Microinsurance/Cell Captives Flashcards
Funeral assistance
- Provides amount of money on death of policyholder or member of family. Policy usually covers policyholder spouse and 1 or 2children, additional premium for extended family. Need to pay amount quickly after death notified
- Generally sold as term assurances
- Low premiums with little or no underwriting. Short waiting periods of up to six months where only accidental death is covered. If underwriting is done sum assured is usually is higher/ premium lower
- Optional tombstone benefit
- Insurance Act 2017- Classified as funeral business, max sum assured of R100000. Not Subject to commission restrictions
- No limitation on number of policies taken out on a life, children subject to moral hazard. Long term insurance act places limits on lives of children aggregated across all life policies on child:
Younger than 6: R10000
Younger than 14: R30000
Risks
- fraud due to speed at which claim is paid, AIDS
- Premiums tend to be small and cost represent large proportion of premium- increased expenses would render policy unprofitable, can be mitigated by reviewable premiums
- Premium collection difficult given small premiums. Usually sold on group level
Micro Insurance
Definition
Insurance that is accessed by low-income populations, provided by a variety of different entities, but run in accordance with generally accepted insurance practice.
Financial inclusion, low premiums with low sum assureds, risk as oppose to savings
Micro Insurance
Background
Insurance Act 2017- separate microinsurance license, lighter prudential requirements including minimum capital requirements, model to reflect risk profile of micro insurers
Existing insurers must obtain a separate micro-insurance license to benefits from simpler requirements.
Micro Insurance
Products and providers
Market currently focused on credit life insurance and micro loans, little focus on health as many health products can only be written under medical scheme
Funeral benefits available from burial societies, Friendly societies and funeral parlors, in addition to insurers.
Burial society: Non guaranteed benefits with upper limit of R20000 and membership capped at 2500, anything larger would require a micro insurance license. Written under cooperatives act and not regulated by PA/FSCA.
Friendly Societies: allowed to offer guaranteed benefits up to a maximum of R15000, Friendly societies act and limited reporting to FSCA
Funeral parlors: Offer illegal benefit outside of regulation. This business is to be brought under co-operatives or insurance act.
Life micro insurance business was previously written under assistance business. Can now be written as funeral business under insurance act or micro insurance with a license. Only insurers with micro insurance license are allowed to write micro insurance and benefit from simpler regulatory requirements. Insurers are allowed to write similar products under an insurance license but don’t benefit from simpler requirements and cannot use the term microinsurance due to policyholder protection rules.
Micro insurers restricted to risk business, no savings. Can write risk only life business and certain non-life. Health can be written under life or as accident and health non life cover.
GOM limits the amount written to:
R100000 for each life assured
R300000 for non-life policies
Policyholder protection Rules
Term limited to 12 months
Defined on sum assured rather indemnity basis
Waiting periods cannot exceed quarter of term, waiting periods on old policies must be recognized for new.
Limitations on exclusions, pre existing conditions cannot be excluded
Valid claims must be settled 2 business day after receipt of documentation.
Micro insurance subject to lighter FAIS and commission restrictions.
Prudential Regulatory Requirements for micro-insurers
FSM1: Framework for financial soundness of micro insurers
FSM2: Valuation of assets, liabilities and own funds
GOM: Governance and operational standards for micro insurers
• Subject to less onerous governance and operational requirements than regular insurer
Responsibility of HAF
Must have an actuarial function capable of assisting board in matters
Express an opinion on the reliability and accuracy of calculations of TPs, MCR, SCR including:
Best estimates and associated assumptions when valuing technical provisions:
• Appropriateness of underlying models and methodology
• Sufficiency and quality of data used in calculations
• Accuracy of calculations
Responsible for evaluating and providing advice on actuarial soundness of product development, terms and conditions, premiums and other values and estimation of cost of capital required to underwrite a product
Provide input to the board regarding the operations, efficiency and effectiveness of the components of the systems for risk management and internal controls relevant to their areas of responsibility
Determining Assets, liabilities, technical provisions and Capital requirements for Microinsurers
FSM 1, FSM2 sets out approach to for determining the value of assets, TP, MCR and capital resources
Is proportionate to nature of micro insurers
Assets are restricted to cash and equivalents, at market value
TPs valued using a formula-based approach comprised of the following:
UPR, IBNR, OCR URP
MCR is calculated as 15% of net written premiums in the 12 months preceding the valuation date, minimum of R4 million
Key Risks for Microinsurers
Volume and expense risk
Increased risk of not recouping admin and distribution costs due to small contract size. Need to sell in large volumes to achieve profitability. Expenses can be a substantial part of premium, therefore important to control.
Policy benefits specified on a sum assured rather than indemnity basis, hence costs of assessing claim amount to be paid are low or zero.
Persistency
Premiums maybe unaffordable in tough economic times. Missed premiums and cancelations rates higher than for higher income market. Needs to be allowed for in pricing. Persistency should be monitored against pricing assumptions.
Can be mitigated through product design e.g. allowing a certain number of missed premiums before cancellation or automatic premium deduction
Underwriting risk/Claim frequency and severity
The severity of claim is not a source of risk, since benefit is specified on sum assured basis. Frequency of claims between different sums are a source
Do not guarantee premiums for extended period, therefore mortality risk is reduced
Maybe aggregation risk due to several lives on a single policy. Also, geographical concentration.
Anti-selection due to limited underwriting
Maybe waiting periods, where only accidental death is covered. Policyholder protection rules limit these to a quarter of the term.
fraud
Operational risk
Market risk
Given short term nature and requirement for cash/ equivalents, market risk is limited
Should monitor for credit/counterparty risk
No allowance for market risk in capital requirements
Regulatory risks
High cost of meeting regulatory requirements in a low premium environment. Addressed by reduced requirements
Market conduct and value for money
High lapse rates low premiums, mean claims ratio can be poor. May not reach sufficient scale to cover overheads
High lapse rates with waiting periods mean policyholder may receive little cover before lapsing.
Low financial sophistication may result in misunderstanding over extent of cover and restrictions.
Cell Captives
Structure
Company (cell owner)can perform the business of the insurer without obtaining own insurance license. An insurer (cell captive insurer) rents out license to cell owner in exchange for a fee
First party cell- cell owner and policyholder the same
Third party cell- cell owner and policyholder different
Promoter cell business- Sold directly to public by the cell captive insurer without going through any of the cells
• Business owned by ordinary shareholders
• It can include business reinsured by cell owners to promoter cells
• It is not much different than regular insurance business but allows insurer to take on risks that have not reached full scale yet.
• More capital effective than ring fencing funds.
Cell owners hold a specific type of share in cell captive and can then place insurance business with the cell captive insurer.
Business is managed by cell owner on behalf of insurer. Owner receives profits through dividends.
Cell captive will provide accounting and regulatory services. May also provide start-up assistance, pricing, underwriting, claims management, reinsurance and investment services.
Capital is provided by the owner’s shareholding in cell captive and can be supplemented by cell captive for a fee.
Cell Captives Operation
Outsourced business model- cell captive will rely on cell owner, intermediaries and administrators to conduct most of business functions.
Functions governed by binder agreements, outsourcing and intermediary services agreements. Conflict of interest situation for outsourced partners
Cell Captives Risks
Conflict of interest situation for outsourced partners
Risks faced by policyholder
- Generally, the same as a normal insurance structure
- Could be exposed to risks due to fair conduct of business, conflict of interests due to profit share
- Ring fencing leads to inability to diversify capital requirements across cells, leading to higher capital requirements.
Risks faced by shareholders
First party cells- losses are limited to these cells via recapitalization requirement, hence risk to other cell owners and promoter cells is limited.
Third Party cells- any losses are first covered by capital held in the cell, then by capital held in promoter. Any excess loss will be covered by capital held in other cells. Similarly, any loses in excess of capital held by promoter will be covered by first and third party cells
Operational risks- outsourcing of key functions such as underwriting and claims management to cell owner.
Reputational risks- due impact of actions of cell owners associated with cell captive
Challenges for cell captives
Cell captive have certain challenges not necessarily present for non-cell insurers
- need to abide by regulations FAIS, insurance act and long-term insurance act
- solvency position needs to be monitored and remedial action e.g. recaptisaltion, done through regular valuations.
- cell captive needs to decide on how to allow for
Cell Captive Considerations
- If company wants to insure itself, in case a first party cell is best, If insuring third parties a cell captive or insurance licenses could be used.
- Expertise to perform required functions – accounting, regulatory, pricing, underwriting, claims management
- If company will grow quickly to scale to support admin functions
- Sufficient capital to meet min cap requirements
