“A good financial service for the poor is one that is done in the most convenient, flexible, affordable and safest way” (Rutherford 1999b).
3.1 Lessons learnt
There are many challenges facing the micro-insurance provider and over the years many schemes have failed, but some have adapted innovative techniques to achieve sustainability and viability in the long term.
3.1.1. - Morale Hazard
Some schemes have implemented differential pricing to reflect different risks and claims experience to decrease moral hazard. Waiting periods and the exclusion of pre-existing conditions in health schemes prevent people from enrolling only when they need care. Co-payments, limited coverage, maximum age conditions, exclusions against alcoholism, drug abuse, injuries from riots minimise the likelihood of unnecessary and frequent claims (Brown & Churchill 1999, Brown & Churchill 2000, Creese & Bennett 1997, Ford Foundation 2000).
3.1.2. - Adverse selection
Terming all policies inactive until a certain number enrol into the scheme, or requiring the whole household to enrol as a unit of membership can assist achieving critical mass. Many credit unions add insurance as a mandatory requirement of an existing service, such as life insurance products on loans . Group based insurance schemes provide cost savings in administration and distribution as well as spreading the risks profile. It is important that the group is pre-existing and not formed for the purpose of accessing insurance as this would attract a disproportionate number of high-risk individuals. The difficulty is to get people to pay premiums on a policy not taking effect and secondly to ascertain the appropriate number required to diversify the risk portfolio of the scheme (Brown & Churchill 1999, Creese & Bennett 1997, Brown & Churchill 2000).
3.1.3. - Flexibility
Different coverage for different premiums can bring in people at the lower level with a view of encouraging them to take on additional coverage for additional premium later on. Insurance schemes must adapt to the living and working conditions of its customers, listening to their needs and priorities and installing trust-building measures that negate the aversion of an up-front payment (Dror & Jacquier 1999). There should be continuos product development and innovation to meet the needs and lifestyles of the poorer classes and the rural sector. Flexible payment systems would allow them to pay when and how much they can. Tiny, often weekly payments are often the key to ensuring full participation (Matin et al 1999, Dror & Jacquier 1999, Roth 2001, Brown & McCord 2000, Ali 2000, Brown & Churchill 2000). Also flexible payment methods such as linking with savings accounts, enable easy payment of annual premiums from interests received . Other options include in-kind payments, sliding scale of premiums and decentralising claims and administration to facilitate easy access (Brown & Churchill 2000).
3.1.4. - Education
‘Credit with Education’ is a strategy first developed by Freedom from Hunger in 1989-90 to improve household food security and child nutrition. This is integrated with group-based lending models such as ‘village banking’. At each meeting of the village banking group some time is set aside for learning by the field agent, the field agent is responsible for getting in new members, attending regular meetings, assisting financial transaction and training members. During the education session the agent answers questions and offers advice, encourages sharing of experiences and promotes solidarity within the group. The strategy has produced some very positive results on the livelihood of the poor, particularly women (Dunford 2001). A similar strategy is needed for insurance, more so due to the complexity of insurance and the lack of available examples. The challenge is to find field staff who has the integrity and respect from the villagers and who also has sufficient capability and interpersonal skills to effectively undertake the dual role required. Clients need to be assured on the integrity of the system and that there will be clear accountability on the use of funds (Brown & Churchill 2000, Roth 2001). The poor need to be shown how protection is accessed by other poor villages and given support to set up similar schemes in their own communities through regular consulting, listening to the consumer and real participation (Creese & Bennett 1997, Rutherford 1999b) .
3.1.5. - Fraud
Information systems that account for finances, analyse claims performance, calculate premiums and ensure eligibility are important to keep control on fraud (Creese & Bennett 1997). Close monitoring of treatment costs and types of treatment are needed over the health care provider. Information requirements such as health history and formal death certificates deter client fraud. Stricter policy clauses, application of underwriting standards, a transparent claims procedure, and the use of deductibles and penalties for loan defaulting clients can reduce the policyholder’s motivation to make false claims (Brown & Churchill 2000). Maintaining the credibility of the organisation is paramount in ensuring that people have faith in the protection promised and will invest into the products offered. The organisation needs to be accountable and transparent in its operations and employees need to be adequately paid to deter corruption.
3.1.6. - Summary
Microinsurance requires a physical closeness between the two parties, smaller organisations are more responsive, efficient and flexible and have a closer distribution relationship than larger players (Ripoll 1996). In the same light financial viability also requires a detailed understanding of clients needs and preferences and an efficient delivery system (Matin et al 1999). The two biggest problems facing microinsurance providers is sustainability and affordability. For any scheme to be sustainable in the long term there is a need for access to a sufficiently sized group to spread the risk and costs of the scheme. An efficient and effective micro-insurance scheme demands high premiums to cover the costs and profit requirements which would effectively mean excluding access for most of the poor. In addition the use of deductibles and co-payments to tackle morale hazard and fraud lead to further exclusion.
Using the community spirit and organising the poor to access necessary services has been done effectively and efficiently for centuries using the co-operative structure. Agricultural co-ops have satisfied the supply, processing and marketing of goods, consumer co-ops have provided goods and services of preferred quality at competitive prices, workers’ productive co-ops have created and maintained employment in the community. Housing co-ops have given low-income people the opportunity to own their own homes and electricity and telephone co-ops have satisfied rural peoples’ needs for power and telecommunications. Co-operative banks and credits unions have served people of limited incomes and extended credit to micro-entrepreneurs (ICA 1995b). In 1996, membership of the International Co-operative Alliance (ICA), the apex body of the world co-operative movement covered 230 organisations serving more than 730 million individuals in over 100 countries (ICA 2000). In the financial services sector the World Council of Credit Unions, Inc. (WOCCU) represents over 36,000 credit unions which provide 108 million members access to safe savings and affordable credit (WOCCU 2001). The success of the co-operative structure and the co-operative philosophy in satisfying the needs of the poor in an effective and flexible manner makes it a good candidate for channelling insurance products to the poor.
3.2. - Co-operatives
‘ A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly-owned and democratically controlled enterprise’
The 1995 ICA Statement on Co-operative Identity (ICA 1995a).