Group and Individual Disability
Group Property Individual Property
Endowment Group Life Individual Life
Group Term Life
Source: Brown (1999 as cited from Weihe et al 1990).
2.6. - Fraud
The poor are desperate to improve their standard of living and have greater opportunities for fraud in an informal environment (Ford Foundation 2000). The provider needs an effective claims verification system, which undertakes adequate investigation but does not delay claims. (Brown & Churchill 1999). The lack of reliable data on client’s age, health status and dependants makes it difficult to determine premium pricing and eligibility of coverage (Brown et al 2000). Verifying beneficiaries, assessing incomes and collecting contributions in the informal sector is a problem due to the lack of information and reluctance to declare (Roth 2001, Savage 1998, Brown & McCord 2000). Many claims are paid without verification due to the high costs of performing inspections. Appropriate internal control and management information systems are vital, as are regular and credible financial reporting systems to give management the opportunity to identify fraudulent activities. However, transparency and controls on management behaviour and good corporate governance practices are not common practice in developing countries, and the technology, expertise and culture are not available to ensure adequate controls.
The pay of supervisory staff in micro-insurance companies are not sufficient to guarantee their integrity (Savage 1998). Agents enrol as many policyholders as possible to earn maximum commission, regardless of risk profile and long term viability, and even resort to stealing a portion of premiums collected. In some institutions agents also acting as collectors of loan repayments, consequently become overburdened and allow low repayment rates and greater opportunistic behaviour by the client (Brown & Churchill 2000). Micro-insurance providers do not have the resources or capability to adequately observe and enforce controls on their own employees, never mind the policyholders.
2.7. - Adverse selection
Adverse selection occurs when a significant portion of high risks policyholders sign up to the insurance policy, if the policy is voluntary than those that are most likely to make a claim will be the first to sign up (Ford Foundation 2000). Reaching a sufficiently large pool size of the right mix of risks is critical to ensure that there are sufficient funds to pay claims, particularly for new insurance schemes whose lack of underwriting experience could endanger solvency (Brown & Churchill 1999, World Bank 2000, Brown & Churchill 2000, Dror & Jacquier 1999).
2.8. - Flexibility
It is important to verify claims and process payments quickly due to the lack of other financial support available to the poor, likewise, efficient reimbursement is important to health care providers as policyholders are not be able to pay the up-front fee (Brown & Churchill 2000). Unfortunately the manual processing system of an MFI leads to delays in obtaining proof of loss and paying claims (Brown & Churchill 2000). Schemes also need to accommodate the earnings volatility and lower contributions of the self-employed and informal workers (World Bank 2000) . Frequency of payment should match the ability of the client and the financial needs of the organisation to pay claims and operating expenses. . Most small savers do not buy insurance due to lack of access or unsuitable products (Ali 2000). Providers need to have constant communication with policyholders with volatile income streams, as demand may change from day to day depending on their economic circumstances.
2.9. - Affordability
The poor operate in a mini-economy in which all activity occurs in very small amounts, subsequently the relative transaction costs tend to be high, for this reason formal institutions are unable to provide services to the poor at an affordable premium (Matin et al 1999). The economic condition of the people affects the growth of insurance, an individual must have the ability to save and earn a regular income to become a potential policyholder. There is a clear correlation between the socio-economic level and the ability to purchase insurance, many low-income communities are excluded access due to their lack of financial resources (Vogt 1999, Creese & Bennett 1997). The majority of income of the poor is spent on life cycle needs such as food, shelter, health and education, with very little available for insurance and savings (Brown & Churchill 1999, Matringe 1997).
2.10. - Retention
Client exit is a significant problem for MFIs, most dropouts occur when there is a downturn in the economy or adverse conditions in agriculture (Wright 1999). Dropouts are also very high due to changes in prices, change in service, misunderstanding of policies, lack of effective and focused marketing and other more pressing needs on clients income . In health insurance where pre-existing conditions are not excluded, clients build up a series of illnesses, use the policy to gain treatment and then wait for another set of illnesses to build up before enrolling in the policy again.
2.11. - Sustainability
Existing microinsurance schemes are far from being sustainable and viable institutes . In the initial years of operations most insurers incur a loss due to; the costs of acquiring and servicing customers, start-up costs of operations, inexperienced underwriting and premium setting and a small market base. These losses can constrain future growth, and if continued can result in the depletion of reserves and lead to insolvency. Whilst premiums need to be kept affordable they should also ensure the financial sustainability of the insurer, irregular flows of income in low-income households make it difficult to predict income streams. Consequently, a sufficiently large pool size is required to justify the substantial resources to market and administer products to a largely uneducated, sceptical and remote population. Overuse of services, escalating treatment costs and fraudulent claims have caused some health insurance plans to incur large losses (Brown & Churchill 2000). Government restriction on investing abroad and the lack of expertise to undertake a prudent but successful investment strategy restricts returns on surpluses and prevents hedging against inflation and currency movements (Brown et al 2000, Ford Foundation 2000, Creese & Bennett 1997). The costs of distribution and small margins mean that the vulnerability of the organisation is high and sustainability is difficult to achieve. In addition there is no reinsurance available to informal insurance providers, leaving them highly exposed to fluctuations in claims expenses (Brown et al 2000).
Insurance schemes for the poor are financially unsustainable due to high overheads, low premiums and high claims. There is a need for either a large capital base or donor contribution in the initial years to give time for the correct infrastructure and number of policyholders to be obtained. The majority of schemes rely on funds other than those received from premiums to maintain sustainability and to ensure that the low-income markets continue to be served (Brown & Churchill 2000).
In summary the challenges facing the micro-insurance provider operating in the informal market to keep premiums affordable and coverage sufficient are huge (Appendix Three). The added need for qualified staff, internal controls, efficient administration systems, reinsurance and resources for marketing and education mean that establishing a sustainable and viable insurance scheme is almost impossible in the short-term. The micro-insurance provider faces the compromise between how low into the poverty sector the scheme can penetrate whilst maintaining full cost recovery. The following chapters looks at suggestions and solutions put forward that may assist the micro-insurance provider to eventually achieve sustainability in the long term whilst still providing access to the poor.