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2011 Global Microcredit Summit Commissioned Workshop Paper

November 14-17, 2011 – Valladolid, Spain

What have we learned

about the most effective

ways to use Microinsurance

to reduce vulnerability:

Health, Life, Disaster

and More

Written by:

Richard Leftley, CEO, MicroEnsure, UK

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TABLE OF CONTENTS

Contents Introduction ......................................................................................................................... 3

Today‟s Microinsurance Market ......................................................................................... 3

A Typical Framework for Providing Access to Insurance .................................................. 6

Distribution: Moving Beyond the MFI ............................................................................. 10

Understanding the Economics across the Value Chain .................................................... 11

The Evolution of Microinsurance Products ...................................................................... 14

Future Challenges to be Addressed................................................................................... 18

Acknowledgements ........................................................................................................... 20

Bibliography ..................................................................................................................... 21

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What have we learned about the most effective ways to

use Micro-Insurance to reduce vulnerability:

Health, Life, Disaster and more. Introduction

Over the past decade there has been significant growth in the microinsurance market

which has evolved from simple credit life products to include higher impact products

such as weather index and health insurance. But what lessons have been learned about

how to provide the poor with access to insurance? This paper considers which

mechanisms and products have shown the greatest potential and also seeks to set out

issues that remain for the industry to solve.

Today’s Microinsurance Market

According to a recent Swiss Re Sigma report, the global microinsurance market has a

potential of covering up to four billion people through market-based risk transfer

solutions and public private partnerships (PPP)1. This translates into a potential premium

volume of approximately USD 40 billion making microinsurance the largest untapped

insurance market in the world.

Source: Swiss Re (2010). Sigma No 6/201

1 Swiss Re (2010). Sigma No 6/201 - Microinsurance - risk protection for 4 billion people.

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It is estimated that of the potential microinsurance market of 4 billion people, only 78.5

million are currently served, just 1.96% of the potential total market share2. Furthermore,

the 2% of the available market that do have access to microinsurance are limited to

accessing simple credit life products that do not meet their needs.

Microinsurance offers a viable alternative for low-income households to manage their

risks. At the same time, it is increasingly being viewed as a vast untapped growth

segment for the insurance sector. The Asia-Pacific region, which is home to around 70%

of the world‟s low-income population, is the largest microinsurance market.

Microinsurance has grown rapidly, particularly in India and Bangladesh, while new

initiatives are being observed in other key markets including China and the Philippines.

Africa is a vast and largely untapped market and offers tremendous growth potential.

Credit life is the dominant microinsurance product, driven by its simplicity and a strong

push from microfinance institutions to bundle life protection with microcredit. However,

the product provides limited protection to low-income families and other products, most

notably health, are cited by clients as being in highest demand. Increasingly insurers are

designing products that offer more comprehensive life/property protection and help to

mobilize savings.

Health and agricultural microinsurance are pertinent to the low-income population;

however, they are also more complex in terms of their design, pricing and administration.

Innovation - in product design, distribution and technology is therefore important in

improving the viability of microinsurance. Index-based weather products for instance, are

examples of innovative product design that help overcome the challenges of traditional

agricultural insurance.

2 The MicroInsurance Centre, LLC (2007). The Landscape of Microinsurance in the World‟s 100 Poorest

Countries.

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The table below summarizes lives covered by product lines within each of the three

regions of the Microinsurance Centre study. It will be noted that the total exceeds the

78.5 million because most products are multi-line and so the same life is counted more

than once. For example, in India VimoSEWA sells one microinsurance product which

covers life, hospitalization, property and disability. VimoSEWA‟s total number of

covered lives would be reflected in all four columns, even though in an overall total, each

policy holder would only appear once.

Covered Lives by Product and Region

Region Life Health Accident &

Disability

Property &

Index

Americas 7,545,057 445,876 105,000 600

Africa 2,036,141 3,053,778 1,603,000 1,600,000

Asia 54,158,332 31,697,038 39,180,508 34,557,434

Total 63,739,530 35,196,692 40,888,508 36,158,034

Source: The Microinsurance Centre, LLC (2007). The Landscape of Microinsurance in the World‟s 100

Poorest Countries

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Health Insurance emerges consistently as the most demanded microinsurance service.

Aside from people‟s obvious desire not to suffer from pain and disease, the illness or

injury of a breadwinner has serious implications for household livelihood security. When

asked about the most important cause of his household‟s poverty, a Zambian villager

responded: “Let hunger be ranked first, because if you are hungry you cannot work! No,

health is number one, because if you are ill you cannot work!”

Risk management needs prioritised by low income individuals in 11 countries

Source: The MicroInsurance Centre, LLC (2007). The Landscape of Microinsurance in the World's 100

Poorest Countries.

A Typical Framework for Providing Access to Insurance

In order to provide the poor with access to insurance, it is necessary to consider what

roles need to be performed and what type of entities are best placed to perform the role. A

typical framework for microinsurance includes three key roles; the risk carrier, the front

office and the back office.

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The Risk Carrier: typically accepts a small payment in return for paying out a much

larger sum in the event of loss. In most cases the risk carrier is an insurance company

regulated to underwrite insurance in the country. However, the risk carrier can also be a

mutual, a global reinsurer3 or a cell captive.

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The Front Office: needs to have a strong

brand, points of sale that are accessible to

the poor and the ability to transact cash to

pay for premiums and reimburse claims to

the users. In essence the front office is

responsible for “selling” insurance to the

poor. As an industry, microcredit

organizations have played a key role in the

front office providing insurers with access to

many millions of borrowers. However,

increasingly micro-savings clients, mobile

phone users, religious communities and

NGO‟s are also being used as front offices

by the microinsurance industry.

3 Reinsurers are typically used when the risk being insured has a significant co-variant risk; for example for

weather insurance. If the rains fail then any domestic insurer will be left with a significant loss, whereas a

reinsurer working across a number of countries will be able to absorb losses from a single country.

4 A cell captive is a specialist underwriting vehicle. Typically the cell is located in a tax efficient location,

the cell manager designs products, sell products and authorizes claims. A local fronting insurer is used as a

conduit to enable the cell to accept risk in any given country. The advantage is that underwriting capital can

be more effectively and legally used in a number of countries without having to secure an insurance

license.

Hollard Cell Captive

In 2009 MicroEnsure partnered with

Hollard, a leading insurer based in

South Africa to launch the World‟s

first microinsurance cell captive.

Hollard provided the underwriting

capital and permitted MicroEnsure to

design products, sell to a range of

clients and authorize claims.

For MicroEnsure this was a major

breakthrough because the cell captive

allowed them to design products that

local insurers were not willing to

underwrite (e.g. health insurance). But

it also provided them with control over

the service level so they could

guarantee claims turn-around times.

Hollard accepts any underwriting

losses that arise but shares

underwriting profit with MicroEnsure.

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The Back Office:

is responsible for making

these products run smoothly.

Typically this will include

elements of product design,

training and education, data

collection, management

reporting and claims

administration. This back

office function can sometimes

be absorbed within the “front

office” or “risk carrier” but the more complex the products, the greater the need for a

specialist back office provider in the framework.

It has been interesting to witness the role of the microfinance community in relation to

insurance over the last decade. In the 1990's it was common for MFI‟s to charge

borrowers a flat fee of around 1% of the loan amount which was paid into an “internal

fund” to cover the loan in the event that the borrower died. Over the last ten years many

MFI‟s have moved away from using these internal funds and have started outsourcing

risk to local insurers. The main reasons for this shift are as follows:

A number of MFI‟s were affected by significant losses following natural disasters

and the internal fund was exhausted forcing the MFI to write off large portions of

the loan fund in order to cover losses arising from deceased borrowers.

The MFI‟s realized that insurers charged less than 1% for this risk. The MFI‟s

continued to charge clients 1% and booked the difference as revenue – in effect

charging the client a significant commission for the insurance

The move from NGO‟s to regulated entities, such as microfinance banks, also

forced many MFI‟s to pay closer attention to the products they offered and

whether they breached regulations.

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A number of MFI‟s continue to provide borrowers with products that the MFI provides

and underwrites themselves. These “self-insured” products are nearly always priced

higher than a regulated insurer would offer, place the financial wellbeing of the MFI at

risk and are illegal. Most MFI‟s engaged in this practice protest that the products are not

really “insurance” but they are and they do not represent good value for the customer.

In the last few years there has been a growing awareness that microfinance may not be

the only avenue for reaching the poor with insurance. Part of this move has been caused

by a number of MFI‟s failing to deliver on their potential in terms of scale. Whilst most

MFI‟s have been willing to provide access to their borrowers in relation to simple

products such as credit life, it has been frustrating for the insurance industry to work with

the MFI‟s on more complex products like health insurance5. As a result, insurers are

starting to partner with non-microfinance partners to reach the poor (see box on page 12).

Over the last few years a number of specialist back office providers have emerged

including PlanetGuarantee, First Microinsurance Agency (AKDN), Paralife and

MicroEnsure. These organizations have tended to position themselves as intermediaries

in the form of agents or brokers in order to be regulated. However, the scope of their

activities is much wider than a typical intermediary; in essence these companies have

chosen to be an intermediary in preference to being a consultancy. It‟s purely a reflection

of the revenue model; a consultant gets paid up-front whereas an intermediary gets paid if

a large volume of policies are sold. In part, these back office providers have

acknowledged the need for a full time administration service to ensure the products run

smoothly and that claims are processed quickly.

5 It‟s been our personal experience at MicroEnsure that large MFI‟s have failed to provide sufficient

internal project management capacity to see these more complex products through the pilot phase and

scaled up. There is also a tendency to fail to work through inevitable operational challenges that occur

during the pilot; instead the MFI‟s assume that the product can only damage their reputation rather than

working toward solutions.

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There are a variety of models emerging with a mix of risk carriers, front and back offices

which are seeking to improve the availability of products and increase the service level

associated with the standard „partner-agent‟ and mutual models. It will be important to

assess these models in the coming years to determine which have the greatest impact.

Distribution: Moving Beyond the MFI

Distributing insurance to the poor has been one of the greatest barrier to scale, whilst the MFI‟s

have provided the platform for credit life and other simple products, as the industry starts to

mature and seek higher impact products and greater scale it has started to look beyond the MFI.

In order to be an effective distributor of insurance, the entity needs a strong brand, accessible

points of sale and the ability to transact cash for premiums and claims.

Mobile Phone Companies: A number of models are starting to emerge using telcos as a front

office. Tigo in Ghana has introduced a “frequent user” product where a life insurance cover is

provided to subscribers. The more airtime used this month determines how much life insurance

cover you have next month. Tigo is willing to cover the premiums as the increased usage and

retention covers the cost. Also in Ghana, MTN has introduced a voluntary life insurance product

for mobile payments users who can opt to purchase cover and have monthly premiums deducted

from their mobile wallet. In Kenya, Safaricom has introduced a personal accident benefit as part

of the M-Kesho product sold via Equity Bank and also in Kenya, Airtel has introduced a free

life insurance to its post paid customers.

Religious Organizations: in market research clients indicated that they did not trust insurance

companies, but they would consider buying insurance from the church. In 2010 MicroEnsure

introduced health insurance in India and Tanzania which was sold either through a church

owned hospital or at the parish church on Sundays. Whilst the church has a strong “brand” and

accessible “points of sale”, the cash handling function had to be built as it was not available.

Utility Companies: in Peru insurance company, La Positiva has partnered with the water board

to sell insurance to the low income market using the regular payments for water as a method of

collecting premiums.

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Understanding the Economics across the Value Chain

Perhaps the most important factor that is regularly overlooked in microinsurance and as a

result leads to operational challenges is how the economics work across the value chain.

During 2010, a team from McKinsey & Company, a leading management consultancy,

worked with MicroEnsure to look at its health insurance operation in India. The work

was instigated because MicroEnsure wanted to better understand some of the challenges

that it and others in the industry were facing in relation to claims servicing in India.

In India MicroEnsure provides over 500,000 people with access to a health insurance

product that costs around $10 per year for a family of four people. The clients are

typically borrowers of various microcredit organizations or borrowers of the district

cooperative banks. The insurance is underwritten by United India Insurance Company

(UIIC) and the claims are serviced by various “Third Party Administrators” (TPAs),

whose role it is to issue ID cards, maintain a network of hospitals and adjudicate claims.

MicroEnsure‟s role as the broker is to help design the product, train the sales force,

educate the consumers using a variety of tools including comic books and serve as the

first contact point for claims (MicroEnsure coordinates with the insurer and the TPA

when issues arise with a claim to get the problem resolved).

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The Economics of a Health Insurance Policy in India

Source: Internal McKinsey study carried out Q4 2010.

Having established how the $10 cost of the product was divided up amongst the insurer,

TPA, MFI (which is called the “distribution partner” in the diagram on the previous page)

and MicroEnsure; the economics for the TPA and for MicroEnsure were examined. The

TPAs in India have their revenue capped by the insurance regulator at 6% of the

premium.

Whilst this may be adequate for higher premium products, 6% of INR 200 results in very

low monetary revenue which is not sufficient for the TPA to cover the costs associated

with issuing an ID card, maintaining a network of hospital providers and adjudicating

claims. The McKinsey team was able to quantify that for one of MicroEnsure‟s accounts,

the TPA was losing $0.18 per family.

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The Economics for the Third Party Administrator

Source: Internal McKinsey study carried out Q4 2010.

Due to the fact that the TPA‟s were losing money on each policy sold, they were failing

to provide adequate service. This typically meant that the TPA‟s were reluctant to

allocate sufficient staff to the microinsurance programs resulting in fewer hospitals

forming part of the available network and a lack of priority around the claims when they

arose. The knock-on effect resulting from the underpayment to the TPA‟s was that

MicroEnsure had to pick up more activities and was forced to play a larger role day-to-

day in the claims servicing. Of the $1 administration fee that MicroEnsure received, 75

cents was being spent back-filling gaps left by the TPA to ensure that the clients received

adequate service which is not sustainable.

The result of this analysis of the economics across the value chain is that MicroEnsure is

working on a new model for providing health insurance in India throughout 2011. The

new model recognizes a greater need for intervention at the point of sale to educate the

client about the product, a need for MicroEnsure to recruit more hospitals so that clients

have more options about where to receive care, a need to educate those hospitals on how

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to process insured clients and a need for more community health workers in the field to

serve as a front line to assist clients with their medical needs.

The Evolution of Microinsurance Products

Over the past decade there have been significant developments in terms of the range of

products that the poor are being offered by the microinsurance industry and this remains a

focus of innovation for the industry.

Initially, microinsurance was constrained to providing credit life products that paid off

the outstanding loan in the event of the death of the borrower. Whilst these products

meant that the borrower‟s family would not have to pay off the loan, the impetus for the

introduction of these products was for the micro lenders to protect themselves. Credit life

rapidly became commoditized with insurers and specialist intermediaries fighting for

market share based on price; when premiums fell below sensible levels, providers started

to innovate in terms of coverage in an attempt to protect the price.

It is now rare to find a pure credit life product; most have been extended to cover a range

of risks including disability, funeral (often for the wider family as well as the borrower),

property damage and even political risk. Credit life has been used as a conduit to bring a

range of products to microfinance borrowers and as a result “enhanced credit life”, as it

has become known, remains the most common product in the market today.

During 2004, work began to develop a new form of crop insurance product called

Weather Index. The motivation for these new products was a realization that small hold

farmers were struggling to gain access to microfinance loans in order to purchase inputs

such as improved seed and fertilizer. The theory was that if an insurance product was

developed that covered the risk of drought and other climatic events, then the

microfinance community would be willing to lend to these farmers who in turn would

buy better inputs and experience higher yields. It was necessary to develop weather index

products because the cost associated with verifying claims under traditional “yield based”

crop insurance was prohibitive for the small hold farming sector. The new weather index

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products used a proxy such as the amount of rainfall to determine whether a farmer

would have suffered a loss. Whilst there have been numerous successful pilots, outside of

India the products have failed to take off and scale up significantly.

Whilst there are numerous reasons for this failure of the weather index products to reach

scale; the two most common issues can be identified as a lack of weather data and the

products retail price. These products require historical rainfall data in order to be able to

calculate the correct risk rate to charge farmers; often this historical data is not available

as weather stations have been destroyed during wars or under-invested in post

independence. Even if a historical data set can be secured for a weather station, there is

no guarantee that the data needed to determine if a claim has been triggered will continue

to be forthcoming from the national meteorological service. The second issue is around

price and the farmer‟s willingness to pay. A product that is designed to pay out following

a “one in ten year weather event” is going to cost at least 10% of the loan amount (you

don‟t need to be an actuary to work that out). Yet farmers often express a willingness to

pay between 3% to 5% of the loan amount for crop insurance. Countries such as India

have followed the developed world‟s example and offered farmers a 75% premium

subsidy and the resulting products that cost 2.5% have sold by the million, other countries

without subsidies have failed to reach scale.

A second generation of weather index products is starting to emerge which try and

address the realities of low levels of available data and which achieve an “affordable”

cost to the farmer. One of these second generation products which MicroEnsure are

developing focuses on the number of dry days in a given month rather than the daily

rainfall. This “dry day” approach which is more akin to a weather hedge than a crop

insurance is starting to demonstrate that it can overcome the lack of data and by enabling

insurance to be sold to farmers for defined, shorter periods are resulting in a lower

monetary cost to the farmer.

Livestock Insurance has also emerged as an area for continued product innovation

which is important given the role of cattle as an informal savings mechanism for many

rural communities. The innovation around these livestock products has mostly been to

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focus on ways to reduce claims fraud, because if fraud could be eliminated then the retail

price of these products could be reduced by as much as half. The issue with fraud is that a

farmer, for example, with three cows buys insurance for one, whichever cow dies first the

farmer chops of the ear tag from the living animal and makes a claim under his insurance.

Most of the innovation in this space has taken place in India with the use of RFID chips

(near field technology) which are inserted into the cow to make it harder for the farmer to

remove the tag and make a claim if the animal is still actually alive. To date the costs of

the more secure tags have outweighed any reduction in premium.

Coverage for the poor‟s dwelling, micro-enterprise and belongings against damage from

fire, theft and natural disaster has also been surprisingly low when you consider the

frequency with which the poor are exposed to disasters and market / slum fires. Most

property coverage that is in place is provided as an add-on to an enhanced credit life

product as opposed to stand-alone property insurance. There are a number of reasons for

this lack of demand for property insurance amongst the poor; firstly most people do not

own their dwelling or the land it is built on and even if they do, they lack formal

documentation to prove their ownership. But insurance is available to owners as well as

tenants and most insurance companies do not require proof of ownership to make a claim.

The real issue here seems to be a deep seated fear that „if I purchase insurance for my

assets that the Government will become aware and start charging me tax‟; something that

most informal sector workers want to avoid.

The final product that has received significant attention from the microinsurance industry

is the provision of health insurance. If you ask a low income family about what causes

them to spend their disposable income on unplanned events, it is unusual for them to not

mention unplanned health expenditure. The poor demand health insurance because they

know they will need to seek medical help on a regular basis. The very reason that health

insurance is so demanded by the poor is also the reason why it is so hard to provide in a

sustainable way. The volume of claims and potential for fraud from the client or the

hospital is significant and failure to control fraud leads directly to the financial failure of

the program. India has the largest micro health insurance market due to a willing

domestic insurance market, available Third Party Administrators (TPA‟s) that process the

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claims, a competitive private healthcare provider market, cheap drugs and a supportive

Government that has launched significant public-private health insurance programs for

the poor; such as the RSBY program. Outside of India it is harder to find willing insurers

to carry the risk; TPA‟s to maintain networks of hospitals and process claims or

competitive private healthcare, although this is starting to change for the better.

The majority of health insurance that is provided for the poor is for emergency health

needs such as hospitalization. Insurers have struggled to provide cover for out-patient

treatment which occur more frequently but are also open to significant levels of fraud.

The cost of administering out-patient treatments as a percentage of the cost of the

treatment itself also makes insurance a flawed mechanism for out-patient care. Some

programs have started to offer out-patient care on a “capitated” basis whereby a fixed

sum is paid to a clinic per enrolee and the clinic has to provide the clients medical needs

over a year. The clinic thereby gets a large number of clients that have prepaid for service

and the clients get a lower cost of service; the clinic is motivated to control costs and

fraud thereby removing a layer of administration.

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Future Challenges to be Addressed

As with most areas of international development, there are a number of challenges that

face the microinsurance industry. Interestingly, these challenges seem to be somewhat

universal in that they can be found in many geographical areas and apply whether you are

an insurer, broker, consultant or MFI. The most pressing challenges are as follows;

1. Client Value Proposition: the industry needs to be able to capture and

communicate why insurance is needed by the poor. Whilst its role as a safety net

is evident, it is less evident whether it compares more or less favourably with

other forms of risk mitigation such as savings, loans and remittances. The work

that the team at MILK and the ILO‟s microinsurance innovation facility is seeking

to address these questions for the industry.

2. Distribution: insurance requires large numbers of clients to be insured in order

for the claims to behave as expected but also so that the distributor can make

sufficient income to cover fixed costs. To date, MFI‟s have been excellent

distributors of basic credit life and enhanced credit life products but as the market

matures it is less clear that MFI‟s will be the best distributors of more complex

products. Mobile phone companies are starting to emerge as capable distributors

of insurance to the poor. Other affinity groups such as churches that have a strong

brand and accessible points of sale have potential if a method how to transact cash

(premiums and claims) more cost effectively.

3. Willing Risk Carriers: for some classes of business such as life and property

there is an oversupply of willing insurance companies. For other classes such as

health insurance there is a lack of willing insurers; this will need to be addressed

through the use of reinsurance cell captives or partially donor funded stop loss

layers to encourage insurers to enter this space.

4. Capable Back Office: it seems evident that clients are very sensitive to how

quickly claims are paid. Whilst some insurers have made huge strides to reduce

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claims turnaround time by concentrating on simple products and processes in the

main there is still significant room for improvement. Insurers need to evaluate

whether they are well placed to turn claims around in days and maintain a low

overhead cost or should specialists by used to outsource this activity?

5. Client Education: clients need to understand the products they have. The

industry has significantly under performed in this area over the last decade. The

industry needs to decide if educating clients is a public or private good and then

fund it accordingly.

6. Regulation: there have been significant efforts over the years to shape efficient

microinsurance regulation. In the main this has been helpful to the industry but

those that have the power to influence regulators (e.g. donors, world bank etc)

need to listen more to practitioners and take their experiences into account rather

than developing regulations in isolation as an academic exercise. Engage the

industry.

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Acknowledgements

I am especially grateful to Martin Fuller, Shadreck Mapfumo, Steve Coffey and Will de

Klerk for their assistance in preparing this paper.

I am thankful to McKinsey & Company for their active support in collecting and

reporting MicroEnsure‟s operations in 2010.

Drafts of the paper, or sections thereof, have also been reviewed for comment by David

Dorey.

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Bibliography

Written Sources:

Leftley, Richard. Field Notes – Credit Life. MicroEnsure Ltd, Cheltenham, 2010

McKinsey, Internal Study into MicroEnsure, Cheltenham, 2010

Swiss Re. Sigma No 6/2010 Microinsurance – risk protection for 4 billion.

Swiss Resinsurance Company Ltd, Economic Research & Consulting, Zurich, 2010.

The Microinsurance Centre, LLC (2007). The Landscape of Microinsurance in the

World’s 100 Poorest Countries [Online].

http://www.microinsurancecentre.org/UploadDocuments/Landscape%20study%20paper.

pdf (Last Accessed: 6th

June 2011)