Insurance Provision for Low-Income Communities: Part 2: Initial Lessons From Micro-Insurance Experiments for the Poor
Brown, W. & Churchill, C.
Publication Date: May 2000
Published by: USAID - Microenterprise Best Practices (MBP) Project
Document Type: Paper
What is current practice? Evidence from 32 microfinance institutions, co-operatives, private companies that have already developed insurance products
Documents the current state of micro-insurance and identifies emerging lessons for Microfinance Institution (MFI) practitioners interested in developing their own insurance products.
Life insurance is the most widely available and proven type of insurance in low-income markets- Lower frequency of death risks and reduced administrative complexity in managing life insurance make it a safer, easier form of coverage;
- Life insurance products studied were not only sustainable but profitable;
- MFI life insurers all had several thousand clients, strong information-tracking, and a stable credit or savings portfolio before they developed insurance on their own.
Health and property insurance have proven more difficult to provide on a fully sustainable basis. Property insurance, when limited to coverage of the outstanding balance of a loan used to purchase an asset, appears to have strong potential for sustainability.
The paper emphasises three lessons:- Increased coverage = increased complexity and increased protection generally requires greater expertise and investment to succeed;
- Reliance on group policies all members of a group are enrolled in a single policy- to reduce risk and administrative costs
- Protections against moral hazard, fraud, and adverse selection thus mandatory coverage and limits on the age or health coverage of potential policyholders are commonly used. Life insurers in the study require presentation of formal death certificates. For health insurers, co-payments and mandatory reference systems are widely used. For property insurers, deductibles and claims inspectors are the primary moral hazard controls.
Product development strategies show that- Savings are more effective than insurance in reducing vulnerability to the economic stresses;
- Insurance provides more appropriate protection for larger losses that occur less frequently;
- To reduce transactions costs of providing insurance, it is useful to layer insurance transactions on top of the delivery of other financial services;
- Savings accounts are a more effective foundation for delivering insurance services than loans, because the credit- insurance link only provides coverage when the client has an outstanding loan;
- A savings- insurance link increases the likelihood that low-income clients with irregular income flows can access insurance.
MFIs and other local institutions are well equipped to act as agents, leveraging their existing, low-cost distribution channels and trusting relationships with low-income clients. Larger organisations - commercial or co-operative insurers - are best able to offer expertise and capital. This makes it possible to offer the benefits of insurance to low-income clients. There are three groups of activities involved in providing these products:- Product manufacturing entails activities related to developing and pricing products as well as managing the risk exposure of the insurance portfolio and the investment of reserves and annual premiums. It is best performed by commercial or co-operative insurers;
- Sales includes all activities related to the marketing, promotion, and initial sale of the product. Best performed by an agent
- Servicing involves the ongoing collection of premiums from and distribution of claims benefits to policyholders. Best performed by an agent.
The paper concludes by identifying areas where further experimentation and effort are needed:- Reinsurance, Documenting product partnerships, Characterising the low-income market, Negotiating regulatory restrictions, Understanding household's insurance needs and Increasing the acceptance of insurance.
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