Making insurance work for all: The microinsurance initiative

Making insurance work for all: The microinsurance initiative

BEING A PAPER PRESENTED AT THE 2012 INSURANCE CORRESPONDENTS SEMINAR IN CALABAR, CROSS RIVER STATE.

BY LEO AKAH

DEPUTY DIRECTOR (AUTH & POLICY)

NATIONAL INSURANCE COMMISSION

BACKGROUND

•          Microinsurance simply put is a low premium approach to insurance for those at the bottom of the pyramid. One school of thought describes it as a conventional insurance sold with small premium amounts per risk. The innovative part of microinsurance is that it reaches an area of the population that is still deemed ‘unbankable’ or physically unreachable to the normal banking sector.

Poor people face many risks that are beyond their control. They are often unable to cope with the financial implications of the death of a family member, illness or loss of income or property, and this perpetuates poverty and undermines asset formation. The concern about the situation of less fortunate people is nowadays a global trend, not only due to humanitarian issues involved, but due to the social, economical, political and even, the ecological consequences created by the dissimilarity and misery. This issue is aggravated when considering the effects of climate change by virtue of global warming, where the impacts on needy people are likely to be even more devastating.

It is on the above premise that microinsurance as an element of financial inclusion was brought to the front burner.

Definition

The International Association of Insurance Supervisor (IAIS) defined microinsurance as “insurance that is accessed by (or accessible to) the low income population, provided by a variety of different entities, but run in accordance with generally accepted insurance practices (which should include the Insurance Core Principles). This means that the risk insured under a micro insurance policy is managed based on insurance principles and funded by premiums”.

Microinsurance therefore does not include government social welfare as this is not funded by premiums relating to the risk, and benefits are not paid out of a pool of funds that is managed based on insurance and risk principles. For the same reason, it does not include emergency assistance provided by governments in, for example, national disasters flood/fire in low-income communities, etc.

The definition is based on three concepts:

“Insurance”, accessible to/accessed by and “ low income population”

2(a) Characteristics of Micro insurance

•          Relevant to the risks of low income households.

•          Accessed by low-income people.

•          Affordable premiums payable in small amounts.

•          Provided by a variety of institutions

•          Run in accordance with generally accepted ICPs

•          Insurance targeting those that are “ignored by mainstream commercial insurance and social insurance schemes”. That is, “persons who do not have access to benefits normally provided through formal employment.

•          Small benefit amounts

•          Clearly defined and simple rules and restrictions

•          Easily accessible claims documentation requirements

•          Fast payment of benefits

•          Specially adopted client education

Other features of Microinsurance from the Client base

•          Irregular income

•          High vulnerability to risk

•          Low financial and actual literacy

•          Higher risk environment (low security, more vulnerable living environments, limited access to services)

•          Lack of trust of large and informal institutions

•          They do not define their insurance as “small” in their mind

Factors that affect the development of Microinsurance market

•          Demand- side factors:

•          Perceived cost  – the perceived cost is not just only the level of the premium, but also by what the person needs to sacrifice to buy insurance.

•           Perceived Value, in turn, is impacted by the fact that low-income people place a disproportionally high value on current consumption, given their budget constraints, rather than future benefits.

•          The level of trust in the institution to successfully deliver on claims.

•          The probability of the risk event occurring (high/ low)

Supply- factors:

•          Compulsion-  for example credit insurance which is a condition for obtaining loan.

•          Derived demand – here a person is induced to buy a product based on his or her demand for another product or service such as funeral service.

Providers of Microinsurance

•          MFIs (NGO MFIs, Licensed MFIs)

•          Member-and Community based organizations (Cooperatives, Mutual Health Organizations)

•          Commercial insurers

•          Specialized Microinsurance

Distribution

•          Commercial insurance providers partner with microfinance institutions to be able to provide low premium insurance policies

•          Commercial insurance companies sell group insurance policy (MI) to an MFI for their clients.

•          Commercial insurance company selling group insurance to an MFI and enters into a partnership arrangement for premium collection and claim settlement.

•          Commercial insurance companies assign one of its agents to market and sell insurance to the individual clients of the MFI.

	Conventional Insurance	Microinsurance
Premium	Typically regular annual, quarterly, monthly. Based on age or other  specific risk characteristics, and collected regularly mostly from bank deductions.	Frequently or irregular premium payments. Group pricing with links to other services.
Policies	Complex policy document, many exclusions, usually annual terms	Simple language, Few to no exclusions, Terms appropriate to market, May require life and non-life benefits
Claims	Claims process for large sums insured may be quite difficult	Claims process for small sums insured is simple yet still controls fraud. Rapid claims processing
Delivery channels	Sold by licensed agents or brokers to wealthy, middle-class, or companies that typically understand insurance.	Often sold by unlicensed non-traditional agents to low-income persons, preferably in groups requiring significant consumer education
Control efficiencies	Screening requirements may include a medical examination, or other tests. Death certificates confirming event	If there is screening requirements. They are very limited to keep costs low confirmation of death by local leaders.

Need for Microinsurance

•          In times of crises, poor people are often the most at risk and least able to protect themselves.

•          Reasons vary from country to country.

•          To reach the market segment being excluded by commercial / regular insurance.

•          Absence of access to the Commercial insurers.

•          Lack of appropriate products for the poor

•          Need to bring down costs and to shore up the profitability of insurance business

•          Operators of commercial insurers having realized the underlying fallacies behind the supremacy of big premium wholesale insurance and government businesses.

Microinsurance as a potential business

•          Availability of large population(in most Sub-Saharan countries( including Nigeria) less than 2% of the poor and vulnerable have access to microinsurance)

•          The general insurance gap in Nigeria is about 94%

•          Convert the need as a social opportunity of providing protection

•          Leveraging on existing infrastructure- huge savings from capital deployment

•          To see as a business opportunity- develop apt insurance products

•          Opportunities offered by the increase in the number of micro finance institutions –a common delivery channel of microinsurance that are being established.

Models of Microinsurance

A key concern in the pricing of an insurance product is the element of cost of acquisition and its delivery.

The “Partner- Agent model

•          Insurers utilize MFIs delivery mechanism to provide sales and basic services to clients.

•          There is no risk and limited administrative burden for MFIs.

The Full service model

•          The provider is responsible for all aspects of product design, sales, servicing, and claims assessment.

•          The insurers are responsible for all insurance – related costs and losses and they retain all profits.

The Community based model

•          The policyholders own and manage the insurance programs and negotiate with external health care providers.

Provider model

•          The service provider and the insurer are the same, i.e, hospitals or doctors offer policies to individuals or groups.

•            Conclusion

In consideration of the fact that the insurance gap in Nigeria is about 96%, one can conveniently say that there is abundant opportunity in Nigeria for insurance growth, particularly microinsurance. The greatest challenge facing microinsurance in Nigeria is how to ensure that the global standard which is often referred to as CAT is met. CAT is an acronym for fair Charges, easy Access and decent Terms. It is however believed that partnership between insurers and social organizations like NGO would be desirable in promoting microinsurance by drawing on their mutual strengths.

Thank you for listening.