Microinsurances: From Vulnerabilities to Business Models? Martin Herrndorf oikos PhD Fellow, Universität St.Gallen Institute of Management [email_address] +41(0)76 263 2601 | +49(0)163 431 1374 Seminar Summer School “Entwicklungspolitik” 31 August – 5 September 2009 University of Cologne Teaching and Research Center Latin America English translation for slideshare!

Seminar Microinsurances Thursday: Ideas, Principles and Actors Presentation 1: Ideas and principles Group Session 1: Case studies – selected projects Presentation 2: Actors and networks Group Session 2: Micro-insurance actors in focus Friday: Actors and Networks on the country level Group Session 3: Country research ‘Colombia’ Presentation 3: Jenny Hennig, GTZ Group Session 4: Strategies for microinsurances Final presentations Interactive Group Sessions cut in this presentation...

Thursday: Ideas, Principles and Actors

Presentation 1: Ideas and principles

Group Session 1: Case studies – selected projects

Presentation 2: Actors and networks

Group Session 2: Micro-insurance actors in focus

Friday: Actors and Networks on the country level

Group Session 3: Country research ‘Colombia’

Presentation 3: Jenny Hennig, GTZ

Group Session 4: Strategies for microinsurances

Final presentations

Introduction Seminar Microinsurances Presentation 1: Microinsurances: Ideas and Principles

Introduction Seminar Microinsurances Vulnerabilities and the demand for microinsurances

Poverty as a dynamic challenge always poor| Usually poor| Churning poor| Occasionally poor | Never poor Always poor Usually poor Churning poor Occasionally poor Never poor Present Status Status 10 Years Ago Situation unchanged Hulme, D, and A Shepherd. 2003. “Conceptualizing Chronic Poverty”. World Development 31:403-23. Improvement of situation  Poverty Reduction   Worsening of situation No cases

Poverty as a dynamic challenge Hulme, D, and A Shepherd. 2003. “Conceptualizing Chronic Poverty”. World Development 31:403-23.

The cause of poverty dynamics Income gained Hulme, D, and A Shepherd. 2003. “Conceptualizing Chronic Poverty”. World Development 31:403-23. Income lost Formal employment Remittances Children have (urban) income Inheritance Public subsidies Death of household head Long sickness Business start-up Bad investment House burned down Land washed away Drug addiction always poor| Usually poor| Churning poor| Occasionally poor | Never poor Always poor Usually poor Churning poor Occasionally poor Never poor Present Status Status 10 Years Ago

Microinsurances as a protection mechanism Churchill, Craig, ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation.

Different social security mechanisms Churchill, Craig, ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation. Self-insurance Informal group-based mechanisms Formal (micro-)insurance Social protection Money lenders (Family) savings Welfare Associations Funeral Associations Rotating Savings and Credit Associations (ROSCAs) Partnerships between insurers and MFIs Public provision / pensions In case of „death“: Diversifying income sources Building social capital Ex-ante reduction of vulnerability

Feasibility of microinsurances Lives affected Diffi-culty Risk Life insurance An ideal and simple risk to insure, with proven demand and impact, easy to scale ***** ** * Accidental death and dismemberment insurance A simple risk, with proxy health elements, but providing incomplete protection ***** *** ** Healthcare cost indemnity insurance Long-term, risky, complex, subject to abuse and fraud, historically many failures *-***** ***** **** Health savings vehicles Support and financial discipline for routine expenses, no help for major events *-***** * * Defined benefit health (major medical, hospital, critical illness) Contribution towards healthcare costs or associated losses for major healthcare events *-***** **** *** Agricultural (property) insurance Risk management is a crucial component of agricultural development ***** **** ***

Consumer demand for microinsurances

Effects – health micro-insurance Adapted from Blanchard-Horan, 2006 , In: Roth, Jim, Michael J. McCord, and Dominic Liber. 2007. The Landscape of Microinsurance in the World’s 100 Poorest Countries . Appleton, WI: The MicroInsurance Centre, LLC.

Introduction Seminar Microinsurances Definitions and Principles

Microinsurances - definition „ Microinsurance is the protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved” Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation.

Microinsurances - principles Same general principle as ‘normal’ insurance But different target group: The poor! Double benefit: New, untapped market for businesses Protection of the poor against risks: Vulnerability Different operational principles Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation.

Same general principle as ‘normal’ insurance

But different target group: The poor!

Double benefit:

New, untapped market for businesses

Protection of the poor against risks: Vulnerability

Different operational principles

Microinsurance principles Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation. Principles Key Question Relevant to the risks of low-income households What do we know about the risks the poor face? As inclusive as possible How can we reach the greatest number of poor people? Affordable premiums How much can the poor pay, when, in which form? Grouping for efficiencies How can we overcome transaction costs in rural and dispersed markets? Clearly defined and simple rules and restrictions How can everybody (even illiterates) understand the product offer? Easily accessible claims documentation requirements How can the poor claim insurance payments quickly? Strategies to overcome the wariness of customers How can ignorance of insurance as a principle be overcome?

How can we reach the greatest number of poor people?

How much can the poor pay, when, in which form?

How can we overcome transaction costs in rural and dispersed markets?

How can everybody (even illiterates) understand the product offer?

How can the poor claim insurance payments quickly?

How can ignorance of insurance as a principle be overcome?

Introduction Seminar Microinsurances Supply of Microinsurances

Access to financial services

Number of microinsurance providers

Microinsurances – total lives covered Region Life Health Accident & Disability Property & Index Americas 7,545,057 445,876 105,000 600 Africa 2,036,141 3,053,778 1,603,000 1,600,000 Asia 54,158,332 31,697,038 39,180,508 34,557,434 Total 63,739,530 35196692 40888508 36158034

Access to microinsurances in Latin America

The context for microinsurances Roth, Jim, Michael J. McCord, and Dominic Liber. 2007. The Landscape of Microinsurance in the World’s 100 Poorest Countries . Appleton, WI: The MicroInsurance Centre, LLC. Macro | The Enabling Environment Meso | Financial Infrastructure Micro | Business Models Commercial & mutual insurers, agents, brokers, intermediaries Actuaries, auditors, technical support, adjusters, insurance claims register, information technology Policy, legislation, regulation, supervision

Market development for microinsurances Qureshi, Zahid, and Dirk Reinhard. 2008. “Making Insurance Work for the Poor”. 4th International Microinsurance Conference 2008

Introduction Seminar Microinsurances Presentation 2: Microinsurances: Actors and Networks

Introduction Seminar Microinsurances The Micro-Insurance Value Chain

Value chain for insurances

Changes in the value chain Qureshi, Zahid, and Dirk Reinhard. 2008. “Making Insurance Work for the Poor”. 4th International Microinsurance Conference 2008

Work distribution – a pyramid model Reinsurer Insurer Insurer Insurer Channel Channel Channel Client Client Client Covered Life Covered Life Covered Life ‚ A few‘ ‚ Dozens‘ ‚ Thousands‘ ‚ Millions‘ ‚ Millions more‘

Work distribution Qureshi, Zahid, and Dirk Reinhard. 2008. “Making Insurance Work for the Poor”. 4th International Microinsurance Conference 2008

Microinsurances – product design tasks Micro-Insurance Product Design (Example: Health) Product manufacturing Define benefit package Identify providers Pricing for sustainability Controls for fraud, moral hazard, adverse selection Product sales Information provision Underwriting Product servicing Assistance with claims Manage relationship with care providers Long-term relationship with clients Product servicing Maintenance of long-term stability Financial management Risk monitoring & management (reinsurance) Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation.

Product manufacturing

Define benefit package

Identify providers

Pricing for sustainability

Controls for fraud, moral hazard, adverse selection

Product sales

Information provision

Underwriting

Product servicing

Assistance with claims

Manage relationship with care providers

Long-term relationship with clients

Product servicing

Maintenance of long-term stability

Financial management

Risk monitoring & management (reinsurance)

Value creation through local education Michael Anthony, Allianz SE, Presentation at Utopia Conference, Berlin Explain insurances and risks covered to the heads of village. To raise understanding and awareness about micro-insurances, mass rallies are being held by Care and local NGO. Village officials explain and discuss the concept of insurance with members of the village. During these awareness campaigns a puppet theatre and microinsurance song are shown to explain insurance. 1 2 3 4

Introduction Seminar Microinsurances Actors and Approaches

Key differences between the actors in the field Financial Performance Social Mission Large & Global Small & Local Weak / distanced Strong / embedded Primary interest / logic Scope of operations Outreach to the poor High / standardised Low / informal Operational & financial capacity High / stable Low / instable Risk-pooling capacity / reserves

Introduction Seminar Microinsurances Actors and Approaches Insurance Companies

Base of the Pyramid – A new paradigm Poor / extremely poor ‘Base of the Pyramid’ = 4 billion customers? Traditional business focus Neglected markets Middle class High income Inclusive business? Anwara Begum, Grameen 'telephone lady' (Credit: Nurjahan Chaklader) Based on Prahalad, C. K., and Allen L. Hammond. 2002. “What Works: Serving the Poor, Profitably”. Harvard Business Review 4-11.

Why poverty markets? Reasons for insurers Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation. Internal factors External factors Corporate social responsibility Risk diversification Securing or growing revenue Push for new markets and innovative products Growing competition in traditional markets Shrinking margins in traditional markets Regulatory requirements Political and activist pressure Liberalization of previously closed markets

Corporate social responsibility

Risk diversification

Securing or growing revenue

Push for new markets and innovative products

Growing competition in traditional markets

Shrinking margins in traditional markets

Regulatory requirements

Political and activist pressure

Liberalization of previously closed markets

How? Agent vs. reinsurance-modell Insurance company Micro-finance Coopera-tive Insurance company Micro-finance Coopera-tive „ Agent“ „ Reinsurance“ General Insurer develop products and carry the risk Microfinance Institutions or cooperatives serve as distribution channels Claim settlement often through distribution partners Typical of life insurances Microfinance Institute or cooperative develop products Part of the risk is shifted to insurance company Claim settlement through distribution partners Typical of health insurances Re-insurer Insurer Distribution channel

Insurer develop products and carry the risk

Microfinance Institutions or cooperatives serve as distribution channels

Claim settlement often through distribution partners

Typical of life insurances

Microfinance Institute or cooperative develop products

Part of the risk is shifted to insurance company

Claim settlement through distribution partners

Typical of health insurances

Introduction Seminar Microinsurances Actors and Approaches (Agro-)Cooperatives

Cooperatives - principles The insurer is owned by the insured Incentive to keep premiums low and claims regulation high Local control between the insured to reduce moral hazard Wide variation in terms of members From a dozen to several millions As a consequence, similar variation in modes of operation Insurance often based on established service models: Credit cooperatives  Credit-life insurance Health cooperatives  Health insurance Farmer cooperatives  Crop / livestock insurance

The insurer is owned by the insured

Incentive to keep premiums low and claims regulation high

Local control between the insured to reduce moral hazard

Wide variation in terms of members

From a dozen to several millions

As a consequence, similar variation in modes of operation

Insurance often based on established service models:

Credit cooperatives  Credit-life insurance

Health cooperatives  Health insurance

Farmer cooperatives  Crop / livestock insurance

Kooperativen - Beispiele Churchill, Craig ed. 2006. Protecting the Poor: A Microinsurance Compendium International Labour Office (ILO), Munich Re Foundation.

Introduction Seminar Microinsurances Actors and Approaches Micro-Finance Institutions

From micro-credit to micro-insurance Core business: Micro credit (and partly social services) Credit protection through credit life insurance Double goal: More attractive credit products and improved risk profile of portfolio Connection of savings and insurance Savings similar to insurance („pay now, get back later“) High demand for savings products from target group More insurance products Health, property, crop, livestock Closer to customer demand (health!) Rising complexity and risk Danger of cross-subsidising and financial stability

Closer to customer demand (health!)

Rising complexity and risk

Danger of cross-subsidising and financial stability

Micro-Finance 1: Local embeddedness Muhammad Yunus Founder Grameen Bank Not-for-profit / low-profit companies Financially sustainable The goal is to create “social businesses” Locally adapted Long-term learning processes More socialisation then training Alliances with profit oriented businesses in clearly-defined joint venture structures

Not-for-profit / low-profit companies

Financially sustainable

The goal is to create “social businesses”

Locally adapted

Long-term learning processes

More socialisation then training

Alliances with profit oriented businesses in clearly-defined joint venture structures

Micro-Finance 2: Standardisation icrofinance? Vikram Akula Founder SKS Microfinance

Micro-Finance 1: Local embeddedness Akula, Vikram. 2008. Business Basics At the Base of the Pyramid. Harvard Business Review 86:53-57. Akula / SKS approach Traditionally Adopt a profit-oriented approach in order to access commercial capital. Not-for-profit / low-profit organisations Financially self-sustaining Establish “social businesses” (Yunus) Standardise products, training and other processes in order to boost capacity — like „Starbucks and McDonalds“. Locally adapted, learn on the ground Process of socialisation, recruit officers from former clients Average training time: 4-6 months (2 months at SKS) Use technology to reduce costs and limit errors. Paper-based bookkeeping, local technology SKS: Handhelds, internet-linked, special software

Not-for-profit / low-profit organisations

Financially self-sustaining

Establish “social businesses” (Yunus)

Locally adapted, learn on the ground

Process of socialisation, recruit officers from former clients

Average training time: 4-6 months (2 months at SKS)

Paper-based bookkeeping, local technology

SKS: Handhelds, internet-linked, special software

Step-wise development of business models? Source : http://www.symbiotics.ch/en/microfinance-institutions.asp , Darius Capital Partners Difficulty with microinsurances: Risk pooling requires a big and widely-distributed portfolio Lumpy investments into insurance knowledge, systems and accreditation  Starting microinsurance incrementally is difficult!

Difficulty with microinsurances:

Risk pooling requires a big and widely-distributed portfolio

Lumpy investments into insurance knowledge, systems and accreditation

 Starting microinsurance incrementally is difficult!

How many people do different providers reach? Roth, Jim, Michael J. McCord, and Dominic Liber. 2007. The Landscape of Microinsurance in the World’s 100 Poorest Countries . Appleton, WI: The MicroInsurance Centre, LLC.

Which services do different providers offer? Roth, Jim, Michael J. McCord, and Dominic Liber. 2007. The Landscape of Microinsurance in the World’s 100 Poorest Countries . Appleton, WI: The MicroInsurance Centre, LLC.

Thanks for your attention! Martin Herrndorf martin. [email_address] skype: herrndorf mobil ch: +41(0)76 2632601 Mobil de: +49(0)163 4311374 www.facebook.com/herrndorf