Joseph Alaban from RIMANSI Organization for Asia and the Pacific, Inc speaks about Microfinance and Micro-insurance. (Jan 30, PACAP Community Development Forum: Microfinance Amidst the Global Financial Crisis)
Over two billion people worldwide lack any type of formal social security protection. Poor people are the least likely to benefit from coverage, yet they are the most vulnerable to risk and economic stress. Responding to this situation requires the involvement of a range of actors, including national governments, communities, the private sector, and development agencies. Currently in the spotlight, microinsurance is one of many financial services that helps manage risk; others include emergency loans and flexible savings. Donor agencies should approach this promising but untested field with caution. In this presentation, basic insurance principles will be covered, as well as some products and models.
Poor people confront many of the same risks faced by the non-poor, but these risks have greater financial impact and occur with greater frequency. Moreover, the vulnerability of poor people is exacerbated each time they incur a loss, creating a vicious cycle that precludes lasting improvements in human and economic welfare. Key risks include death, illness or injury, loss of property (e.g., theft, fire), and natural disaster (e.g., earthquake, drought).
Most poor people manage risk with their own means. Many depend on multiple informal mechanisms (e.g., cash savings, asset ownership, rotating savings and credit associations, moneylenders) to prepare for and cope with such risks as the death of a family breadwinner, severe illness, or loss of livestock. Very few low-income households have access to formal insurance for such risks. Prevention and avoidance. When possible, poor people avoid and/or actively work to reduce risk, often through non-financial methods. Careful sanitation, for example, is a non-financial way to reduce the risk of infectious illness, particularly among young children. Using family networks to identify business opportunities is another such mechanism. The imperative to avoid risk often leads to conservative decision making by poor people, especially in business considerations. Preparation . Poor people save, accumulate assets (such as livestock), buy insurance, and educate their children to handle future risks. For certain risks, informal community systems (e.g., Ghanaian burial societies) offer protection. However, such systems generally do not adequately protect against costly and unpredictable risks, such as the debilitating illness of a family income earner. Formal insurance products are beginning to be offered to low-income markets, such as simple credit life insurance (which covers an outstanding loan balance in the event of a borrower’s death), but these insurance products sometimes appear to be designed to protect the lending institution rather than its clients. Coping . Ex post coping can result in desperate measures that leave poor households even more vulnerable to future risks. In the face of severe economic stress, poor people may take out emergency loans from moneylenders, microfinance institutions (MFIs), and/or banks. They may also deplete savings, sell productive assets, default on loans, and/or reduce spending on food and schooling. In general, prevention and planning are far less costly than coping strategies for the individual.
Risk-managing financial products include liquid savings accounts from which clients can draw to reduce the effects of an economic stress; emergency loans; and microinsurance. Which of these options poor people might prefer depends on a range of issues: Alternative coping strategies. While the poor may need the support provided by these services, they are unlikely to voice a significant demand because they do not have any expectations that a bank or insurer would willing or able to address their needs. The demand for risk-managing financial services, therefore, has to be inferred based on the cost and effectiveness of current risk coping strategies used by the poor. Type of risk. The risk pooling aspect of insurance works best for both provider and consumer when the loss is relatively large and there is a low likelihood that the risk will occur. Insurance is therefore useful to cover funerals, expensive medical treatments, or rebuilding a burned house. If the loss is relatively small, or potentially so, then savings or credit might be more appropriate. Planning propensity. For saving or insurance to be options to manage risk, the decision to protect one’s household from risk needs to be made in advance — to start paying premiums or to build up a savings reserve. Poverty level. For the poor, asset accumulation in the form of savings and/or insurance requires forgoing consumption today for greater security tomorrow. Therefore, for savings and insurance to be good options, the household needs to have some net income so that it can put money aside, to buy an asset, or pay a premium. Cash flow. Saving and borrowing enable persons to allow consumption to be somewhat independent of income. For the non-poor, the ability to smooth consumption often results in access to material possessions. For the poor, the emphasis is less on buying things and more on risk and cash management, spreading expense spikes over time. Social conditions. The choice between credit, savings, and insurance may depend more on social and cultural considerations than costs and benefits. Education, biases, and risk tolerance, The demand for savings, credit, and particularly insurance also depends on one’s education, biases and tolerance for risk. Although savings and credit are fairly familiar to most people, many low-income people are not familiar with the risk-pooling concept or they have a misperception about insurance needs. Source : Microinsurance: Improving Risk Management for the Poor, No. 1 (Luxembourg: ADA, August 2003).
Two variables can be useful to identify and classify the risks households face: (1) the degree of uncertainty caused by the risk, and (2) the relative size of the loss. The uncertainty of a risk can be thought of in terms of three elements: if the risky event will occur, when it will occur, and how often it might occur. The loss or cost of a risky event can be one-time or ongoing. By positioning the risks faced by households along these two dimensions, it is possible to assess how well various risk management options protect low-income households against each type of risk. Credit and savings products offer low-income households a method for converting a series of small contributions into a large sum of money. Emergency loan funds offered by institutions, such as the Grameen Bank, Shakti Foundation, and Action Aid in Bangladesh, are good examples of providers reducing typical restrictions on credit products to provide more effective risk protection. Flexibility in the loan size and the repayment terms make these institutions’ products responsive to the risk management needs of their clients. However, credit and savings products cannot provide complete protection against risks resulting in a loss greater than what a household can save or repay. As the size of loss increases relative to a household’s expected future income, credit products become increasingly ineffective risk-management tools. Similarly, savings products offer only partial protection against risks causing large losses relative to household income. At this point, insurance becomes a more effective method of risk management. Insurance products aim to protect people from a low probability of catastrophic loss. By pooling the risks of many households, insurance products can potentially offer more complete protection against property, health, death, and disability risks at an annual cost that is within the household’s budget. However, insurance becomes a less effective risk management response as the degree of uncertainty and relative cost associated with a risk reach extreme levels. As a result, most mass, covariant risks, such as epidemics and natural disasters, are difficult to insure. This is especially true if an insurance provider has a relatively small customer base and operates in a contained geographic area. Some mass, co-variant risks can be insured if an insurer spreads the risk among a sufficiently large group of policyholders. By directly offering policies to people over a large, dispersed geographic area , insurers have successfully developed products that protect against natural disasters, such as hurricanes and earthquakes. However, where the expected frequency of occurrence of a mass, covariant risk cannot be reasonably predicted from historical records, or where a risk occurs often in the same region, such as flooding in Bangladesh, insurance will not be an economically viable solution for low-income households. Access to liquid savings deposits and aid from the international relief community are alternative sources for partial coverage against these risks. Source : Warren Brown and Craig F. Churchill, Insurance Provision in Low-Income Communities, Part I, Primer on Insurance Principles and Products (Toronto: Calmeadow, 1999).
Microinsurance is the 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. As with all insurance, risk pooling allows many individuals or groups to share the costs of a risky event. To serve poor people, microinsurance must respond to their priority needs for risk protection (depending on the market, they may seek health, car, or life insurance), be easy to understand, and affordable.
Basic principles that should be observed by microinsurance providers are universal to insurance and risk management. They include: Similar units are exposed to risk. Insurers require that risks in a particular class or group of policies be similar. Insurers also require that the group insured (or the &quot;risk pool&quot;) includes a large number of these similar risks, relative to the total population. Large numbers of policyholders reduce the potential for adverse selection (a situation where claims are higher than expected because only high-risk households purchase the insurance) and increase the likelihood that the variance of actual claims will be closer to the expected mean used in calculating premiums. There is limited policy holder control over the insured event . Insurance protection cannot be offered if policyholders can control whether an insured event will occur. Selling an insured truck and claiming it as stolen; setting fire to an old, insured home to build a new one with the insurance settlement; and failing to properly care for an insured goat thereby increasing the chance it will die of disease — all of these behaviors (called “moral hazards”) take advantage of the insurer by increasing their claims experience above expectations. Insurable interest exists. Insurance cannot be provided to policyholders who have a vested interest in a loss occurring. A property insurance policy, for example, on a home cannot be sold to anyone other than the residents of the home. Losses are determinable and measurable. Insurance providers must have a mechanism for verifying the occurrence of a loss and identifying its cause and value. Losses should not be catastrophic. The risk-pooling mechanism of insurance breaks down against risks that cause large losses for a substantial portion of the risk pool at the same time. Chance of loss can be calculated. Setting insurance premiums requires estimating the size of expected losses and the chance of loss. Premiums are economically affordable. In general, for an insurance policy to be an attractive purchase, the cost of premiums must be substantially less than the benefit offered by the policy. Source : Warren Brown and Craig F. Churchill, Insurance Provision in Low-Income Communities, Part II, Initial Lessons from Micro-Insurance Experiments for the Poor (Bethesda, Md., USA: DAI, 2000).
Case Presentation: Microfinance and Micro-insurance
RIMANSI Organization for Asia and the Pacific, Inc.
Overview <ul><li>What risks do poor people face and how do they protect themselves? </li></ul><ul><li>What is microinsurance? </li></ul><ul><li>What are the difficulties in providing insurance to poor people? </li></ul><ul><li>What are some microinsurance delivery models? </li></ul><ul><li>What are some dos and don’ts for donors? </li></ul>
What Risks Do Poor People Face? <ul><li>Key Risks </li></ul><ul><li>Death </li></ul><ul><li>Illness or injury </li></ul><ul><li>Loss of property </li></ul><ul><li>(theft, fire) </li></ul><ul><li>Natural disaster (earthquake, drought) </li></ul>“ Life is one long risk” Microfinance client in the Philippines
How Do Poor People Protect Themselves from Risk? Preparation Coping Prevention and Avoidance <ul><li>Careful sanitation </li></ul><ul><li>Identifying business opportunities </li></ul><ul><li>Saving </li></ul><ul><li>Accumulating assets (i.e., livestock) </li></ul><ul><li>Buying insurance </li></ul><ul><li>Educating children </li></ul><ul><li>Taking emergency loans </li></ul><ul><li>Depleting savings </li></ul><ul><li>Selling productive assets </li></ul><ul><li>Defaulting on loans </li></ul><ul><li>Reducing spending </li></ul>
Understanding the Demand for Risk-Managing Financial Services The demand for Liquid savings Emergency loans Microinsurance depends on Alternative Coping Strategies Social Conditions Education, Biases, Risk Tolerance Cash Flow Planning Propensity Poverty Level Type of Risk
Different Financial Services for Different Risks Very Large Small Certain Highly Uncertain Degree of Uncertainty Relative Loss / Cost Life Cycle Events Death Disability Health Property Mass, Co-variant Source : Warren Brown and Craig F. Churchill, Insurance Provision in Low-Income Communities, Part I. Flexible Savings and Credit Insurance Flexible Savings Partial protection
What Is Microinsurance? <ul><li>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. </li></ul><ul><li>To serve poor people, microinsurance must be: </li></ul><ul><ul><li>Responsive to their priority needs for risk protection </li></ul></ul><ul><ul><li>Easy to understand </li></ul></ul><ul><ul><li>Affordable </li></ul></ul>ONE STRATEGY
Basic Insurance Principles 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) Insurable interest exists Losses are determinable and measurable Losses should not be covariant (catastrophic) Chance of loss is calculable Premiums are economically affordable 1 2 3 4 5 6 7
EMERGENCIES EXTREME POVERTY Emergencies causing sickness and eventual death often push families to traditional means of risk protection (selling assets such as livestock, land, precious metals, drawing down on savings and contingency borrowing) which erode the household’s net worth.
- CGAP DONOR BRIEF. No. 16, December 2003 <ul><li>Over two billion people worldwide lack any type of formal social security protection. Poor people are the least likely to benefit from coverage, yet they are the most vulnerable to risk and economic stress. </li></ul>
Thus… Risk protection needs to be part of any effective strategy for poverty reduction; Microinsurance can be a better form of risk protection for the poor;
Definition <ul><li>Micro-insurance is a financial product/service that the poor are willing and able to pay for so that they are able to manage their risks better. </li></ul><ul><li>The poor = indicators of poverty </li></ul><ul><li>willing to pay + able to pay </li></ul><ul><li>Risk = the probable loss arising from a financially de-stabilizing or catastrophic event </li></ul>
THE NEED: <ul><li>Unpredictable catastrophic events (e.g., death, sickness, disease and disability in the family, natural and man made disasters) </li></ul><ul><li>Serious social, political and moral consequences result from financial crises (loss of business, malnutrition, school drop out, civil unrest, entry into the underworld of crime, drug addiction and sexual exploitation) </li></ul><ul><li>Children and women are the most vulnerable to these consequences </li></ul>
THE OPPORTUNITY: <ul><li>the enterprising poor are willing and able to participate in micro-insurance programs; </li></ul><ul><li>Many microfinance institutions, co-ops and NGOs in the Philippines and other developing countries are already running in-house mutual benefit funds in response to member/client demand (informal and unregulated operations); </li></ul><ul><li>MFIs social network can be tapped to cost effectively provide access to microinsurance; </li></ul>
THE BUSINESS ADVANTAGE: <ul><li>existing channels to the poor that can be harnessed for low cost transactions and education </li></ul><ul><li>existing microfinance distribution channels may translate into more efficient micro-insurance operations. </li></ul><ul><li>regular interactions with clients translate into: </li></ul><ul><li>+ better knowledge of demand patterns </li></ul><ul><li>+ better design of insurance products </li></ul>
Mutual Benefit Association (MBA) <ul><li>any society, association or corporation formed or organized not for profit but mainly for the purpose of paying sick benefits to members, or of paying to relatives of deceased members a fixed or any sum of money… </li></ul><ul><li>Source: Chapter VII, Title 1, Sec. 390 of the Insurance Code of the Phils. </li></ul>
Microinsurance <ul><li>refers to the insurance business activity of providing specific insurance products that meet the needs of the disadvantaged for risk protection and relief against distress or misfortune. </li></ul><ul><li>IMC 9-2006, October 25, 2006 </li></ul>
Microinsurance Product <ul><li>premium computed on a daily basis does not exceed ten percent (10%) of the current daily minimum wage rate for non-agricultural workers in Metro Manila; </li></ul><ul><li>maximum amount of life insurance coverage is not more than five hundred (500) times the daily minimum wage rate for non-agricultural workers in Metro Manila. </li></ul><ul><li>IMC 9-2006, October 25, 2006 </li></ul>
Microinsurance Policy <ul><li>Following the definition, a micro-insurance policy shall have the following features: </li></ul><ul><li>simple product design that clearly identifies the face amount, benefits and terms of the insurance uniformly applied to the clients; </li></ul><ul><li>low amount of premium/contribution; </li></ul><ul><li>policy contract is easily understood by the client/member; </li></ul><ul><li>straightforward and uncomplicated documentation requirements; </li></ul><ul><li>frequent collection of premium/contribution that coincides with the cash-flow of the insured; </li></ul><ul><li>fast and timely payment of insurance claims </li></ul>
MBA Guaranty Fund <ul><li>Initial: P5,000,000.00 (USD100,000) </li></ul><ul><li>Every year thereafter, all microinsurance MBA’s must increase their Guaranty Fund by an amount equivalent to five percent (5%) of their gross premium collections until the Guaranty Fund shall reach twelve and a half percent (12.5%) of the required capital for domestic life insurance companies. </li></ul><ul><li>IMC 9-2006, October 25, 2006 </li></ul>
MBA (from MFI/COOP) <ul><li>As a business organization, it is fully able to take advantage of synergies in financial and social transactions that arise when it partners with the credit and savings co-op for the collection of premiums, verification and payment of claims and pre-membership and membership education. </li></ul>
MBA vs. Commercial *MBAs can work well with the commercial insurance companies through reinsurance treaties. Only the policy holder with option to cover family members but with additional premium Includes legal dependents of the members covered in a single premium Coverage Most insurance companies can settle claims within one month from date of claim Several documents are required, which vary from one insurance company to another Can be done as early as 1 to 3 days from the time of notification but no longer than 1 week if claim documents are complete Simplified documentation Payment of Claims Has to shell out a lot of funds but bankruptcy can be avoided through reinsurance facilities Catastrophic Claim Higher premiums generate more benefits Paid contributions stay with the association Level contributions, level benefits Contributions/ Premiums For profit, stock company Service to the members Orientation Board of Directors composed of private individuals who have invested in the company Board of Trustees composed of members of the MBA who know the needs of their co-members Policy Making Body COMMERCIAL INSURANCE COMPANY MUTUAL BENEFIT ASSOCIATION (MBA) PARTICULARS
What is RIMANSI? <ul><li>A regional resource center based in the Philippines to help rural and urban poor households in Asia and the Pacific improve their access to affordable yet adequate micro-insurance services, through microinsurance business support services </li></ul>
RIMANSI: RISK MANAGEMENT SOLUTIONS <ul><li>As business development support provider: </li></ul><ul><li>Catalyst to facilitate and support efforts of MFIs/MBAs to provide better access by the poor to micro-insurance products and services </li></ul><ul><li>Mechanism for risk pooling and cost sharing </li></ul><ul><li>Forum for performance based monitoring and evaluation </li></ul><ul><li>Advocate for policy and regulatory reform </li></ul>
Founding Members <ul><li>Alalay sa Kaunlaran, Inc. </li></ul><ul><li>CARD MBA, Inc. </li></ul><ul><li>CARD, Inc. </li></ul><ul><li>CARD Bank, Inc. </li></ul><ul><li>Kasanyangan Foundation, Inc. </li></ul><ul><li>People’s Alternative Livelihood Foundation of Sorsogon, Inc. </li></ul><ul><li>Rural Bank of Talisayan, Inc. </li></ul><ul><li>USWAG Development Foundation, Inc. </li></ul>
Vision <ul><li>A network of professionally-managed mutual benefit associations that provide affordable, comprehensive, quality risk protection to millions of poor people in Asia and the Pacific </li></ul>
Mission <ul><li>We are a resource center that develops and offers risk management solutions to member-owned micro-insurers, especially mutual benefit associations, strengthening their capacity in providing risk protection services to the poor on a sustainable basis. </li></ul><ul><li>We advocate for a policy environment conducive to micro-insurance development. </li></ul>
Business Objectives <ul><li>Assist the partner-MFIs establish their own micro-insurance programs especially MBAs </li></ul><ul><li>Design and formulate appropriate micro insurance products for the poor. </li></ul><ul><li>Formulate and promote Performance Standards(SEGURADO) aligned with international best practices. </li></ul><ul><li>Promote mutual assistance and sharing of resources, technology and information among stakeholders. </li></ul><ul><li>Build the financial infrastructure for micro-insurance through research, education and policy advocacy. </li></ul><ul><li>Become a self-reliant and sustainable service provider. </li></ul>
Service Package 1: <ul><ul><li>Needs Assessment </li></ul></ul><ul><ul><li>Market research (where applicable, conversion of in-house insurance programs into formal and professionally run MBAs) </li></ul></ul><ul><ul><li>Business planning </li></ul></ul><ul><ul><li>Operations training & member mobilization </li></ul></ul><ul><ul><li>Operations start up </li></ul></ul><ul><ul><li>Governance set up </li></ul></ul><ul><ul><li>Registration & licensing </li></ul></ul><ul><ul><li>Design of MIS </li></ul></ul><ul><ul><li>Monitoring during the initial months </li></ul></ul>
Service Package 2: <ul><ul><li>assistance in yearly audit and relicensing </li></ul></ul><ul><ul><li>new product development (life insurance variants, non-life, health, education, savings features) </li></ul></ul><ul><ul><li>improvement of product features </li></ul></ul><ul><ul><li>member satisfaction surveys and service improvement </li></ul></ul><ul><ul><li>upgrade of MIS and accounting systems </li></ul></ul><ul><ul><li>monitoring adequacy of actuarial reserves </li></ul></ul><ul><ul><li>BOT and management training </li></ul></ul><ul><ul><li>create pool of practice experts </li></ul></ul><ul><ul><li>establish meso level support organizations </li></ul></ul>