatory systems, institutional reform, infrastructure, political stability, democracy, social equality and a stable economy. But hand in hand with these developments the role of insurance is of equal importance for long term sustainable success in poverty alleviation and reducing overall inequality.

5.2. – Delivering insurance to the poor

An insurance scheme for the poor which is affordable, adequate and sustainable is difficult to achieve due to lack of financial capital, technical resources, adequate numbers, trusts, regulatory requirements, transparency and accountability. The road to achieving a comprehensive insurance scheme is full of pitfalls and must be undertaken cautiously and carefully with good corporate governance at the heart of each step. The appropriate form for servicing the poor and one that has been used for centuries is that of a co-operative. A good co-operative will serve the needs of members, providing flexible, affordable and appropriate products. As the scheme belongs to the poor it will minimise fraud and moral hazard, and encourage participation. Partnerships with technical advisors, international donors or organisations such as ICMIF are imperative to ensure that the organisation grows into a self-sufficient, licensed insurance co-operative (or at least is able to provide a comprehensive range of products on a sustainable basis). The co-operative identity will ensure that the needs of the poor are not ignored as has been the case with so many other large non-co-operative insurance companies in developing countries. Implementation of co-operative schemes can also provide security to large populations of Muslims in poor countries.

The environment of each country, each region and each village is different and its insurance requirements are also unique, therefore to put forward a standardised approach to establishing a micro-insurance scheme would be impractical. However the following process summarises the main thoughts of this paper to achieving a sustainable and viable insurance scheme:

Providing insurance to the poor

STEP ONE	Year zero	Undertake feasibility study on the demand for insurance within a pre-existing group such as a credit union or co-operative. It is beneficial that savings and credit facilities are already available to cover small losses of client and introduce a saving culture. The scheme should be compulsory or have a sufficient number of policyholders determined before it becomes active, it should also cover a wide range of risks and minimise exclusion.
STEP TWO	Year one	Search for a partner from an established insurance company, preferably a co- operative and negotiate an appropriate agreement for distribution, training, products and reinsurance. OR Set up own insurance scheme, separate to existing services, with limited coverage and simple products (e.g. loan protection and life insurance) and confirm with donor agency or organisations like ICMIF for long term technical assistance and training needs.
STEP THREE	Year one	Establish clear and concise policy wordings, product coverage, administration system for dealing with applications ,claims and payment. Ensure adequate capital reserves.
STEP FOUR	Year one to five	Education and marketing of insurance concept to policyholders, training of staff on principles and practices of insurance, implement an accurate and timely accounting and information system.
STEP FIVE	Year one to five	Train staff on co-operative principles, reinsurance, insurance accounting, reserving, actuarial calculation and specialist training on different product lines
STEP SIX	Year five to fifteen	Regulatory compliance training for staff, training on investments. Investigate and expand in different product lines, more intense reinsurance training and administer a regional and national network of branch offices.
STEP SEVEN	Year five to fifteen	Investigate potential collaboration with other micro-insurance schemes, find equity partners from the co-operative movement or from a feasible established insurer or raise capital from members and lobby government for enabling legislation.
STEP EIGHT	Year fifteen to twenty	Obtain reinsurance cover and move towards setting up own co-operative insurance company.

The path towards a viable and sustainable micro-insurance scheme

				Obtain reinsurance cover Establish co-operative insurance company
		Lobby government Capital from members Microinsurance collaboration Equity partners
		Compliance training of staff Investments training Investigate and provide additional products Detailed reinsurance training Regional & national network
	Train staff on co-operative and reinsurance principles and basic insurance accounting, reserving and actuarial calculations Specialists training on marketing, underwriting and distribution of different products
	Education and marketing to policyholders Training of staff and agents on insurance Implement suitable accounting system

			Policy wordings Policy overage Adequate reserves Administration system
			Partner-agent V Own insurance scheme
		Feasibility study Group participation

*The number of years for the micro-insurance provider to complete each ‘step’ would be dependent on the ability, dedication and motivation of the managers of scheme, the quality of the technical partner, membership size, good corporate governance and local regulatory requirements. In particular, the activities in the first few years will determine the success of the scheme as demonstrated by the diagram.

ª If the provider decided to aim for formalisation then it is envisaged that twenty years would be the longest period of time it should take to achieve legal status.

5.3. – The way forward

Years of subsidies and grants have not achieved any recognisable inroads into poverty alleviation. It is only recent investigation into the real reasons preventing sustainable growth out of poverty that the role of risk protection mechanisms has been acknowledged. There is a responsibility now for governments and international aid organisations to create an enabling environment for the development of social protection mechanisms to the poor. Long term solutions that build towards a better life for future generation are more beneficial to the cause of poverty alleviation than subsidies that support short-term measures. International agencies working with the poor such as ICMIF, WOCCU, ICA, CGAP, USAID and Freedom from Hunger need to collaborate and share information and projects to a greater extent. The onus is on industry experts and representatives such as ICMIF to form partnerships to investigate innovative ways to overcome the needs of the poor and make more modern risk transfer mechanisms such as commodity pricing, weather protection and crop insurance available and work in practice for the poor. The technical expertise and training facilities of organisations such as ICMIF should be used to support more microinsurance programs to become viable and sustainable. The overriding aim should be to get the most effective assistance to the most people in the most efficient way.

There needs to be greater involvement of the poor in guiding development projects and less reliance on national governments and academics who believe they know what the issues are. The poor desire to be empowered, they are in the best position and have the greatest determination to escape poverty, all they want is a fair chance to achieve it. Co-operative insurance, through the protection and solidarity it provides, and its pro-poor principles, empowers individuals to have the capability to secure a better future for themselves and for subsequent generations.

Appendix One

The plight of the poor in low human development countries

HDI rank 1998	Country	HDI value 1998	GDP per capita (PPP US$) 1998	GDI value 1998	Population without access			Share of income or consumption
					To safe water (%) 1990-98	To health Services (%) 1981-93	To sani-tation (%) 1990-98	Poorest 20% (%) 1987-98	Richest 20% (%) 1987-98
140	Lao People’s Dem. Rep.	0.484	1,734	0.469	32	0	-	9.6	40.2
141	Madagascar	0.483	756	0.478	32	0	-	5.1	52.1
142	Bhutan	0.483	1,536	-	42	20	30	-	-
143	Sudan	0.477	1,394	0.453	27	30	49	-	-
144	Nepal	0.474	1,157	0.449	29	90	84	7.6	44.8
145	Togo	0.471	1,372	0.448	45	-	63	-	-
146	Bangladesh	0.461	1,361	0.441	5	26	57	8.7	42.8
147	Mauritania	0.451	1,563	0.441	63	70	43	6.2	45.6
148	Yemen	0.448	719	0.389	39	84	34	6.1	46.1
149	Djibouti	0.447	1,266	-	32	0	-	-	-
150	Haiti	0.440	1,383	0.436	63	55	75	-	-
151	Nigeria	0.439	795	0.425	51	33	59	4.4	55.7
152	Congo, Dem. Rep. of the	0.430	822	0.418	32	0	-	-	-
153	Zambia	0.420	719	0.413	62	25	29	4.2	54.75
154	Côte d’Ivoire	0.420	1,598	0.401	58	40	61	7.1	44.3
155	Senegal	0.416	1,307	0.405	19	60	35	6.4	48.2
156	Tanzania, U. Rep. of	0.415	480	0.410	34	7	14	6.8	45.5
157	Benin	0.411	867	0.391	44	58	73	-	-
158	Uganda	0.409	1,074	0.401	54	29	43	6.6	46.1
159	Eritrea	0.408	833	0.394	32	0	-	-	-
160	Angola	0.405	1,821	-	69	76	60	-	-
161	Gambia	0.396	1,453	0.388	31	-	63	4.4	52.8
162	Guinea	0.394	1,782	-	54	55	69	6.4	47.2
163	Malawi	0.385	523	0.375	53	20	97	-	-
164	Rwanda	0.382	660	0.377	21	-	-	9.7	39.1
165	Mali	0.380	681	0.371	34	80	94	4.6	56.2
166	Central African Republic	0.371	1,118	0.359	62	88	73	2.0	65.0
167	Chad	0.367	856	-	32	0	-	-	-
168	Mozambique	0.341	782	0.326	54	70	66	6.5	46.5
169	Guinea-Bissau	0.331	616	0.298	57	36	54	2.1	58.9
170	Burundi	0.321	570	-	48	20	49	7.9	41.6
171	Ethiopia	0.309	574	0.297	75	45	81	7.1	47.7
172	Burkina Faso	0.303	870	0.290	58	30	63	5.5	55.0
173	Niger	0.293	739	0.280	39	70	81	2.6	53.3
174	Sierra Leone	0.252	458	-	66	64	89	1.1	63.4

HDI (Human development index) – composite index based on life expectancy, educational attainment and standard of living. A HDI below 0.500 reflects low human development and well being.

GDI (Gender-related development index) – composite index using same variables as HDI but adjusted in accordance with the disparity in achievement between women and men. A GDI of less than 0.500 show that women in these countries suffer the double deprivation of low overall achievement in human development than men.

Source: UNDP (2000).

Appendix Two

The availability of insurance to the poor

HDI rank 1998	Country	HDI value 1998	GDP per capita (PPP US$) 1998	Insurance density: premiums per capita 1998 (USD) *	Insurance penetration: premiums as a share of GDP 1998 (%)*	World population 1998 (%)	World insurance market 1998 (%)*	World insurance Market 2000 (%)*
48	Costa Rica	0.797	5,987	69.0	2.34	0.06	0.01	0.00
49	Croatia	0.795	6,749	133.7	2.94	0.08	0.03	0.01
55	Mexico	0.784	7,704	62.9	1.52	1.65	0.29	0.33
59	Panama	0.776	5,249	119.8	3.59	0.05	0.02	0.01
60	Bulgaria	0.772	4,809	16.1	1.08	0.14	0.01	0.00
61	Malaysia	0.772	8,137	133.4	4.02	0.37	0.13	0.13
62	Russian Federation	0.771	6,460	29.4	1.56	2.53	0.20	0.19
63	Latvia	0.771	5,728	60.8	2.34	0.04	0.01	0.00
64	Romania	0.770	5,648	12.1	0.71	0.39	0.01	0.00
65	Venezuela	0.770	5,808	76.5	1.89	0.40	0.08	0.00
68	Colombia	0.764	6,006	51.3	2.33	0.70	0.10	0.03
71	Mauritius	0.761	8,312	157.2	4.32	0.02	0.01	0.01
72	Libyan Arab Jamahiriya	0.760	6,697	35.9	-	0.09	0.01	-
74	Brazil	0.747	6,625	103.3	2.15	2.85	0.78	0.14
75	Saudi Arabia	0.747	10,158	39.1	0.52	0.35	0.04	0.00
76	Thailand	0.745	5,456	41.5	2.28	1.04	0.12	0.12
77	Philippines	0.744	3,555	13.0	1.50	1.25	0.05	0.04
78	Ukraine	0.744	3,194	6.4	0.76	0.88	0.01	0.00
80	Peru	0.737	4,282	23.3	0.90	0.43	0.03	0.01
82	Lebanon	0.735	4,326	140.4	2.69	0.06	0.02	0.01
84	Sri Lanka	0.733	2,979	10.0	1.20	0.32	0.01	0.01
85	Turkey	0.732	6,422	33.1	1.06	1.11	0.10	0.03
86	Oman	0.730	9,960	58.5	0.87	0.04	0.01	0.00
87	Dominican Republic	0.729	4,598	29.0	1.70	0.14	0.01	0.00
91	Ecuador	0.722	3,003	21.5	1.32	0.21	0.01	0.00
92	Jordan	0.721	3,347	29.8	1.90	0.11	0.01	-
97	Iran, Islamic Rep. of	0.709	5,121	18.6	0.67	1.13	0.05	0.00
99	China	0.706	3,105	11.4	1.49	21.58	0.66	0.79
101	Tunisia	0.703	5,404	35.4	1.65	0.16	0.02	0.00
103	South Africa	0.697	8,488	571.6	3.49	0.68	1.15	1.16
104	El Salvador	0.696	4,036	22.7	1.16	0.10	0.01	0.01
107	Algeria	0.683	4,792	9.1	0.54	0.52	0.01	0.00
108	Vietnam	0.671	1,689	1.8	0.51	1.33	0.01	0.00
109	Indonesia	0.670	2,651	5.8	1.27	3.55	0.06	0.05
111	Syrian Arab Republic	0.660	2,892	23.0	0.52	0.26	0.02	-
119	Egypt	0.623	3,041	8.5	0.65	1.13	0.02	0.01
120	Guatemala	0.619	3,505	16.2	0.92	0.19	0.01	0.00
124	Morocco	0.589	3,305	33.8	2.60	0.47	0.04	0.02
128	India	0.563	2,077	8.6	2.61	16.88	0.39	0.50
130	Zimbabwe	0.555	2,669	27.9	3.92	0.20	0.01	0.01
135	Pakistan	0.522	1,715	2.9	0.66	2.55	0.02	0.01
138	Kenya	0.508	980	9.5	3.48	0.50	0.01	0.00
151	Nigeria	0.439	795	2.7	0.86	1.83	0.02	0.00

HDI (Human development index) – composite index based on life expectancy, educational attainment and standard of living. A HDI below 0.500 reflects low human development and well being.

*Only those 88 countries with premium volumes more than USD 150 million have statistical data provided in Sigma

Source: UNDP (2000), Sigma (1999) and Sigma (2000).

Appendix Three

Problems of providing insurance to the poor

Case study 1: Self-Employed Women’s Association (SEWA), Ahmedabad, India

SEWA is a trade union based in Ahmedabad city of Gujarat state in India. Since 1972 it has been organising poor, self-employed women of the informal sector, these women come from different occupations ranging from vendors, home-based workers and service providers. SEWA provides supportive service to 350,000 women in the form of healthcare, childcare, housing, training, full employment, self-reliance and insurance. In 1974 SEWA established a bank to provide savings and credit services to poor women, it has 175,000 depositors and close to 40 crores rupees (about US $ 8 million ) working capital (Pandya 2001).

Appendix Ten

UNCTAD/ICMIF model of credit life insurance for people with micro means

(The Gudger Model)

access credit with credit life insurance from

take excess-of-loss reinsurance from

Cedes risks beyond its capacities to

Distributes reinsurance risk to

International group of established/secure reinsurers

taking varying percentages of the pool’s required capacity through the exchange

Source: Grozel & Amijee (1999), as adapted from Michael Gudger Model, STEP Program, ILO.

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[1] The inefficient delivery of child allowances and other grants to eligible women in rural areas means that many are without any access to financial support (SFU 2000).

[2] It is estimated that around 1 billion rural households in developing countries lack access to safe water supplies (Carney 1999, UNDP 2000).

[3] More than 2.4 billion people lack adequate sanitation (UNDP 2000).

[4] The tariffs that high-income countries impose on agricultural goods from developing countries are five times as high as on manufactures (Creese & Bennett 1997).

[5] In 1996 the HPI-1 in rural Uganda was more than twice than in urban Uganda (UNDP 2000)

[6] Between 1990-95 exclusion from health services was almost nil in most OECD countries, 20 percent in all developing countries and 51% in least developed countries (UNDP 1997, as quoted in Dror & Jacquier 1999).

[7] Every minute an additional 11 people are infected with HIV/AIDS, 12 million Africans have died of aids and by 2010 there will be 40 million orphans in the continent (UNDP 2000).

[8] In India tuberculosis is four times as high amongst the poorest fifth of the population than the richest (World Bank 2000).

[9] In South Africa the under five mortality rate for the poorest 20 percent is double that of the richest 20 percent and three times in Northeast and Southeast Brazil (World Bank 2000).

[10] In Bangladesh during the 1990s surveys showed that 63% of those involved in litigation paid bribes to court officials (UNDP 2000).

[11]More than 85 percent of all conflicts were within country borders between 1987 and 1997 (World Bank 2000).

[12] It is a means for the creditor to access cheap, unskilled labour indefinitely (SFU 2000).

[13] In Grahamstown, South Africa, the costs of a funeral was fifteen times the monthly income (Roth 2001).

[14] SEWA bank found that the main reason for irregular loan repayments was illness of the women or family member, families were paying interest rates between 20% to 30% to professional money lenders to cover high medical bills (Hauck 1997).

[15] COOPERAR in Venezuela offers a benefit equal to the amount held in savings and an option to double this by increased premiums (Brown & Churchill Part II 2000).

[16] In Mauritius the Sugar Insurance Fund Board insures sugar cane producers against cyclones, droughts, hurricane, fires and heavy rainfall. The insurance is compulsory and costs on average 0.09 per cent of the price paid to small producers, in the event of a loss the producers are reimbursed almost 65 per cent of their loss (Matringe 1997).

[17] Some forms of coverage are particularly restrictive such as the health insurance scheme of SEWA which only pays out after 24 hours hospitalization and reimbursement after almost three months covers only 22 percent of total costs of hospitalisation (McCord 2001).

[18] From the study of Brown & Churchill (2000) institutions with access to actuarial expertise were able to charge a lower price for the same coverage types and maintain financial sustainability.

[19] Some informal life insurance providers in Ethopia, called idirs, retain the right to fluctuate claims payments and premiums in accordance with mortality rates. However, this only serves to replace the protection of a risks with uncertainty on whether the loss will be fully covered or if the insured is able to pay additional premiums if mortality rates increase (Brown & Churchill 2000).

[20] In 1996 the annual per capita expenditure on insurance in Latin America was just under US$200 compared to more than $2,000 in the United States (Creese & Bennett 1997).

[21] SEWA provides a prime example of the problems of attrition facing the microinsurance provider, in 1999/2000 and 2000/1 it experienced a drop in number of policyholders of six percent. This was due to the fact that SEWA offered a single entry point to their insured programme in July 1, premium collections took place in the preceding three months. During this period the main client area of Ahmedabad was hit by severe flooding, this drained the resources of the poor who were the worst hit, and therefore did not leave any funds available for insurance premiums. (McCord 2001).

[22] Health insurers NHHP (Uganda) and GRET (Cambodia) are having difficulty in covering their claims costs, UMASIDA (Tanzania) has growing deficits with clinics who now refuse to serve policyholders which increases drop out rates. SEWA’s scheme has a high level of claims sustainability due to the subsidy from SEWA’s health programme and ‘barefoot doctors’ service. This provides a more comprehensive package of services for the client through access to primary care, preventative care and assistance for accessing insurance services. Overall sustainability of SEWA is achieved from interest earnings on a reserve endowment provided by GTZ (McCord 2001).

[23] Of the 32 institutions studied by Brown and Churchill (2000), 24 provided some form of life insurance and all but six provided it on a mandatory basis, with almost all provided it as a condition of a loan or savings account.

[24] The SEWA lifelong Insurance Policy is linked to a saving account at SEWA Bank. The member has to pay a deposit of 500Rps (700 Rps in 2001) and from the interest on the deposit the premium is paid, this eases administration costs for SEWA but also the one-time payment means the member no longer has to consider the opportunity costs each year of purchasing insurance against future consumption. In addition the recurring fund insurance policy allows the very poor women to save for lifelong insurance policy (Hauck 1997).

[25] King Finance (South Africa) and FINCA (Uganda) expedite the claims and payment process by directing all loan officers to send claims and appropriate documentary proof into a central processing unit, the payment is made normally within 48 hours for the simple outstanding loan insurance policy for King Finance and almost 10 days for FINCA which has to send all claims to its partner insurance company for payment. (Brown & Churchill 2000).

[26] La Equidad (Colombia) invites potential clients to preventive measures meetings for existing policyholders and provides training of front line staff on the workings of the insurance products (Brown & Churchill 2000).

[27] La Equidad requires policyholders to pay ten percent losses on all risks except earthquake and violent theft, on which 3 percent and 15 percent are charged respectively. Claims inspectors were employed by COLUMNA (Guatemala), La Equidad and NLC (Pakistan) to verify cause of damage, this was only used for high value claims due to the costs of involved (Brown & Churchill 2000).

[28] Network Leasing Corporation (NLC) makes the client return the asset that was purchased with the loan (Brown & Churchill 2000).

[29] The term co-operative and mutual will be used interchangeably throughout the paper.

[30] In a ROSCA equal periodic savings of every member are pooled and given to each member by turn (Matin et al 1999).

[31] In an ASCA, pooled savings may accumulate until a member is willing to take out a loan, within a time period the saved capital and interest earned is distributed back to the members (Matin et al 1999).

[32] In Argentina, over 500 Co-operatives distribute about 10% of the country’s electricity reaching 15% of the population. In rural areas they provide electricity to almost 100% of the population (Ullrich 1997).

[33] ACME is the European regional association of ICMIF.

[34] The per capita income in Saudi Arabia has fallen from $28,000 in the early eighties to almost $10,000 due to a doubling in the population and an unemployment rate rising from nothing to 18%.

[35] The first is Bait Al Mal (funded by Zakat – Islamic Tax or contribution of 2.5%) (Fisher 1999).

[36] In 2000 takaful premiums were estimated at USD 538 million whilst world premiums amounted to USD 2,443.7 billion (Sigma 2001).

[37] Malaysia is the only country with a specific takaful Law.

[38] In Malaysia since 1994 the annualized average growth was 92% life (Family Takaful) and 34% general. Since 1998 this slowed to 30% life and 17% general (Bhatty 2001).

[39] In 1979, a seminar held by the Arab Insurance League and the ICIF (later to become ICMIF) concluded that co-operative insurance is permissible in Islam under the rules of Takaful. It also recommended that the co-operative insurance sector should provide support to the takaful movement in the spirit of co-operation amongst co-operatives.

[40] A takaful insurer is allowed to purchase reinsurance cover from a conventional company if there is insufficient capacity in the takaful market, therefore the co-operative would be a more religiously acceptable alternative than the conventional reinsurer.

[41] The PEARLS evaluation program is a set of financial ratios used to monitor the stability of credit unions (Protection, Effective financial structure, Asset Quality, Rates of return and cost, Liquidity and Signs of Growth).

[42] The retention capacity is a function of the size of the market, financial development, market structure and local reinsurance (Outreville 1996).

[43] 1999 was the third highest in terms of insured losses from catastrophes $18 billion and 1998 was fourth highest with $15 billion (Pollner 2001).

[44] During the mid-1990s, Caribbean countries experienced insurance rate increases between 200%-300% due to indemnity payments made for large hurricane and earthquake cover worldwide (Pollner 2001).

[45] An analysis of developing countries between 1985 and 1990 showed a 10% economic growth level in low inequality countries (Gini Coefficient =0.34) resulted in a fall of 9 percentage points of people below the poverty line. In high inequality countries (Gini Coefficient=0.55) the poverty reduction was only 3 percent (Hanmer et al 2000).

[46] Of the 174 countries surveyed, 97 rank higher on the HDI then on GDP per capita (PPP US$) and 69 rank lower (UNDP 2000).

[47] For the whole bank 19% of loans are one year overdue, and in some areas half the loan portfolio is overdue by at least one year (Pearl and Phillips 2001).

[48] Mutuelle des travailleurs de l’education et de la culture (MUTEC) was founded by a teacher’s union in Mali in 1987 to address teachers needs for pension benefits. The MHO of Fandène in Senegal was founded in 1989 by the village community to improve the access of its members to quality health care (Atim 1998).

[49] The rural MHO Lalane Diassap, Senegal dues are FCFA 150 per person per month, the average income of the peasants is FCFA 15,000 per month, for the average family of five the contribution would be 5 per cent of total family income.

[50] Members are required to visit a group member in hospital to show concern but also validate the injury and identity of the claimant

[51] The general Law on Mutualité (Law No. 96-022) was passed on February 21, 1996, following a number of decrees covering rules, regulations, registration and management of funds.

[52] Risks is shared between the ceding company and the reinsurers on a fixed percentage

[53] The ceding company retains a fixed monetary amount and arranges protection from the reinsurer up to a further monetary amount.