A proper insurance program safeguarding the interests of policyholders and ensuring the financial integrity of the industry must be backed by a minimum amount of capital as prescribed by regulators. In developing countries accumulated small premiums from low-income households are insufficient to satisfy capital requirements, subsequently microfinance providers predominantly remain in the informal sector.
Regulatory requirements for insurance licenses in developing countries
Country Minimum required
Life USD Minimum required
Non-life USD Total USD
Honduras 1,600,000 1,600,000 3,200,00
Argentina N/a* 750,000 – 2,250,000 %
Barbados N/a 500,000 – 1,500,000 2,500,000
Puerto Rico 300,000 - 1,000,000 500,000 – 750,000 1,500,000
Dominican Republic 500,000 500,000 N/a
Guatemala 380,000 380,000 1,200,000
*Figures not provided.
Source: Information provided by ICMIF member organisations as at August 2001
Whilst providing financial services through the informal sector is the most appropriate manner in accessing and serving the poor, this causes difficulties in providing adequate and sustainable insurance products. Informal insurance providers cannot access necessary capital and technical resources to develop products and pay claims effectively. Operations in the informal sector escape government monitoring, coupled with the inherent complexity of insurance products, the lack of accountability and transparency can endanger the sustainability of the scheme. Policyholders have no legal recourse if the provider becomes insolvent and is unable to pay claims, this also opens up the possibility of manipulation of the poor by rogue individuals and organisations. Additionally, the capacity of the organisation to absorb risks is imperative to the success of the insurance scheme, informal insurance providers do not have access to the reinsurance market and therefore can only provide minimal protection to the poor.
There are a number of possible ways that a micro-insurance provider may formalise its operations. Some aid agencies as well as subsidising premiums are also donating capital to micro-insurance providers to become legal entities, however these opportunities are few and far between. Many co-operative based insurers have raised the necessary capital from their members by collecting small amounts of contributions over a number of years. Partnerships between established and informal providers on a national and regional basis through fronting arrangements and partner-agent models have been discussed earlier. Collaboration between national micro-insurance schemes under a common holding structure can also achieve the necessary scale required (Appendix Eight).
Whilst some micro-insurance schemes have managed to achieve formal status through these means, there is still a need for more enabling legislation to be in place to allow more micro-insurance providers into the formal sector. Lowering of capital requirements is something that governments do not favour, mainly due to the lack of importance of the poor and the influence of large multinationals to limit the number of players in the industry. In most developing countries capital requirements are actually increasing. More effective lobbying needs to take place by international aid organisations such as the World Bank and the IMF, as they have the greatest influence with self-serving politicians. Practical solutions also need to be investigated to how the sustainability of the insurance provider can be maintained whilst lowering capital requirements. Experts from organisations such as ICMIF and its members should actively discuss and lobby with insurance regulators on how an appropriate form of “micro-regulation” could be structured which would protect the rights of the consumer and support the industry. This type of “micro-regulation” or rules should be implemented into existing informal schemes to show regulators that schemes can maintain their financial integrity with lower capital bases. An example of such a set of rules has been developed for credit unions by the WOCCU who also are active on the International Basle Committee. Additionally, governments should encourage microinsurance providers to partner with established insurance companies nationally and globally as a means to provide the excluded with more protection (Appendix Seven).