Chapter Two – Problems with providing insurance to the poor

Insurance is not as widespread in developing countries as in the developed world and in the poorest of countries it is virtually non-existent. Available figures show that only Nigeria has any officially recognisable form of insurance from the 35 countries identified as low in human development (HDI<0.500), all developing countries, even those with large populations have a very low proportion of the world insurance market. Of the 42 medium human development countries for which information was available, despite population increases, 29 had decreased their proportion of the world insurance market with only India, China and South Africa increasing between 1998 and 2000 (Appendix Two). In 1998 the three largest insurance markets (U.S.A., Japan and the U.K.) covered almost 64% of the total world insurance market but only 8% of the world population, by 2000 this had grown to almost 69%. Formal (legal) insurance is not being made available where it is needed the most, where human well being is at the lowest and vulnerability at its highest.

Availability of insurance in countries with low human development compared to those with high human development

HDIª
rank
(from 174)

1998
Insurance*
rank by volume
from 88

1998 Country
HDI value
1998 GDP per capita
(PPP US$)
1998 Insurance density:
Premiums
per capita
1998
(USD) Insurance penetration:
premiums
as a share of GDP 1998 (%)
World
Population
1998
(%) *World insurance
market
1998
(%) *World insurance
market
2000
(%)
3 1 USA 0.929 29,605 2,722.7 8.65 4.71 34.17 30.61
9 2 Japan 0.924 23,257 3,584.3 11.73 2.17 21.02 26.39
10 3 U.K. 0.918 20,336 2858.9 12.09 1.01 8.40 11.82
135 58 Pakistan 0.522 1,715 2.9 0.66 2.55 0.02 0.01
138 65 Kenya 0.508 980 9.5 3.48 0.50 0.01 0.00
151 61 Nigeria 0.439 795 2.7 0.86 1.83 0.02 0.00

ªHDI (Human development index) – composite index based on life expectancy, educational attainment and standard of living. A HDI value equal to or more than 0.800 has high human development, 0.500-0.790 HDI has medium human development and a HDI below 0.500 reflects low human development and well being.

*Only those 88 countries with premium volumes more than USD 150 million have statistical data provided in Sigma

Sources: UNDP (2000), Sigma (1999) and Sigma (2001).

The lack of interest by the formal sector to serve the poor is due to low collateral, higher transaction costs, interest rate restrictions, corruption, uncertain profitability, high risks, lack of pro-poor values and inability to serve the specific needs of the poor (Matin et al 1999). Insurance is a capital-intensive industry requiring large start up costs and financial commitments, modern technology and a well-educated workforce. Additionally, monetary stability, opportunity for investments, a politically and economically stable environment and a sound consistent, favourable and fair regulatory system is not available in developing countries (Ripoll 1996). Consequently, the provision of insurance to the poor has been left to the informal sector through existing microfinance institutes, NGOs, credit unions and co-operatives without overwhelming success. These organisations are faced with a multitude of problems and issues that prevent them from providing adequate, affordable and secure insurance products.

2.1. - Coverage
Protection has to be restricted by age, loan size, value and causes of loss to maintain affordable premiums and solvency of the scheme (Morduch 1999, Brown & McCord 2000). Health insurance clients are still forced to pay a large amount for medical expenses themselves, therefore low premiums with low coverage are not smoothing the healthcare shocks of the poor . Additionally for those that live far from health care facilities the costs and time of travel is too high (Creese & Bennett 1997). The quality of healthcare also suffers as good doctors and nurses do not want to be located where the majority of poor reside without additional financial compensation.

Very few institutions offer property insurance to protect the policyholder against loss or damage to equipment, livestock, small amounts of gold or cash that has taken many years to accumulate and whose replacement is unaffordable. This is mainly due to the high moral hazard and difficulties in establishing the true cause of loss or damage. Where cover is provided this is limited to specific causes of loss, and usually not against frequently occurring risks e.g. flooding in the rural villages of Bangladesh (Brown & Churchill 2000). Agricultural insurance is mostly found in towns protecting the risks of purchasers, lacking any penetration in the mass rural producer population due to their low productivity. As informal schemes cannot access reinsurance markets, protection on events that may effect a significant portion of policyholders such as catastrophic losses are not provided. Consequently, policies have to be limited to risks absorbable by the small capital base of the provider (Brown & Churchill 1999, Brown & McCord 2000, Matin et al 1999, Dror & Jacquier 1999). Most current insurance arrangements are informal self-insuring schemes, set by particular tradesmen facing certain risks such as death or marriage, these are more effective and affordable for those that are slightly better off than the poor (Matin et al 1999). Some schemes are established to protect the liability of the institute, providing loan protection rather then life savings insurance and standalone term endowment policies which may provide a greater benefit to the poor (Brown & Churchill 2000).

2.2. - Regulation
Insurance regulations protect consumers and insurers from financial instability and misleading selling practices. However, in developing countries regulations are targeted at serving the middle and upper income markets and hinder the delivery of insurance to low income communities. High capital requirements make developing products for low-income markets uneconomical for established insurers due to the small premiums and high risks. Consequently, micro-insurance providers have to operate informally, without access to expertise and reinsurance (Brown & Churchill 1999,Brown & Churchill 2000).

Insurance regulation is important to maintain the credibility of the insurance industry, unfortunately, in many developing countries regulatory requirements are not adhered to. Many government agencies do not have adequate financial resources, qualified staff, relevant information and operational independence to effectively supervise the insurance industry. Obtaining and distributing accurate and objective information on enterprise performance and solvency is costly but necessary to enforce effective regulation and monitoring. In developing countries financial reporting systems and standards are not harmonised, performance statistics of providers are unreliable and it is very easy to overstate profitability, capital margins and general financial health (Dror & Jacquier 1999). Insurance organisations have not reached a suitable level of maturity in developing countries due to inadequate financial and logistical resources, unsuitable regulations, and insufficient knowledge and information. Corruption and cronyism in governments means insurance provision is secluded to the upper and middle class sectors, there is no confidence in the quality and soundness of financial institutions (Savage 1998, World Bank 2000).

Regulation of micro-insurance is even more important, as the client base is uneducated and lacks the ability to assess the performance of the provider, who also lacks the expertise to efficiently run and manage an insurance business (Wright 1999). As most MFIs do not operate within the guidelines of the law they must dedicate additional resources to ensure sufficient capital and reserves, provide regular financial reports and monitor the activities of their agents (Brown et al 2000). Operating in the informal sector means more care is needed when dealing with data and monitoring the performance of the organisation. Without effective regulation and the ease of entry and exit, the possibility and opportunity for negligence or unscrupulous behaviour is quite high. Uneducated consumers, particularly amongst the poor are continuously defrauded and sold fictitious policies by unlicensed insurers, resulting in claims not being paid when losses occur (Savage 1998). Insurance is much more complex than simple savings and loans and there is a high possibility of misinterpretation of exclusions and coverage. The provider has the legal and financial resources to dispute a claim whilst the poor do not. The lack of contract enforcement means that consumers are not protected against losses from the insolvency of the provider or from fraudulent behaviour (Savage 1998, World Bank 2000, Wright 1999).

2.3. - Morale Hazard
Moral Hazard is the risk that the insured will change his/her behaviour and increase the possibility of a claim (Ford Foundation 2000). This is more likely in microinsurance as the policyholder has little to lose and a lot to gain. In the case of loan protection insurance, the lender may have less incentive to ensure that payments are made on time and in full and the borrower may invest in higher-risk higher-return activities. The policyholder also may be less likely to look after his/her health, property and spending patterns in the knowledge that insurance cover is available (Dror & Jacquier 1999, World Bank 2000, Morduch 1999).

2.4. - Education
There is a lack of education amongst the poor about insurance, they find it difficult to understand and accept the risk pooling concept, leading to high drop out rates particular from clients that have not made a claim (Ford Foundation 2000, Brown & McCord 2000, McCord 2001, Havers 2001, Vogt 1999, Brown & Churchill 2000). Insurance has a poor image amongst the poor, insurance officers are seen as quick to sell and slow to pay, claims processes are hindered by bureaucracy, and policy limitations and exclusions are unclear due to complex policy wordings. Clarifying insurance policies is an additional costs and burden on the provider, especially as the policyholder may not be able to read let alone understand the terms and conditions (Brown & Churchill 2000, Vogt 1999, Dror & Jacquier 1999).

In developing countries insurance is not mandatory and the poor have many other important items to spend the little disposable income they have. Additionally the uncertainty of loss as in property insurance makes it more difficult to sacrifice income than for more certain events such as death and healthcare (Brown & Churchill 2000). Premiums have to be affordable and the benefits of the protection need to be presented to policyholders regularly, especially those of the low-risk category. Marketing of micro-insurance products is more than just selling insurance policies, there is a need to educate the client on the benefits of the product, the coverage it provides and how to make claims. It is more difficult than selling credit or savings as there are no immediate tangible benefits, clients have to be convinced in investing in the cover for the long term and not try and recuperate his/her money through a claim. Consequently, the marketing and communication skills are just as important as technical know-how and more attention needs to be paid to customer satisfaction and feedback (Creese & Bennett 1997, Brown et al 2000).

2.5. - Technical expertise
Due to the high levels of risks and volatility of the client base, management of a micro-insurance programme requires an even greater level of technical expertise and actuarial capacity (Havers 2001). Substantial resources need to be dedicated to claims verification, policy processing and information systems to ensure adequate controls and efficient payment of claims. Strong underwriting procedures are required when only a small percentage of the market is insured to avoid over exposure to high-risk policyholders. Managers have to be able to predict future costs and claims using complex actuarial calculations and market research to ensure the sustainability of the scheme and efficient pricing . Information systems are important to track policyholders and verify claims, these are costly to implement and need staff training. Most MFIs do not have access to adequate management information systems that would provide accurate and timely information. Manual accounting systems and processes hinder management control, and where information is available MFIs do not have the ability to use it (Brown et al 2000). Expertise on investing reserves and surpluses are needed to provide an additional vital source of income and ensure future liabilities are matched (Brown & Churchill 2000).

Many small microfinance institutes particularly credit institutions move into insurance products motivated by the profits made by larger NGOs without grasping risk management strategies or techniques, this leads to many becoming insolvent and clients without any form of protection. Some microfinance institutions enter into more complex products without having the necessary administration systems, technical staff, distribution channels and financial strength to support their growth (Vogt 1999, Dunford 2001). MFIs can only provide simple products as they lack the expertise to successfully price, sell and service more complex products such as health and property. Even when considering increasing the coverage for basic outstanding life insurance the complexity of information requires a high level of expertise. Provision of health insurance is even more difficult due to the range of causes of health risks, the information required to assess these risks, and knowledge needed to identify fraud by the policyholder and the healthcare provider. Disability claims are complex in measuring the size of the loss and determining the value of ongoing payments (Brown & Churchill 1999).

The lack of skills and technology to effectively price products weakens the financial sustainability of the scheme. Products such as permanent life, health and property require specialist actuarial skills to undertake the complex calculations for pricing. Micro-insurance providers currently set pricing using simplified calculations that place a dangerous reliance on clients’ estimates of sufficient premiums. Insurance is a highly technical business and MFIs
do not have access to or can afford qualified skilled staff to operate an insurance scheme which covers a wide range of products effectively and efficiently. MFIs also do not have access to know-how or the training tools to empower local staff with the relevant knowledge and technology (Brown & Churchill 1999, Brown et al 2000, Brown & Churchill 2000, Ford Foundation 2000, Women’s World Banking et al 2000).