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MFIs and Risk Management Tools for the Poor: An Introduction to MicroInsurance : 

MFIs and Risk Management Tools for the Poor: An Introduction to MicroInsurance Fifth Annual Conference of MicroLending Institutions in C&EE and the NIS 16-18 May 2002 Budapest, Hungary Danubius Thermal Hotel Margitsziget Michael J. McCord The MicroInsurance Centre www.microinsurancecentre.org

Outline : 

Michael J. McCord, mjmccord@bellsouth.net Outline Insurance Basics The Client Risks The Supply Side MicroInsurance Models The Partnership Model Lessons Learned and Special Issues

Definition: “MicroInsurance” : 

Michael J. McCord, mjmccord@bellsouth.net Definition: “MicroInsurance” “Micro-” Insurance products that are designed to be appropriate for the poor in relation to cost, terms, and coverage “Insurance” Financial product that protects against unexpected losses through pooling resources. Policy holders pay only the average loss experienced by its “risk pool”

Definition: “Risk Pooling” : 

Michael J. McCord, mjmccord@bellsouth.net Definition: “Risk Pooling” Bringing together resources from a large number of people and or groups, to share in the losses of a few resulting from a risky event.

Principles for Insurance Provision : 

Michael J. McCord, mjmccord@bellsouth.net Principles for Insurance Provision Large numbers of similar units exposed to the risk Limited policyholder control over the insured event Existence of insurable interest Determinable and measurable losses Calculable chance of loss Non-catastrophic losses Economically affordable premiums

Insurance Risks : 

Michael J. McCord, mjmccord@bellsouth.net Insurance Risks Adverse Selection (Tendency of persons with a higher-than-average chance of loss to seek insurance at standard (average) rates, which, if not controlled by underwriting, results in higher-than-expected loss levels ) Moral Hazard (Hazard arising from any non-physical, personal characteristic of a risk that increases the possibility of loss or may intensify the severity of loss for instance bad habits or low integrity. An example might include failing to properly care for an insured goat because it is insured, thereby increasing the chance it will die of disease.) Fraud (Intentional perversion of truth in order to induce another to part with something of value.) Cost Escalation (risk that the costs re-price faster than the premium.)

MicroInsurance: The Clients : 

MicroInsurance: The Clients

Client Risk Response Options : 

Michael J. McCord, mjmccord@bellsouth.net Client Risk Response Options Adapted from C. van Oppen

Risk Management: Savings, Credit, and Insurance : 

Michael J. McCord, mjmccord@bellsouth.net Risk Management: Savings, Credit, and Insurance Very Large Small Certain Highly Uncertain Relative Loss / Cost Life Cycle Events Death Insurance Flexible Savings and Credit Health Property Mass, Co - variant Flexible Savings - Partial protection Disability Very Large Small Certain Highly Uncertain Degree of Uncertainty Relative Loss / Cost Life Cycle Events Death Health Property Mass, Co - variant - Disability Brown and Churchill, 11/1999

Household Life Cycle Financial Needs : 

Michael J. McCord, mjmccord@bellsouth.net Household Life Cycle Financial Needs Birth (C,S,I) Marriage (C, S) Death (C, I) Education (C,S) Health (C,S,I) Fixed Asset Acquisition (C) Old Age (I,S) Asset Protection (I) Marriage Ceremony (C,S) Working Capital (C) Investments (S) C = Credit; S = Savings; I = Insurance

Impact of Shocks on Family Income : 

Michael J. McCord, mjmccord@bellsouth.net Destitute Loan Cycles Economic Levels Wealthy Non-poor Moderate poor Poverty Line Impact of Shocks on Family Income Adapted from a slide by Bill Grant (Ebony Consulting International) Extreme poor Vulnerable non-poor

Impact of Financial Shocks on MFI Clients : 

Michael J. McCord, mjmccord@bellsouth.net Impact of Financial Shocks on MFI Clients Impact on: The affected client (cash, business, assets) Their family (reduced HH income, outflows) Their group (in a group scheme – loss of friend, member, savings, morale) The MFI (destabilization, reduced morale, maybe loss of P&I)

MicroFinance and MicroInsurance : 

Michael J. McCord, mjmccord@bellsouth.net MicroFinance and MicroInsurance MicroFinance can help people move out of poverty: Credit Savings MicroInsurance can help people protect the gains they have made

The Supply Side:General Models of MicroInsurance Delivery : 

The Supply Side:General Models of MicroInsurance Delivery

Slide 15: 

Michael J. McCord, mjmccord@bellsouth.net

General Models of MicroInsurance Delivery : 

Michael J. McCord, mjmccord@bellsouth.net General Models of MicroInsurance Delivery Community-Based Model (UMASIDA Tanzania) Owned and Managed by Members Provider Model (GRET Cambodia) GRET insures, and primary doctor is employee Insurer Model (SEWA India) MFI is insurer (Limited with C.U.) Partnership Model (AIG and MicroCare with Uganda MFIs) No risk to MFI, administrative burden minimal

Community-Based Model : 

Michael J. McCord, mjmccord@bellsouth.net Community-Based Model Risk

Provider Model : 

Michael J. McCord, mjmccord@bellsouth.net Provider Model Policy Holders Product Manufacturing   Development, Pricing, Testing, Management, Risk controls, Reserves Sales Market policies, address questions, provide feedback) Service Assess and pay claims to policyholder or beneficiary Secondary Care: Hospital Primary Care: GRET Doctor = Provider Responsibilities Risk

Full Service Insurer Model : 

Michael J. McCord, mjmccord@bellsouth.net Full Service Insurer Model Product Manufacturing Life and Accidental Death (Development, Pricing, Testing, Management, Risk controls, Reserves) Provided through SEWA. Product Manufacturing Health and Property (Development, Pricing, Testing, Management, Risk controls, Reserves) Sales (all policies) (Market policies, address questions, provide feedback) Policyholders (Purchase policies, make health reimbursement, property coverage, and life claims to servicing, accesses hospital care, and saves for premiums at SEWA Bank) Service (all policies) (Assess and pay claims to policyholder or beneficiary) SEWA Bank (manages client savings for premiums and Insurance program accounting) BENEFICIARY (for life and property) HOSPITAL (for health issues, client pays direct) SEWA LIC/NIA Risk

Partnership Model – Group Personal Accident Insurance : 

Michael J. McCord, mjmccord@bellsouth.net Partnership Model – Group Personal Accident Insurance Risk

Partnership Model - Health : 

Michael J. McCord, mjmccord@bellsouth.net Partnership Model - Health Risk

Insurance Delivery Roles in Partnership Model : 

Michael J. McCord, mjmccord@bellsouth.net Insurance Delivery Roles in Partnership Model Each company uses its comparative advantage to create a professional product that can benefit all parties.This is done without anyone doing anything significantly outside the bounds of their core and normal operations.

MicroFinance Partnerships : 

Michael J. McCord, mjmccord@bellsouth.net MicroFinance Partnerships Credit Transfer Services MFI Partner CLIENTS (Individuals or groups)

Decision-Tree for MicroInsurance Product Development : 

Michael J. McCord, mjmccord@bellsouth.net - - YES Consider Consider Developing Developing Alternative Alternative Risk Managing Risk Managing Financial Financial Services Services Potential Market? Potential Market? Solicit Insurer Partnership Solicit Insurer Partnership NO Negotiate Partnership Not Found - - YES Potential Market? Potential Market? Solicit Insurer Partnership Solicit Insurer Partnership NO Not Found Defer Product Development Defer Product Development Consider Starting with Simple Types of Coverage Consider Starting with Simple Types of Coverage Consider Alternative Risk - Managing Financial Services Consider Alternative Risk - Managing Financial Services Defer Product Development Consider Starting with Simple Credit Life Coverage Consider Starting with Simple Types of Coverage Defer Product Development Consider Alternative Risk - Managing Financial Services Consider Alternative Risk - Managing Financial Services Found Warren Brown, Colleen Green, Gordon Lindquist: Cautionary Note for MFIs and Donors Considering Developing Microinsurance Products Decision-Tree for MicroInsurance Product Development Are clients interested in insurance protection? and Is this protection the most effective risk management solution?

Risk is the key issue!! : 

Michael J. McCord, mjmccord@bellsouth.net Risk is the key issue!! Insurance Risk can deplete MFI capital (CARD Bank, health insurers the world over) For formal insurers risk of MFI clients can be negligible (AIG did not even reinsure their MFI portfolio)

Why MFIs should be interested in the Partnership Model : 

Michael J. McCord, mjmccord@bellsouth.net Why MFIs should be interested in the Partnership Model Keeps MFI free of insurance risk while allowing MFI to satisfy client demands Usually limited capacity with MFIs MFI capacity-building focus is with CREDIT and savings Insurance has a much different risk structure and requires significantly different skills MFIs can earn commissions with virtually no risk and limited effort Insurance is NOT a new product, it is a new business

Issues with the Partnership Model : 

Michael J. McCord, mjmccord@bellsouth.net Issues with the Partnership Model Insurers need convincing In most countries they do not see this market India legal mandate Ghana Insurance Commissioner (high demand) Insurers have an upper hand in negotiations Be prepared (need a basic understanding) Track agreement (ex. claims period agreement) Legal Issues “Agent” (insurance and banking regulators) Profit flows (to insurer with commissions to MFI, flows with risk) The relationship (management can be trying)

Slide 28: 

Michael J. McCord, mjmccord@bellsouth.net

Some Special issues : 

Michael J. McCord, mjmccord@bellsouth.net Some Special issues Demand Willingness to pay Voluntary versus Mandatory

Demand : 

Michael J. McCord, mjmccord@bellsouth.net Demand Do not assume there is demand Generally L.A. and Caribbean Cases (est. 25%, employed, ILO) SEWA India (100% compulsory to 20% voluntary, MIC) AIG Uganda (up to 70% voluntary purchase over time, MIC) Jordan (appropriate for only non-poor, Loewe, GDI) Zambia (questionable demand, Manje, ILO draft) Specific Products CMF Nepal (maternity benefits, Sharma et al) GRET Cambodia (cattle insurance, Brown and Churchill)

Why is demand questionable? : 

Michael J. McCord, mjmccord@bellsouth.net Why is demand questionable? Risk pooling (lack of understanding) Bad reputation of insurance Methods of premium collection Poor marketing Culture

Assessing Demand : 

Michael J. McCord, mjmccord@bellsouth.net Assessing Demand Qualitative research For concept and prototype development Focus Groups Participatory rapid appraisal Quantitative research Prototype testing Surveys Questionnaires Product satisfaction studies (quant and qual) A continuous process as with all market research

Willingness to pay : 

Michael J. McCord, mjmccord@bellsouth.net Willingness to pay Willingness to pay a premium is a factor of: Family resources The relationship between product components and client needs (must be understood by the potential client) The method of payment (frequency or savings mechanism) The total cost

Voluntary vs. Compulsory Provision : 

Michael J. McCord, mjmccord@bellsouth.net Voluntary vs. Compulsory Provision Benefits to Voluntary Determine real demand Forces understanding of staff and clients Forces marketing Issues with Voluntary Slow growth of risk pool Higher premiums because of low volume risk pool Operationally more complex Benefits to Compulsory Operationally simple Insurers prefer Lower marketing costs Issues with Compulsory Client annoyance Masks demand

Lessons Learned1 : 

Michael J. McCord, mjmccord@bellsouth.net Lessons Learned1 Make sure to address real needs of clients (coverage, terms, collection, claims) Follow a new product development process Some protection can be provided without insurance (MFIs should provide savings and emergency loans first) MicroInsurance can be profitable

Lessons Learned2 : 

Michael J. McCord, mjmccord@bellsouth.net Lessons Learned2 Initial premiums need to: be conservatively priced, and balance coverage, premium, mode of payment, and client resources Maintain strong, but appropriate, controls and systems (moral hazard, adverse selection, fraud; ex. death certificate and flexible paperwork) Training, training, training staff and management– insurance and marketing clients – risk pooling

Challenges to MicroInsurance : 

Michael J. McCord, mjmccord@bellsouth.net Challenges to MicroInsurance Getting more formal sector insurers interested in this market Understanding demand and attrition Getting clients (and staff) to understand the insurance concepts Developing savings products to assist with premium payments Tying insurance to loans? Savings? Nothing? Matching clients needs with products Scarcity of actuarial data (impacts premium and risk)

Things to remember: : 

Michael J. McCord, mjmccord@bellsouth.net Things to remember: Capacity (an honest assessment and a review structures will show honest MFIs that they should not be insurers) Start simple (often an expanded life product is best to start so everyone gets used to insurance and the relationships developed to offer it) Follow a product development process (concept development based on client demand, prototype development and testing, pilot testing, rollout, assessment) Partnerships (seek out partnerships rather than try to become an insurer yourself)

www.microinsurancecentre.org : 

Michael J. McCord, mjmccord@bellsouth.net www.microinsurancecentre.org The MicroInsurance Centre“Creating partnerships to insure the World’s Poor”

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