Microinsurance Risk Management Strategy

What risks do poor people face and how do they protect themselves?
What is micro-insurance? Basic insurance principles What are the difficulties in providing insurance to poor people?

Microinsurance legislation in India

What are some micro-insurance delivery models?

Examples of Risks and Crises

Category
Natural Risks Health Risks Life-cycle risks Economic Risks Social Risks

Examples
Heavy rainfall, landslides, earthquakes, floods, drought Illness, injury, accidents, disability, epidemics Birth, maternity, old age, family break, death Unemployment, business failure, technological or trade related shocks Crime, domestic violence, riots

Environmental Risks Pollution, deforestation, land degradation

Classification of Risks and Crises

Idiosyncratic Risks - Risky events that are individual or household specific - Narrow geographical or social spread Covariate Risks - Risky events that affect many households simultaneously - larger geographical or social spread

How Do Poor People Protect Themselves from Risk?

Prevention and Avoidance

Careful sanitation Identifying business opportunities

Preparation

Saving Accumulating assets (i.e., livestock) Buying insurance

Taking emergency loans Depleting savings Selling productive assets Defaulting on loans Reducing spending

Coping

Different Financial Services for Different Risks

Two variables for classifying the risks: - the degree of uncertainty (time and frequency) - the relative size of the loss (one time or ongoing) Efficacy of savings, credit and insurance as risk management tool based on the typology of risks classified by these two variables

What is microinsurance

insurance refers to a financial service that uses risk-pooling to provide compensation to individuals or groups that are adversely affected by a specified risk or event. Risk-pooling involves collecting large groups (or pools) of individuals or groups to share the losses resulting from the occurrence of a risky event. Persons affected by a negative event benefit from the contributions of the many others that are not affected and, as a result, they receive compensation that is greater than the amount they have invested in the insurance policy. Thus, products that allow an affected individual to receive only up to the amount they have contributed are considered as savings products, not insurance.

What is microinsurance

The micro- portion of the definition refers to the subset of insurance products that are designed to be beneficial to and affordable for low-income individuals or groups

Basic Insurance Principles

1
Large number of similar units are exposed to the risk
(risk pooling) Policyholder control over the insured event is limited (minimize moral hazard and adverse selection)

2
3 4

Insurable interest exists Losses are determinable and measurable

5 Losses should not be covariant (catastrophic) 6 Chance of loss is calculable 7 Premiums are economically affordable

What Are Some of the Difficulties in Providing Insurance to Poor People?

Technical Specialization Requires specialized capacity, which is complicated by the lack of reliable data characteristic of low-income, informal markets

Marketing and Sales

Most poor people do not understand insurance or may be biased against it

Distribution Channels

Requires a distribution system that can handle small financial transactions efficiently in convenient locations, and engender trust

Micro-insurance Legislation in India

Regulated by Insurance Regulatory and Development Authority (IRDA) India Obligations of Insurers to Rural Social Sectors 2002 - A quota system, which compels insurers to sell a percentage of their policies to low income and rural clients

Micro-insurance Legislation in India

Quota for Rural clients: - Life insurers must sell 7 % of total policies by number (not value) in the first year with increasing amounts up to 16 % in year 5. - With general insurance, 2 % of gross premium income must come from rural areas in the first year, 3 % in year 2, and 5 % thereafter.

Activities Involved in Offering Insurance

Product Sales
Marketing, education, signature of policies Product Manufacturing Policy Holders

Design issues such as pricing, claims procedures, level of coverage

Product Servicing Premium collection, payment of claims

Examples of Microinsurance Delivery

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 Community-Based Model The policyholders own and manage the insurance program, and negotiate with external health care providers
Full-Service Model The provider is responsible for all aspects of product manufacturing, sales, servicing, and claims assessment The insurers are responsible for all insurance-related costs and losses and they retain all profits

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

Partner Agent Model

Agents act as intermediaries between an insurance company and its market. The MFI acts as the agent, marketing and selling the product to its existing clientele through the distribution network it has already established for its other financial services. The insurance provider acts as the partner, providing the actuarial, financial, and claims-processing expertise, as well as the capital required for initial investments and reserves as required by law.

Partner-Agent Model
Partner Agent
Product Sales Product Manufacturing Product Servicing Service Provider

Policy holder

Partner Agent Model - Benefits for MFI

Limited Initial Capital Investment and Low Variable Costs. Compliance with Legal and Regulatory Requirements. Potential for Stable Revenue Stream Learning the Business

Partner Agent Model - Benefits to Insurance Company

Access to New Markets Access to Clientele with Strong Financial Records. Lower Transaction Costs for Serving a New Market. Regulatory Compliance.