MICROCAPITAL.ORG STORY: Wharton Business School Online Portal Acknowledges The Need For Innovation In The Microinsurance Sector And Highlights The Existing Barriers To A Wider Acceptance Of Microinsurance Products Based On Observations By UK-Based Microinsurance Research Centre, Munich Re Foundation And The ILO’s Microinsurance Innovation Facility

  A recent article on the ‘Knowledge@Wharton’ online portal entitled ‘Microinsurance: A safety net with too many holes’ [1] contains a detailed discussion of existing challenges facing the microinsurance market. The article notes that there has been some recent innovation in the microinsurance sector, a market that has experienced relatively slow growth compared to the microfinance sector in general. The authors note that innovation is to be welcomed and a Bangladeshi pilot microinsurance programme is cited as an example.

The Bangladeshi product, which involves six NGOs (non-governmental organizations) and Bangladesh-based Pragati Life Insurance Ltd. [2], will include life insurance with some hospitalization coverage. It has an initial target of 26,000 Bangladeshis and plans to scale up significantly after two years. The coverage will be over three or five year terms, an unusual feature as a term in excess is typically the norm, according to Mr Mosleh Uddin Ahmed, a consultant and CEO of Micro Insurance Research Centre (MIRC) [3] in the UK. Mr Ahmed is in Bangladesh to help launch the project and was quoted as stating that a long tenor would not work ‘given the precarious incomes of the target market’.  Another innovative feature of this pilot is that policyholders will receive a refund of life premiums paid in addition to 5 percent of their investment income if they make no claims during the life of the product. If there is no claim on the hospitalization coverage, the premium will not be refunded but the price of subsequent premiums would be reduced by 10 percent for each year that there is no claim after that.  

The article notes that innovation is a good way to encourage growth in the placid microinsurance market. Microinsurance has been ‘a hard sell among the world’s poor’ partly because of ‘a lack of understanding of how insurance products work, the poor population’s general reticence to part with what little financial resources they have, badly designed products and a shortage of localized risk management knowledge among providers’. Mr Ahmed points out that even in Bangladesh where there are thousands of registered MFIs, only 11 licensed life insurance companies offer microinsurance products.

The article goes on to highlight the importance of microinsurance particularly in the current climate where sharp fluctuations in commodity prices and diminishing government support for poorer comunities are becoming rife. Some commentators believe that ‘this is an ideal time for microinsurance to work alongside the more established microfinance lending and play a bigger role in alleviating the problem’ of poverty. The idea is that ‘people work themselves out of poverty using microlending’ and ‘microinsurance helps prevent them from falling back into it’ according to Mr Dirk Reinhard, vice chairman of the Munich RE Foundation [4] , the non-profit risk management educational arm of the German reinsurer.  

Apart from the need for innovation, the article explores other challenges that impede the progress of the microinsurance sector. A key challenge is the need for large volumes and economies of scale in the microinsurance market. In addition, the ‘risk relationships’ are reversed in microinsurance, a factor which makes the need to secure clients’ trust very important. As stated by Mr Craig Churchill, head of the International Labour Organization’s Micro Insurance Innovation Facility [5], ‘the provider puts up the capital and trusts the customer to pay it back’ in microfinance but ‘in microinsurance, the policyholder pays up front and hopes the provider keeps its promise to make a payment in accordance with the contractual terms’. He added that ‘for a tranche of society that probably has never used — let alone heard of — these insurance products, it’s an enormous leap of faith’.   Equally important is the need for flexibility and customization. Professor Santosh Anagol, a Wharton professor of business and public policy currently researching microfinance in India, noted that default rates do not change significantly when a microlender is flexible and ‘willing to change repayment terms from, say, once a week to once a month in order to factor in the typically infrequent and variable cash flows of low-income householders’. He added that offering such flexibility is a good way to build a ‘deep relationship that’s critical for creating that trust and getting in close touch with the lives of the poor’. Likewise it is imporant to tailor products so that they reflect local risks ‘which can vary greatly from one village or livelihood to the next’. Mr Churchill noted that ‘an insurer can’t just offer what they always do but at a reduced price’ and that a product ‘really has to be redesigned after assessing what the local needs are, and it has to be accessible’.  

Mr Churchill was quoted as approving the design and distribution of the life insurance initiative launched by New Delhi-based Max India Ltd [6]. and New York Life Insurance [7]. Called ‘Max Vijay’ [8], the insurance product is also a long-term savings product for low-income Indians and 70,000 policies were stated to have been sold within the first year of its launch. The application process is simple and a Max Vijay customer fills in a one-page form, provides a proof of identity and pays a minimum enrollment premium ranging from Rs. 1,000 to Rs. 2,500 (approximately USD 20 to 52). Subsequent premiums over the 10 years of the policy are optional and investments are guaranteed. In the case of natural death, the claimant receives the guaranteed sum assured and the account value. In the case of accidental death, the claimant receives the account value and double the amount of sum assured. In addition, Max Life has signed an agreement with a national retail chain, I-SERV, to let policyholders manage their policies at 12,500 of its stores, ensuring its accessibility and easy distribution. The article did accept that life insurance is easier to ‘localize’  compared to health, weather, property, agriculture and catastrophe insurance products. Non-life products typically require more extensive on-the-ground knowledge in terms of not only a product’s design, but also its administration and monitoring. All of these adds to the financial burden for an insurer.  

Related to the issue of distribution is the role of NGOs to facilitate insurers’ access to remote markets. NGOs tend to be more in touch with the client base and in a better position to understand ‘what’s crucial for their well-being’. Insurers on the other hand have the actuarial skills that enable them to construct a viable contract, calculate premiums and address pricing issues. Partnerships between NGOs, insurers, MFIs and community organisations can be mutually beneficial for all concerned. The article notes that governments can in some cases play an important role, for example by providing subsidies (in the form of one-off premiums or otherwise). However, the counter argument is that government funding may be better applied to other matters such as ‘funding individual ID cards to enable faster customer identification and reduce fraud-detection costs, or providing regional health, livestock and weather databases to collect much-needed data to help insurers develop and monitor products’.  

Once the microinsurance market becomes more established, the authors note that the sector will also face many of the same issues that plague the microfinance market today, ‘notably questions about whether it is indeed helping to lift people out of poverty’. 

Previous Microcapital.Org publications on microinsurance and the issues raised here have been set out in the Bibliography section [9] – [16].  

By Chinq Yee Chong, Research Assistant  

Bibliography  

[1] Article on the ‘Knowledge@Wharton’ online portal entitled ‘Microinsurance: A safety net with too many holes’: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2346  

[2] Pragati Life Insurance Ltd.: www.pragatilife.com/  

[3] Micro Insurance Research Centre: www.microinsurancecentre.org/  

[4] Munich RE Foundation: www.munichrefoundation.org/   

[5] International Labour Organization’s Micro Insurance Innovation Facility: www.ilo.org/microinsurance    

[6] Max India Ltd: www.maxindia.com/   

[7] New York Life Insurance: www.newyorklife.com/  

[8] Max Vijay: www.maxvijay.com/  

[9] NEWS WIRE: United States: Time Magazine Asks Why Poor People Decline Insurance  

[10] MICROCAPITAL.ORG STORY: SKS Microfinance and Bajaj Allianz Life Insurance Co. Ltd. Extend Microinsurance Project ‘Swayam Shakti Suraksha’ to Cover Husbands of SKS Members  

[11] MICROCAPITAL.ORG STORY: The Scope For Microinsurance And The Importance Of Best Practices: Observations by ACCION International, Zurich Financial Services And Risk Management Solutions Inc.  

[12] MICROFINANCE PAPER WRAP-UP: Emerging Markets in Microinsurance, by Arthur D. Little  

[13] MICROCAPITAL STORY: Microinsurance Innovation Facility Opens Second Round of Research Grants  

[14] MICROCAPITAL STORY: Tensions In The Microinsurance Sector – Observations From Munich Re’s Experience In Indonesia  

[15] MICROCAPITAL STORY: Opportunity International’s MicroEnsure of the United Kingdom to Launch Microinsurance Program for Climate Change and Crop Failure in India  

[16] PAPER WRAP-UP: “Health Microinsurance: A Comparative Study of Three Examples in Bangladesh” by Mosieh U Ahmed, Syed Khairul Islam, Md. Abul Quashem, and Nabil Ahmed (Part IV of IV)

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