Funerals as an example, are a major expense for the poor[13], aggravated by the rise in HIV/AIDS. Selling assets, obtaining credit, drawing on savings, receiving gifts or purchasing insurance are possible methods available to pay for the costs. Selling assets is difficult due to the time lag and lack of available assets, use of credit and savings mean either greater debt or sacrificing a productive use of accumulated wealth and gifts are monetarily insignificant. Therefore funeral insurance is the most appropriate and affordable method to cover the expense (Roth 2001).
1.4. - Micro-insurance
Insurance is the most effective means of reducing the vulnerability of the poor from the impacts of disease, theft, violence, disability, fire and other hazards. Insurance protects against unexpected losses by pooling the resources of the many to compensate for the losses of the few, the more uncertain the event the more insurance becomes the most economical form of protection. Policyholders only pay the average loss suffered by the group rather than the actual costs of an individual event, insurance replaces the uncertain prospect of large losses with the certainty of making small, regular, affordable premium payments (Brown & McCord 2000, Brown & Churchill 1999). The primary function of insurance is to act as a risk transfer mechanism, to provide peace of mind and protect against losses. Risk can be handled by either; assumption, combination, transfer or loss prevention activities. Insurance schemes utilize the combination method by persuading a large number of individuals to pool their risks into a large group to minimize overall risk (Ali 2000). In the developed world insurance is part of society, such that some forms of cover are required by law. In developing countries the need for such a safety net is much greater, particular at the poorest levels where vulnerability to risks is much greater and there are fewer opportunities available to recover from a large loss.
1.4.1. – Types of micro-insurance products
Loan protection insurance ensures that in the event of death all outstanding repayments are written off. Health and disability insurance enables the poor to cover the costs of medicine, hospital stay and treatment as well as protecting the loss of income due to sickness or injury[14]. Funeral insurance covers the costs of burial, and property insurance replaces assets lost due to theft, damage or destruction (Brown & Churchill 1999). Livestock insurance is important in developing countries where animals are not only a source of food but are used for agricultural production and transport (IDB 1977). Life savings insurance, which pays the deceased beneficiary the amount held in the savings account plus a benefit enables funeral expenses to be taken care of and replaces some of the loss of income source (Brown & Churchill 2000)[15]. Insurance can cover the risks of damage, piracy and theft of goods in transit which is much greater in developing countries, particularly for those that are landlocked. Commodities account for about 34 per cent of the export earnings of developing countries, in Africa they represent 79 percent. Producers are vulnerable to a number of geological and environmental risks including floods, earthquakes, droughts, typhoons and hurricanes. Crop insurance schemes can protect the producer from the losses of climatic and natural disasters[16]. The availability of agricultural insurance including crop insurance, machinery, raw materials and even life-insurance gives greater assurance to credit providers to service the poor (Matringe 1997). Insurance is vital to ensure the continued access to credit and greater security for the individual. For the MFI, providing insurance products lowers default rates and reduces the clients need to draw down on savings, which improves the profitability and sustainability of the organisation (Ford Foundation 2000, Brown & Churchill 1999, Hulme & Mosley 1996).
1.4.2. – Micro-insurance and human development
In the past poverty has been measured solely by per capita income, however, it is now widely recognised that poverty also includes deprivation from health, education, food, liberty and opportunity. The Human Development Index (HDI) measures welfare of people using three factors, income (GDP per capita), educational attainment and life expectancy at birth (UNDP 2000). Micro-insurance programs can increase HDI by providing creditors with greater security and incentive to lend to micro-enterprises (World Bank 2000). For the individual, reducing risk through insurance enables credit and savings to be used more productively on income-generating opportunities (Devaux 2000, Matin et al 1999). With greater resources and a safety net the borrower can take on greater risk to achieve higher income and stimulate outside investment. They can also market their products outside of the local market achieving a better price for goods and for raw materials (Ford Foundation 2000). Insurance enables the policyholder to save a portion of his income, without the need to use it on medication, fire, theft and death, it can instead be invested in a child’s education. The requirement for less income also enables parents to send their children to school instead of working in the fields, better education leads to better health and better income earning potential as well as population control (World Bank 2000). Health insurance enables access to better medical services and a better quality and longer life. Access to adequate insurance protection can assist the poor to achieve sustainable growth and provide them with the capability to attain a better standard of living. It can mitigate the impact of personal and national calamities on the build up of assets, providing escape from the viscous circle of poverty that engulfs each new generation. Insurance can also protect those that have risen above the poverty level against unforeseen events that may cause them to fall into poverty again. Insurance provides security where none is available from the state, it facilitates self-sufficiency and empowers people to build for their own future.
Whilst the benefits of insurance for the poor are clear there are still very few micro-insurance schemes which have proved their viability and sustainability. The next chapter will look at why it has been so difficult to provide the same insurance products to the poor which are so widely available in developed countries.
Chapter Two – Problems with providing insurance to the poor
Insurance is not as widespread in developing countries as in the developed world and in the poorest of countries it is virtually non-existent. Available figures show that only Nigeria has any officially recognisable form of insurance from the 35 countries identified as low in human development (HDI<0.500), all developing countries, even those with large populations have a very low proportion of the world insurance market. Of the 42 medium human development countries for which information was available, despite population increases, 29 had decreased their proportion of the world insurance market with only India, China and South Africa increasing between 1998 and 2000 (Appendix Two). In 1998 the three largest insurance markets (U.S.A., Japan and the U.K.) covered almost 64% of the total world insurance market but only 8% of the world population, by 2000 this had grown to almost 69%. Formal (legal) insurance is not being made available where it is needed the most, where human well being is at the lowest and vulnerability at its highest.
Availability of insurance in countries with low human development compared to those with high human development
HDIª rank (from 174) 1998 | Insurance* rank by volume from 88 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 (%) |
3 | 1 | USA | 0.929 | 29,605 | 2,722.7 | 8.65 | 4.71 | 34.17 | 30.61 |
9 | 2 | Japan | 0.924 | 23,257 | 3,584.3 | 11.73 | 2.17 | 21.02 | 26.39 |
10 | 3 | U.K. | 0.918 | 20,336 | 2858.9 | 12.09 | 1.01 | 8.40 | 11.82 |
135 | 58 | Pakistan | 0.522 | 1,715 | 2.9 | 0.66 | 2.55 | 0.02 | 0.01 |
138 | 65 | Kenya | 0.508 | 980 | 9.5 | 3.48 | 0.50 | 0.01 | 0.00 |
151 | 61 | Nigeria | 0.439 | 795 | 2.7 | 0.86 | 1.83 | 0.02 | 0.00 |
ªHDI (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, 0.500-0.790 HDI has medium human development and 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
Sources: UNDP (2000), Sigma (1999) and Sigma (2001).
The lack of interest by the formal sector to serve the poor is due to low collateral, higher transaction costs, interest rate restrictions, corruption, uncertain profitability, high risks, lack of pro-poor values and inability to serve the specific needs of the poor (Matin et al 1999). Insurance is a capital-intensive industry requiring large start up costs and financial commitments, modern technology and a well-educated workforce. Additionally, monetary stability, opportunity for investments, a politically and economically stable environment and a sound consistent, favourable and fair regulatory system is not available in developing countries (Ripoll 1996). Consequently, the provision of insurance to the poor has been left to the informal sector through existing microfinance institutes, NGOs, credit unions and co-operatives without overwhelming success. These organisations are faced with a multitude of problems and issues that prevent them from providing adequate, affordable and secure insurance products.
2.1. - Coverage
Protection has to be restricted by age, loan size, value and causes of loss to maintain affordable premiums and solvency of the scheme (Morduch 1999, Brown & McCord 2000). Health insurance clients are still forced to pay a large amount for medical expenses themselves, therefore low premiums with low coverage are not smoothing the healthcare shocks of the poor[17]. Additionally for those that live far from health care facilities the costs and time of travel is too high (Creese & Bennett 1997). The quality of healthcare also suffers as good doctors and nurses do not want to be located where the majority of poor reside without additional financial compensation.
Very few institutions offer property insurance to protect the policyholder against loss or damage to equipment, livestock, small amounts of gold or cash that has taken many years to accumulate and whose replacement is unaffordable. This is mainly due to the high moral hazard and difficulties in establishing the true cause of loss or damage. Where cover is provided this is limited to specific causes of loss, and usually not against frequently occurring risks e.g. flooding in the rural villages of Bangladesh (Brown & Churchill 2000). Agricultural insurance is mostly found in towns protecting the risks of purchasers, lacking any penetration in the mass rural producer population due to their low productivity. As informal schemes cannot access reinsurance markets, protection on events that may effect a significant portion of policyholders such as catastrophic losses are not provided. Consequently, policies have to be limited to risks absorbable by the small capital base of the provider (Brown & Churchill 1999, Brown & McCord 2000, Matin et al 1999, Dror & Jacquier 1999). Most current insurance arrangements are informal self-insuring schemes, set by particular tradesmen facing certain risks such as death or marriage, these are more effective and affordable for those that are slightly better off than the poor (Matin et al 1999). Some schemes are established to protect the liability of the institute, providing loan protection rather then life savings insurance and standalone term endowment policies which may provide a greater benefit to the poor (Brown & Churchill 2000).
2.2. - Regulation
Insurance regulations protect consumers and insurers from financial instability and misleading selling practices. However, in developing countries regulations are targeted at serving the middle and upper income markets and hinder the delivery of insurance to low income communities. High capital requirements make developing products for low-income markets uneconomical for established insurers due to the small premiums and high risks. Consequently, micro-insurance providers have to operate informally, without access to expertise and reinsurance (Brown & Churchill 1999,Brown & Churchill 2000).
Insurance regulation is important to maintain the credibility of the insurance industry, unfortunately, in many developing countries regulatory requirements are not adhered to. Many government agencies do not have adequate financial resources, qualified staff, relevant information and operational independence to effectively supervise the insurance industry. Obtaining and distributing accurate and objective information on enterprise performance and solvency is costly but necessary to enforce effective regulation and monitoring. In developing countries financial reporting systems and standards are not harmonised, performance statistics of providers are unreliable and it is very easy to overstate profitability, capital margins and general financial health (Dror & Jacquier 1999). Insurance organisations have not reached a suitable level of maturity in developing countries due to inadequate financial and logistical resources, unsuitable regulations, and insufficient knowledge and information. Corruption and cronyism in governments means insurance provision is secluded to the upper and middle class sectors, there is no confidence in the quality and soundness of financial institutions (Savage 1998, World Bank 2000).
Regulation of micro-insurance is even more important, as the client base is uneducated and lacks the ability to assess the performance of the provider, who also lacks the expertise to efficiently run and manage an insurance business (Wright 1999). As most MFIs do not operate within the guidelines of the law they must dedicate additional resources to ensure sufficient capital and reserves, provide regular financial reports and monitor the activities of their agents (Brown et al 2000). Operating in the informal sector means more care is needed when dealing with data and monitoring the performance of the organisation. Without effective regulation and the ease of entry and exit, the possibility and opportunity for negligence or unscrupulous behaviour is quite high. Uneducated consumers, particularly amongst the poor are continuously defrauded and sold fictitious policies by unlicensed insurers, resulting in claims not being paid when losses occur (Savage 1998). Insurance is much more complex than simple savings and loans and there is a high possibility of misinterpretation of exclusions and coverage. The provider has the legal and financial resources to dispute a claim whilst the poor do not. The lack of contract enforcement means that consumers are not protected against losses from the insolvency of the provider or from fraudulent behaviour (Savage 1998, World Bank 2000, Wright 1999).
2.3. - Morale Hazard
Moral Hazard is the risk that the insured will change his/her behaviour and increase the possibility of a claim (Ford Foundation 2000). This is more likely in microinsurance as the policyholder has little to lose and a lot to gain. In the case of loan protection insurance, the lender may have less incentive to ensure that payments are made on time and in full and the borrower may invest in higher-risk higher-return activities. The policyholder also may be less likely to look after his/her health, property and spending patterns in the knowledge that insurance cover is available (Dror & Jacquier 1999, World Bank 2000, Morduch 1999).
2.4. - Education
There is a lack of education amongst the poor about insurance, they find it difficult to understand and accept the risk pooling concept, leading to high drop out rates particular from clients that have not made a claim (Ford Foundation 2000, Brown & McCord 2000, McCord 2001, Havers 2001, Vogt 1999, Brown & Churchill 2000). Insurance has a poor image amongst the poor, insurance officers are seen as quick to sell and slow to pay, claims processes are hindered by bureaucracy, and policy limitations and exclusions are unclear due to complex policy wordings. Clarifying insurance policies is an additional costs and burden on the provider, especially as the policyholder may not be able to read let alone understand the terms and conditions (Brown & Churchill 2000, Vogt 1999, Dror & Jacquier 1999).
In developing countries insurance is not mandatory and the poor have many other important items to spend the little disposable income they have. Additionally the uncertainty of loss as in property insurance makes it more difficult to sacrifice income than for more certain events such as death and healthcare (Brown & Churchill 2000). Premiums have to be affordable and the benefits of the protection need to be presented to policyholders regularly, especially those of the low-risk category. Marketing of micro-insurance products is more than just selling insurance policies, there is a need to educate the client on the benefits of the product, the coverage it provides and how to make claims. It is more difficult than selling credit or savings as there are no immediate tangible benefits, clients have to be convinced in investing in the cover for the long term and not try and recuperate his/her money through a claim. Consequently, the marketing and communication skills are just as important as technical know-how and more attention needs to be paid to customer satisfaction and feedback (Creese & Bennett 1997, Brown et al 2000).
2.5. - Technical expertise
Due to the high levels of risks and volatility of the client base, management of a micro-insurance programme requires an even greater level of technical expertise and actuarial capacity (Havers 2001). Substantial resources need to be dedicated to claims verification, policy processing and information systems to ensure adequate controls and efficient payment of claims. Strong underwriting procedures are required when only a small percentage of the market is insured to avoid over exposure to high-risk policyholders. Managers have to be able to predict future costs and claims using complex actuarial calculations and market research to ensure the sustainability of the scheme and efficient pricing[18]. Information systems are important to track policyholders and verify claims, these are costly to implement and need staff training. Most MFIs do not have access to adequate management information systems that would provide accurate and timely information. Manual accounting systems and processes hinder management control, and where information is available MFIs do not have the ability to use it (Brown et al 2000). Expertise on investing reserves and surpluses are needed to provide an additional vital source of income and ensure future liabilities are matched (Brown & Churchill 2000).
Many small microfinance institutes particularly credit institutions move into insurance products motivated by the profits made by larger NGOs without grasping risk management strategies or techniques, this leads to many becoming insolvent and clients without any form of protection. Some microfinance institutions enter into more complex products without having the necessary administration systems, technical staff, distribution channels and financial strength to support their growth (Vogt 1999, Dunford 2001). MFIs can only provide simple products as they lack the expertise to successfully price, sell and service more complex products such as health and property. Even when considering increasing the coverage for basic outstanding life insurance the complexity of information requires a high level of expertise. Provision of health insurance is even more difficult due to the range of causes of health risks, the information required to assess these risks, and knowledge needed to identify fraud by the policyholder and the healthcare provider. Disability claims are complex in measuring the size of the loss and determining the value of ongoing payments (Brown & Churchill 1999).
The lack of skills and technology to effectively price products weakens the financial sustainability of the scheme. Products such as permanent life, health and property require specialist actuarial skills to undertake the complex calculations for pricing. Micro-insurance providers currently set pricing using simplified calculations that place a dangerous reliance on clients’ estimates of sufficient premiums. Insurance is a highly technical business and MFIs
do not have access to or can afford qualified skilled staff to operate an insurance scheme which covers a wide range of products effectively and efficiently. MFIs also do not have access to know-how or the training tools to empower local staff with the relevant knowledge and technology (Brown & Churchill 1999, Brown et al 2000, Brown & Churchill 2000, Ford Foundation 2000, Women’s World Banking et al 2000).
|
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| Group and Individual Disability | ||||
Individual Health | |||||
Group Health | |||||
Group Property | Individual Property | ||||
Permanent & Endowment Group Life | Individual Life | ||||
|
|
|
|
Source: Brown (1999 as cited from Weihe et al 1990).
2.6. - Fraud
The poor are desperate to improve their standard of living and have greater opportunities for fraud in an informal environment (Ford Foundation 2000). The provider needs an effective claims verification system, which undertakes adequate investigation but does not delay claims. (Brown & Churchill 1999). The lack of reliable data on client’s age, health status and dependants makes it difficult to determine premium pricing and eligibility of coverage (Brown et al 2000). Verifying beneficiaries, assessing incomes and collecting contributions in the informal sector is a problem due to the lack of information and reluctance to declare (Roth 2001, Savage 1998, Brown & McCord 2000). Many claims are paid without verification due to the high costs of performing inspections. Appropriate internal control and management information systems are vital, as are regular and credible financial reporting systems to give management the opportunity to identify fraudulent activities. However, transparency and controls on management behaviour and good corporate governance practices are not common practice in developing countries, and the technology, expertise and culture are not available to ensure adequate controls.
The pay of supervisory staff in micro-insurance companies are not sufficient to guarantee their integrity (Savage 1998). Agents enrol as many policyholders as possible to earn maximum commission, regardless of risk profile and long term viability, and even resort to stealing a portion of premiums collected. In some institutions agents also acting as collectors of loan repayments, consequently become overburdened and allow low repayment rates and greater opportunistic behaviour by the client (Brown & Churchill 2000). Micro-insurance providers do not have the resources or capability to adequately observe and enforce controls on their own employees, never mind the policyholders.
2.7. - Adverse selection
Adverse selection occurs when a significant portion of high risks policyholders sign up to the insurance policy, if the policy is voluntary than those that are most likely to make a claim will be the first to sign up (Ford Foundation 2000). Reaching a sufficiently large pool size of the right mix of risks is critical to ensure that there are sufficient funds to pay claims, particularly for new insurance schemes whose lack of underwriting experience could endanger solvency (Brown & Churchill 1999, World Bank 2000, Brown & Churchill 2000, Dror & Jacquier 1999).
2.8. - Flexibility
It is important to verify claims and process payments quickly due to the lack of other financial support available to the poor, likewise, efficient reimbursement is important to health care providers as policyholders are not be able to pay the up-front fee (Brown & Churchill 2000). Unfortunately the manual processing system of an MFI leads to delays in obtaining proof of loss and paying claims (Brown & Churchill 2000). Schemes also need to accommodate the earnings volatility and lower contributions of the self-employed and informal workers (World Bank 2000)[19]. Frequency of payment should match the ability of the client and the financial needs of the organisation to pay claims and operating expenses. . Most small savers do not buy insurance due to lack of access or unsuitable products (Ali 2000). Providers need to have constant communication with policyholders with volatile income streams, as demand may change from day to day depending on their economic circumstances.
2.9. - Affordability
The poor operate in a mini-economy in which all activity occurs in very small amounts, subsequently the relative transaction costs tend to be high, for this reason formal institutions are unable to provide services to the poor at an affordable premium (Matin et al 1999). The economic condition of the people affects the growth of insurance, an individual must have the ability to save and earn a regular income to become a potential policyholder. There is a clear correlation between the socio-economic level and the ability to purchase insurance,[20] many low-income communities are excluded access due to their lack of financial resources (Vogt 1999, Creese & Bennett 1997). The majority of income of the poor is spent on life cycle needs such as food, shelter, health and education, with very little available for insurance and savings (Brown & Churchill 1999, Matringe 1997).
2.10. - Retention
Client exit is a significant problem for MFIs, most dropouts occur when there is a downturn in the economy or adverse conditions in agriculture (Wright 1999). Dropouts are also very high due to changes in prices, change in service, misunderstanding of policies, lack of effective and focused marketing and other more pressing needs on clients income [21]. In health insurance where pre-existing conditions are not excluded, clients build up a series of illnesses, use the policy to gain treatment and then wait for another set of illnesses to build up before enrolling in the policy again.
2.11. - Sustainability
Existing microinsurance schemes are far from being sustainable and viable institutes[22]. In the initial years of operations most insurers incur a loss due to; the costs of acquiring and servicing customers, start-up costs of operations, inexperienced underwriting and premium setting and a small market base. These losses can constrain future growth, and if continued can result in the depletion of reserves and lead to insolvency. Whilst premiums need to be kept affordable they should also ensure the financial sustainability of the insurer, irregular flows of income in low-income households make it difficult to predict income streams. Consequently, a sufficiently large pool size is required to justify the substantial resources to market and administer products to a largely uneducated, sceptical and remote population. Overuse of services, escalating treatment costs and fraudulent claims have caused some health insurance plans to incur large losses (Brown & Churchill 2000). Government restriction on investing abroad and the lack of expertise to undertake a prudent but successful investment strategy restricts returns on surpluses and prevents hedging against inflation and currency movements (Brown et al 2000, Ford Foundation 2000, Creese & Bennett 1997). The costs of distribution and small margins mean that the vulnerability of the organisation is high and sustainability is difficult to achieve. In addition there is no reinsurance available to informal insurance providers, leaving them highly exposed to fluctuations in claims expenses (Brown et al 2000).
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