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DONOR INFORMATION RESOURCE CENTRE
Helping to Improve Donor Effectiveness in Microfinance
www.microfinancegateway.org
Microinsurance: Microinsurance: A Risk Management StrategyA Risk Management Strategy
PRESENTATION INSTRUCTIONSPRESENTATION INSTRUCTIONS
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April 22, 2004
OverviewOverview
What risks do poor people face and how do they protect themselves?
What is microinsurance?
What are the difficulties in providing insurance to poor people?
What are some microinsurance delivery models?
What are some dos and don’ts for donors?
What Risks Do Poor People Face?What Risks Do Poor People Face?
Key Risks
Death
Illness or injury
Loss of property (theft, fire)
Natural disaster (earthquake, drought) “Life is one long risk”
Microfinance client in the Philippines “Life is one long risk”
Microfinance client in the Philippines
How Do Poor PeopleHow Do Poor PeopleProtect Themselves from Risk?Protect Themselves from Risk?
PreparationPreparation
CopingCoping
Prevention and AvoidancePrevention and Avoidance
• Careful sanitation• Identifying business opportunities• Careful sanitation• Identifying business opportunities
• Saving• Accumulating assets (i.e., livestock)• Buying insurance• Educating children
• Saving• Accumulating assets (i.e., livestock)• Buying insurance• Educating children
• Taking emergency loans • Depleting savings• Selling productive assets• Defaulting on loans• Reducing spending
• Taking emergency loans • Depleting savings• Selling productive assets• Defaulting on loans• Reducing spending
Alternative Coping
Strategies
Alternative Coping
Strategies
Social Conditions
Social Conditions
Education, Biases,
Risk Tolerance
Education, Biases,
Risk Tolerance
Cash FlowCash Flow
Planning PropensityPlanning
Propensity
Understanding the Demand for Risk-Managing Understanding the Demand for Risk-Managing Financial ServicesFinancial Services
The demand forThe demand for
Liquid savings Emergency loansMicroinsurance
depends on
The demand forThe demand for
Liquid savings Emergency loansMicroinsurance
depends on
Poverty Level
Poverty Level
Type of Risk
Type of Risk
Very Large
Small
Certain Highly Uncertain
Degree of Uncertainty
Relative Loss / Cost
Life Cycle Events
Death
Disability
He
alth
Pro
perty
Mass, Co-
variant
Different Financial Services for Different RisksDifferent Financial Services for Different Risks
Source: Warren Brown and Craig F. Churchill, Insurance Provision in Low-Income Communities, Part I.Source: Warren Brown and Craig F. Churchill, Insurance Provision in Low-Income Communities, Part I.
Flexible Savings and
Credit
Flexible Savings and
Credit
InsuranceInsurance
Flexible Savings
Partial protection
Flexible Savings
Partial protection
What Is Microinsurance?What Is Microinsurance?
Protection of low-income people against specific perils in exchange for regular monetary payments (premiums) proportionate to the likelihood and cost of the risk involved.
Protection of low-income people against specific perils in exchange for regular monetary payments (premiums) proportionate to the likelihood and cost of the risk involved.
To serve poor people, microinsurance must be:
Responsive to their priority needs for risk protection
Easy to understand
Affordable
To serve poor people, microinsurance must be:
Responsive to their priority needs for risk protection
Easy to understand
Affordable
ONE
STRATEGY
ONE
STRATEGY
Basic Insurance PrinciplesBasic Insurance Principles
Large number of similar units are exposed to the risk(risk pooling)Large number of similar units are exposed to the risk(risk pooling)
Policyholder control over the insured event is limited (minimize moral hazard and adverse selection)Policyholder control over the insured event is limited (minimize moral hazard and adverse selection)
Insurable interest existsInsurable interest exists
Losses are determinable and measurableLosses are determinable and measurable
Losses should not be covariant (catastrophic)Losses should not be covariant (catastrophic)
Chance of loss is calculableChance of loss is calculable
Premiums are economically affordablePremiums are economically affordable
11
22
33
44
55
66
77
What Are Some of the Difficulties in Providing What Are Some of the Difficulties in Providing Insurance to Poor People?Insurance to Poor People?
Technical Specialization
Technical Specialization
Requires specialized actuarial capacity, which is complicated by the lack of reliable data characteristic of low-income, informal markets
Most poor people do not understand insurance or may be biased against it
Requires a distribution system that can handle small financial transactions efficiently in convenient locations, and engender trust
Marketing and Sales
Marketing and Sales
Distribution Channels
Distribution Channels
Relative Complexity of Insurance ProductsRelative Complexity of Insurance Products
Crop insurance
Health and disability insurance
Annuities and endowment
(retirement provision)
Property insurance
Term life insurance(payment to beneficiaries on death)
HIGHLY COMPLEXHIGHLY COMPLEX
SIMPLERSIMPLER
Degree of Risk in Providing InsuranceDegree of Risk in Providing Insurance
Moral HazardMoral Hazard
FraudFraud
Adverse SelectionAdverse Selection
OverusageOverusage
Limited RiskLimited Risk
Moderate RiskModerate Risk
Substantial RiskSubstantial Risk
Health Insurance
Property Insurance
Life Insurance
The The DismalDismal History of Crop Insurance History of Crop Insurance
Unspecific Coverage By guaranteeing a minimum crop yield, programs insured against all possible causes of poor crop yield, an endless list of risks
Covariant Losses Many programs were bankrupted when a natural calamity affected most insured members at once
Moral Hazard Farmers were less likely to follow sound husbandry practices because all severe yield losses were protected, leading to increase in claims
Balance of Risks Coverage was focused in specific regions and provided only for poor farmers, covering only the highest risks
Trying to provide insurance in uninsurable conditions:Trying to provide insurance in uninsurable conditions:
Activities Involved in Offering InsuranceActivities Involved in Offering Insurance
Product Sales
Marketing, education,
signature of
policies
Product Sales
Marketing, education,
signature of
policies Product
Manufacturing
Design issues such as pricing,
claims procedures, level of coverage
Product Manufacturing
Design issues such as pricing,
claims procedures, level of coverage Product
Servicing
Premium collection, payment of
claims
Product Servicing
Premium collection, payment of
claims
Policy HoldersPolicy
Holders
Some Microfinance Delivery ModelsSome Microfinance Delivery Models
Partnerships between MFIs (or other intermediaries) and insurers
Full service provision where regulated insurers provide specific products to the low-income market
Health care service providers offer a health care financing package and absorb the insurance risk
MFI-based insurance where MFIs take on the risk offering insurance to their clients
Community-based programs where communities pool funds and manage a relationship with a health care provider
Examples of Microinsurance DeliveryExamples of Microinsurance Delivery
Partner-Agent Model• Insurers utilize MFIs’ delivery
mechanism to provide sales and basic services to clients
• There is no risk and limited administrative burden for MFIs
• Example: FINCA Uganda partners with American International Group
Community-Based Model• The policyholders own and manage
the insurance program, and negotiate with external health care providers
• Example: UMASIDA in Tanzania
Provider Model• The service provider and the
insurer are the same, i.e., hospitals or doctors offer policies to individuals or groups
• Example: Gonoshatsasthya Kendra in Bangladesh
Full-Service Model• The provider is responsible for all
aspects of product manufacturing, sales, servicing, and claims assessment
• The insurers are responsible for all insurance-related costs and losses and they retain all profits
• Example: SEWA in India
Example: AIG and FINCA UgandaExample: AIG and FINCA Uganda
Product Sales
Product Sales
PolicyHolders
PolicyHolders
Product Manufacturing
Product Manufacturing
Product ServicingProduct
Servicing
PartnerPartner AgentAgent
FINCA UgandaFINCA
UgandaAIGAIG
Potential Market• Are clients interested in
insurance protection? • Is this the most effective
risk management solution?
Linkage identified?
Pre-requisites for Donor Intervention in MicroinsurancePre-requisites for Donor Intervention in Microinsurance
Consider alternativ
e risk- managing financial services
Consider alternativ
e risk- managing financial services
Broker partnership,
monitor performance
YESYES
NO
Donor Skillsand Knowledge
• Does donor have experience develop-ing markets for low income people?
• Does donor have basic insurance technical expertise?
• Does donor have access to local market knowledge?
NO YESYES
YESYESNO
Preliminary Guidance for Donors Preliminary Guidance for Donors
Consider client demand
Invest in technical expertise
Monitor performance
Move cautiously and facilitate linkages
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Work with strong institutions
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1. Consider Client Demand1. Consider Client Demand
DO Consider client demand to
understand what risk-managing financial service is most appropriate
Invest in educating poor people on the benefits of insurance
DO NOT
Push institutions to offer microinsurance
The demand for risk protection should come from clients, not donors
2. Move Cautiously and Facilitate Linkages2. Move Cautiously and Facilitate Linkages
DO
Encourage commercial insurers to serve the
poor by brokering relationships with MFIs
DO NOT
Try to influence government policies before there is more
experience with microinsurance
Coordinate microinsurance efforts with other donors, insurers, governments
3. Work with Strong Institutions3. Work with Strong Institutions
DO
Take a patient approach, but define a clear, time-bound exit
strategy
DO NOT
Fund new microinsurance
providers without sufficient technical
capacity
Work with strong institutions and conduct a careful analysis of their capacity to manage microinsurance products
4. Invest in Technical Expertise4. Invest in Technical Expertise
DO
Provide access to technical assistance for
specific technical problems
DO NOT
Provide grant funding to cover claims costs
Be careful about supporting unregulated insurance schemes that lack expertise, access to reinsurance, or consumer protection oversight
For MFIs Volumes of policyholders (% of
women)
Premium and claim values
Loss ratios
Renewal rates
Average time for claim settlement, premium rate charged to clients
Administrative costs ratio
For Insurers Annual reviews of premiums
written
Loss and expense ratios
Claims reserves ratio
Other reserves
Investment returns
Premium rate charged to the MFI
Net income, capital, and surplus
Key Microinsurance Performance IndicatorsKey Microinsurance Performance Indicators
5. Monitor Performance of Microinsurance 5. Monitor Performance of Microinsurance PartnersPartners
SummarySummary
Microinsurance is one of many financial services that helps manage risk
To serve poor people, microinsurance must respond to their priority needs for risk protection, be easy to understand, and be affordable
Insurance is a complex matter requiring technical expertise that most MFIs and donors do not possess
At present, the ability of donors to facilitate linkages and share knowledge on microinsurance is more important than providing funds for specific programs
Where to Get More InformationWhere to Get More Information
Contact: Nataša Goronja1818 H Street, NW Washington, DC 20433
Tel: 202-473-9594 Fax: 202-522-3744E-mail: cgap@worldbank.org
Web: www.cgap.org
• CGAP Working Group on Microinsurance, “Donor Guidelines for Funding Microinsurance,” (paper prepared for CGAP, Washington, DC, October 2003).
• Microinsurance: Improving Risk Management for the Poor, Nos. 1 and 2 (Luxembourg: ADA, August and November 2003).
• W. Brown, C. Green, and G. Lindquist, A Cautionary Note for Microfinance Institutions and Donors Considering Developing Microinsurance Products (Bethesda, Md., USA: DAI, 2000).
• C. Churchill, D. Liber, M.J. McCord, and J. Roth, Making Microinsurance Work for Microfinance Institutions: A Technical Guide to Developing and Delivering Microinsurance (Geneva: ILO, 2003).
• W. Brown and C. Churchill, Insurance Provision to Low-Income Households: Part I (Toronto:Calmeadow, 1999), and Part 2 (Bethesda, Md., USA: DAI, 2000).
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