Lecture 9: Microinsurance Flashcards
Microinsurance basics - how it works, what it is
Microinsurance means protection of low income people against specific risks.
- This is in exchange of regular premium payments. * Proportionate to the likelihood and cost of the risk involved.
Even if the per unit profit is minuscule, when it is multiplied across a huge number of sales, the return can become attractive
Four reasons MFIs are tempted by microinsurance
MFIs are motivated because microinsurance lowers credit risk, improve customer loyalty, enhance product profitability and diversify income streams
Lower credit risk
Borrowers fail to repay their loans mainly because of experiencing a shock—e.g., a death or illness in the family—that creates a financial stress. * Insurance can help that family cope with shocks and reduce the MFI’s loan losses
Improve customer loyalty
MFIs often need to offer a variety of products to enhance retention. * Diversifies the product menu. * Even when clients do not want a loan, they may still appreciate a savings account, a wire transfer service or insurance protection
Enhance product profitability
A diverse product menu allows cross-selling opportunities, spreads acquisition costs across multiple products, and enhances product profitability
Diversify income streams
Microinsurance provides an additional source of income either from profit if the scheme is provided in-house (and well-managed), or from fees if done in partnership with an insurer.
Difference between microinsurance and microfinance
Microlending: bank takes the risk that poor will not repay their loans. * Microinsurance: poor policyholders essentially take the risk. * Because they are unsure whether the insurer will act on its promises if the insured event occurs
Various strategies could make microinsurance affordable
For example, * Having small benefit packages, * Spreading premium-payments over time to match with household’s cash flow, and * Supplementing premiums with long-term subsidies from governments or donors.
Concerns
Conventional insurance contracts are generally full of complex conditions, conditional benefits, written in jargons that even lawyers struggle to recognise.
- The rationale may be consumer protection, but if the consumers do not understand what is written, its very purpose is defeated. * Moreover, its content can give the insurance company an excuse not to pay a claim
Insurance for low-income households, by itself, can only have a limited effect. * Because insurance is * An effective means of protecting against occasional large losses, * But it is not an efficient means of coping with frequent small losses.
Four ways to set up micro-insurance firm
- First option: Partnership with an insurance company,
- Second option: Creating its own insurance brokerage
, * Third option: Self-insuring,
Fourth option: Creating its own insurance company
- First option: Partnership with an insurance company,
MFIs can persuade insurers to convince that microinsurance is indeed a valuable market opportunity.
Has the advantage of outsourcing the risk to formal insurers. * In general, if an MFI cannot attract an insurer into a partnership, it is probably not effectively communicating what it has to offer.
- Second option: Creating its own insurance brokerage
As with the partner-agent model, this arrangement has the advantage of outsourcing the risk to formal insurers.
As the brokerage is not tied to any one insurance company, it can explore various options on behalf of the MFIs and their clients.
, * Third option: Self-insuring,
- One argument for self-insurance is a belief that the MFIs (or their customers) will have to pay extra for the insurer’s overhead.
A further argument against self-insurance is that it may be illegal to offer insurance without a licence.
* In addition, regulated MFIs are probably not allowed to keep insurance liabilities on their balance sheets.
* Some MFIs self-insure because they do not want to share the insurance profits with another organization.
Probably, problems with claims including delays and rejections is the main reason for self-insurance.
- In sum, self-insurance might even be preferable to the partner-agent approach if the following set of challenging conditions are met: (1) The MFI is large enough to pool risks (at least 10,000 members) and those risks are reasonably homogeneous; (2) The product is kept simple; (3) The MFI obtains catastrophe coverage from an insurance company; (4) The MFI accesses appropriate technical assistance (to help with product design, pricing, data management and performance monitoring); and (5) Regulators will allow it.
or * Fourth option: Creating its own insurance company
Over time, the brokerage builds up sufficient expertise in underwriting, settling claims and managing data, and amasses sufficient funds to form a credit union-owned insurance company
- Own insurance allows greater influence on product design and service standards.
Investment strategy of the insurance company: not to mix the credit and insurance risks.
Unwise to invest a significant proportion of premiums in the MFI’s loan portfolio.
Micro-insurance is productive
Some microinsurance products are designed to support investments in productive activities. For example, * Agriculture insurance enables farmers to access loans for agricultural inputs, without which banks would be more cautious about lending.
