May 2007

ACCESS TO INSURANCE FOR THE ACCESS TO INSURANCE FOR THE POORPOOR

MICROINSURANCE IN COLOMBIAMICROINSURANCE IN COLOMBIA

Roberto Junguito, Alejandra González, Jimmy Martínez, Juan Manuel RestrepoRoberto Junguito, Alejandra González, Jimmy Martínez, Juan Manuel Restrepo

FASECOLDAFASECOLDA

May 7-8 Rio de Janeiro, BrazilMay 7-8 Rio de Janeiro, Brazil

May 2007

• THE BASE OF THE PYRAMID: A MARKET READY TO BE DISCOVERED

• MICROINSURANCE: BUSINESS OPPORTUNITY THAT REDUCES POVERTY

• MICROINSURANCE IN COLOMBIA– DEMAND– SUPPLY

• CONCLUSIONS: CLOSING THE GAP

TOPICSTOPICS

May 2007

• THE BASE OF THE PYRAMID: A MARKET READY TO BE DISCOVERED

• MICROINSURANCE: BUSINESS OPPORTUNITY THAT REDUCES POVERTY

• MICROINSURANCE IN COLOMBIA– DEMAND– SUPPLY

• CONCLUSIONS: CLOSING THE GAP

TOPICSTOPICS

May 2007

• 4 billion people in the world with an annual income less than 3000 US$ are part of the base of the pyramid (BOP).

• The world’s BOP has potential market worth 5,000 billion US$- Latin America: 509 billion US$- Colombia: 42 billion US$

THE BASE OF THE THE BASE OF THE PYRAMIDPYRAMID

May 2007

BOP annual income (million)

BO

P p

op

ula

tio

n

(mil

lio

n)

1.0

10.0

100.0

1,000.0

10,000.0

0.0 20,000.0 40,000.0 60,000.0 80,000.0 100,000.0 120,000.0 140,000.0 160,000.0 180,000.0 200,000.0

LAC Asia

Africa Eastern Europe

India China

Brazil

Bangladesh

Colombia

Mexico

Nigeria

Etiopía

PanamaUruguay

Russia

BASE OF THE PYRAMID BASE OF THE PYRAMID DISTRIBUTIONDISTRIBUTION

Source: IFC

May 2007

• THE BASE OF THE PYRAMID: A MARKET READY TO BE DISCOVERED

• MICROINSURANCE: BUSINESS OPPORTUNITY THAT REDUCES POVERTY

• MICROINSURANCE IN COLOMBIA– DEMAND– SUPPLY

• CONCLUSIONS: CLOSING THE GAP

TOPICSTOPICS

May 2007

THE POOR ARE MORE THE POOR ARE MORE VULNERABLE TO RISKSVULNERABLE TO RISKS

COLOMBIASHARE OF HOUSEHOLDS THAT SUFFERED ECONOMIC HEALTH AND NATURAL

DISASTER SETBACKS, BY INCOME QUINTILE

0%

5%

10%

15%

20%

25%

30%

35%

Any serious illness or disease Head of family unemployed Natural Disasters

Source: Living Standards Measurement Study Survey, 2003

11

22 3344

55

11 22

3344

5511

22 3344

55

May 2007

THE POOR ADOPT PERVERSE THE POOR ADOPT PERVERSE STRATEGIES TO COVER LOSSESSTRATEGIES TO COVER LOSSES

COLOMBIA STATEGIES ADOPTED IN THE EVENT OF ECONOMIC SHOCKS

BY INCOME QUINTILE

11

1

1

1

2 2

2

2

2

33

3

3

3

4 4

4

4

45

5

5

5

5

0%

5%

10%

15%

20%

25%

Food expenses werereduced

Clothing expenseswere reduced

Other householdmembers started to

work

Incurred debts Savings were spent

% O

F H

OU

SE H

OLD

S PE

R Q

UIN

TIL

PERVERSEPERVERSE INFORMAL AND FORMALINFORMAL AND FORMAL

Source: Living Standards Measurement Study Survey, 2003

May 2007

• Insurance product of limited coverage and small transaction values that are offered to low income households.

• Households may overcome poverty traps. Microinsurance allows these households to invest in riskier but more profitable productive activities.

• Allows the poor to smooth consumption through indemnization payments in case losses occur.

MICROINSURANCE: A FORMAL MICROINSURANCE: A FORMAL INSTRUMENT THAT MITIGATES RISKSINSTRUMENT THAT MITIGATES RISKS

May 2007

PEOPLE COVERED BY MICROINSURANCE PEOPLE COVERED BY MICROINSURANCE

IN THE WORLD’S POOREST COUNTRIESIN THE WORLD’S POOREST COUNTRIES Millions

67

7,82,6 3,5

ASIA LAC COLOMBIA AFRICA

Source: The Landscape of Microinsurance in the World’s 100 Poorest Countires, Microinsurance Centre, 2007

Asia includes: Turkmenistan, Pakistan, India, Sri Lanka, Nepal, China, Bangladesh, Laos, Cambodia, Vietnam, Filipinas, Indonesia LAC includes: Guatemala, Nicaragua, Panama, Dominican Rep., Colombia, Venezuela, Ecuador, Peru, Bolivia, Paraguay Africa includes: Mauritania, Senegal, Mali, Burkina Faso, Ghana, Togo, Benin, Nigeria, Cameroon, Gabon, D. R Congo, Rwanda, Uganda, Tanzania, Zambia, Malawi, Comoros y Madagascar.

May 2007

POTENTIAL MARKET SIZEPOTENTIAL MARKET SIZE

1,2%10,2%7,1%2,6%

98,8%89,8%92,9%97,4%

Asia LAC Colombia Africa

BOP % withMicroinsurance

BOP % withoutMicroinsurance

Source: The Landscape of Microinsurance in the World’s 100 Poorest Countires, Microinsurance Centre, 2007; The Next Four Billion, BM, 2007. Asia includes Bangladesh, Cambodia, China, Filipinas, India, Indonesia, Nepal, Paquistan, Sri Lanka, Vietnam; LAC includes Bolivia, Nicaragua, Ecuador, Guatemala, Paraguay, Venezuela, Peru, Colombia, Panamá; Africa includes Burkina Faso, Camerún, Gabón, Malawi, Mali, Nigeria, Ruanda, Senegal, Tanzania, Uganda, Zambia

May 2007

• THE BASE OF THE PYRAMID: A MARKET READY TO BE DISCOVERED

• MICROINSURANCE: BUSINESS OPPORTUNITY THAT REDUCES POVERTY

• MICROINSURANCE IN COLOMBIA– DEMAND– SUPPLY

• CONCLUSIONS: CLOSING THE GAP

TOPICSTOPICS

May 2007

SOCIAL ECONOMIC LEVEL (SEL)

28%

32%

15%

13%

12%

0% 5% 10% 15% 20% 25% 30% 35%

SEL 2

SEL 3

SEL 4

SEL 5

SEL 6

Source: Fasecolda and Remolina – Estrada 2007

May 2007

OCCUPATION

• The high portion of freelance workers represents a challenge to insurance companies due their income instability.

• Insurance products must be flexible to adapt to the insured’s income flow.

3%

7%

44%

45%

0.2%

1%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

Unemployed

Student

Household

Retired

Employed

Freelance

Source: Fasecolda and Remolina – Estrada 2007

May 2007

LOW INCOME HOUSEHOLDS ARE MORE EXPOSED TO RISKS

Frequency with which households suffer losses. Frequency with which households suffer losses.

Type of lossType of loss

12% 65%

65%

55%

46%

32%

13%

26%

35%

44%

65%

8%

4%

8%2%

4%

4%

4%

2%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

SEL 2

SEL 3

SEL 4

SEL 5

SEL 6

Always Frequently Sporadically Never Doesn't know

30%

26%

21%

12%

10%

23%

24%

24%

21%

12%

7%

10%

14%

31%

40%

0% 10% 20% 30% 40% 50% 60%

SEL 2

SEL 3

SEL 4

SEL 5

SEL 6

UnemploymentSerious illess / High risk surgeryHouse vehicle has broken down

Source: Fasecolda and Remolina – Estrada 2007

May 2007

72%

67%

61%

66%

72%

23%

28%

31%

30%

27%

1%

2%

2%

1%

1%

3%

3%

6%

2% 1%

1%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

SEL 2

SEL 3

SEL 4

SEL 5

SEL 6

Self-owned of family resources Loan with a Financial InstitutionPersonal Loan (with a nonfinancial institution) Insurance bought previouslyProperty was not replaced / Loss continues

HOUSEHOLDS COVER WITH OWN RESOURCES THE MAIN PORTION OF LOSSES

Source: Fasecolda and Remolina – Estrada 2007

May 2007

% OF HOUSEHOLDS WITH 1 OR MORE INSURANCE POLICIES

0%

10%

20%

30%

40%

50%

60%

Funeral rites Property Life

SEL 2 and 3

SEL 4, 5 and 6

INSURANCE BY SOCIAL ECONOMIC LEVEL

Source: Fasecolda and Remolina – Estrada 2007

May 2007

INSURANCE OR GAMBLING?

• Low income population spends the same proportion in insurance products as in lottery games.

• Notwithstanding, the death

probability at 30 years is more than 50 times the probability of winning the lottery.

• Insurance and financial culture must be promoted

2.1%

3.0%

2.1%

1.1%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0%

SEL 2 and 3

SEL 4, 5 and 6

Insurance Lottery / "Chance" / Gambling

% of households’ annual expenses*% of households’ annual expenses*

* Data corresponds to households that made both expenses.* Data corresponds to households that made both expenses.

Source: Fasecolda and Remolina – Estrada 2007

May 2007

HOW DO HOUSEHOLDS PERCEIVE VOLUNTARY INSURANCE? *

• The predominant perception is that insurance is a fundamental need.

• However, low income households view insurance as a luxury or as necessary but unattainable service.

• Limited budget is a barrier poor people face to purchase insurance

13%

12%

11%

8%

5%

6%

9%

7%

8%

8%

43%

46%

57%

67%

73%

31%

24%

18%

10%

3%

4%

6%

5%

7%

10%

4%

3%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

SEL 2

SEL 3

SEL 4

SEL 5

SEL 6

Luxury ObligationFundamental / basic need Necessary but unattainableNecessary evil S/thing that cannot be understood

*Life, home and vehicle insurance are included. The questions *Life, home and vehicle insurance are included. The questions was asked for a basket of insurance voluntary insurance was asked for a basket of insurance voluntary insurance products which include Life and Property and Casualty.products which include Life and Property and Casualty.

Source: Fasecolda and Remolina – Estrada 2007

May 2007

POOR HOUSEHOLDS UNDERESTIMATE RISK

29%

25%

27%

13%

13%

13%

12%

7%

14%

14%

54%

57%

58%

59%

54%

4%

6%

8%

14%

19%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

SEL 2

SEL 3

SEL 4

SEL 5

SEL 6

I am confident nothing bad is going to happen and I assume the risksI am aware of some risks but I don't see it necessary to protect against themI am aware of the risks and protect my self against the most important onesI am aware of the risks and I totally protect my self against them with insurance

Source: Fasecolda and Remolina – Estrada 2007

May 2007

POOR FAMILIES FAVOR MONTHLY PREMIUM PAYMENTS

56%

39%

39%

35%

38%

5%

7%

6%

5%

7%

10%

13%

14%

7%

15%

8%

13%

8%

11%

12%

15%

19%

16%

19%

22%

16%

31%3% 8%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

SEL 2

SEL 3

SEL 4

SEL 5

SEL 6

Monthly Bimestral Quaterly Half-Yearly Only Payment Not interested

Source: Fasecolda and Remolina – Estrada 2007

May 2007

• THE BASE OF THE PYRAMID: A MARKET READY TO BE DISCOVERED

• MICROINSURANCE: BUSINESS OPPORTUNITY THAT REDUCES POVERTY

• MICROINSURANCE IN COLOMBIA– DEMAND– SUPPLY

• CONCLUSIONS: CLOSING THE GAP

TOPICSTOPICS

May 2007

COMPANIES OFFERING MICROINSURANCE

DISTRIBUTION OF COMPANIES IN COLOMBIA

With microinsurance41%

Without microinsurance

59%

EQUITY OWNERSHIP

Foreign50%

National50%

TYPE OF INSURANCE COVERAGEVida e ITPAccidentes de personasIncendio y terremotoDaños, hurto

Workers' Compensation Work Accidents / Professional illness

Funeral rites Funerals

TYPE OF INSURANCE COVERAGETotal and permanent incapacitySerious illnessHome expensesFunerary ritesLimb lossOrgan transplantAccident medical billsHospital billsEducational allowance

Home assistanceElectrical equipmentPersonal accidentsBurglaryLiability insurance

Funeral rites Allowance

Life

Property

BASIC COVERAGE

Life

Property

ADDITIONAL COVERAGES

Source: Fasecolda

May 2007

MICROINSURANCE: ISSUED PREMIUMS

Share of Microinsurance in Total Premiums Issued december 31, 2006

Other insurance95%

Microinsurance5%

Share of Microinsurance by Business LineLife16%

W.C1%

Funerals4%

Property79%

Source: Fasecolda

May 2007

NUMBER OF INSURANCE POLICIES

ISSUED POLICIES (december 31, 2006)

WC2%

Property 60%

Funeral rites24%

Life14%

TOTAL 2,741,656TOTAL 2,741,656Source: Fasecolda

May 2007

PREMIUM AND PAYMENT FREQUENCIES

• Most products have both a monthly coverage and payment frequency

• It provides the insured large flexibility.

Coverage Period

Monthly40%

At maturity5%

Annual55%

Payment frequency

Annual10%

Monthly90%

Source: Fasecolda

May 2007

PRICE OF MICROINSURANCE PREMIUMS

Number of Microinsurance Products According to Monthly Premiums

2

4

5

4

7

Less than $1 dollar

$1 - $2 dollars

$2 - $3 dollars

$3 - $4 dollars

More than $4 dollars

Source: Fasecolda

May 2007

PRODUCT EXAMPLES

USD

Fire, lightning, earthquake and/or flood damages

100% asset value (constructions and contents)

Assistance $ 121,5Monthly premium $ 2,6

PROPERTY MICROINSURANCE

Source: Microinsurance Survey - FASECOLDAMICROSEGURO DE VIDA

(Datos en dólares)

PLAN 1 PLAN 2Life and TPI $ 1.340 $ 2.233

Serious illness (50%) $ 670 $ 1.117Home expenses $ 335 $ 558Funerary rites $ 134 $ 223Monthly premium $ 1 $ 1,7

(USD)

Source: Microinsurance Survey - FASECOLDA

LIFE MICROINSURANCE

Source: Fasecolda

May 2007

LOSS PAYMENTS

Lapse Time Between Claim and Payment

15 days15%

Immediate (funeral rites)

10%

10 days25%

2 days5%

48 hours5%

By accident type (WC)5%

30 days35%

Source: Fasecolda

May 2007

DISTRIBUTION CHANNELS

22%

11%

22%

9%18%

18%

Cooperatives Direct saleMicrofinancial NGO's BancassurancePublic Service Invoices Others

Source: Fasecolda

May 2007

REINSURANCE

• The majority of companies retain most of the microinsurance risk– The share of microinsurance in total premiums is very

low– Loss experience has been low– Foreign owned companies reinsure with headquarters

• No barriers to reinsurance have been encountered

May 2007

CONTRIBUTIONS

• The majority of companies don’t receive contributions from NGO’s or government institutions.

• Only one company does.

May 2007

• THE BASE OF THE PYRAMID: A MARKET READY TO BE DISCOVERED

• MICROINSURANCE: BUSINESS OPPORTUNITY THAT REDUCES POVERTY

• MICROINSURANCE IN COLOMBIA– DEMAND– SUPPLY

• CONCLUSIONS: CLOSING THE GAP

TOPICSTOPICS

May 2007

• Colombia shows an outstanding development of microinsurance practices

• However, only 10% of the BOP is covered.• Poorest households are more exposed and they

underestimate risks.• Risks are mainly covered with own resources and

inappropriate strategies. • Poor households spend the same on gambling and lottery

as they do on insurance.• Insurance and financial culture must be encouraged

CONCLUSIONSCONCLUSIONS

May 2007

• 41% of Colombian companies provide some type of microinsurance

• Equidad and Solidaria, the cooperative insurance companies, have had an outstanding performance

• There is a great variety of coverage's being offered. • Microinsurance have focused on the urban sector.• Microinsurance development in Colombia is based on

market solutions.

CONCLUSIONSCONCLUSIONS