January 2006 IntoAction 1 Microinsurance Making work for the poor Report Summary Schloss Hohenkammer By Craig Churchill, Dirk Reinhard Microinsurance Conference Munich, 18—20 October 2005 and Zahid Qureshi

Of the four billion people on earth today who live on less than two dollars a day, fewer than ten million currently have access to insurance.

Published by In cooperation with

Munich Re Foundation

From Knowledge International Labour to Action Office Geneva IntoAction 1 / Microinsurance Page 2

In its quest to be more useful at a “Only by pulling together,” Dr. Schin- Aside from preparing microinsurance smaller cost to more poor people, zler said, “will we – the insurance guidelines for donors and having a microinsurance got a macro boost industry, local NGOs, development number of sub-groups look in depth when about a hundred experts from agencies as well as regulatory author- at topics ranging from demand to around the world gathered to thrash ities – be able to provide appropriate regulations, the CGAP Working Group out obstacles and opportunities at solutions. Munich Re has therefore on Microinsurance has carried out the conference facility of Munich Re taken an important step in identifying some 20 case studies of existing in Germany from 18 to 20 October microinsurance as a strategic topic for microinsurance programmes 2005. its innovation teams.” in different countries (e.g., Benin, Bangladesh and Peru) to identify good The challenges of microinsurance Thomas Loster, Chairman of the and bad practices. The case studies are many, delegates were reminded in Munich Re Foundation, also touched were funded by SIDA (Swedish Inter- the welcoming address by Dr. Hans- on the long-term, results-oriented national Development Cooperation Jürgen Schinzler, Chairman of the approach: “For us this is not a one- Agency), GTZ (Deutsche Gesellschaft Supervisory Board of Munich Re and day business that will be taken care of für Technische Zusammenarbeit, Chairman of the Board of Trustees of by hosting a conference. To help Germany), DFID (Department for the Munich Re Foundation, which improve living conditions for those International Development, UK) and hosted the conference jointly with the who do not have access to financial the ILO. CGAP Working Group on Micro- services, a concerted effort is needed insurance. “Premium income is low, to find solutions to problems and then administrative costs are relatively turn these solutions into action, step Learning from experience high, and infrastructure for insurance by step. The Munich Re Foundation The focus of the conference was to is lacking; that’s why commercial will be a reliable partner in facilitating analyse the findings of these case insurers have not taken more interest this process.” studies and fine-tune the emerging in this market.” As a key initial step, the conference solutions: what has worked, in which lived up to its billing: “Making settings, how does it benefit the poor, Cooperation is key Insurance Work for the Poor – Current and is it likely to be a model for other Practices and Lessons Learnt.” Dirk programmes in the years ahead? Reaching poor people, many of Reinhard, Deputy Chairman of the whom are illiterate and make a living Craig Churchill defined micro- Munich Re Foundation, worked with in the informal economy, is difficult, insurance as “the protection of low- Craig Churchill of the ILO’s Social he added, and the benefit of insurance income people against specific perils Finance Programme (International is often misinterpreted since the low- in exchange for regular premium Labour Organization), who serves as income markets do not understand payments proportionate to the likeli- Chairman of the CGAP Working why the premium is not reimbursed if hood and cost of the risk involved.” Group on Microinsurance, to organise no claims are made. It has the potential of providing the event. a new market for the private sector How can the cost of handling a CGAP (the Consultative Group to while complementing the public large number of small contracts be Assist the Poor), a consortium of sector’s efforts towards social security reduced, he asked, and is there donors including the World Bank, is for workers in the informal economy, legislation to facilitate the insurance based in Washington DC. Its Working he said. of poor people and to protect them Group on Microinsurance, set up four against fraud? years ago, comprises consultants and experts as well as representatives of donor agencies and organisations committed to extending insurance protection to low-income people.

Microfinance is a way to extend the same rights and services to low-income house- holds that are available to everyone else. It protects people against shocks, and allows the majority of the population to become part of a country’s economic activity. It can help to build markets, and show that profits and principles can reinforce each other. Kofi Annan, UN Secretary General, 10 October 2005 IntoAction 1 / Microinsurance Page 3

Why insurers shy away from insuring low-income people: — Premiums small — Costs high — Infrastructure lacking Why microinsurance can be good business: — Vast new segment for insurers whose own markets are saturating — Today’s low-income customers are tomorrow’s high-end clients

There are government policies and Institutional options The study, however, takes exception programmes to reduce poverty and to its profit level of around 20% on vulnerability by diminishing people’s A key element is how entrepreneurs – the premium as excessive and takes exposure to risks and enhancing micro or macro, individuals or groups, both AIG Uganda and its partner their capacity to protect themselves, private or public – have gone about institutions to task for not upgrading he added, but in most developing setting up and operating microinsur- the product and claims payment countries these programmes are ance programmes. The case studies processes and for neglecting client not particularly effective. point to four institutional options: education as a key part of marketing. “The main obstacles are: no — Partner–agent model The need for more or better training mechanisms to systematically reach — Credit unions and for field staff in the MFIs – so informal workers; no employer cooperative/mutual insurers they can do a better job of explaining contributions; the poor cannot afford insurance to their clients – is also the full cost; insufficient government — Direct sales model recommended by a case study in resources to cover recurring expen- — Community-based model Zambia. There, Madison Insurance, ses; and inadequate infrastructure to with both life and non-life licences, provide appropriate services.” partners up with four MFIs to insure Partner–agent model roughly 100,000 lives. Notable in this In six plenary and 18 parallel case: one MFI has a profit-sharing sessions, participants discussed The partner-agent model involves arrangement with Madison instead ways of overcoming these challenges an established insurance company of a commission; and the availability by considering the role of clients, working with a distribution channel – of insurance seems to have increased insurers, reinsurers, technical a microfinance institution (MFI) acceptance among borrowers assistance providers, regulators and or other – that is actively serving of members suspected of being HIV- governments as well as analysing low-income clients. The insurance positive. bread-and-butter functions such as company maintains the reserves, sets underwriting, premium collection premiums, supervises claims and For MFIs a key priority, and claims payment, product design, manages compliance with regulatory as agents of partner requirements. The agent institution marketing and distribution channels, insurers, should be training and financial management and facilitates the rational transfer of risk, resources and expertise between the staff to explain insurance governance to develop strategies for in ways the illiterate poor sustainability. informal and formal sectors. can understand. The conference sessions were It is a “win-win-win” arrangement; planned and designed to enable for the insurer which is able to reach While the partnership model participants to serve as a sounding a market (through the MFI) that eliminates most regulatory complica- board for the CGAP Working Group it cannot reach on its own; for the tions, often the distribution channel on Microinsurance, which will MFI that can provide members with must still be licensed as an agent. synthesise the results of its work better services at lower risk; and A point made at the conference in a comprehensive book to be for low-income households which get was that, where warranted, some published by the ILO and Munich Re valuable protection that otherwise flexibility by regulators and super- Foundation in 2006. would not be accessible to them. visors could facilitate partner–agent An often-cited example of this model relationships. This publication will be a is AIG Uganda which started its compendium involving some 30 microinsurance programme eight authors, a seminal work that is years ago. It now covers 1.6 million expected to shape the development lives through 26 MFIs, with an and growth of microinsurance in estimated US$ 800,000 in premiums years to come. for 2004. IntoAction 1 / Microinsurance Page 4

Credit unions and coopera- The case of ServiPerú, however, A prime example of the direct sales tive/mutual insurers demonstrates that affiliation with a model is the 15-year-old Delta Life of movement can be a double-edged Bangladesh, serving the low-income Savings and credit cooperatives, sword. This insurer lived by this market on its own without donor or credit unions as they are called in sword for some 30 years, but almost support or technical assistance. many countries, often offer loan died by it in the early ‘90s when spon- A for-profit company listed on the protection insurance – usually soring cooperatives, along with the Dhaka Stock Exchange, it is regarded referred to as credit life – to ensure country’s economy, took a nose-dive. as the “Grameen Bank” of micro- that “the debt dies with the debtor,” It restructured as a provider of , having pioneered a policy so that an unpaid loan balance and funeral services, and created a that pinpoints specific needs of the does not adversely affect either the subsidiary brokerage to manage its poor for credit as well as savings and surviving family or the institution insurance portfolio. Even now, its insurance, all in a 10- or 15-year term that granted the loan. Credit unions micro health insurance product has endowment package. Delta now also offer life-savings coverage to little support from cooperatives, with serves more than a million persons. stimulate saving, and some provide their members accounting for only Direct sales can overcome housing or funeral insurance, 10% of the insured. Not every country some of the control disability, health and in a few cases has cooperative soil fertile enough for even casualty insurance. These microinsurance. problems of partner–agent products are added onto existing and cooperative/mutual credit and savings services. Many Nevertheless, that the seemingly models. are provided informally – although small way in which cooperative in some countries they are legally insurance differs from the partner– The popularity of endowment policies recognised as member-benefit agent model – the agent’s stake in the that help the poor gradually build products. insurer – has in practice made a big up assets is something Delta has in difference in complying with the spirit common with Tata–AIG, which In addition to savings and loans of microinsurance. The ownership offers separate term policies as well. cooperatives, microinsurance stake gives the agent institution Interestingly and unlike developed services under this model may also a say in the design and running of not markets, it is Tata–AIG’s endowment be provided by insurance companies only the insurance programme but policies that seem to be in much that are stand-alone enterprises. also in the democratically operated greater demand. In fact, some 140 cooperative and partner insurer itself, ensuring The two cases demonstrate that mutual insurers in 70 countries that it remains responsive to clients’ insurance companies can reach the serving low-income as well as needs and interest. A point made low-income market directly, at higher-end segments of their markets in a plenary session was that the least in Bangladesh and India. Direct are members of a global association cooperative/mutual insurance selling helps overcome some of the called ICMIF (International model demonstrates what James problems in the partner–agent and Cooperative and Mutual Insurance Wolfensohn, former president of the models, where some Federation). World Bank, regarded as important insurers may not have good control The mutuality model is in in the fight against poverty – that over their distribution channels development must not be done to the line with the advice of and may be separated from the poor but by them, and that they former World Bank Presi- market segment. Nevertheless, this should have a say in the design and dent James Wolfensohn advantage to an insurer comes running of programmes. that development must with the higher costs of a new not be done to the poor delivery structure that only serves an but by them. Direct sales model insurance function (whereas the other models involve building on Insurance companies can also serve La Equidad, created 35 years ago a delivery structure that already exists low-income policyholders directly as a cooperative in Colombia to serve for savings and credit, so additional through individual agents that other cooperatives and their transaction costs for insurance are are on salary or commission or both. members, exemplifies the main minimal). The conference paid close attention difference between the partner–agent to the joint venture Tata–AIG in India, and cooperative insurance models. which has introduced so-called Besides a broad range of products for microagents as a new delivery the general market, it now offers channel. India requires what some two group-based micro life insurance other countries only encourage: that products through two partners: each insurer have a set percentage an MFI called Women’s World Foun- of its business coming from the dation (WWF), and a group of its own rural and social sectors. To achieve affiliated cooperatives. More than (and surpass) its quota, Tata–AIG 10,000 of WWF’s microcredit is innovating with a direct marketing customers and 18,000 of coopera- approach that involves assisting tives’ members have so far taken up hand-picked low-income women to this insurance. form insurance agencies. IntoAction 1 / Microinsurance Page 5

The simpler the better If a product cannot be easily explained in a few sentences, it will not succeed. But the simpler the product, the harder it may be to design.

Community-based model The scheme, for poor women making Basics to keep in mind a living in the informal sector of the In sub-Saharan African countries, economy, uses the third-party Lessons learnt and conclusions where up to 90% of working people payment mechanism and offers its reached from a number of cases have informal employment lacking 25,000 members a 70% coverage studied around the world were even the most basic social protection, of health expenses for a premium pointed out in various sessions and communities of poor people have of roughly 75 US cents a month. would be of particular interest been banding together to create AssEF’s microinsurance program is to insurers contemplating the low- micro health insurance schemes. The about three years old and in its critical income market: schemes are non-profit in character formative stage is serving some — Understand the demand through and have a voluntary membership. 3,500 policyholders, or one out of quantitative and qualitative Policyholders prepay premiums into a every seven members. Close research of clients’ needs, fund and are entitled to specified monitoring and good management preferences and familiarity with benefits. The community plays an have helped the health insurance insurance. important role in the design and programme achieve strong growth running of the programme. A network since it was founded in 2002, — Gather critical information about support organisation provides tech- and have ensured its sustainability. key product features and the nical assistance and general over- A general assembly and a board clients’ ability to pay and service sight, while it negotiates fees with one of directors of 13 women elected by expectations. or more healthcare providers. members lead the organisation. — Target not only clients but field Community micro health Although this scheme in Benin staff who, if not buying into the insurance schemes – and a similar one in Senegal have product themselves, will not mutuelles de santé – succeeded in serving the poor, be able to persuade clients either. in West Africa need to many of the poorest may still be Health insurance, followed by reach not only the poor beyond their outreach, and that there agricultural insurance, stood out in but also more of the is a need for greater government panel discussions as the most urgent poorest. involvement to protect the destitute and largely unmet need of the poor. and reduce the burden on the poor. Without insurance and with meagre One case study reviewed at the Though mutual in character and means, low-income groups have a far conference is of a mutual micro- theoretically within the overarching greater proportion of “catastrophic finance network in Benin, Association mutuality movement, community- levels” of healthcare spending. d’Entraide des Femmes (AssEF), based health insurance associations – Even in countries where healthcare is with an in-house health insurance mutuelles de santé – are also available, there are barriers between scheme. The network has 27 savings operationally different from micro- subsystems – public, private and and credit funds and 240 groups insurers in the credit union and non-profit. serving poor women in the capital cooperative/mutual category. Among city of Contonou and its outskirts. the estimated 300 such schemes in West Africa, three are subjects of case studies: Union des Mutuelles de Santé de Guinée Forestière, Union Technique de Mali, and the Union des Mutuelles de Santé de Thiès. IntoAction 1 / Microinsurance Page 6

One conclusion drawn by the panel Although the role of the reinsurer, There were positive opinions aplenty on challenges and strategies to regional or global, is at the end of the about the synergy the conference extend healthcare to the poor was value chain, it has to follow the local produced and how the get-together that governments and donors should national regulation. A priority should of specialists helped clarify and concentrate first on integrating micro be to enable informal microinsurance crystallise the pool of knowledge. health insurers into the overall schemes, through whichever institu- Generally, participants shared the systems, and coordinate and combine tional model, to comply with local view that many organisations have different sources of healthcare regulations and deal with reinsurers. shown interest in microinsurance, for improved efficiency and cost- and it was encouraging to see the Microinsurance as a concept is in effectiveness. Munich Re Foundation pursuing a its early stages, although awareness long-term plan of action with specific Agricultural insurance, widely is increasing for particular needs steps to get results – for example, regarded as a risky line not and opportunities. Yet, the level local conferences to better reach the sustainable without government of discussion needed on insuring targeted people in countries like India. support, was also singled out for the poor is not taking place in greater attention and innovation. the insurance and world. That is something the Munich Re Following the conference, the CGAP Insurers are sitting on an enormous Foundation and the CGAP Working Working Group on Microinsurance pile of knowledge. They could help Group on Microinsurance are keeping met and, among other measures, shorten the microinsurers’ learning in mind for work and action to follow set up sub-groups dedicated to curve. the conference – an expert meeting agriculture and health. that was not an end in itself but Donors, too, were urged to facilitate marked the beginning of a process. For microinsurance generally, and linkages and share knowledge – Overall, the conference outcome was health and agriculture lines in to coordinate their efforts with the to reinforce the importance of further particular, facilitating the involvement microinsurance activities of other developing microinsurance as a of reinsurers was seen as a key donors, the government’s social key tool to reducing the vulnerability priority by many conference partici- protection schemes, and initiatives of the poor. pants. A formal industry requirement of private sector insurers. Their is that a reinsurer can cover risk only attention was drawn also to the need if it is passed on from a direct insurer for a combination of on- and off-site that is properly licensed – a condition monitoring of the performance of most informal microinsurers do not existing microinsurance programmes meet. It was suggested that regulators that they choose to support. and donors work together to provide There were several reminders to partial guarantees to reinsurers, governments to heed their role similar to the schemes between banks in the provision of microinsurance. and MFIs – guarantees that might be The government was seen as carrying structured as a stop-loss policy for the out three functions: providing reinsurer. coverage through social protection programmes; creating a suitable regulatory environment; and promoting formal-sector entry into the low-income market.

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