MICROINSURANCE Role of Policy, Regulation and Supervision in The Development of Microinsurance Markets in Colombia, India, The Philippines, South Africa and Uganda

EASAAviAdence
from Five Country Case Studies
15th Floor, Regus, Eros Corporate Tower Nehru Place, New Delhi 110 019, India
MICROINSURANCE role of policy, regulation and supervision in the development of microinsurance markets in Colombia, India, the Philippines, South Africa and Uganda.
CLIENT: Archimedes Investment Limited, British Virgin Islands
Final Submission: May 2009

CONFIDENTIAL: INTENDED FOR USE ONLY THE CLIENT: ARCHIMEDES INVESTMENT LIMITED, A COMPANY REGISTERED IN BRITISH VIRGIN ISLANDS
Introduction
Microinsurance has become an aspect of insurance that needs to be examined carefully by any player in the insurance market. This includes both the insurer and the broker. In this regard we have included studies that cover a 5 country ambit, as well as a closer examination of the broker market . In particular , the role of the intermediary in South Africa, which principles and comments should also apply to a large degree and be helpful to intermediaries in the Microinsurance space elsewhere. We have also included in more detail the Indian Case Study component of the 5 Country Microinsurance synthesis. Background*
It is estimated that only 80 million out of the worlds 2.5 billion poor are now covered by some form of micro insurance. Most still remain without access to this critical financial service. The products on offer broadly fit the following categories: Credit Life, Term Life / Funeral Insurance, Livestock, Property Insurance, Index Based Crop Insurance, Package Policy and Health Insurance. Market definition and Market size* For conventional micro-insurance products that are already being distributed by existing underwriters, it may prove to be a challenge to propose alternative placement arrangements such as reinsuring into a cell or even Hollard. The constraints could be a combination of regulatory conditions in each territory (where local insurers are not expected to place offshore reinsurance for classes that are perceived to be within their
underwriting limits like credit life) and / or reluctance to reinsure out on profitable business. However, there are immediate reinsurance opportunities in the case of highly specialised micro-insurance products such as health and weather index insurance, for which the traditional reinsurance programmes do not provide capacity and for which the local insurers will tend to have neither the expertise nor the appetite to retain the full risk. The following details the possible market size per product and per territory (excluding credit life): Country Uganda Health Insurance Weather Index Insurance 250,000 100,000
Ghana
N/A
100,000
(at this time Ghana has NHIS and government is not keen on private alternatives but this could change) Tanzania Kenya 300,000 500,000 150,000 150,000 50,000 250,000 (There exists a state-owned Nigerian Agricultural Insurance Corporation and it is not very clear if any other firm can do
South Africa Rwanda Nigeria
100,000 500,000
other
projects
around
agricultural insurance.) Philippines India 350,000 150,000
3,500,000
1,000,000 (unlikely that health insurance would be ceded)
Indonesia
150,000
50,000
Key Trends (PESTIR)* Firstly, there has been a general trend of policymakers wanting to see access to finance and related services enabled in markets at the bottom of the pyramid which consists of the poor majority that have traditionally been
neglected by financial services, amongst other things. It is in light of this thinking that there has been a rapid development of micro-finance institutions, especially in Nigeria. There are also ongoing reviews of appropriate regulatory frameworks in order to support this development. Secondly, with the current global economic downturn following the global credit crisis, governments will be increasingly interested in products that support the poor. In the case of a product such as weather index insurance, it supports small-scale farmers by providing protection against certain natural hazards and also mitigates the risks for lenders so that they are able to continue to extend credit lines in the sector. In this way it contributes improved agricultural productivity which in turn reduces the problem of food inflation and improves food security. In cases such as Botswana, the government is willing to back these private-sector initiatives aimed at providing effective solutions for small-scale farmers there.
Customer Need*
The consumer need is undoubtedly significant. In order to be effective for the poor, the products should be simple, affordable, easy to administer and with payouts being virtually automatic in order to avoid expensive loss verification procedures. It is expected that, with weather index insurance, lenders should be more willing to provide loans to this category of farmers that are perceived to be high risk because of the risk of droughts to which they are exposed. Differentiation* There is a huge opportunity to be involved in research and development on new and innovative and specialised micro-insurance products. Weather index
insurance is a very recent development. Although credit life is becoming a commodity product, for which many other insurers can claim to have capacity and on which competition could become focused on pricing, a greater potential to increase margins could involve adaptations or bundling of it with other complex lines of agricultural risks such as weather index. Competition* For generic products such as credit life, the traditional insurance companies have capacity for such products and hence there is competition on those. For highly specialised products such as weather index insurance, there is still limited real competition. Nevertheless, the micro-insurance business environment is becoming more competitive.
Pricing*
Weather Index insurance rates depend on the type of crop (different crops are more or less affected by water variability) and on the weather station which represents the chance of an event triggering. Market research indicates a rate of 5% for weather index insurance. The policies tend to tailor the trigger point to match the required price. Since the loss experience from these products tend to be either all or nothing there tends to be resistance for rates over 5% as after a few years of no losses the farmers or lenders start to place pressure for lower cost loans. The microinsurance health policies underwritten in India has a premium of Rs 275 for a Rs 20,000 cover on a floating basis. This low cost is largely due
to the high population density and severe competition between healthcare providers. Critical is a low cost but effective TPA mechanism which in India costs Rs 100 per policy per year. In Africa, it is expected that this TPA could be $3.5 - $5 per policy and hence a premium of $15 - $ 20 per family per year is likely to be targeted. Exposure values* Weather Index sum insured per acre is anywhere between $100 to $1,500 depending upon the crop and the costs of the inputs. Average is closer to $450. Swiss Re has previously offered to take 100% of the risk. Health insurance annual premium spend is $15 - $20 per family. In India, the sum insured is around $500. It is also assumed that roughly 5% of a population will be hospitalised in a year.
Credit Life average loan sizes are $500 with a premium rate of 5% Whilst reinsurers have not been approached on the above lines (bar discussions with Swiss Re on weather index insurance), we are comfortable that reinsurance will be available. Loss Ratios* The business is maintained on the following basis: For each $1 of premium paid, $0.70 goes to claims, $0.20 is administration fees, $0.05 are fees to others and $0.05 is the insurer portion to cover cost of capital and profit margins. In the certain territories in Africa, there would also be a need to provide for premium tax.
REGULATORY CHALLENGES AND KEY RISKS* Reinsurance to a cell structure It is recognised that each country has differing requirements in terms of what risk can be ceded offshore, particularly risks that can be seen as domesticated risks (eg motor and credit life). Whilst in most African counties there are no compulsory requirements on reinsurance, in India, however, insurers must make 10% obligatory cessions to GIC. There is also a concern that some countries such as India have requirements for rated paper (India requires BBB for life insurers) which will challenge Hollard which does not have a rating. We are therefore looking to mitigate this through (a) our relationship with Africa Re in Africa who are seen as a local reinsurer so this should be
overcome to a large extent in Africa (although each class of business would need to be assessed). Other insurers such as Swiss Re are being engaged with outside of Africa particularly to address the concerns about rated paper; and (b) the nature of the risks where domestic insurers have limited capacity or risk appetite for weather index or health. We do note that credit life may prove more of a challenge. As the reinsurance requirements will vary by country and by class of business, we are therefore using a rough estimation that the amount ceded will start at 50% in year 1, 40% in year 2 and 30% in year 3. Foreign exchange risk*
The potential for foreign exchange risk remains high in the current economic cycle. Whilst it is extremely difficult to measure foreign exchange rate risk, we are building in some margin in the model. Further, being a South African company in Africa takes out some of the risk that a European or Western insurer would have as we are somewhat aligned to the African and emerging market currencies; The business should end up in a PCC offshore (potentially Mauritius) in hard currency which will mitigate some of the risk; Finally, we would also consider this as being in line with our international strategy so would aim to mitigate currency risks at a group level rather than at partner level. Investment committee are currently investigating this further. WHAT WE ARE LOOKING FOR World class administrator WHAT HOLLARD NEEDS AND BRINGS Support of international aspirations
Have in-house pricing and underwriting skills Strong distribution skills, including
so Hollard can support roll-out. Eg HGR sees as a complementary business. international group
consumer education and marketing; Hollard World class team at low cost, due to their motivation to address the poor; Capital to support rapid roll out Strong international networks and credibility which opens doors
demanding support on microinsurance (esp Botswana ,
Mozambique, Namibia as well as Jubilee and ADIC) Hollard can support the structuring, business support and risk carrier requirements needed to increase efficiency.
*Extracts and comments from a Microinsurance Business Case prepared for Hollard by its New Business Team .
It is instructive and useful to look at the work and papers done by others on Microinsurance by way of contextualizing a vast subject. An excellent starting point is the IAIS Paper: Making insurance markets work for the poor: A synthesis of five country case studies on the role of regulation in the development of microinsurance markets. By Hennie Bester, Doubell Chamberlain and Christine Hougaard I quote verbatim from the paper as follows: The objectives of this project were to map the experience in a sample of five developing countries (Colombia, India, the Philippines, South Africa and Uganda) where microinsurance products have evolved and to consider the influence that policy, regulation and supervision have had on the development of these markets.
This evidence was used to extract cross-country lessons that seek to offer guidance to policymakers, regulators and supervisors who are looking to support the development of microinsurance in their jurisdiction. It must be emphasised that these findings do not provide an easy recipe for developing microinsurance but only identify some of the key issues that need to be considered. In fact, the findings emphasise the need for a comprehensive approach that is informed by, and tailored to, domestic conditions and adjusted continuously as the environment evolves. Executive summary In times of crisis, poor people are often the most at risk and least able to protect themselves. Calamities such as the sudden death of a family member, illness or injury, and loss of income or property can increase the vulnerability of poor people and perpetuate poverty. Insurance can mitigate the losses from such risks.
However, despite the growing importance and rapid expansion of insurance
services geared to low-income households (microinsurance), many poor people remain without adequate protection. This report presents an overview of the role of policy, regulation and supervision in the development of microinsurance markets in Colombia, India, the Philippines, South Africa and Uganda. This evidence is then used to extract cross-country lessons for policymakers, regulators and supervisors looking to support the development of microinsurance in their jurisdictions. Salient features of microinsurance markets in the sample countries The microinsurance markets in the five sample countries share a number of key features. These are important for understanding the evolution of microinsurance markets:
Low uptake of insurance and microinsurance: Total insurance use is extremely low in the sample countries. With the exception of South Africa, insurance penetration is consistently below 5% of Gross Domestic Product (GDP). Within this, the take-up of microinsurance among adults is even more constrained: only in South Africa and Colombia do more than 10% of adults have microinsurance and much of this provided by informal insurers. Large proportion of the population falls into low-income categories: A large proportion of the population live on less than $25 a day. This ranges from 19% in Colombia to 96% in Uganda. The number of ultra-poor people, those living on less than $1 a day, is also significant. The low level of income has two immediate implications. Firstly, it suggests that microinsurance is not a peripheral topic but is the appropriate insurance category for a substantial proportion of the population. Secondly, it implies a limited disposable income for insurance products and a high opportunity cost of doing so.
High levels of informality: In all of the countries except Uganda the informal sector is estimated to account for a sizable amount of the total microinsurance market, ranging from 20% of microinsurance policyholders in India to 52% in Colombia. Large reliance on compulsory credit-based insurance: Formal microinsurance is largely comprised of compulsory credit life policies sold on the back of microcredit. Even in the countries where credit life does not make up most of the microinsurance market, it is still significant. The growth of microcredit is therefore an important driver of microinsurance growth. Voluntary sales bundled with other products or services and/or through mutual/cooperative channels: Where there is voluntary take-up, it tends to be funeral insurance policies (South Africa and Colombia) or policies bundled with other products and services. The overwhelming majority of voluntary products are
sold via client aggregators such as cooperatives/mutual associations,
microfinance institution (MFI) networks, retailer networks (in the case of South Africa) or even utility companies (in the case of Colombia). Microinsurance definitions vary but share low-risk features: The bulk of microinsurance products offered in the sample countries share features that help to limit the risk (prudential and market conduct) of these products. This includes limited benefits, short-term contracts, simplified products typically underwritten on a group basis and the coverage of limited risk events (typically high frequency, low impact). Various factors affect the development of the microinsurance market. These include factors relating to the demand side, supply side and regulatory environment as well as to the overall macroeconomic context and infrastructure. Demand-side factors: understanding the insurance decision
Responses in focus groups conducted as part of each country study, as well as the salient features of the microinsurance market described above, suggest fairly
consistent patterns of ehaviour in the individual clients decision to buy insurance or not. Unless compelled, an individual will only buy insurance if the perceived value of the insurance product exceeds the perceived opportunity cost of purchasing it. The insurance decision can thus be analysed in terms of the various factors that determine perceived cost and perceived value. Perceived cost is determined not only by the level of the premium, but also by what the person needs to sacrifice to buy insurance. This opportunity cost is much higher for a low income consumer. Perceived value, in turn, is impacted by (1) the fact that low-income people place a disproportionally high value on current consumption, given their budget constraints, rather than future benefits (they have a high discount rate),
(2) the level of trust in the institution to successfully deliver on claims, and (3) the probability of the risk event occurring (with high frequency and/or
probability risks such as health and life likely to receive priority in the minds of consumers). Supply-side factors: making microinsurance markets a market for voluntary microinsurance where none exists needs business models That facilitate positive market discovery, i.e. that the consumers are introduced to the product in a way that allows them to understand its potential value and that they must be able to institute a successful claim. No discovery will take place if the client is unaware that they are covered by insurance, and the discovery will be negative if a claim is rejected for reasons that were not explained at the time of purchase. The experience in the sample countries suggests that the likelihood of positive discovery among low-income clients depends on the distribution channel
or business model used to deliver microinsurance. Five distinctive (though not exhaustive) channels were identified:
1. Compulsion: Compulsory insurance in the form of credit insurance on the back of loans is the single biggest category of microinsurance across the sample countries. 2. Reinvention: In the absence of formal insurance provision, or simply because they are unable to afford it, low-income communities develop informal risk pooling mechanisms to cope with risk events, thereby effectively reinventing insurance. 3. Derived demand: This happens when the client does not set out to buy insurance, and may not even be aware of the existence of insurance products, but
is induced to buy a product based on his or her demand for another product or service such as a funeral service.
4. Passive aggregators: Such models leverage existing client bases (e.g. retailers as aggregators) or reach out through low-cost passive sales strategies. Products need to be simplified to be sold through such channels. 5. Individual agent-based outbound sales: The traditional model where an individual agent sells insurance that is not attached to another product, typically face-to-face with the client, but it can also be done through out-bound call centres. The country experience is that the bulk of microinsurance is sold through channels 1, 2 and 3. However, regulatory models often favour channel 5. In practice, however, such distribution may be too expensive for low-premium products, making this model unattractive for providers. Regulation may (sometimes unintentionally) also facilitate channel 1 by allowing compulsion, but few regulators consider the consumer protection concerns arising from the captive
client base and limited competition. Channel 4 holds great potential for market development, but evidence suggests that these agents are unable to create a
market for a new product they rely on prior discovery through another channel before they can achieve success. Impact of policy, regulation and supervision on market development The experience of the sample countries shows that policy, regulation (including regulation not specific to insurance) and supervision impacts on microinsurance development in various ways: General features of the policy, regulatory and supervisory framework
Pro-active and inclusionary regulatory approaches generally are more supportive of microinsurance development than reactive and exclusionary approaches. Regulatory uncertainty undermines microinsurance development.
The overall regulatory burden determines the need for a dedicated microinsurance dispensation. If the overall regulatory burden is low, the need for a dedicated microinsurance dispensation is reduced. Financial inclusion policy and regulation Financial inclusion policy and regulation can push microinsurance development but long term market growth and scale depends on the financial viability of selling the products in the given market. Regulators and supervisors need a clear mandate to support development.
Prudential regulation
Unnecessarily high regulatory barriers undermine the entry and formalisation of potentially legitimate providers. As a strategy to compensate for limited supervisory capacity, prudential barriers are not successful as the supervisor does not have the capacity to enforce the regulations on all potential market participants. The result may often be to fuel the informal sector. Tiering and graduation have been used in the sample countries to facilitate entry, formalisation and growth while still maintaining prudential standards. Unlevel playing fields introduce a bias against provision by potentially legitimate players. Following a risk-based approach, entities writing the same kind of risk should face a similar regulatory burden. Unnecessary restrictions on institutional types may exclude legitimate providers.
Where regulators follow an exclusionary approach they may limit underwriting
(and intermediation) to specific and predetermined institutional types, making it difficult for new business models with different legal identities to enter the market. This approach effectively requires the regulator to be able to pick winners, which it often does not have the capacity to do. Sound corporate governance allows regulators and supervisors to leverage nontraditional institutional types. Weak governance for a particular category of institution (such as cooperatives) means that a much higher regulatory effort is required to ensure compliance. However, excluding such institutional types may impede development. Where the regulator has implemented measures to improve governance structures rather than excluding such institutions, a whole new category of entities were able to support market development.
Demarcation shapes provider models. Strict demarcation increases the cost of offering a product that combines life, non-life and health elements. Product regulation Weak insurance definitions result in regulatory avoidance and arbitrage. In
several of the sample countries weaknesses and gaps in insurance definitions have been exploited to avoid regulation, illustrating the need for clear definitions of insurance business. Low-risk features of microinsurance products have allowed regulators to structure regulatory definitions suited to the risk. Impact of macro-economic conditions and infrastructure
These factors are often beyond the control of the authorities, but may still have a significant impact on microinsurance development and need to be taken into account: Economic growth stimulates insurance take-up by increasing available income. Privatisation/liberalisation may increase competition and have been associated with the development of insurance markets in the sample countries. High levels of inflation may undermine the insurance value proposition if not managed.
Financial crises can destroy trust in insurance products if they destroy policyholder value or insurance providers go bust, but may subsequently lead to improved regulation and increased competition.
Strong physical, social and commercial infrastructure aid microinsurance development. Emerging guidelines
The following guidelines, for consideration by policymakers, regulators and supervisors looking to support the development of microinsurance in their jurisdictions, are based on the analysis of the experience of the sample countries. Policy guidelines Guideline 1: Take active steps to develop a microinsurance market. Most microinsurance markets develop by extending insurance to client groups not currently served by formal insurers. Low-premium products are often regarded as unprofitable by insurers. At the same time, low-income clients may have limited
knowledge of insurance, may have a high internal discount rate and often exhibit an inherent distrust of formal insurers. To overcome these challenges microinsurance markets have to be triggered or made. For this reason, it is
important to confer a market development mandate on regulators over and above their normal supervisory mandate. This mandate requires an understanding of both the existing and potential market, and implies that regulators will consider both formal and informal providers and formalisation challenges. It also allows space for market experimentation while monitoring risk and responding with appropriate policy statements and regulatory adjustments. Guideline 2: Adopt a policy on microinsurance as part of the broader goal of financial inclusion. Public policy expresses the intent of government. Explicit policy objectives on microinsurance market development provide market players with the necessary security and guidance to invest with confidence in market areas where the
regulatory framework may still be uncertain or in the process of development, as is often the case with microinsurance. The policy must be aligned with other government policy objectives, appropriate
to the circumstances of the country and preceded by broad-ranging consultations. It should be located within governments broader approach to financial inclusion. The policy should facilitate both outreach by registered insurers and formalisation of informal insurers. Prudential guidelines Guideline 3: Define a microinsurance product category. Microinsurance products require small premiums to be affordable to low-income clients. Profitable microinsurance operations therefore depend on least-cost underwriting and distribution. Achieving this may necessitate a reduced compliance burden (both prudential and market conduct) in jurisdictions with a
high regulatory burden. Such a reduced compliance burden can, however, only be justified on the basis of reduced risk. This requires the regulatory definition of a microinsurance product category that entails systematically lower risk. This
can be achieved through limits on benefit values, policy contract duration and the risk events covered, as well as the simplification of policy terms. The income level of the prospective policyholder is not considered a viable element of a microinsurance definition as the verification of income is too expensive and often of suspect integrity. Guideline 4: Tailor regulation to the risk character of the microinsurance product category. Once a product category has been defined to lower risk, prudential and market conduct requirements can be tailored accordingly to allow for lower-cost underwriting and distribution targeted at the low-income market (while maintaining sufficient standards to protect clients and maintain trust). Generally,
this can either be done through exemptions from certain requirements, or by
creating a reduced-burden (in terms of entry and other requirements) regulatory tier for microinsurance. The option implemented must be based on a detailed assessment of the local market and regulatory environment to ensure the development of risk-proportionate rules. Guideline 5: Allow microinsurance underwriting by multiple entities. Member-based mutual-type institutions tend to fare better than traditional insurers in offering microinsurance in countries where this is part of the social life. Existing regulation, however, often makes it too onerous for these community- based mutuals to register as formal insurers, or may even explicitly exclude them. Allowing various institutional forms to register as microinsurance providers, should they meet the same regulatory and corporate governance requirements, levels the playing field
Guideline 6: Provide a path for formalisation.
Unlicensed insurance providers usually emerge in response to real needs for risk mitigation within low-income communities, and serve a valuable social and economic function. Yet they may lead to consumer abuse and may fail due to inadequate risk management. Therefore formalisation is in the public interest. However, limited supervisory resources usually make this difficult to achieve. The best way forward is to define a clear evolution path whereby informal institutions can gradually and realistically meet the minimum regulatory requirements. Throughout the formalisation process, the supervisor must be careful not to overreach its capacity or make idle threats, thereby undermining its credibility. Market conduct guidelines
Guideline 7: Create a flexible regime for the distribution of microinsurance. Low-cost, geographically accessible distribution through trusted channels is essential for successful microinsurance development. Increasingly new
technologies are being employed in this quest, as well as alternative channels such as retailers, labour unions, church groups or public utilities. Not all of these intermediaries fit comfortably into the traditional broker/agent regulatory definitions. Substantial benefit can therefore be obtained by allowing these channels to grow and intermediate microinsurance. Appropriate measures to control market conduct risk need to be in place. Guideline 8: Facilitate the active selling of microinsurance. Experience shows that voluntary microinsurance uptake is highest when it is actively sold, particularly with another product or service, such as loans or credit goods, future funeral services, mobile phones or other financial services such as
banking services. One-on-one sales are, however, expensive and can easily push
already thin-margin, low-premium microinsurance products into unprofitability. The imperative is therefore to avoid market conduct regulation that can make the individual sales process too costly. This is best done by standardising microinsurance products, simplifying terms and conditions, ensuring adequate disclosure, and by avoiding price controls on the intermediation process. Supervision and enforcement Guideline 9: Monitor market developments and respond with appropriate regulatory adjustments. While effective enforcement of regulation is needed, the microinsurance market at the same time needs the space for innovation. The supervisors task is therefore a balancing act: to regulate and enforce in such a way as not to make conditions overly onerous on market players, while at the same time responding to abuse
through careful market monitoring. For this purpose, it is important that
minimum levels of information must be submitted to the supervisor. The reality of limited capacity may also mean that some areas of the market may remain completely unregulated. Directing capacity to high risk areas while monitoring unregulated areas for changes in risk profile may, therefore, be the only option available within resource constraints. Guideline 10: Use market capacity to support supervision in low-risk areas. In an environment of constrained supervisory capacity, supervisory approaches that draw on the capacity of market participants and other entities may enhance supervision. This may take several forms and should be designed around the specific conditions and entities in the market. For example, the supervision of certain market players (such as primary cooperatives) may be delegated to entities such as secondary/umbrella cooperatives providing services to primary
cooperatives. The supervision of tied agents may also be delegated to insurers to ensure that agents are appropriately trained and behave in an appropriate manner. 1. Introduction In times of crisis, poor people are often the most at risk and the least able to protect themselves. Calamities such as the sudden death of a family member, illness or injury, and loss of income or property can increase the vulnerability of
poor people and perpetuate poverty. Financial markets and insurance services in particular can mitigate the losses resulting from such risks. These services, however, are out of reach for millions of poor people and disadvantaged groups. Despite the growing importance and rapid expansion of microinsurance (i.e. insurance services geared to low-income households6), most poor
people are still without adequate protection.
This report presents an overview of the findings of a five-country case study on the role of regulation in the development of microinsurance markets. The objectives of this project are to map the experience in a sample of five developing countries, Colombia, India, the Philippines, South Africa and Uganda, where microinsurance products have evolved and to consider the influence of policy, regulation and supervision on the development of these markets. From this evidence, cross- country lessons are extracted that offer guidance to policymakers, regulators and supervisors who are looking to support the development of microinsurance in their jurisdictions. It must be emphasised that these findings do not provide an easy recipe for developing microinsurance but only identify some of the key issues. In fact, the findings emphasise the need for a comprehensive approach informed by, and tailored to, domestic conditions and adjusted continuously as the environment evolves.
The project is majority funded by the Canadian International Development Research Centre (www.idrc.ca) and the Bill & Melinda Gates Foundation
(www.gatesfoundation.org) along with funding and technical support from the South Africa-based FinMark Trust (www.finmarktrust.org.za)7 and the German GTZ8 (www.gtz.de) and BMZ9 (www.bmz.de/en/). FinMark Trust was contracted to design and manage the project. Together with representatives of the IAIS, the Microinsurance Centre and the ICMIF, the funders are represented on an advisory committee overseeing the study. This document is organised in five sections: Section 2 sets out the analytical framework applied in the rest of the study, Section 3 summarises the microinsurance experience of the five countries. Section 4 looks at the drivers of microinsurance market development in the countries, Section 5 proposes an approach to carving out a microinsurance space within regulation, and Section 6 concludes with the emerging guidelines arising from the cross-country
lessons. The emerging guidelines are intended as informative implementation tools for developing country policymakers, regulators and supervisors. 2. Analytical framework
This study applies a number of lenses to the evolution of microinsurance markets in the five countries. These lenses, collectively referred to as the analytical framework, in turn inform the synthesis of drivers and cross-cutting findings. We start with a description of the analytical framework. 2.1. Financial inclusion framework
The five country studies explored the drivers of financial inclusion within the
insurance market, in particular considering the impact of regulation. Ultimately, more inclusive financial systems are the desired outcome of the emerging guidelines proposed in this report. Financial inclusion is achieved when consumers across the income spectrum in a country can access and sustainably use financial services that are affordable and appropriate to their needs. The overall level of inclusion achieved is determined by a variety of factors affecting the individual directly (demand-side factors) as well as the institutions providing the services (supply-side factors). 2.2. Access frontier The access frontier (Porteous, 2005) seeks to map the current and potential market for financial products and providers. It also seeks to identify those
segments of the population which will remain beyond the reach of the market and therefore fall within the scope of government social welfare. 2.3. Goal of microinsurance The country studies in this report focus on the role the insurance market can play in reducing the vulnerability of poor people. Why is it important to develop microinsurance markets? The ultimate goal of microinsurance is to enable the poor to mitigate their material risks through the insurance market in order to reduce vulnerability, thereby increasing their welfare. To be successful, microinsurance should mitigate the most material risks of a poor client in a way that is affordable and appropriate to the low-income market. In the process of mitigating their risk, microinsurance may also stimulate the provision of other services that are important to the poor, for example, credit services, funeral services or health services. This is achieved by more predictable
income flows to providers, which in turn ensure viability of the provision of such services to the low-income market. Microinsurance enhances the welfare of the poor by addressing material risks as well as supporting the delivery of critical services.
It must be noted that the availability, or even take-up, of insurance products is not sufficient to achieve the goal of reduced vulnerability and improved welfare. To deliver value, low income insurance products should also be affordable and appropriate to the needs of the poor. This requires sufficient awareness of the availability and value of insurance among the poor as well as the ability to claim on policies. Providers and intermediaries should also treat consumers fairly. If it is difficult or impossible for a low-income client to make a legitimate claim on their insurance policy it will not reduce vulnerability and renders the product of little value. The country evidence shows that microinsurance take-up is often not the result of voluntary strategies by the poor to mitigate their material risks. Rather, it is the
outcome of compulsion by credit providers seeking to cover their own exposure to default. In this case, microinsurance may still deliver significant value to the client but care is needed to ensure fair treatment of the low-income consumer. 2.4. Definition of microinsurance
Conceptual definition: Microinsurance is defined by the IAIS (2007b) as insurance that is accessed by the low-income population, provided by a variety of different entities, but run in accordance with generally accepted insurance practices (which should include the Insurance Core Principles). Importantly, this means that the risk insured under a microinsurance policy is managed based on insurance principles and funded by premiums. It therefore excludes social welfare as well as emergency assistance by governments, as this is not funded by premiums relating to the risk, and benefits
are not paid out of a pool of funds that is managed based on insurance and risk principles.
This definition encompasses three concepts that require further explanation in the context of this study: insurance, accessible to/accessed by, the low-income population. Insurance: Generally, insurance denotes a contract whereby an insurer, in return for a premium, undertakes to provide policy benefits. It is distinguished from, for example, social welfare in that it is funded by premiums relating to the risk, and in that benefits are paid out of a pool of funds that is managed on insurance and risk principles (IAIS, 2007b). Benefits may include one or more sums of money, services or other benefits, including an annuity. Microinsurance forms part of the broader insurance market, distinguished by its particular low-income market segment focus. This market often needs distinctive methods of distribution and distinctly structured products.
Accessible to: Microinsurance products need to be accessible and appropriate to
the low-income population, i.e. that the low-income population be in a position to sustainably use such products (including claiming). The low-income population: This study does not propose a specific income cut-off for the microinsurance target market. The target market should be defined within the local country context. Microinsurance is not strictly limited to those living under the national poverty line or the comparative measures (e.g. $1 or $2 adjusted for purchasing power parity). Many of these households may actually be beyond the reach (e.g. affordability) of an insurance mechanism and will remain the dependent on the social security system. Furthermore, low-income levels generally mean that even the middle-income class (not classified as poor under the national poverty line) in a particular country will have relatively low income levels and, therefore, require low-premium products.
Operational definition: Definitions based on the income levels of the purchaser, or the client, are difficult and costly to implement in practice. As result, the practical definitions applied by the market or regulator mostly define microinsurance policies by setting benefit or premium limits, thereby ensuring that it is mostly (but not exclusively) targeted at the poor. Other functional criteria used to define microinsurance (virtually always in combination with a benefit cap) include the following: Product categories that particularly reflect the needs of the poor (e.g. funeral insurance, or insurance for motorcycles or cellphones, which are important to the low-income market for business purposes) Distribution channels, especially channels accessible to the poor; Simplicity of terms, conditions and processes; and
Contract characteristics, for example limiting exclusions that may be difficult for clients to understand or allowing clients to catch up on occasionally missed premiums without lapsing the policy More details on the definitions applied in the sample countries are in Section 3. 2.5. The insurance value chain Delivering an insurance product to a client comprises a number of activities collectively referred to as the insurance value chain. Unlike the transaction banking value chain, where the activities are often performed by the same legal entity, the various activities comprising the insurance value chain are typically performed by more than one legal entity. The risks attached to the various
activities differ and they are regulated by different regulators and supervisors or not at all.
2.6. The distinction between formal and informal
Throughout this document, reference is made to informal and formal (or regulated and unregulated) markets, products, providers or distribution channels. Key issues to consider include the reasons for informality and what the appropriate policy and regulatory response should be. It is therefore important to clarify what is implied by informality: Formal: Formal financial products and services are defined as products or services provided by financial service providers that are registered with a public authority to provide such services. Informal: Informal financial services refer to everything that is not formal as defined above and includes a wide range of providers. At its simplest this includes completely informal societies that are often of a community and mutual nature. In some cases informal markets may also include formal legal entities (e.g. funeral
parlours) providing insurance without being regulated for the purposes of doing so. Informal insurance is not necessarily illegal.
Specific providers or products may be exempted from insurance regulation or may simply be operating in the absence of regulation. When a particular section of the formal market is regulated in theory but not supervised in practice, it may actually present similar risk and challenges to the informal sector. The informal financial sector can play a crucial role in financial sector development. The existence of large informal markets is a key indication of demand for insurance products not met by the formal market as well as potential barriers to formalisation and market development. Informal institutions often fill the vacuum created in the process of formalisation by acting as distribution mechanisms or by providing the service themselves. The scale and number of informal insurance providers provides a reality check on the challenges for supervisors and regulation that attempts to formalise these
markets. In many cases, the supervision of this sector may simply fall beyond the logistical or resource capacity of the supervisor.
From an inclusion perspective, the objective is to facilitate the development of the formal sector and encourage formalisation while at the same time preserving the critical services the informal sector is providing. 2.7. Categories of risk The definition and analysis of risk and its various drivers is central to the analysis and proposals in this document. In this section we note the definitions and concepts that are applied in the discussion of risk. The Insurance Core Principles (ICPs IAIS, 2003) hold that the supervisory authority requires insurers to recognise the range of risks that they face and to assess and manage them effectively (ICP 18) and to evaluate and manage the risks that they underwrite, in particular through reinsurance, and to have the tools
to establish an adequate level of premiums (ICP 19). ICP 18 states that the insurance supervisor plays a critical role by reviewing the insurers risk
management controls and monitoring systems, and by developing prudential requirements to contain these risks. In the final instance, it is the responsibility of the board (via good corporate governance practices) to ensure that risk is adequately managed. The risk of insurance business stems from a variety of reasons. To simplify the discussion in this document we distinguish three (interdependent) categories of risks: prudential risk, market conduct risk and supervisory risk: Prudential risk refers to the risk that the insurer is unable to meet its obligations under an insurance contract. Insurance provides benefits on a defined risk event in return for premiums that are paid in advance. A contractual commitment to provide benefits creates the risk that the insurers liabilities in respect of expected future claims at some point in time may exceed the assets they have available to
meet those claims. This is driven by a number of more specific risks categorised by the International Actuarial Association (IAA) as underwriting risk, credit risk, market risk, operational risk and liquidity risk (IAA, 2004). Prudential risk is in the first instance determined by the nature . These categories as are in line with the solvency methodologies outlined in IAA (2004) and IAIS (2007a) of the insurance products in an insurance portfolio (underwriting risk determined by the likelihood and size of exposure) and secondly by how the insurer is managing and providing for its obligations under these policies. Key insurance product features that affect risk are: the nature of the risk event covered and its expected
frequency and impact; the duration of the product contract; the benefit value; and the complexity of the product. The product-driven nature of underwriting risk is a key feature of risk that we return to later in this document. Market conduct risk refers to the risk that the client is not treated fairly and/or does not receive a payout on a valid claim. Effectively, this is the risk that clients are sold products they do not understand, are not appropriate to their needs,
and/or that they will not be able to claim on. This risk is driven by various factors
including: the nature of the product (product complexity, level of cover provided), the nature of the intermediation process (compulsory/voluntary nature of the purchase, standalone/embedded nature of the product, the level of disclosure or advice, nature of the claims process) and the nature of the client (level of sophistication and financial literacy). In some insurance literature, market conduct risk may also refer to the risk arising from the insufficient disclosure of financial information by the insurer to investors and supervisors. This is not included in the definition of market conduct applied in this document. Supervisory risk refers to the risk that the supervisor is unable to sufficiently supervise (due to limited capacity) specific components of the market. The result of this is that an insurer or insurance product with low technical/underwriting risk may actually turn out to have a high risk to the system because it is not appropriately supervised.
2.8. Policy, regulation and supervision
2.8.1. Regulatory vs non-regulatory drivers of market development This report is about the impact of regulation on the development of microinsurance markets. Many insurance markets initially developed in an unregulated environment. The first pitfall to guard against is therefore to think that markets develop as a result of regulation. Largely they do not. The insurance sector is affected by external factors in the financial sector and by the economic and country context more broadly, such as the macroeconomic environment, the political economy, the general and financial sector infrastructure, and the demographic profile of the country (gender, age, income levels and the distribution of income). For example, a country undergoing financial liberalisation or recovering from a financial sector crisis or recession will face different policy challenges with its insurance regulatory framework than other countries. Likewise, a country where the majority of the population is poor, or
where the financial sector and other infrastructure are poorly developed, will face different circumstances and goals than other countries. The first challenge is to distinguish between the regulatory and non-regulatory drivers of market development. Whereas this distinction is quite clear in certain
cases, causality is often a matter of degree and even opinion. The approach in this study is to identify the non- market conduct concerns may impact on prudential risk in that the reputational damage may, e.g., lead to an insurer becoming insolvent but it is still quite distinct from it. Regulatory drivers of market development at a high level to provide the general context for tracing the impact of regulation. As far as possible we identify all the potential impacts of regulation, even though in many cases regulatory drivers may have been overridden by other market factors. 2.8.2. Purpose of insurance regulation
It is important to note that regulation is not an end-goal in itself, but is the means to ensure the existence and development of a well-functioning market. A well- functioning market includes serving the broadest possible client base, including the poor. In seeking to achieve the goal of a well-functioning market, policymakers, regulators and supervisors pursue a number of more specific objectives including: Stability of the sector: This objective is sought by ensuring the soundness of operators and may resonate in capital requirements, corporate governance requirements, fit and proper requirements and other aspects of the regulatory framework. Among the regulatory objectives, this is often the one that has been pursued for the longest time.
Consumer protection:
While this is also an implicit goal in the stability objective, this objective most often resonates in market conduct/intermediation regulation (both in terms of the intermediation channels permitted, the due process to be followed, the commissions that can be charged and the requirements placed on intermediaries). Improving market efficiency: This may entail preventing anti-competitive behaviour and overcoming information asymmetries. In its application, such regulation may overlap with both stability and market conduct regulation. Market development:
(or financial inclusion more specifically) is sometimes included as an explicit policy or regulatory/supervisory objective for example in India, where the supervisor, the Insurance Regulatory and Development Authority (IRDA), is also explicitly tasked with a development mandate. Other strategic objectives: This can, for example, include the prevention and control of financial crime as required by international standards imposed by the Financial Action Task Force or the economic empowerment of previously disadvantaged citizens as in South Africa. Given the ultimate goal, none of these individual objectives should be pursued at the cost of a well-functioning market. Some objectives may also conflict. For example: when an authority has the explicit mandate to develop the market, this
may require the relaxation of regulations imposed for stability purposes. Therefore
the market development objective may clash with the way the stability objective
was pursued. Various objectives, however, often mutually enhance each another. 2.8.3. Public policy instruments To achieve its stated objective, a government uses three categories of public policy instruments to influence markets: Policy: The term policy denotes the declared intention of a government on how it wishes to order the financial sector and the objectives that it wishes to achieve. The trade-offs between various government objectives (for example consumer protection and financial inclusion) is therefore managed within the policy domain. Such policy can be contained in a specific policy document (i.e. can comprise a dedicated policy framework), but can also be the stated intention of government,
more broadly/generally contained in speeches, in the preamble to legislation and in other documents (i.e. the general policy stance). Policy may sometimes be
sufficient, in itself, to achieve government objectives without regulation following from the policy. This may be the case particularly when government wants the market to achieve the stated goals. In most instances, however, policy is the canvas against which regulation is then developed. Regulation: Technically speaking, the statutes of a country are termed legislation. They are passed by the national legislative authority (be it parliament or congress). Legislation represents a relatively rigid public policy tool that is normally difficult and time consuming to pass and difficult to amend. In addition to legislation, subordinate legislation may be issued by the executive authority or regulator. Such instruments are more flexible, yet still have the force of law. In the event of conflicts, legislation will take precedence. In some jurisdictions, subordinate legislation is referred to as regulations.
When referring to regulation, this document bestows a broader meaning on the term than subordinate legislation, namely: the various legal instruments with
binding legal powers (legislation as well as subordinate legislation) that together comprise the regulatory body or regulatory framework pertaining to insurance. Regulation furthermore includes the action of regulating the insurance industry to achieve the policy goals. This in turn includes the development of regulatory requirements. The regulator may issue guidance in relation to regulation. Such guidance can be in the form of memoranda or circulars. It does not have the force of law, but can be converted into legally binding regulations if required. Supervision: Supervision describes the functions whereby the state seeks to ensure compliance with regulation. The supervisors role can be defined as the oversight and compliance, on behalf of the state, of the implementation of regulation by private entities, with the power to impose the penalties allowed for if not adhered to. Generally, the policymaker will be the national government or the ministry with jurisdiction over the insurance industry; the regulator will be the ministry
issuing the legislation pertaining to insurance or a statutory body issuing
subsidiary rules; and the supervisor will be a statutory body for implementing such regulation, e.g. an insurance commission or financial services board, superintendence or authority more broadly. In many jurisdictions the supervisor, as defined here, can therefore simultaneously be the regulator. 2.8.4. Insurance regulatory scheme Different categories of regulation are used to influence the behaviour of participants in the insurance value chain. These are collectively referred to as the insurance regulatory scheme, which is captured in Figure 4. The report uses this scheme to analyse the impact of policy and regulation on the development of microinsurance markets in the sample countries. Figure 4: The insurance regulatory scheme Source: Authors
Financial inclusion policy/regulation refers to policy or regulation promulgated
with the objective of extending access to, and usage of, formal financial services by people who are either excluded from or who do not use formal financial services (provided by registered/licensed and supervised financial institutions). Such regulation takes various forms, for example compulsory or consensual quotas targeting defined population segments, financial literacy provisions, tax incentives, extending the reach of the formal payment system, etc. Sometimes a government may choose not to regulate financial inclusion, but simply to adopt financial inclusion policies with the explicit aim that financial institutions would pursue inclusion on a voluntary basis. Although these do not have the force of law, they directly influence the conduct of providers. Prudential regulation seeks to ensure that insurers are able to meet their contractual obligations to their clients. This is done by, for example, setting minimum entry requirements such as minimum levels of capital and requiring
compliance with a set of prudential regulations governing the functioning of the insurer. Market conduct regulation refers to the regulation of the distribution, or intermediation, of insurance products. Regulation of this kind could include
requirements as to who can intermediate insurance, fit and proper requirements for agents and brokers and other intermediaries, regulation of the selling process, including disclosure requirements and giving of advice, regulation of the payment of commission, statutory requirements that make the take-up of certain types of insurance compulsory (for example credit life insurance may be declared compulsory when taking out a non-collateralised loan), etc. Product regulation can be distinguished from prudential and market conduct regulation in that it does not relate to the insurer or the sales/intermediation process, but to the product.
Product regulation aims to ensure stability and consumer protection by regulating the nature and structure of insurance products. In the most basic form, regulatory systems are often structured around definitions of specific products or product categories. Aspects of product regulation. Product regulation may involve one or more of the following:
Registration/ approval: In some jurisdictions, regulation stipulates that products need to be filed with the regulator/supervisor, with a window period for response by the supervisor, before the product is launched. If no objection is made by the supervisor within the stipulated timeframe, the product is automatically approved. In other instances, explicit approval is required by the regulator before offering products. This may be used as a way of compensating for an otherwise light regulatory burden and to allow innovation.
Standards: Regulation may require microinsurance to meet specific standards on simplification, standardisation, documentation, cool-off periods, term, exclusions, etc. In some instances, requirements relating to terms and provisions may be quite onerous; in others it may facilitate innovation.
Price control: Regulation may set specific minimum or maximum prices for product categories. Premium floors are mostly aimed at trying to ensure solvency of the insurer by avoiding price competition, whereas premium ceilings are mostly motivated by consumer protection considerations (though in practice they often serve to protect insurers against intermediaries with bargaining power, rather than protecting the consumer.
Demarcation: Regulation may also prohibit particular players from providing products (e.g. non-corporates) or may determine that certain types of products may be provided by only certain types of providers (demarcation).Creating a
product-based approach to microinsurance where a regulatory space is created
for those who can comply with product standards is therefore a further instance of product regulation. The intention is to limit the risk, thereby justifying different market conduct and prudential standards.
Compulsory products: Lastly, regulation may compel insurers to offer specific products. Institutional regulation, which includes corporate governance regulation, refers to those statutory requirements that determine the legal forms or persons, for example public companies and cooperatives that can underwrite insurance, as well as the regulatory corporate governance requirements applicable to these legal forms. The nature and extent of the corporate governance requirements normally determine whether that particular legal institution is suitable to manage the risks inherent in underwriting insurance. The institutional and corporate governance regulation is generally not specific to the insurance sector but generic across sectors. However, some countries have a tradition of passing
specific statutes for individual insurance firms, especially mutuals.
Other regulation: A number of other regulatory requirements could also affect the development of the microinsurance market. Although not insurance-specific, they affect the underwriting and intermediation of insurance products. Examples include anti-money laundering provisions, taxation, regulation of the payment system (that impacts the ease whereby premiums can be paid), regulation of the microfinance sector and credit regulation generally. It is not only regulation that affects market developments. The absence of regulation can play an equally powerful role. Similarly, even if regulation exists, a supervisory approach of benign neglect or forbearance can allow the market to develop in ways that cannot be foreseen ex ante by a regulator. 2.9. Methodological approach In each country study, the following research process was followed:
Understanding the microinsurance market. Each country study describes the microinsurance market in terms of: (i) the various players (corporate and mutual/cooperative, formal and informal) active in the low-income market;
(ii) the products available and any low-income market product innovations; (iii) usage among the low-income population of formal and informal insurance products; as well as (iii) distribution channels employed in the low-income market and any distribution innovations. These findings are used to make conclusions about the key characteristics of the micro-insurance market. Focus group research was used to identify the need for and understanding of insurance among the target market. This included an investigation into the risk experience, provider, product and channel preferences of the focus group participants, as well their trust in the insurance market in general.
Understanding the insurance regulatory framework. Each study gives an
overview of the insurance regulatory framework, in general and as pertaining to microinsurance.
Drivers of microinsurance. In light of the above, each study seeks to draw out respectively the non-regulatory (market, macroeconomic and political economy context related) and regulatory drivers of the state of microinsurance. In this report, crosscutting drivers of market development are developed. In capturing the cross-country findings, we also develop a model of the way that microinsurance markets develop.
Emerging guidelines. The drivers are used as the basis for determining lessons for the regulation of microinsurance as supported by the country experience. These are then used as a basis to formulate potential guidelines. The aim is to identify common themes across the countries and distil guidelines for policymakers,
regulators and supervisors that facilitate microinsurance market development while also protecting consumers. The methodology for each country consists of desktop research as well as consultations with industry roleplayers, regulators, supervisors and other stakeholders. The methodologies applied involved:
Traditional demand and supply mapping;
Qualitative focus group research;
Insights from behavioural economics that, together with focus group findings, allow for a hypothesis on how insurance usage is triggered and insurance markets are developed;
Regulatory and policy analysis; and
Controlling for context and the distinctive evolution of the broader insurance market in each country in deriving conclusions. 2.10. Project scope
The scope of the study covers all life and non-life insurance products targeted at the low income market, including savings products provided by insurers (endowments) where it includes an element of guarantee. Pure savings products and retirement savings products are excluded from the scope of the study, as is government social welfare and social security provision. While capital health insurance products are considered, indemnity health insurance is excluded from the scope of the study. Indemnity health insurance is an extremely important product for the low-income market but needs a dedicated study as it often is regulated and supervised differently to other insurance business and is a complex field, intricately linked to health service provision.
The study covers all categories of providers and intermediaries including informal markets. The next section provides an overview of the context and main findings arising from each of the countries reviewed providing the basis for the cross-cutting findings in Section 4. 3. Country context This section provides a brief overview of the country context and microinsurance market composition for each of the sample countries. 3.1. Colombia Over the past two decades, Colombia has experienced financial liberalisation and growth, but also a major financial sector crisis. Against this backdrop, microinsurance has developed significantly, traditionally through large cooperative insurers and more recently also on the back of microfinance development. This is all the more remarkable as there is no microinsurance
regulation and only indicative financial inclusion policies. Colombia illustrates that microinsurance can develop where external circumstances are favourable and where the policymaker and regulator have a fairly open stance, even without a
dedicated microinsurance regime. Yet uniform prudential requirements mean that it remains difficult to provide microinsurance from the bottom up. 3.1.1. Context Despite the informal economy employing almost 60% of the workforce and contributing at least half of GDP, Colombia compares favourably to the other sample countries for literacy, urbanisation and poverty levels: Colombia India Philippines South Africa Uganda Population 46-million 1.1-billion 89-million 47-million 29-million Urbanisation 57% 29% 63% 59% 13% Literacy (% of adults) 93% 61% 93% 82% 67%
Population <$1/day 8% 40% rural; 20% urban 14% 23% 82%
Population <$2/day 19% 88% rural; 61% urban 44% 36% 96% 3.1.2. Salient features of the microinsurance market Use: An estimated 19% of Colombian adults are microinsurance clients. There are about 2.74-million21 formal microinsurance policies (9% of the adult population). Informal microinsurance, most notably funeral insurance provided by so-called funeral entities, is also important. Industry sources estimate the informal market reaches up to three-million clients (10% of adults), making it slightly bigger than the formal market (at 52% of the total microinsurance market). The insurance law, the Fundamental Law of the Financial System (FLFS), requires foreign companies to set up a local subsidiary in order to sell policies locally. This phenomenon, the result of a high inflationary environment, was most prevalent in the 1970s and 1980s in Colombia, but is now on the decline.
National Banking Association Survey, 2007, as quoted in country report. Note that this figure may be overestimated, as it is not clear that the actual number of account holders, rather than accounts, was measured. There may be some duplication of accounts per person. This may be a slight overestimation of policyholders, as some people may have more than one policy. Players: There are 43 registered insurers in Colombia, of which 41 are corporates and two are cooperatives. Though 17 insurers provide some form of icroinsurance products, the two insurance cooperatives, La Equidad and Solidaria, are the microinsurance pioneers. They remain the largest players in the microinsurance market. With 1.7-million insurance policyholders, they are estimated to account for 62% of the total formal microinsurance market. This is, however, still significantly below the total cooperative membership of 3.7- million, implying scope for further cooperative-based microinsurance expansion.
Products: Voluntary microinsurance plays an important role in Colombia
compared to international experience. Compulsory credit life insurance is estimated to account for only 27% of all microinsurance clients, though it is growing strongly on the back of credit expansion. The most popular life microinsurance products are funeral insurance, followed by credit life insurance. Innovative new products are also increasingly marketed on the non-life side, including motorbike insurance, insurance tailored to cover the stock of small businesses, repatriation insurance for migrant workers, products providing benefit pay-outs in the form of grocery vouchers or education fee coverage, and cellphone insurance. Fasecolda (the insurance industry association) estimates property insurance to comprise 60% of the microinsurance market. This category is in turn largely comprises cellphone insurance. Thirty-million Colombians (about 64% of the population), 72% of whom are classified as lower income, now own a cellphone.
Distribution: Traditional broker and agent distribution channels do not feature
prominently in the microinsurance market. Instead, microinsurance is distributed largely through cooperatives, as well as through micro-credit NGOs requiring compulsory credit life . 3.1.3. The insurance policy, regulation and supervision landscape Colombia has no dedicated insurance law. Insurance is incorporated with other financial activities under the Fundamental Law of the Financial System (FLFS) and its subordinate decrees and regulations. The Financial Superintendence (FS) acts as insurance regulator and supervisor. Prudential and institutional regulation: Both public corporations and cooperatives may register as insurers. The minimum upfront capital requirement consists of a standard minimum capital component, as well as additional technical
capital requirements per class of product provided. In 2006, the standard
component was $2.7-million for life and non-life insurers, $1.5-million for credit and export insurers, and $11-million for reinsurers. The technical equity required ranges from $0.3-million to $1.2-million, according to the type of product. The total minimum upfront capital requirement therefore depends on the combination of products provided by the insurer. Apart from the FLFS, Law 79 of 1988 on Cooperatives is also relevant. It establishes a framework to develop cooperative activities and allows cooperative insurers to provide insurance to non-members. There is no special dispensation for cooperative insurers and they have to adhere to the full set of regulatory requirements for insurers. Product regulation: On registration, insurers are authorised to provide various classes of policies (group life, health, vehicle, asset, etc). New products have to be submitted to the FS, "Directs sales" refer to insurance products sold directly by the insurer without tied agents or brokers, for example through telemarketing, direct mail, or call centres. Sometimes this involves insurers selling products
through their employees without such employees being considered agents or brokers. This is allowed under Art. 5 FLFS and Art 2 Decree 2605, 1993.
With the insurance premium added as a separate item to a persons monthly utility statement but product authorisation is not required. Strict product demarcation applies only to individual life policies. Under Article 38 of the FLFS, insurers providing individual life policies must do so exclusively. Any other life insurers may sell group life, collective life, health, personal accident, funeral or education policies, as well as annuities and non-life policies. Non-life insurers may sell collective life, group life and health insurance in addition to asset based policies. Market conduct regulation: In Colombia, insurance may be distributed directly by the insurance company, through agents, insurance agencies or by means of insurance brokers. Under the Cooperative Law, insurance cooperatives may sell their own or another insurers policies without using agents, brokers or agencies.
The main difference between brokers and agents is that, while agents are natural persons, brokers must be a limited company or public corporation. They must register with the financial superintendence and are subject to
capital requirements. Agents do not have to register and the onus is placed on the insurers dealing with them to ensure that they are compliant and competent. Insurers must certify that they have trained their agents to ensure that they are competent and must make their training programmes available to the FS. In practice, insurers implement this requirement jointly through courses presented by the industry association, Fasecolda. The direct distribution and agencies channels are interpreted quite broadly to accommodate new channels. New channels (for example, bancassurance or distribution through public utilities) have also been regulated through subordinate regulation on an ad hoc basis. There is no price control on premiums or commissions. Market conduct provisions mostly relate to consumer protection measures such as the right to choose the provider in the case of credit
insurance and the establishment of proper complaints procedures.
Financial inclusion policy: Financial inclusion is an important policy objective, specifically the president and government invests much energy in supporting the development of financial services for the poor. A key feature is the Opportunity Banking policy, which seeks to provide access to financial services, including payments, transfers, savings, loans, insurance, pensions and remittances. It does not place regulated inclusion objectives on private financial institutions, but establishes the overall policy framework that guides public and private players to extend access to financial services. Among others, the government has amended banking regulations to allow the establishment of non- bank agents (named nonbank correspondents) to extend the formal banking network into previously unserved areas. As of June 2007, there were 3 508 non- bank correspondents and between 2006 and 2007 the new channel has enabled almost one-million Colombians to access formal credit for the first time. Non-bank
correspondents are not currently allowed to sell insurance, though they may collect premiums. 3.1.4. Impact of policy, regulation and supervision on the market As the FLFS makes no reference to microinsurance, and there is no official microinsurance definition, the Colombian experience illustrates that
microinsurance can grow. The only difference between group life and collective life policies is that in the former there is some relationship between the policyholders, for example they belong to the same union. Collective life would for example refer to the policies sold via the electricity utility. Absence of any regulatory concessions to facilitate its development. However, this is only possible because general insurance regulation does not impose an unduly heavy burden on the intermediation of microinsurance; neither is it restrictive on underwriting:
Insurance provided by unregulated funeral entities. Funeral entities serve a large part of the market and have also supported formal market development by increasing awareness and familiarity with the concept of insurance. A 2006 opinion by the FS (based on a 2003 constitutional court judgment) holds that the policies provided by funeral service providers fall outside the definition of insurance in the FLFS. These providers therefore operate on an unregulated and unsupervised basis. Though this regulatory forbearance has by and large served the development of the market, it could create the risk of consumer abuse if not carefully monitored by the supervisor.
Demarcation rules favourable to market development. Market development in Colombia is supported by the fact that an insurer is allowed to provide health, non-life and group life policies under a single licence.
Flexible market conduct regime. The Colombian regulatory framework facilitates
microinsurance intermediation in a number of ways. It accommodates new
channels within the direct sales or agencies categories or through specific subordinate legislation as they arise. Furthermore, no price controls (in the form of commission caps) apply to the intermediation process. Cooperatives may sell insurance to non-members and may act directly as a distribution channel. Lastly, the FS delegates supervision of agents to insurers. These factors combine to make Colombia one of the sample countries with the most flexible market conduct regime. This gives providers the confidence to pursue distribution innovation, as witnessed in the various new channels emerging.
Active government encouragement of low-income market activity. To date one of the main impacts of the Opportunity Banking policy has been the introduction of non-bank correspondents as an intermediary category to support the distribution of financial services in poor and remote areas. The expansion of microcredit in turn paves the way for credit life microinsurance expansion.
3.1.5. Conclusion: insights and lessons from Colombia
The financial liberalisation and subsequent crisis in Colombia shaped the current state of the microinsurance market in that it increased competition for domestic clients, which prompted a move downmarket by domestic banks and insurers in the quest for new market segments. Microfinance expansion in turn stimulated the growth of the credit life microinsurance market. Despite the growing importance of compulsory credit life insurance, voluntary microinsurance (driven by the cooperative insurers) still dominates, with funeral insurance being the most popular product and non-life insurance, especially cellphone insurance, also growing in popularity. A relatively open regulatory stance as well as generally low regulatory burden, especially on the intermediation side, has meant that market rather than regulatory forces have been the definitive driver of microinsurance development. Nevertheless, a number of policy and regulatory aspects have affecting the microinsurance market. Perhaps most significantly, the Opportunity Banking policy represents a significant push by government for the facilitation of financial
inclusion. Though current evidence suggests that the absence of microinsurance specific regulation has generally not hampered the development of microinsurance, overall microinsurance penetration remains low and
microinsurance is still largely driven by two large cooperative players. The creation of a microinsurance definition may serve to align policies and efforts for developing the market and close the regulatory gaps that do exist, such as the fact that no intermediate step or tier with reduced regulatory cost is available to smaller or community-based entities who want to enter the microinsurance market. 3.2. India The sheer scale of the Indian low-income market creates enormous scope and need for microinsurance. Potential voluntary demand is strong, particularly for micro-health cover. A strong political imperative exists for financial inclusion,
resonating in regulation that mandates low-income market expansion, as well as a dedicated microinsurance space. Yet microinsurance penetration in India is still extremely small. The legacy of a state-owned insurance monopoly still looms large. Private insurers as well as the insurance regulatory authority are new and have found it difficult to prioritise microinsurance in the face of other pressing concerns. The regulatory strategy to compel insurers to reach downmarket has triggered some interest in the low-income market, but rarely beyond that required by law. Furthermore, general insurance regulation as well the specific provisions for
microinsurance impose restrictions that have contributed to its limited success so far. 3.2.1. Context
With a population of around 1.1-billion, India is the second-most populated country in the world. In recent years, there has been strong GDP growth. Yet poverty remains high, especially among the 70% of the population living in rural areas. The World Bank (2007) estimates that 88% of the rural population and 61% of the urban population live on less than $2 a day, reducing to 40% rural and 20% urban (33.5% of the total population) for $1 a day. Government nationalised the insurance industry in the 1950s, monopolising it into two state-owned corporations: the Life Insurance Corporation (LIC) and the General Insurance Corporation (GIC), the latter with four subsidiaries. The insurance industry was only liberalised in 1999 to allow private insurers. Since then insurance premiums have grown rapidly on the back of new entries to reach 3.5% of GDP. The two state-owned insurers remain the largest insurers in the market.
India is unique in that the government plays a proactive role in providing
insurance to the very poor (those below the $1 a day threshold) through various social security programmes and subsidised insurance schemes. Therefore the microinsurance market in India should largely be regarded as the low-income population living on more than $1 a day. 3.2.2. Salient features of the microinsurance market Usage: Though no figures are available on the exact size of the microinsurance market in India, a rough estimate would place it at around 14-million people, or about 2% of the adult population25. Note that India is the only country for which this estimate includes health This figure is derived as follows: the main market for microinsurance in India is the MFI clients (clients of both privately run MFIs and the members of self-help
groups (SHGs) promoted under the Governments/NABARD SHG-Bank Linkages
Programme). There are about 50-million MFI clients, of which 30m are currently served. Of these, 30-40% are poor which means that there are about 10.5-million credit life micro-insurance clients. The low take-up can be ascribed to a general lack of awareness of insurance as a financial product, even in the high- to middle- income market. This emerged strongly in the focus group findings. Rural financial services infrastructure for distribution is lacking, as well actuarial data27, and these also inhibit the development of the microinsurance market. Players: Though the state-owned insurers still have the largest market share, there are now 32 licensed insurers. A feature setting India apart from other countries is the fact that microinsurance is mostly provided by large, corporate insurers. This is due to a cautious regulatory approach that limits the players in the non-bank field to large cap institutions, which is a response to small and cooperative financial
institutions not performing well historically. The cooperative/mutual sector therefore does not feature as a microinsurance
provider, though corporate insurers use it as a distribution channel. Informal insurance is virtually exclusively the domain of formal entities such as health insurance schemes not registered for insurance purposes, rather than community risk-pooling groups, and is estimated to comprise only 20% of the market. Products: Microinsurance in India is for the most part driven by compulsory credit life insurance on the back of microfinance. The limited reach of the public health system has also created a high natural demand for health insurance. Many MFIs therefore provide a credit linked package of compulsory insurance cover to their clients this includes life, asset as well as health insurance. The cover is for the term of credit, usually one year. Health cover provided in such packages is not
comprehensive and covers only certain listed diseases which require
hospitalisation. Accident cover is a rider with life insurance and is a fixed payout. India is therefore unique in that compulsory insurance cover extends beyond life cover. It is estimated that only 10% of microinsurance policies are sold on a voluntary basis. Of these, up to 90% are endowment products rather than pure risk products, indicating a preference among the low-income population for financial products that provide some payout regardless of whether a risk event has happened. Health insurance (by Yeshasvini and a few other schemes) largely account for the informal part of the microinsurance market. The health insurance cover in this case is quite comprehensive, unlike in credit linked policies, and covers a number of illnesses as well as out-patient costs. The lack of adequate health care facilities in rural areas, however, undermines micro-health insurance.
There are about 5-million clients served by community health schemes. However, there are some overlaps among the clients of private MFIs/SHG-Bank Linkages Programme and also the lives that are covered by credit life and social security schemes. Therefore, assuming an overlap of about 10%, the total number of low-
income clients served by microinsurance will be around 14-million. This estimation does not include micro-pensions. These figures would have increased by around 20-30% in 2008 as the microfinance sector in India has grown at this pace for last several years. Note that this estimate differs from for example Roth, McCord and Liber (2007), where it is stated that in excess of 30-million lives are covered by microinsurance in India. This can be ascribed mainly to the fact that the emphasis in this study is on the number of policy (insurance product) holders rather than the number of lives covered (more than one life may be covered per insurance product). In addition, this study did not count micro pensions (noted as an important product in Roth et al) as microinsurance.
As agreed in the methodology for the country studies, health insurance would be
outside the scope of the study. Due to its important role in the low-income market, India is however the one country for which an exception was made. As private insurers are still young, they have not been able to accumulate enough pricing data. Distribution: Distribution is an important part of the microinsurance landscape in India. Regulations were issued in 2005 to create a microinsurance agent category for the dedicated distribution of microinsurance. Currently such agents distribute only about 20% of all microinsurance. Instead, distribution mainly takes place through MFIs, which either do not qualify as microinsurance agents under the regulations or which find the regulations too restrictive, as partners or agents of formal insurers. The key features of the microinsurance market are in Figure 6.
3.2.3. The insurance policy, regulation and supervision landscape Insurance in India is regulated under the Insurance Act of 1938 (as amended). Concomitant to the liberalisation of the insurance industry, the Insurance IRDA Act of 1999 established IRDA as the regulator and supervisor. As its name indicates, IRDA has two explicit mandates: regulating the industry for stability purposes, and also promoting industry development. Prudential and institutional regulation: The Insurance Act, 1938 defines four categories of insurance: life, fire, marine and miscellaneous. IRDA licenses two categories of insurers: life and general (covering the last three product categories). Applicants must be registered companies. Cooperative insurers are allowed but must comply with the full regulatory load
and minimum capital requirements28. No more than 26% of the issued share
capital of an insurer may be foreign-owned. All insurers, regardless of type of product offered or institutional type, must hold Rs100 crores (about $25-million) in minimum start-up capital. Product regulation: One insurer is not allowed to offer both life and general insurance, unless it forms two separate companies. Health insurance may, however, be provided under either a life or a general insurance licence. New products are subject to a file-and-use approval approach. General (non-life) insurance premiums have traditionally been regulated, i.e. were subject to price control. In an effort to improve efficiency, IRDA, 28 Just one cooperative insurer, specialising in agricultural insurance, has been established so far. Market conduct regulation:
IRDA recognises four types of insurance intermediaries: brokers, agents, corporate agents (that can for example include rural banks or MFIs) and microinsurance agents. Intermediaries have to undergo a minimum number of hours of training and (with the exception of microinsurance agents) have to pass an examination before they can register. From 2008, IRDAs approach has been to concentrate on solvency issues and to delegate market conduct supervision to self- regulatory insurance councils, for example in administering examinations of prospective insurance agents. Nevertheless, IRDA has set up a grievance cell/complaints office and works with insurers towards the expeditious disposal of complaints. Furthermore, it works towards the standardisation of concepts, simple application forms, acceptable accounting standards, transparency in business operations and disclosure of financial statements. Financial inclusion policy and regulation:
Financial inclusion is an explicit policy objective of the Indian government and various initiatives have been launched to that effect. India is one of only two
sample countries with a microinsurance regime in place. Two sets of regulations issued by IRDA under its market development mandate are relevant to microinsurance: Regulations regarding rural and social sectors obligations, 2002: These regulations oblige insurance companies to procure insurance business on a quota basis from pre-defined rural areas and social sectors, with the latter defined as unorganised workers, (and) economically vulnerable or backward classes in urban and rural areas. The quotas are phased up over time: 5% of all life insurers policies must be from rural areas in year one, phasing up to 16% in year five. For non-life insurers, 2% of total gross premiums underwritten must be from rural areas in year one, phasing up to 5% in year five.
In the social sectors, each insurer has to maintain at least 5 000 policies in year one rising to 20 000 in year five, for both life and general insurance. An insurer failing to reach the targets incurs a financial penalty. Repeated violations could prompt IRDA to revoke such an insurers licence. Microinsurance regulations, 2005: These regulations embody IRDAs commitment to extending the reach of the insurance sector. They create a specific category of microinsurance agents to
distribute microinsurance products on behalf of registered Previously, health and property were combined in one product and property rates cross-subsidised health. With property rates falling, this is no longer feasible. All insurers and provident societies incorporated or domiciled in India are members of the Insurance Association of India. It has two councils, namely the Life Insurance Council and the General Insurance Council, funded by industry. Both
councils act as self-regulatory bodies by developing codes of conduct, setting disclosure standards, developing compliance programs, etc.
Full name: The Insurance Regulatory and Development Authority (Obligations of insurers of rural social sectors) Regulations Gazetted in November 2005. Available at: www.irdaindia.org/regulations Microinsurance products are defined as both life and general insurance products. The definition is set according to minimum and maximum benefits, the minimum/maximum term of the insurance policy and minimum/maximum age of entry, as well as certain simplicity requirements. The specifications vary according to the type of cover provided. 3.2.4. Impact of policy, regulation and supervision on the market
A high regulatory burden undermines dedicated microinsurance provision. The
high minimum statutory capital requirement is a deliberate entry barrier imposed by IRDA. As there is no concession for dedicated microinsurance providers, this policy could impede growth of the microinsurance industry since it precludes mutual groups and other community-based entities from formalising into registered insurers. Likewise, market conduct regulation, for example the price controls on commissions, increases the burden on insurance provision to the low- income market, as does the service tax. Rural and social sector quotas force a move downmarket, but do not necessarily improve the livelihoods of poor people. The impact of the quotas has been ambivalent. While it has prompted some insurers to experiment with new distribution channels through NGOs, MFIs and the rural banking network, many insurers still do not regard this as a profitable market opportunity beyond the quotas. The quotas furthermore do not specify that policyholders
need to be poor, and it is reported that many insurers meet the quotas by focusing on higher-income individuals within the rural and social sectors. Microinsurance regulations open space for microinsurance distribution, but the impact is undermined by restrictions. The concessions granted to microinsurance
agents bring down intermediation costs and allow enhanced functions such as the routing of premiums. This is, however, undermined by the fact that these concessions are available only to a limited category of agents. The implication of the exclusion of for-profit entities from the microinsurance agent definition is best illustrated in the case of NBFCs that are for-profit companies, often MFIs, registered by the Reserve Bank of India. NBFCs account for more than 80% of the clients served by microfinance and are a ready base for microinsurance distribution. Excluding them from the microinsurance agent definition means that insurers are forgoing this cheaper distribution opportunity. It is estimated that, largely as a result of this restriction, only 20% of microinsurance products are currently distributed through microinsurance agents.
Despite the relaxation in the demarcation requirement for microinsurance, and
despite the high potential demand indicated in the focus groups35, no composite microinsurance products have yet been registered. It is argued that this is because insurers are reluctant to bind themselves to any one other insurer. Furthermore, the microinsurance regulations restricting microinsurance agents to partner with one life and one non-life insurer exclusively makes it impossible to combine the best products from different companies into a bouquet that would suit the needs of particular types of clients within the microinsurance space. 3.2.5. Conclusion: insights and lessons from India Despite large microinsurance potential and policy measures for low-income market expansion, the reach of the Indian microinsurance market remains limited to 2% of adults. Where microinsurance uptake has grown, this has been linked mainly to the growth of the microfinance sector rather than of microinsurance per
se. A number of factors explain this, including a lack of awareness among the
public and perceived low affordability. Furthermore, while self-help groups and other low-income groups are important role for microinsurance distribution, underwriting through informal mutual groups has not played a significant role, with the informal insurance market largely comprised of health insurance schemes. Low use, however, is also linked to a distinct regulatory aspect. The history of government involvement has meant that the private insurance market and the regulatory authority are still new, making low-income expansion all the more difficult. Though IRDA has implemented a number of measures to expand the reach of the insurance market, the approach followed has often been quite prescriptive and restrictive. Thus far, rural and social sector obligations have triggered only limited interest in the low-income market beyond what the quotas require. Likewise, the microinsurance space has not achieved significant success. It must be noted that the regulations are still fairly new and may take some time to take effect. That the space does not allow for a separate prudential tier implies that minimum capital requirements remain a significant barrier to entry. On the
market conduct side, the restrictive definition has contributed to microinsurance agents by and large not yet becoming a vehicle for accelerated outreach to low- income clients. 3.3. Philippines The Philippines has a strong mutual/cooperative tradition and informal risk pooling and underwriting is common. This, together with the growth of the microfinance industry, has been the driving force behind the development of microinsurance. Besides India, the Philippines is the only sample country where microinsurance is explicitly provided for in the insurance regulatory regime. However, whereas India created concessions for microinsurance on the intermediation side, the Philippines created a special prudential tier, with significantly lower minimum capital requirements, for the underwriting of
microinsurance policies and linked this to the allowance for Mutual Benefit
Associations (MBAs) in their Insurance Code. Filipino insurance regulation allows a great deal of institutional flexibility for formal insurers they can be stock companies, cooperatives or MBAs, the latter having to be non-profit in nature. The microinsurance regulations also contain an innovative mechanism to facilitate formalisation of informal insurance operators: microinsurance MBAs which are unable to meet the minimum capital requirements upfront, are allowed to increase their capital over time without having to forfeit their registration. Through these regulations, and some public awareness campaigns, the Filipino Insurance Commission triggered a move to formalise the informal sector. However, much informal activity remains.
3.3.1. Context
The Philippines has a population estimated at about 88-million people, spread over more than 7 000 islands 48% of the population lives in urban areas. The World Bank (2007) estimates 44% of the population to live on less than $2 a day and 14% on $1 a day or less. During 2007, GDP grew by 7.3%. The Philippines has a relatively sophisticated banking sector and the country has been a pioneer in mobile payments that are accessible to the low- income market. The insurance sector is less developed, with insurance premiums representing only 1.2% of GDP. The private microfinance industry has only recently started to grow, after having been crowded out by three decades of government-subsidised directed credit programmes. Since the introduction of a National Microfinance Strategy to encourage increased private sector participation in 1997 the market has grown from less than 500 000 to more than 3.6-million clients, provided through more than 1 400 MFIs.
3.3.2. Salient features of the microinsurance market Players: There are 33 life, 94 non-life and three composite insurers in the Philippines. Commercial insurers play only a small autonomous role in microinsurance. Their low-income market activity is mostly limited to credit life insurance provided via the MFI sector. Insurance distributed by MFIs and rural banks39 (denoted as corporate insurance on the diagram) accounts for 68% of formal microinsurance use. Mutual insurance, provided by MBAs, also plays an important role. MBAs are intricately linked to the MFI sector. There are 18 MBAs, six registered as microinsurance MBAs. All of the latter and most of the former were established by MFIs to serve as a vehicle for providing microinsurance to their clients. Of the 22 000 operational cooperatives in the Philippines (80% of which are financial cooperatives), about half are estimated to provide some form of insurance to their
members through mutual fund schemes. These schemes are not licensed by the Insurance Commission. Only two cooperatives currently provide insurance
formally, both of them registered simultaneously as cooperative service providers with the Cooperative Development Authority, and as life insurers with the Insurance Commission. One, CLIMBS, is registered as an MBA with primary cooperatives as members. These two cooperative insurers therefore act as insurers to networks of cooperatives that essentially serve as distribution agents. The other, CISP, has been put under curatorship by the Insurance Commission because of financial difficulties symptomatic of the generally poor condition of prudential risk management pervasive in the cooperative sector. Other groups, such as damayan funds (risk-pooling societies), also provide risk- pooling. However, as these do not provide guaranteed benefits, their activities fall beyond the definition of insurance.
Products: Compulsory credit life is estimated to account for 49% of microinsurance use. Within the voluntary market, life insurance and casualty insurance (including disability and health insurance related to accidents) are the most important products. MBAs provide only life and credit life insurance. In the informal (self- insured cooperative) market, life insurance, sometimes with added hospitalisation or accident coverage, is the most common insurance product offered. Distribution: Microinsurance is distributed mainly through MFIs (including rural banks), MBAs, cooperatives and other groups. Individual sales through traditional broker and agent channels are rare. Only the two cooperative insurers apply agent-based sales directly to individuals. As they are also registered as cooperative service providers under the Cooperative Development Authority, they target people belonging to their cooperative member networks for such sales. They have their
own set of Insurance Commission-licensed Note that the largest commercial
insurer involved in microinsurance, Country Bankers, was formed by the rural banks to underwrite their credit life policies. Note that these life insurance policies are traditional life insurance policies, not funeral insurance as found in some other jurisdictions. In the Philippines setting, products targeted at funeral costs are generally provided by pre-need companies. This health insurance entails a capital pay-out in the case of a health contingency, rather than covering medical expenses incurred (the traditional meaning of health insurance). The latter is provided outside of the jurisdiction of insurance regulation, by health maintenance organisations regulated by the Department of Health and defined as juridical entities organised to provide or arrange for the provision of pre-agreed or designated health care services to its enrolled members for a fixed pre-paid fee for a specified period of time (Department of Health
Administrative Order No. 34 dated July 30, 1994). Agents assigned directly to a
partner cooperative to market insurance and process the documentation. CLIMBS shares the commission between the agent (called an assurance manager) and the primary cooperative, which is considered a marketing arm of CLIMBS. For claims processing, however, the primary cooperative may deal directly with CLIMBS and opt not to go through the assurance manager. This cuts the claims processing time (CLIMBS promises to pay the claims within seven days). Three main market factors drive the development of the microinsurance market: Microinsurance mainly driven by microfinance development: The growth of the microfinance industry demonstrates the viability of the poor as financial services clients. Increased competition among MFIs has led to providing better and expanded services to members. Realising their clients need for
protection against risks (e.g. death in the family, illness, loss of assets by small businesses), many MFIs started to offer or facilitate the provision of insurance services to clients beyond just credit life insurance. Microcredit also served to
create awareness of financial services among the poor, and compulsory credit life insurance has familiarised the market with insurance to the extent that spontaneous demand for other types of insurance, such as health and life, is emerging. Moreover, MFI staff and credit processes provide an existing and cost- effective channel for selling insurance, premium collection and claims payments. Role of groups in microinsurance: Microfinance provision in the Philippines is mostly initiated and facilitated through client groups, many of whom are clients of MFIs. The group
mechanism is used to grant loans and collect repayments. This group-based
mechanism, and clients familiarity with it, has lent itself to the formation of MBAs for providing insurance to MFI clients. The role of CARD MBA: The MBA has become the vehicle of choice for insurance provision by MFIs, largely due to the experience of CARD (centre for Agriculture and Rural Development) MFI, one of the MBA pioneers in the Philippines. CARD initially offered informal insurance to its members. With time, however, it realised that this was unsustainable and could bankrupt the organisation. On advice from the regulator, CARD registered an MBA to rehabilitate its insurance operations and bring it within the formally regulated space. CARD MBAs subsequent success provides an example to other MFIs that want to cater for the risk protection needs of their members, and has been instrumental in the establishment of a tiered regulatory regime for microinsurance MBAs. CARD furthermore plays an important
development role in the MFI-MBA sector. Under the Insurance Commission Circular 9-2006, an MBA is only recognised as a microinsurance MBA
when it has a minimum of 5 000 clients. As most MFIs were not yet large enough, CARD MBA implemented a programme called Build Operate and Transfer. Under this programme, small MFIs members are initially insured with CARD MBA, though enrolment, documentation and processing of claims are lodged within the MFI. CARD also provides technical assistance. When the necessary scale is reached, the MFI can register an MBA and fully handle its own insurance. 3.3.3. The insurance policy, regulation and supervision landscape Insurance in the Philippines is regulated under the Insurance Code (Presidential Decree No. 1460) of 1978, with the Insurance Commission as regulator and supervisor. Insurance is, however, also provided outside of the regulatory mandate of the Insurance Commission, through guaranteed-benefit pre-need plans and health insurance contracts. Pre-need plans are regulated by the Securities and
Exchange Commission, whereas health insurance contracts are provided by health maintenance organisations (HMOs) regulated by the Department of Health. There are discussions in Congress to bring these institutions under the authority of the Insurance Commission. Prudential and institutional regulation: The Insurance Code identifies four types of insurers: life insurers, non-life insurers, composite insurers and mutual benefit associations. The code allows cooperatives providing insurance (registered under the Cooperative Development Authority but not extensively supervised in practice) to also register for insurance purposes, but only two cooperatives (out of thousands providing in-house insurance) have done so. A life insurance provider may organise itself either as a stock corporation or a mutual life company. An important characteristic of prudential and institutional regulation in the Philippines is the fact that it allows for a tiered minimum capital regime. In effect, five tiers are created:
Under Circular 2-2006, minimum capital requirements were raised to Php 1-billion ($24- million) for new life and non-life insurers and double that for composite insurers. This is up sharply from the $1.2-million previously required of commercial insurers. The Insurance Commission has the discretion to reduce this requirement by up to half for cooperatives, but thus far no cooperatives have applied for registration under this condition, as specific guidelines for implementing this provision of the cooperative code have not yet been formulated. Existing MBAs must hold capital of $305 000 (Php12.5-million), an extremely sharp increase from the minimal capital requirement previously in place (Php10 000). This increase is even more pronounced for new MBAs. They must now hold capital of about $3-million (Php125-million). Microinsurance MBAs (see the discussion of this category below) must hold capital of $122 000 (Php5-million) that must be phased up over time to the level of existing MBAs.
It is the only category for which such graduation is allowed.
Pre-need plan is the term used in the Philippines for an endowment insurance product, for example an education savings plan that promises to pay out a certain amount at a certain time in future in exchange for a monthly premium. A stock corporation is owned by shareholders while a mutual life company is owned by policyholders. Product regulation: Insurance is demarcated into life and non-life, but composite products are allowed under certain circumstances, depending on the institutional form: Commercial insurers (stock companies) may either provide life or non-life exclusively, or apply for a composite licence, in which case they can provide both categories. As discussed, health care plans fall outside the jurisdiction of the Insurance Commission.
Yet life and non-life insurance can include health insurance related to accidents Cooperative insurance societies registered with the Cooperative Development Authority and also licensed by the Insurance Commission may provide both life and non-life products.
MBAs may provide only life insurance. It is counterintuitive that MBAs are subject to the strictest demarcation, even though they are the main vehicle for microinsurance and the microinsurance regulations define both life and non-life microinsurance products. This may be because the Microinsurance Circular could not override the Insurance Code that was passed long before microinsurance came on the horizon. Market conduct regulation: Insurance may only be distributed through licensed agents or brokers. They could be individuals or companies/organisations (in which case the company has to
provide the specific list of people or individuals who may act on its behalf). Brokers and agents are required to take a written examination prior to authorisation and are required to explain the nature and provisions of the contract to their clients, particularly the minimum disclosure requirements printed in the insurance policy contract. No commission caps are imposed. Under banking regulation, an insurance company allied with a bank is allowed to sell insurance products to that banks clients within the premises of the bank (bancassurance)45. This is however not allowed for rural banks. In practice, the traditional broker and agent channel is not applied in microinsurance. Only the two cooperative insurers use individual
agent selling, and even there, they only do so within their own network of member cooperatives, in partnership with such member cooperatives. For the rest, the MFI either enters into a partnership with an insurer for the distribution of insurance 45 Section 20 of Republic Act No. 8791, otherwise known as the General Banking Law of 2000, allows a bank, subject to prior approval of the Monetary Board, to use any or all of its branches as outlets for the sale of other financial products,
including insurance, of its allied undertaking. Under BSP Circular No. 357, Series of
2002, this is applicable only to universal and commercial banks, not to rural banks. to its members, or a licensed agent of the commercial insurance company sells a group insurance policy to the MFI or rural bank. Financial inclusion policy and regulation: In line with governments financial inclusion objective, the Insurance Commission in 2006 issued Memorandum Circular No. 9-2006 to encourage microinsurance provision. It defines microinsurance as insurance (life and nonlife) aimed at mitigating the risks of the poor and disadvantaged. It is defined in terms of maximum premium (of about $25.546 a month) and maximum benefits (of approximately $4 000) for life insurance only (no benefit caps apply to non-life microinsurance policies that are included in the microinsurance category). It also stipulates that policies must clearly set out all relevant details, must be easy to
understand, and must have simple documentation requirements. Premium
collection must coincide with cash flow of/not be onerous to the target market. Although any registered insurer can offer microinsurance products, the regulatory concessions created in the circular apply only to microinsurance MBAs. An MBA can be recognised as microinsurance MBA if it provides only microinsurance and has more than 5 000 member-clients. Microinsurance MBAs are allowed to hold reduced minimum capital vis--vis new MBAs and must phase up their minimum capital over time to reach the level of as existing MBAs. If they are unable to comply with this, an even lower amount is allowed, but they must increase their capital at a rate of 5% of gross premium collections per year until they reach the required minimum capital. Furthermore, the Circular requires the establishment of a set of performance standards, tailored to the capacity and activities of microinsurance MBAs, to evaluate, amongst others, their solvency, governance and risk management.
3.3.4. Impact of policy, regulation and supervision on the market Regulation shapes the microinsurance market in the Philippines in a number of ways: A market-following approach of monitoring market trends and tailoring regulation accordingly: The Insurance Code confers wide powers on the Insurance Commissioner to issue circulars in response to changing market conditions. This allows the Commission to provide the insurance industry sufficient latitude to innovate, and to issue
regulatory measures that consider and accommodate such innovations. This is in line with regulation in the broader Filipino financial sector. Impact of financial inclusion policy: The National Microfinance Strategy dramatically influenced the growth of the microfinance industry. It triggered credit life expansion and the growth of the MBA vehicle that in turn paved the way for implementing the Insurance Commission circular defining microinsurance and setting out a tiered prudential
structure favouring microinsurance MBAs. However, to date, unlike the approach in India and South Africa, governments financial inclusion policy does not extend to encouraging large commercial insurers to reach into the low-income market, except to sell group credit life policies to MFIs and rural banks. Commercial insurers enjoy neither capital nor market conduct concessions to market microinsurance products, and the Philippines has therefore seen only a few instances of innovation by large insurers focused on the low-
income market. On the contrary, the dramatic increase in their minimum capital requirements (from $1.2-million to $24-million) has arguably discouraged experimentation in the low premium market. Tailored regulatory space facilitates microinsurance, but with limitations: The microinsurance circular (Circular 9-2006) carved out a space for dedicated microinsurance MBAs in the Philippines. This approach has proved conducive to microinsurance development (with six microinsurance MBAs already registered and more being prepared for registration). The provision allowing MBAs that cannot meet the minimum capital requirements to register and then grow their capital over time is proving useful to formalize insurance operations that were previously conducted in an informal and unsupervised manner. Microinsurance MBAs, however, remain unable to underwrite non-life and health products,
thereby limiting their ability to extend their product range in line with the needs of
their clients, unless they obtain underwriting by large commercial insurers.
A lack of effective supervision over all insurance-type products undermines microinsurance market development: Though two popular product types in the Philippines, pre-need and health care plans, both constitute insurance, these products fall outside of the jurisdiction of the Insurance Commission. This implies that differing rules and regulations are applied to various insurance products. This has created confusion in the market, as was apparent from the focus group interviews, where people indicated that they were hesitant to buy any insurance due to a recent failure of a large pre-need company to meet its obligations. Furthermore, a lack of enforcement of the provisions of the Cooperative Code has led to the proliferation of in-house insurance schemes among cooperatives not licensed to provide insurance under the Insurance Code. These in-house insurance schemes are not subject to actuarial
evaluations and therefore create risks for their members. More than 65% of total cooperatives registered with the Cooperative Development Authority are no longer operating due to mismanagement, governance issues and more importantly, the lack of rules and regulations. Inability of rural banks to sell insurance products within bank premises: Most rural banks are in the countryside and about 25% of these banks deliver microfinance services to poor clients. Given their proximity to poor people, rural banks have the potential to be effective channels for widespread delivery of microinsurance products. However, this potential cannot be exploited at present since only universal and commercial banks (that are usually in urban areas) are allowed to sell other financial products (that includes insurance products) on their premises. As a result, rural banks resort to taking group credit life insurance policy contracts with commercial insurers to cover their loan
exposure to bank clients. At present, very few microfinance clients of rural banks have therefore availed themselves of insurance products other than credit life. It is reported that the Insurance Commission has to date approved five microinsurance products provided by commercial insurers. Therefore, the definition of microinsurance in terms of premium and benefit limits did to some extent provide a benchmark for commercial insurers to create innovative products that would be affordable to the poor. 3.3.5. Conclusion: insights and lessons from the Philippines Microinsurance in the Philippines is fundamentally group-based and largely microfinance driven. It illustrates how MFI-based microinsurance can evolve beyond the provision of credit life insurance to also provide life, accident and capital health insurance to members. The provision of microinsurance by
commercial insurers outside of the MFI realm, however, remains underdeveloped and the fact that total microinsurance penetration is estimated at less than 6% of
adults indicates much scope for expansion. Despite some remaining obstacles
(such as the proliferation of in-house cooperative insurance, the fact that pre-need and health plans fall outside of the Insurance Commissions jurisdiction and the inability of rural banks to provide bancassurance), a number of policy and regulatory aspects bode well for the growth of microinsurance. Financial inclusion policy, in the form of the National Microfinance Strategy, is boosting microfinance and hence the microinsurance sector. The Insurance Commission takes a reactive, market-following approach that encourages innovation. In this way, it has adopted a risk-based supervision approach. The challenge is that this approach requires ongoing management to monitor risks, which may imply challenges to the capacity of the regulator. Most importantly, the Philippines present one of only two current examples where microinsurance has explicitly been included in the insurance regulatory regime. The microinsurance concessions are however limited to MBAs that are willing to exclusively provide microinsurance and have reached a certain level of scale. While commercial insurers may also
offer products that fall within the definition, there are no regulatory concessions applicable to them. 3.4. South Africa South Africa has one of the highest insurance penetrations in the world. At the
same time it is characterised by a history of inequality and poverty. In the financial sector this has created a distinct divide between the intensively served high- income end of the market and the low income market, the latter largely excluded from the formal sector. Where formal providers would not go, informal markets developed. Following the end of apartheid, the government has pursued a policy of financial inclusion with agreed targets for insurance outreach by commercial insurers into previously marginalised markets.
The combination of formal and informal provision has created the biggest microinsurance market (relative to population) in the five sample countries. Funeral insurance dominates the low-income market, showing the importance of the demand for the underlying service in triggering insurance uptake. Due to a history of abuse, South Africa also strongly emphasises consumer protection. Extensive market conduct legislation was promulgated for the entire financial sector. It increased the cost of insurance intermediation to such an extent that the individual marketing of microinsurance policies became too costly. The government is in the process of designing a dedicated microinsurance space to ensure continued growth. 3.4.1. Context
South Africa is a middle-income country with a population of around 47-million, of
which 59% live in urban areas. The country has recently had an economic upswing, with GDP growth averaging around 4% since 2000. South Africa has a well- developed, sophisticated financial sector. Use of financial services has risen to 60% of adults. The payment system infrastructure is strong, with an excess of 15 600 Automatic Teller Machines and a multitude of POS (Point of Sale) devices spread across the country (PriceWaterhouseCoopers (PWC), 2007). With a premium-to- GDP ratio of among the highest in the world (16%)48, the insurance sector is well developed. The industry traditionally served the high-income end of the market and only recently started to focus on ways in which to innovate (in terms of products and especially distribution) to penetrate the low-income market. In the traditional formal vacuum, a robust informal risk-pooling market has developed, almost exclusively for funeral insurance. 3.4.2. Salient features of the microinsurance market
Players: There are 75 commercial long-term (life) and 97 short-term (non-life) insurers. No composite insurers are allowed. The formal market is dominated by corporate insurers. Though the two largest insurers originally developed as mutuals, they demutualised to become public companies towards the end of the 1990s. Today, there is only one mutual insurer50. In addition, a number of burial societies provide funeral insurance formally (as friendly societies), within a limited- benefit space provided for them under the insurance legislation. On the informal side it is estimated that there are between 80 000 and 100 000 mutual burial societies serving between four and eight-million people51, as well as between 3 000 and 5 000 funeral parlours providing funeral cover of which we estimate 50% to do so formally, i.e. with underwriting by registered insurers, and 50% informally. All in all, almost two thirds of the demand for funeral insurance is met informally. Products: Formal insurers have started to move downmarket recently, focusing on
innovations for more appropriate products. This is partly due to industry
associations efforts to create product standards for the purpose of complying with the Financial Sector Charter. The charter is a commitment negotiated between industry and various roleplayers to achieve certain access targets that were then adopted in regulation and committed government to providing the regulatory space that supports inclusion. The criteria for these standards include fair charges, easy access and decent terms (so-called CAT standards). As a result, various products are now available that provide cover at as little as $3-$7 a month and that are characterised by simple and flexible terms. The South African microinsurance market is distinguished from most of the international experience in that voluntary insurance accounts for most of the microinsurance market. Compulsory credit life insurance accounts for only about 22% of the total microinsurance market. This figure moves up to 41% when only focusing on the formal market. The increasing prominence of credit life
insurance is largely the result of the development of the Mutual insurers are not allowed unless a special act of parliament is passed to provide for them. Of these burial societies, only 180 are registered friendly societies. Under the Friendly Societies Act, only friendly societies with a turnover of more than R100 000 (about $13 000) need to submit annual financial statements and adhere to
the requirements of the act. Only 74 of the 180 registered friendly societies are in this category. Note that this is a conservative estimate and that the share of credit life insurance may therefore be higher. There is limited take-up of non-life and non-funeral life insurance among poor people, despite recent innovations and the introduction of housing, cellphone, personal accident and other types of insurance targeted at the low-income market. Focus group insights indicate this to be a function of affordability and a lack of awareness of the value proposition such products offer. The only asset- based insurance product starting to achieve some voluntary take-up is cellphone
insurance. This reflects the rapid adoption of mobile telephony and the
importance of cellphones as personal and business communication tools in the lives of the poor a phenomenon strongly supported by the focus groups. Distribution: Intermediation innovations have been important in all the successful microinsurance products. These include using cellphones as communication and sales tools, as well as joint ventures with retailer chains and even with low-income groups such as church networks or sports clubs as distribution channels. Innovation in microinsurance distribution has been made possible by the availability of a large, well-developed retail network in South Africa, as well as a sophisticated payment system. Due to the restrictive market conduct regulation, all these products are sold in a passive, off the shelf way, with no or limited advice and verbal disclosure of product terms. Rather, insurance policy contracts are filled out using a tick-of-the-box approach that requires minimal insurer or sales person engagement. This is a feature that characterises only models aimed at the lower-income market. High-income individuals tend to
be served via the traditional broker/agent model. Low-income market products
are also sold on a group basis and with contract periods of no more than one year (with the norm being one-month contracts renewable with the payment of each premium). All of this has assisted in bringing down the risk, both from an underwriting and a market conduct point of view, of insurance products sold to the low-income market and the implicit emergence of a microinsurance category of products. A regulatory review process has been launched with the intent to formalise the definition of microinsurance so as to tailor regulation to its specific risk characteristics. 3.4.3. The insurance policy, regulation and supervision landscape Insurance in South Africa is primarily regulated by the Long-term Insurance Act (52 of 1998) and the Short-term Insurance Act (53 of 1998), governing respectively the life and non-life insurance industries. The Financial Services Board (FSB) is the statutory body in charge of supervision. Health insurance (in the form of indemnity
benefits covering medical expenses) is regulated separately under the Medical
Schemes Act (131 of 1998) and does not fall under he supervision of the FSB. In addition, certain elements of the Friendly Societies Act (25 of 1956) and the Cooperatives Act (14 of 2005) are of relevance. Market conduct is regulated primarily through the Financial Advisory and Intermediary Services (FAIS) Act (37 of 2002). Below, the main aspects of the regulatory scheme are discussed. Institutional and prudential regulation: Only public companies with insurance as their main business are allowed to register as insurers under either the long-term or short-term act. No company may have more than one insurance licence and no composite licences are possible. Registered friendly societies may provide insurance without registering under the insurance acts, provided their policy benefits do not exceed R5 000 (just more than $600). Under the
Cooperatives Act, registered financial cooperatives may provide insurance but
must register under the long or short-term act. In effect this implies that they must convert to a public company, undermining the intent of the act to facilitate the delivery of financial services by cooperatives. Prudential regulation requires minimum upfront capital of approximately $1.3- million for life and $0.7-million for non-life insurers. Product regulation: On registration, each insurer is authorised to provide a number of classes of policies as defined under each act. No product pre-approval is required, though insurers are required to report separately to the FSB on each class of policies they provide. In the case of the Long-term Act, it is possible to register as an assistance business (funeral insurance) provider only, with assistance business policies defined as policies not exceeding R10 000 (about $1 300) in value. Though no prudential or institutional concessions are made for assistance business-only insurers, assistance business is granted
special regulatory treatment in a number of instances: it is the only class of
product for which no commission caps are imposed and its intermediaries are temporarily exempted from the education requirements under the FAIS Act. Insurers are required to give assistance policyholders the option of a monetary benefit, even when the policy contract terms specifies that payment will be in kind (i.e. the provision of a funeral). Assistance business is the only product subject to this requirement. Market conduct regulation: Market conduct regulation is primarily contained in the FAIS Act. It sets the conditions for the intermediation of insurance (and other financial services) to the public to enhance consumer protection. Among others, it requires all intermediaries providing advice or intermediary services to be authorised to do so by the supervisor.
Intermediary services are defined as actions requiring the person to exercise
judgment that leads the client to enter into a transaction; in the case of advice, this includes the recommendation of a product choice. Authorisation in turn entails various education, experience, fit and proper, reporting and other requirements53. FAIS does not require advice to be provided on all transactions, but when furnishing advice, the financial service provider is obliged to conduct an analysis of clients financial needs, identify the products that will be appropriate to the clients needs and take reasonable steps to ensure that the client understands the advice and makes an informed decision. Furthermore, records of client interactions and advice should be kept for a minimum of five years. In terms of a guidance note issued by the FSB, financial products may be sold by non-authorised intermediaries as long as they do not provide advice or intermediary services, that is, as long as they do so in a passive, clerical way that does not require the exercise of judgment. This has opened the space for tick-of-the-box, advice-less sales
models, which in turn have found application in the various innovative models currently on the market.
In addition to FAIS, commission levels payable to intermediaries are capped under the regulations to the Long-term and Short-term Acts, with the exception of assistance business. Including the need to appoint a compliance officer; the need to maintain externally audited accounting records; an annual levy; the duty to supply factually correct information to the client and to confirm this in writing upon request; and the duty to disclose the nature and extent of any remuneration. Financial inclusion policy and regulation:
Since democratisation in 1994, South Africa has been characterised by a drive
towards black economic empowerment. As part of this process industry, labour and other stakeholders within the financial sector in 2003 negotiated and signed the Financial Sector Charter as a commitment by the formal industry to implement black economic empowerment that includes the extension of financial access to the lowincome market. The charter also commits government to providing a facilitative regulatory framework to achieve the charter targets and goals. The access targets for insurance require that 6% of the low-income54 population have effective access to short-term and 23% to longterm insurance by 2014. This equates to 1.2-million short-term and 4.5-million long- term policyholders (FinScope, 2006). Effective access is defined in terms of the distance to the nearest service point, the range of products and services available, their appropriateness to the needs of the low-income market, and whether they are affordably priced as well as structured and described to customers in a simple and easy to understand manner. In addition, industry is committed to spending 0.2% of post-tax profits on consumer education.
Other regulation of note includes the implementation in 2007 of the National Credit Act of 2005: This has implications for the credit life insurance industry, in that it reiterates the clients right to choose the provider of insurance, should the credit provider compel them to take out credit life cover, as well as for transparent sales and pricing of credit life insurance. Current reconsideration of insurance legislation as it pertains to microinsurance: Concerns about potential consumer abuse in the low-income market, combined with governments commitment under the charter to remove regulatory barriers
to market development, have prompted the National Treasury (the policymaking body for the financial sector) to reconsider the insurance regulatory framework. The aim is to create a microinsurance regulatory space to (i) bring down regulatory unit costs to facilitate outreach into the lowerincome market by formal insurers and (ii) provide formalisation and graduation options for the informal market. 3.4.4. Impact of policy, regulation and supervision on the market Financial inclusion policy drives low-income market expansion and triggers innovation:
The access targets in the Financial Sector Charter have been the main driving force in formal sector expansion over the past few years. Bringing down transaction costs has been essential in the attempt to achieve this. Intermediation innovation has emerged as the most viable avenue for achieving lower transaction costs and larger scale reach.
At the same time FAIS Act increases intermediation costs: The greater drive towards consumer protection embodied in the FAIS Act increases the per transaction cost of intermediating financial services, creating a disincentive to serve lower-income (and hence lower revenue-per-premium) clients. This is especially true where advice is provided as part of the sales process. However, since the regulation allows financial products to be sold by non-authorised intermediaries as long as they do not provide advice or intermediary services, this has opened the space for tick-of-the-box, advice-less sales models that in ownership of household assets and access to services to group individuals into one of ten potential LSMs. The average income across LSM1-5 is about $300 per household, or $100 per individual per month. The average individual income in LSM 5 amounts to about $140 per month (FinScope, 2006).
The result of (i) the need for low-income market expansion under the charter, (ii)
the increased transaction costs under FAIS and (iii) the space for advice-less sales, is a split in the market into a high-income end served with detailed financial advice, versus a low-income market served through advice-less selling techniques. The implication is that the low-income market receives no advice in the insurance products that they buy. Regulation inhibits the large number of informal providers being formalised: Current institutional regulation inhibits the formalising of mutual groups by requiring registered insurers to be public companies. Given the importance of burial societies in the funeral insurance market, this undermines formal microinsurance development. Furthermore, existing prudential regulation, set at a uniform level for respectively the life and non-life category, is not commensurate to the risks inherent in microinsurance products.
Strict demarcation undermines the development of short-term microinsurance: Demarcation between short-term (non-life) and long-term (life) insurance implies that short term insurers are not able to offer funeral insurance, which is classified as a long-term insurance product. In practice, however, the product characteristics of funeral insurance as provided in South Africa correspond to that of short-term insurance rather than long-term insurance, as these products tend to be written on a one-month or one-year at most renewable contract basis. Given the dominance of funeral microinsurance, an inability to provide funeral insurance is a serious disadvantage to low-income market expansion.
3.4.5. Conclusion: insights and lessons from South Africa South Africa is characterised by a large voluntary market for funeral microinsurance, driven by the cultural significance attached to a dignified funeral in African society. Whereas informal social risk-pooling mechanisms and funeral parlours account for a large proportion of total demand, the highly sophisticated formal insurance market is also increasingly expanding downmarket, partly as a result of Financial Sector Charter commitments. In addition, credit life insurance remains an important and growing market. Effective market provision of microinsurance requires the distribution of products with low value premiums. Although the cost of distribution can be substantially increased by regulation it can also be substantially reduced through distribution innovations, as the application of tick of the box models has shown. This has,
however, only been successful in funeral insurance, due to the high awareness of and natural demand for it that makes it possible to sell it as a commodity without active sales effort. Now the market faces the challenge of also selling other life and non-life insurance to their funeral insurance clients.
Beyond funeral insurance the awareness among low-income people of the value of insurance is low, implying that such products need to be actively sold. Active, advice-based selling to the low-income market has, however, thus far been inhibited by onerous market conduct regulation. The proposed regulatory reform of microinsurance is encouraging in that it suggests an active engagement by the regulatory authorities to address the challenges highlighted. Should the proposal for regulatory reform be accepted and implemented, it will provide a valuable case study on the impact of regulatory change on the development of a microinsurance market.
3.5. Uganda
Uganda has a small, relatively young insurance market. The country faces many challenges in the expansion of microinsurance, especially the voluntary, non-credit life market. Extremely low and irregular average household incomes in Uganda mean less disposable income to pay for insurance. Moreover, the limited footprint of formal sector activity, such as banks and national retailers, imply that there are few channels for low-cost insurance distribution. Though focus groups indicated a strong need for the mitigation of health risk (and to a more limited extent also of other risks), the understanding of insurance among the population is limited, accompanied by widespread mistrust of the insurance industry. Adding to these market factors is the fact that the insurance regulatory framework in Uganda is very young.
However, the passing of an insurance law and the establishment of a supervisor
has brought greater certainty, triggering significant entry of foreign insurers over the past 10 years. At the same time, regulatory gaps remain. The first priority of the supervisor must of necessity be to cultivate a compliance culture. This leaves little time and resources to be spent on microinsurance. 3.5.1. Context Uganda is a small, extremely low-income country. In the 1980s it was subject to a period of hyperinflation, followed by a large currency devaluation55, from which the country took a long time to recover. Of the total population of 29-million (of which 13-million are adults) 87% still reside in rural areas (this presents a key complication for the distribution of financial services), 96% live on less than $2 a day, and 82% live on less than $1 a day (World Bank, 2007). Uganda faces many development challenges, one of which is developing its relatively underdeveloped financial sector. Only 21% of the
Ugandan adult population use any type of formal or semi-formal56 financial
service, and 17% use informal financial services only. This implies that 62% of the adult population do not use any type of financial service (FinScope Uganda, 2006). The insurance sector is even more underdeveloped than the financial sector, with gross premiums totalling less than 1% of GDP. Until recently, the insurance industry in effect operated in an unregulated domain. Formal insurance sector legislation, regulation and supervision have only been implemented over the last decade. 3.5.2. Salient features of the microinsurance market
Usage: The insurance market currently serves no more than 8% (1m) of the adult population. Only 3% (0.4m) of adults use traditional (non-micro) insurance (FinScope Uganda, 2006),
while an estimated 0.6-million (4.6%) use microinsurance57. Uganda is therefore unique5 After the devaluation, a life insurance policy would only pay out 1% of its original value. The banking sector is tiered by regulation into 4 types of financial services, the first three of which are classified as formal and the latter as semi-formal: banks; credit institutions; microfinance deposit-taking institutions; and cooperative cooperatives and MFIs. Banks (tier 1) may mobilise deposits, extend credit and perform foreign exchange transactions; tier 2 may do everything as tier 1 except perform foreign exchange transactions; tier 3 may do the same as tier 2, except operate cheque accounts; tier 4 may mobilise savings only from its own members, not the general public, and may extend credit. This estimate is based on an AMFIU (Association of Microfinance Institutions of Uganda) estimate that there
are between 500 000 and 800 000 micro-credit borrowers with credit insurance countrywide. The low penetration overall is due primarily to the low and
irregular incomes of the Ugandan population that leaves little disposable income to pay insurance premiums. Focus group interviews also show widespread mistrust of the insurance industry as well as limited understanding of insurance. Interestingly, no informal risk-pooling is picked up in the usage data, though focus groups indicate that some community-based informal risk pooling activity does exist and people also appeal to family networks to mitigate funeral and health risks. Players: The insurance sector is fragmented, with 20 relatively small players. The foreign presence is strong 12 of the 20 insurers are foreign-owned. In the microinsurance sphere, some of the underwriting is done by commercial insurers
and some by the MFIs that provide credit life insurance. There is little, if any, cooperative or mutual insurance activity.
Products: The life insurance sector is much smaller than the non-life sector and constitutes only 4% of gross insurance premiums. This small share is often attributed to the currency devaluation of the 1980s that undermined consumers trust in the life insurance sector. 41% of all non-life insurance is miscellaneous accident insurance, the category under which credit life insurance is traditionally written. It is therefore an anomaly that most credit life insurance is not written under a life licence. Microinsurance is virtually exclusively comprised of credit life insurance sold through microfinance institutions (MFIs). Distribution: Infrastructure distributing microinsurance is limited. Uganda lacks a formal retailer network. The infrastructure that is available such as the bank
network and cellphone platforms is not actively used at present to distribute insurance. Bank branch infrastructure is concentrated mainly in urban areas,
thereby excluding most of the population. The payment system is also weak and transactions are still mainly conducted using cash. Poor value proposition: Insurance as currently provided in Uganda offers clients a poor value proposition, with insurers spending a large portion of premium income on administration costs. At 35% of net premiums, the average claims ratio is very low (compared to about 60% in South Africa), indicating that little money is paid back to policyholders as benefits. There are several reasons for this, including a lack of efficiency and competition in parts of the industry, and the high costs associated with relatively weak and expensive communications and payment infrastructure. Insurers are small by international standards, making it difficult for them to spread their fixed costs. A lack of actuarial and other insurance skills also hinders development. The entry of foreign insurers into the
Ugandan market is, however, triggering product innovation and a more
competitive marketplace, as seen in a steady reduction in premiums on credit life insurance. 3.5.3. The insurance policy, regulation and supervision landscape Before 1996, the insurance industry was effectively unregulated, with nominal supervision by the then Department of Insurance within the Ministry of Finance. Insurance regulation was introduced in 1996 with the promulgation of the Insurance Statute, converted to the Insurance Act (Cap 213) in 2000. The Insurance Act governs all insurance business and is supplemented by the Motor Vehicle Insurance (Third Party Risks) Act (Cap 214 Laws of Uganda, 1989) that makes third party insurance compulsory for all vehicle owners. The Cooperative Societies Statute, 1991 and the Companies Act (Cap 110 of 1961) establish the
institutional framework for respectively cooperatives and companies. The
Insurance Commission was established as supervisor in 1997. The recent nature of the regulation has meant that trust in the industry and a compliance culture is still developing. Prudential and institutional regulation: The Act does not contain a substantive definition of insurance. It is defined as simply including assurance and reinsurance, with no furtherdefinition of these terms. By convention rather than definition it seems that provision of benefits without any guarantee falls under informal risk pooling rather than insurance. The Act restricts institutions that may provide insurance to companies, insurance corporations, cooperative insurance societies and mutual insurance companies. The latter is restricted to having between 25 and 300 members, which creates a risk pool too small for responsible underwriting. Consequently no mutual insurance companies have been registered.
Capital requirements are about $580 000 for either a life or non-life licence, double that for a composite licence, and $1.4m for a reinsurer. These requirements were instituted in 2002.
Previously, local insurers were required to hold only $115 000, while foreign insurers were required to hold the present $580 000. This sharp increase for local insurers has been described as a deliberate attempt by the commission to reduce the number of insurers in the market (subsequently the insurers reduced from 30 to the current 20). Lower capital requirements apply to mutual insurance companies (but not to cooperatives). They are not required to provide any upfront capital, but must hold a surplus of not less than 15% of
assets over liabilities, or such other percentage to be determined by the commission.
Product regulation: The Insurance Act demarcates life and non-life insurance and reinsurance, but does not specify a medical insurance category or how insurers should treat medical insurance. As a result, the commission interprets it as residing under miscellaneous non-life insurance. Composite insurance products may be provided by composite insurers only. The Act provides for a scale of minimum premium rates for non-life product lines to be agreed between the industry association and the regulator. The first finalised set of minimum premiums was agreed on in 2007 and is now being implemented. Furthermore, all new products must be submitted to the Insurance Commission for
approval. Before granting approval, the commission considers issues such as the experience of the insurer in writing the particular type of business, the data and the calculations underlying the pricing. A number of possible microinsurance products have been rejected by the Insurance commission for failing in these respects.
Market conduct regulation: The distribution of insurance is limited to registered brokers and agents. A broker is an independent contractor working for commission, while an agent is appointed by an insurer to solicit applications for insurance in exchange for commission. Brokers are required to be bodies corporate or companies incorporated under the Companies Act. Legally, companies may be agents but in practice most agents are licensed in
their capacity as individuals. The Act expressly prohibits employees of insurance companies
from being insurance agents. Two limited exceptions apply: (i) bancassurance is allowed for banks and micro deposit-taking institutions, but they are only allowed to distribute products covering their own credit exposure; (ii) compulsory third party vehicle insurance, as a commoditised product, may be bought directly at petrol stations. Although direct sale of products by an insurer to the public is not prohibited by legislation, the use of this distribution channel is very limited. As there are no call centre distribution channels, clients have to approach an insurance company and ask to purchase a product directly. The Act does not contain any prescriptions on how the sales process should be conducted
and whether the client is entitled to advice or product disclosure and what this should entail.
It does, however, establish an obligation for the Insurance Commission to provide a bureau where members of the public can submit complaints related to insurance. It also explicitly prohibits misleading advertising. Only registered brokers (not agents) may collect premiums on a credit basis. This implies that if an insurance policy is sold by an agent or directly, and the policy is written for a period longer than a month, clients will not be allowed to pay premiums on monthly. The Act furthermore stipulates that a scale of maximum commission rates must be agreed
between the intermediary and insurer associations and the supervisor. Different maximum commission levels are determined for different classes of insurance and these levels vary between 25% for consequential loss and 5% for motor third party insurance. Overall, commissions account for about 24% of net premiums received by insurers in the Ugandan non-life market. Maximum commissions are not set for life insurance. Financial inclusion policy: Financial policymakers have paid some attention to promoting access to credit or microfinance. The Poverty Eradication Action Plan (PEAP) of 2004
identifies rural financial services (defined as credit or microfinance) as a focus area for the
elimination of poverty, though no specific regulations have been issued in this regard. Microinsurance is not included in the scope of the PEAP, but as virtually all microinsurance is
credit life, the development of the rural financial services industry could lead to microinsurance expansion. 3.5.4. Impact of policy, regulation and supervision on the market Despite introduction of regulatory framework, some regulatory uncertainty continues to plague the market: Regulatory certainty was greatly improved by the establishment of the Uganda Insurance Commission and the introduction of the insurance regulatory framework.
Only once such certainty was achieved did foreign insurers start to enter the market. Therefore the introduction of a regulatory regime was fundamental to the development of
the Ugandan insurance market. Unclear regulation and ad hoc enforcement have, however, meant that some uncertainty has persisted in the low-income market. For example, though insurance is demarcated into life and non-life, some grey areas remain, with common practice being to write credit life insurance under a non-life licence. This creates difficulties for those insurers not willing to interpret the law in this way. The absence of explicit health insurance regulation has created uncertainty for players in this space or interested in
entering the market. At the same time it has also opened a space for market development,
Note that, while health microinsurance is not explicitly part of the scope of the study, this was a particular gap in the insurance regulatory framework that emerged in Uganda. Health insurance was also shown by focus groups to potentially be the product with the highest likelihood of spontaneous demand among the low-income population. This is due to a distrust in the life insurance industry (due to past hyperinflation experiences) on the one hand, and indicative of a poor public health system on the other hand. Market conduct regulation inhibits market development: Uganda is judged to have high
intermediation costs relative to the other countries in this study. This can partly be ascribed to the fact that such a large proportion of the population live in hard-to-reach rural areas with poor bank and payment infrastructure that makes premium collection expensive. There is, however, also a strong regulatory driver behind this phenomenon. Despite limitations, the strongest distribution network remains that of the banking sector. By not allowing bancassurance apart from credit life insurance on the banks own loans, regulation effectively neutralises the single most important alternative distribution footprint available in a poorly served nation. Furthermore, the setting of minimum premium rates stifles
competition in the market and the commission caps can make it uneconomical to distribute insurance to lower-income consumers. In addition, the fact that providing credit on premium payments is restricted to brokers makes direct distribution unattractive, thereby further limiting potential distribution channels. Institutional limitations on the market: The inclusion of a mutual insurance company institutional category in the Insurance Act with lower capital requirements indicates a willingness by the authorities to facilitate insurance provision by smaller mutual entities.
However, the limit placed on maximum membership (300 members) is not high enough to
facilitate the creation of a large enough risk pool to write insurance. The mutual option that could encourage community-based insurers to emerge is therefore an option in name only. 3.5.5. Conclusion: insights and lessons from Uganda Uganda illustrates the challenges of expanding access to microinsurance in an extremely poor country with a relatively underdeveloped formal financial sector. This is exacerbated by
a lack of well-developed informal risk pooling mechanisms implying that the overwhelming majority of the population is vulnerable to financial shocks. Insofar as it has achieved some
take-up, microinsurance has been limited to credit life insurance. As the market develops, it is therefore important for non-credit life insurance to be established in the low- income market. To achieve this, people need to be won over through positive experiences in credit life insurance and insurance in general to break the prevailing mistrust in insurance. The introduction of a new regulatory regime offers a unique opportunity to pre- empt potential pitfalls and ensure a framework that will facilitate financial inclusion an objective
especially important in a country with such high poverty levels as Uganda. While the Ugandan case has shown the benefits of introducing greater certainty, it also illustrates the potential pitfalls to avoid namely the creation of an overly restrictive regime designed
without explicit regard for financial inclusion that leaves certain important market segments with an inconclusive regulatory regime. 4. Factors affecting microinsurance market development This section summarises the key factors affecting microinsurance development in the sample countries. It presents some hypotheses on how these factors combine to shape the
development of the microinsurance market. Although the ultimate focus is on understanding
the impact of regulation, the broader country context needs to be considered. Four different categories are detailed in this section: demand-side (insurance decision), supply- side (particularly emerging channels of distribution), regulatory factors (using the structure of the regulatory framework) and macro-economic conditions (including general infrastructure). We commence with a summary of the salient features common to the microinsurance markets in the sample countries. 4.1. Salient features of microinsurance markets in the sample countries
The microinsurance markets in the five sample countries share a number of key features: Low insurance and microinsurance take-up: Total insurance take-up (microinsurance and other insurance) is very low in the sample countries. Insurance penetration is consistently below 5% of GDP, expect in South Africa. Within this, the take-up of microinsurance among adults is even more constrained, with only South Africa and Colombia achieving more than 10% of adults and much of this is provided by informal insurers. A large proportion of population are in low-income categories:
A large proportion of the
population in the sample countries (ranging from Colombia at 19% to Uganda at 96%) live on less than $261 a day. The ultra-poor (less than $162/day) population is also significant. Low- Note that India is the only country for which indemnity health insurance is explicitly included in the microinsurance data. This is due to the intricate link between microinsurance and health insurance in India. In the Philippines, some health cover, in the form of an insurance policy that can be claimed in the event of for example an accident, is also included, but indemnity health insurance as a dedicated field, provided by health maintenance organisations is excluded, as it falls outside the jurisdiction of insurance regulation.
Secondly, low income
levels also imply limited disposable income to allocate to insurance products and a high opportunity cost of doing so. The reality is that a proportion of the low- income population may simply be too poor to be reached by the commercial insurance market where they are expected to pay the premium. Care should be taken by regulators when designing regulation aimed at encouraging insurance provision at the ultra-poor levels. These groups may have to remain the responsibility of government, falling in the market redistribution zone as depicted in the access frontier in Section 2.2. In Uganda the low level of insurance take-up, even of informal products, may in part reflect the very low- income
profile of the population. Though microinsurance expansion is definitely possible, at some stage growth will become constrained by high levels of absolute poverty. High informality: In all of the countries barring Uganda, estimates show that the informal sector accounts for a sizable proportion of the total microinsurance market, ranging from 20% in India to 52% in Colombia. Informal mechanisms take various forms. In Colombia it is mainly funeral insurance provided by funeral parlours that are not regulated for the
purposes of providing insurance. In South Africa informal insurance is provided by funeral
parlours in a similar way as in Colombia but also on a much larger scale through completely
informal burial societies. In India, formal entities provide insurance without being registered for insurance purposes and largely consist of health insurance schemes. In the Philippines informal provision is largely made up of cooperatives offering insurance but not registered for the purpose of doing so. In Uganda, no quantitative evidence is available to suggest significant informal insurance activity. The focus groups did note the presence of informal risk-pooling groups, but this was not reflected in the available data. This may be more the result of limitations in the available data rather than a lack of risk- pooling. The
apparent low level of informal insurance may, however, also indicate that, given the extremely low levels of income in Uganda, the nature of the risk-pooling mechanisms are largely ad hoc (i.e. no premium collection by a structured society of some kind). Hence it was not picked up in the demand-side survey. Large reliance on compulsory credit-based insurance: Formal microinsurance mainly comprises compulsory credit life policies sold on the back of microcredit. Even in the countries where credit life does not make up the bulk of the microinsurance market it is still
significant, and credit life expansion on the back of micro-credit growth remains an important driver of microinsurance growth As noted in Section 3.1.4, funeral parlours have managed to obtain an exemption from insurance regulation which allows them to provide in-kind funeral service benefits without having to register or comply with insurance regulation. Different to Colombia, these activities are not covered by an exemption to insurance legislation and are, therefore, illegal. As noted in Section 3.4, it is estimated that 80-100 000 burial societies are estimated to provide funeral cover to between four-million and eight-million people. This is provided on a non- guaranteed basis so it is not deemed to be insurance.
Voluntary sales bundled with other products or services and/or through mutual/cooperative channels. Voluntary take-up tends to be funeral insurance policies (South Africa and Colombia) or other policies bundled with other products and services. For example: micro-life policies purchased in addition to credit life coverage via the credit provider in the Philippines and accident and health policies added to compulsory credit life in India. To a lesser degree, this can also include non-life insurance policies often purchased via a credit retailer to replace a specific asset such as a mobile phone when lost or stolen as was found in Colombia and South Africa. The overwhelming majority of voluntary products
are sold via client aggregators such as cooperatives/mutual associations, MFI networks, retailer networks (in South Africa) or even utility companies (in Colombia).
Cooperative/mutual associations dominate in Colombia, the Philippines and in South Africa (if informal provision is included). In India, they do not play an important role in the underwriting of microinsurance, but nevertheless present an important distribution channel for formal insurers. Microinsurance definitions vary but share low-risk features. The bulk of microinsurance products offered in the sample countries share features that help to limit the risk (prudential and market conduct) of these products, such as:
Limited benefits: Microinsurance benefits across the sample countries tend to offer low benefit values in line with the needs of low-income households even where regulation
does not impose a limit. For the same type of risk and geographical distribution a larger number of smaller benefit policies have a lower risk profile than a smaller number of higher benefit policies.
Term of contract: For the reasons outlined in Box 2 on the next page microinsurance tends to be underwritten on a short-term basis. As it is easier to forecast and manage claims on a short-term product than a long-term product, such products hold lower
technical risk.
Complexity: Complicated products with various components are more difficult to manage than simpler products. Such products are also more complicated for the consumer to understand, increasing the risk of mis-selling. Although this is not sufficiently achieved in all countries, microinsurance products tend to be simpler in design to be understandable to a market with lower levels of financial literacy. This limits the risk of these products.
Nature of event covered and ability to predict (including availability of data): Although the shorter contract term reduces the risk, it does not remove the risk completely. Insurers still require sufficient data to forecast likely claims and price their products. The
ability to predict risk varies significantly across different product categories. Life risks are often supported by better data, which allows accurate forecasting. Other risks such as
weather risks may be more complicated to forecast and the size of the risk event also makes it much harder to manage for an individual (and particularly smaller) insurer. Based on the evidence in the country studies a large proportion of current microinsurance products offered cover high-frequency, low-impact risk events that are easier to manage. Exceptions like weather insurance, however, remain. These features are reflected where regulatory definitions have been developed to define a separate space for microinsurance underwriting. For example,
India defines a maximum and minimum contract term, maximum benefit values and
requires availability of the insurance policy documents in the vernacular language.
The Philippines defines maximum premiums as well as maximum benefit values for life microinsurance and sets simplicity requirements.
South Africa is proposing a definition that sets maximum benefits, requires simplicity, and sets a maximum contract duration (12 months) for the insurance policy. It also limits the types of risk events that may be covered by micro-insurers (e.g. excluding weather index insurance). Box 2. Underwriting methodologies define microinsurance as short term
Long-term policies require individual underwriting: Traditional life policies are sold and
underwritten on an individual basis. Such policies tend to have a long or whole-life term and the insurer typically cannot cancel the insurance policy without the consent of the policyholder. The premium may also be fixed for the contract period. The insurer is tied to the risk of the policyholder, which necessitates a detailed individual risk assessment to be able to predict risk adequately and assign each individual to a risk pool or category. To manage this risk, insurers require individual underwriting for such policies where the applicant has to fill in a detailed form with biographical and health details and in most cases
has to undergo a health examination (or make a health declaration). Successful underwriting will ensure that the actual experience of a specific policyholder corresponds as closely as
possible to the expected experience of the risk category to which it was allocated. Microinsurance mostly based on group underwriting: The individual underwriting process is expensive and therefore simply not feasible for low-income, low-premium policies. As a result, insurers targeting the low-income market often assess the profile of groups rather than of individuals. Combined with the fact that these are new markets on which data is often not available, this implies that insurers do not have as accurate an understanding of
the risk profile of the group (or the individuals in the group) as they would have had in the case of individual underwriting. Due to this uncertainty, they are generally not willing to
commit to a long-term price guarantee or contract. Group policies therefore tend to be written on a short-term contract basis, with policies sold on a one-year or even one-month renewable basis. In such a set-up the insurer has the option not to renew the contract or to adjust the price on each renewal in line with the risk experience of the group. Group underwriting requires short contract terms for risk management: Given that individual underwriting is unlikely to be viable for small premium policies, the conclusion is
that microinsurance will by default be short term. This was observed in the sample countries. Any regulatory restriction on minimum insurance policy contract duration, for example the minimum term of five years in the life microinsurance definition in India, may, however, influence insurers ability to manage risk in this way. In the next section we explore the demand-side insights gained from the focus groups and combine this with the usage trends noted in this section to consider the reasons people decide to use insurance without being compelled to do so. 4.2. Understanding decisions about insurance This section looks at the demand side of the take-up equation. We start with the crosscutting
findings from the country focus groups and then synthesize these into a potential model to explain the insurance decisions of low-income households. The value of accurate demand-side data: Initiatives to expand the market are greatly aided
by the availability of accurate data. In South Africa and Uganda detailed demand- side survey data is supporting policymakers and insurers in defining ways of achieving low- income market expansion. Although not comprehensive, recent surveys of the insurance sector in Colombia have catalysed an increasing interest in this market. The absence of detailed demand-side data for the other countries has meant that this project had to rely on
estimates from the limited available data sets. While this is sufficient to derive high-level
market figures, it provides little help to, for example, insurers that have to conduct more detailed analyses for product development, pricing and market sizing. Although focus groups, such as those conducted as part of this project, do not provide quantitative data, they provide a useful qualitative understanding of the needs and financial behaviour of low-income households. The results of these focus groups are in the next section. 4.2.1. Insights from focus groups
Methodology: Qualitative focus group research was conducted for each of the country studies. This involved groups of low-income people who were encouraged to discuss their
risk experiences, their perceptions and understanding of insurance. Participants were typically not informed beforehand that insurance was the topic. This allowed people from a similar background to interact and share their perceptions and experiences. Different ways of recruiting participants were used in the different countries: In Colombia, six focus groups were held with 10 lower-income people each, three in Bogota and one each in three other cities.
In India, participants were selected from both clients and non-clients in the target group of various NGOs and MFIs. Discussions involved 115 clients in 10 focus groups and 75 non-clients in another nine focus groups.
In the Philippines, discussions were held with 73 participants in nine groups selected from current and potential clients of MBAs and MFIs that offer microinsurance.
In South Africa, six groups of between six and eight participants each were conducted on asset insurance three male and three female. Groups were selected to represent the poorest and next-poorest levels of the income spectrum. All participants were urban
(from the greater Johannesburg area), but some had rural links. In addition this was
combined with earlier focus groups on funeral insurance (12 groups covering rural and urban, male and female as well as different age groups).
In Uganda, 12 focus groups discussions were held in both rural and urban areas. These groups included males and females classified as very low-income (earning US$1-3 a day), lower-income (earning US$3-9 a day) and middle- to higher-income (earning more than US$9 a day). The focus group research highlighted a number of cross-cutting, demand-side insights into the state of the microinsurance markets. These are summarised below:
The poor face various material risks: In all the focus groups, poor people were aware of being exposed to risk. Health risks, in particular, were emphasised. The risk of the death of a breadwinner, or of becoming disabled or unemployed, was also often cited as significant. Generally, the risk of assets being damaged or lost, though acknowledged as important, was afforded less priority in the minds of respondents:
In Colombia, the death of a breadwinner was the most important risk (combined with the need for funeral expenses), followed by accidents, illness, hospitalisation, disability and natural catastrophes.
Risk of death, unemployment or sickness was stressed in South Africa.

Health was the top priority for more than 60% of participants in the Indian focus groups.
Illness in the family was the only risk for which respondents in the Philippines indicated a spontaneous need for risk mitigation.
Well, it is sickness because you are not sure and it is your life. You can forego a wedding but you cannot forego sickness. You have to attend to it immediately. (Ugandan respondent)
Little knowledge and awareness of the insurance value proposition was a main findings across all the focus groups. Though some respondents indicated that they are familiar with insurance as a form of protection that gives one peace of mind,
uncertainty remained around how insurance works. In the Philippines, some focus group respondents indicated that they had never had any explanation or introduction to All such insights are to be regarded as qualitative only and are not statistically representative of the lowincome population. As they had not been introduced to insurance, they had not considered buying an insurance product. Furthermore, the fact of no pay-out if no risk event
happens was raised as an issue in several of the focus groups. This points to a lack of understanding of the value proposition of insurance as protection against risk events, rather than as a savings vehicle providing a return regardless of risk. The following responses from the Ugandan focus groups underline the limited knowledge and awareness:
There is one reason why I would not go for insurance, even if it is charging me one shilling, you say you have insured me for let us say burglary, no burglar comes even
close to my house to take anything. At the end of the year I would have given the insurance company free money.
"Sincerely this community knows nothing about insurance. Most of the insurance companies are based in the city. Those that we know, we see adverts as we go to Kampala."
"I dont trust insurance companies because I cannot trust something I dont have full knowledge about. I need to be educated fully about it and therefore I can decide whether to trust it or not."
The importance of trust to achieve insurance take-up: An introduction to insurance is
greatly facilitated where there is trust in the provider or intermediary. This can be, for example, trust of community or member-based groups, trust attached to a particular brand (retailers, utility companies and banks are examples of this) or trust derived from word of mouth of positive claims experiences. Conversely, the insurance transaction is complicated where trust is undermined when, for example, institutions fail and cannot meet their obligations under the insurance contracts or claims are rejected without proper cause. The focus groups revealed a general mistrust of the formal sector and the
insurance sector in particular:
In India, the lack of trust and perceived low benefits were outstripped only by a lack of awareness and affordability issues as reasons for not taking up insurance.
I do not trust them. They are profit-making companies. They do not benefit people (Ugandan respondent).
Many participants in the Philippines indicated that they do not want to purchase any type of insurance products because of past bad experiences with a big commercial insurance provider and, more recently, some pre-need companies which defaulted on their commitments. This damaged the reputation of the insurance industry in the minds of the low-income market.
This is echoed in Uganda where hyperinflation eroded the value of life insurance policies two decades ago: Previously insurance was okay. Government used to honour claims but eventually they failed and people completely lost the idea of insurance. (Ugandan respondent). The importance of quick and reliable claims payment: Claims payment emerged as important in determining peoples perception (and trust) of insurance. The need exists for speedy payments with little administrative hassle. A past negative or slow claims experience, or hearing about the negative claims experience of others, may lead to a negative perception of insurance:
They take long to compensate their customers when risks occur. That is what I have heard but I dont know whether it is true (Ugandan respondent). I have seen the bad experience my grandmother had with her cellphone insurance.
When it was faulty, they kept on fixing it without replacing the phone.... It cost us transport money to take it in. From there on, I hate everything and anything about cellphone insurance, as they will not replace the cellphone. The process was tedious and annoying. Moreover, in the meantime you suffer as you have no other phone to use and you are paying (South African respondent).
A similar picture emerged outside the focus groups. The long delay in claims payments
was the main motivation for CARD MBA moving to get its own insurance licence. Also most of the complaints received by the Ugandan Insurance Commission are related to delays in settlement of claims.
Affordability and spending priorities: Even when respondents acknowledge that insurance could offer value, affordability is a problem given other spending priorities. This is especially relevant for participants with irregular incomes or people who cannot commit to a fixed premium amount every month. It must be noted, however, that this may relate to perceived affordability as respondents were not always informed on the actual cost of insurance:
Affordability was listed as second only to lack of awareness as the reason for not taking up insurance among focus group participants in India. It was, however, noted that this correlates with a lack of awareness. Even should products be available that are actually affordable, respondents tended to perceive insurance as unaffordable.
In Colombia, some participants indicated that they did not have insurance because they perceive it to be expensive and because they believe only high-income people can buy insurance.
In the Philippines, focus group discussions revealed that participants spend 50%- 70% of their total income on food and educating children, leaving little if any room for
insurance.
it is very expensive to afford it is usually big organisations and the rich." (Ugandan respondent)
Price sensitivity may vary for different product categories. A surprising observation from the South African focus group discussions was the relative insensitivity towards the price of funeral cover, with no concern expressed by one respondent on finding out that another respondent in the same group is paying much less for the same amount of cover. This is, however, not the case for asset insurance products: a cellphone insurance may cost R35. If I have R50, I cannot spare R35 to pay insurance
because I need to use the same money to pay transport to go and pay the insurance.
As it stands now, I do not have a bank account where insurance money can be debited. (South African respondent) Conclusion: The focus group insights indicate that, though affordability is perceived as a significant barrier to access, trust and low levels of knowledge and awareness dominate in explaining the low demand for insurance despite high levels of need. Low levels of awareness also reflect the often limited sales effort invested in the low-income end of the market. 4.2.2. Towards a model of the insurance decision
Based on the experiences in the sample countries we have modelled a behavioural pattern to help understand individual clients decisions of whether to obtain insurance or not. Although this framework is consistent with the observations across the country studies, it needs to be substantiated through further research. Figure 11: Model of the insurance decision Perceived cost is determined by both the value of the premium and the opportunity cost of paying that premium. A low-income consumer who has to give up other consumption to pay an insurance premium will attach a much higher opportunity cost to this than a higherincome
consumer who does not have to sacrifice any consumption to pay for the premium.
This correlates with the general finding that income levels correlate with take-up and that growth in take-up correlates with economic growth. Perceived value is influenced by at least the following three factors:
High cash discount rate and the nature of the benefit: The phenomenon of overdiscounting by low-income households68 would seem to be a strong driver in the income hypothesis by posing a hyperbolic discounting theory that argues that people over-discount future needs in favour of current consumption. . Levels of trust: The perceived value of an insurance product is higher when the
consumer has a higher level of trust in his/her ability to lodge a successful claim. Several factors influence the level of trust. A complex product with a lengthy contract document containing a lot of fine print may lead the consumer to distrust his/her ability to successfully claim compared to a simpler or commoditised product with more understandable terms and disclosure. In the same way, insurers that have demonstrated that they are willing to pay legitimate claims promptly will be trusted more, and their products will achieve a higher perceived value. As mentioned in Section 4.1, specific
entities such as mutual/cooperative associations or trusted clothing retailers have also been able to achieve a higher level of trust. That is why member-based groups are
consistently more successful at distributing microinsurance than individual agents or brokers unknown to the customer.
Probability of the risk event happening: Products covering risk events such as health and life risks with high frequency and/or probability have a higher perceived value than products that cover assets risks, where the risk event may not happen at all. This model of the insurance decision goes some way in helping to understand the dynamics driving the demand for microinsurance. The next section seeks to categorise the supply models observed in this study. 4.3. Making a market for microinsurance
A variety of models are being used to intermediate microinsurance with varying degrees of
success. In this section, the models found in the sample countries are categorised and their relative success in driving insurance take-up is described. The experience is remarkably consistent across the five countries, making is possible to draw conclusions on the features required to achieve microinsurance take-up. The section does not present an exhaustive to save for long-term goals where current needs are pressing, or to insure for uncertain risks. Such an understanding will also help regulators to design an appropriate regulatory space. Evaluating success: It is important to consider the criteria against which to assess the
models. Financial inclusion means that people not only have access to appropriate and affordable products, but that they actively choose to use them to mitigate their risks (see
Section 2.1). Ultimately our interest is in facilitating increased take-up of insurance products that are affordable and appropriate to the needs of the poor. However, take-up by itself is not a sufficient objective. Consumers may, for example, be forced to take out insurance without being aware of the cover or how they can claim. Alternatively, mis-selling may result in take-up but the consumer may not be able to claim due to exclusions that were not made clear at the time of the sales transaction. The objective is, therefore, to increase take-up of
appropriate insurance products in a way that the client can actually claim.
Positive market discovery: Based on the country experience, we propose that the above objective can be achieved when a particular business model ensures positive market discovery.
Market discovery means that the consumer must be introduced to a product in a way that allows them to understand the value that insurance may hold for them. This is in line with the old adage that insurance has to be sold (i.e. you need a market maker) and is also supported by the finding in Section 4.2.1 that low levels of knowledge and
awareness are a key barrier to inclusion.
Positive discovery means that consumers should not only be sold the product but must be able to claim on it, resulting in a positive demonstration of the value of the product. No discovery will take place if the client is unaware that they are covered by insurance, and the discovery will be negative if a claim is rejected for reasons that were not explained at the time of purchase. A market for a particular microinsurance product that is built on positive market discovery allows other less expensive models to extend into the market. We assess five categories of models emerging from the country case studies based on their
ability to achieve positive market discovery: compulsion, reinvention, derived demand, passive aggregators, and individual agent-based outbound sales 4.3.1. Compulsion
Dominant microinsurance channel: Compulsory insurance in the form of credit insurance on the back of loans is the single biggest category of microinsurance across the sample countries. It represents the vast majority of microinsurance policies in India and Uganda and is estimated to account for about half of the microinsurance market in the Philippines. In South Africa, it is outstripped only by funeral insurance. In Colombia, compulsory credit life
is the fastest-growing segment, driving the overall growth of microinsurance. This product category has evolved on the back of credit expansion and was initially driven by lenders 69 We also note that, in practice, business models may combine some of the features that we present as distinct categories. Models do, however, exist for each of these categories and even if combined, the assessment of the specific category features will remain valid. Compulsion and captive markets: This product is compulsory as the lender can insist on the consumer buying the insurance product (normally life insurance or insurance against default in payment) as a pre-condition to obtaining a loan. In some cases (e.g. South Africa) such
compulsion is officially sanctioned by legislation allowing the lender to insist on such cover but giving the borrower the right to choose the provider of insurance. In some cases the cover may not be disclosed to consumers, who remain unaware that they are covered, what the cover costs and even that premiums are deducted as part of their loan repayment (or
even funded in advance out of the loan in some cases). For example: even though South African legislation gives consumers the right of choosing the provider of the insurance policy, consumers are often not informed of this right. In practice, therefore, this provides the lender a captive market to sell its own or preferred insurance policies often resulting in
overpriced premiums as there is little threat of competition.
Positive discovery depends on disclosure: While some jurisdictions, such as South Africa, compel the credit provider to disclose the credit life insurance policy and provide the customer with a choice as to the insurance provider used, some countries place no obligation on the creditor to provide a choice or to disclose the insurance policy. Even where disclosure is required by law, limited enforcement means that lenders who are not incentivised to disclose details to the client are not forced to do so. This can lead to abnormally low claim ratios and poor value to the client. If the compulsory model is to potentially lead to a positive discovery of microinsurance, the existence of the policy and its
terms must be disclosed to the credit client. Potential to offer value to consumers:
The compulsory model is attractive as it significantly reduces the cost of intermediation. The same network and staff are used to market the credit and sell the insurance policies, and premium collection is conducted via the loan repayment mechanism. In some cases, these policies have evolved to become more client centric, offering additional benefits and ensuring that the client is in a position to use these. Compulsion can facilitate positive discovery: Although compulsory models run the risk of
negative or no insurance discovery, with appropriate regulation they can be a powerful tool
to extend insurance to the low-income market. A positive experience with credit insurance may encourage consumers to use insurance for other risks without being compelled to do so. 4.3.2. Reinvention Spontaneous informal risk-pooling: When formal insurance is not available, or unaffordable, low-income communities often develop informal risk-pooling mechanisms to cope with risk events, thereby effectively reinventing insurance. Burial societies or
cooperative insurance societies are formed to support members who have lost a loved one and have to pay for a funeral. Such informal schemes may evolve over time into formal
insurance programmes or remain informal providers of risk cover. Risk pooling is not always the primary reason for a community-based institution. Many cooperatives evolve to provide financial and other services and only start to offer house insurance or risk pooling later. Trust in the mutual mechanism: In contrast to the lack of awareness and trust of formal insurance, focus groups highlighted the role of community and member-based organisations
(such as cooperatives or mutuals) as a trusted source of risk mitigation. This applies even when member-based institutions are unregulated and much weaker than commercial
institutions and the trust may, therefore, be misplaced. Nonetheless this inherent trust allows mutuals to overcome some of the demand-side barriers presented in Section 2.1. There is evidence of such member-based activities in all the sample countries and they are particularly prominent in Colombia and the Philippines where the bulk of microinsurance is provided by member-based channels, as well as in South Africa if the informal market is included.
Mutuals: In an insurance context, the members of a mutual insurer own the insurer.
Individuals become members of a mutual when they purchase an insurance policy. Thus all members are also policyholders and all policyholders are members. Votes are generally proportional to the number of policies held or the value of the insurance policies. As owners, policyholders/members are responsible for the governance of the organisation. The surplus is redistributed to members. While mutuals may be membermanaged to a varying extent, the norm is for mutual insurers not to be membermanaged, but to outsource the function to professional managers. Mutual organisations may, however, also exist more informally than mutual insurers, for example the friendly society or the mutual benefit association. In all instances, however, the principle of mutuality of interest among members remains.
Cooperatives: The cooperative can be defined as a distinct type of organisation based on the principle of mutuality/common interest among members. Unlike mutual insurers, the cooperatives raison dtre is usually broader than the provision of insurance, which is often a secondary activity of the organisation. The members of the cooperative do not necessarily have to purchase an insurance policy, i.e. membership does not necessarily imply policyholder status. Member-management is furthermore proportional to membership rather than number of policies, with each member generally being assigned one vote. Cooperatives can, however, also grow into larger networks or become
cooperative insurers, where the main purpose does become insurance provision. The principle of member-ownership and governance, however, remains core. Member-based entities. Both mutuals and cooperatives can be defined as member-based entities to be distinguished from corporate entities. A number of characteristics mark the member-based form:
Ownership/governance/benefit: The member-based organisation is owned and governed by its members, for their mutual benefit, and with the surplus accruing to the members (that are in most instances the policyholders).
Management: Small mutual/member-based organisations usually start out by being

managed by the members themselves. This may progress to professional management
being appointed by the members. As long as members own and govern the organisation, the delegation of management does not undermine the member-based/mutual nature.
Membership character: How membership is obtained may also define the organisation. In some cases, all members are also policyholders (mutual insurers), in others all members are not necessarily policyholders (some cooperatives) and sometimes (as is the case in Colombia) policies may even be sold to non-members. This is, however, not a central defining characteristic of whether an organisation is member-based or not.
Nature of risk carried: In many smaller/informal mutual-type organisations, risk is pooled informally, for example the burial society sometimes on an ex post basis (i.e. all members contribute to support the one who has suffered a loss), sometimes on an ex ante basis (all members make regular contributions to a pool, which is then used to compensate members incurring a specific loss). In other organisations there has been a progression to guaranteed benefits. While entities can be distinguished by the nature of the risk carried, they remain part of the overarching member-based organisation category.
In this document, cooperatives and mutuals (in whatever way they manifest and are defined in each of the countries) are regarded in their capacity as member-based organisations. 4.3.3. Derived demand Voluntary insurance uptake is most often the result of demand for another product or service:
Derived demand for microinsurance happens when the client does not set out to purchase insurance and may not even be aware of the existence of insurance products, but is induced to buy an insurance product based on his or her demand for another product or
service. The secondary demand for insurance is therefore derived from the primary demand for another product or service. Examples include the following: In South African culture, an expensive funeral is regarded as an unavoidable expense, pushing people to plan ahead by taking out funeral insurance. This demand for funeral services drives the demand for insurance, rather than the need for life insurance in general. This is supported by the fact that 40% of formal funeral cover in the low- income market is bought via funeral parlours. This is also the case in Colombia, where funeral service providers selling funeral cover (albeit outside of the formal definition of insurance) account for more than half of the total microinsurance market.
In India, voluntary insurance, where it exists, often relates to the need to take out insurance to cover health expenditures a service that people know that they will not be able to afford when needed. For non-life products, the South African focus groups revealed that, even when a person deems non-life insurance to be important, they will only buy it in practice when related to the credit purchase of a household good or a cellphone, generally regarded as an essential asset for social and business/employment purposes. Colombia also has an increased demand for cellphone insurance among the poor, as well as for motorbike
insurance, with motorbikes being a vital transport and business asset for many people. Distribution through same channel as underlying product or service: Insurance based on derived demand is most often distributed through the service provider (for example funeral
parlour) or product distributor (seller of mobile phones) of the product or service which the client set out to purchase in the first instance. This reduces distribution costs. Trust in the insurance product may be supported by the credibility of the service or product provider.
4.3.4. Passive aggregators
Innovative new models are emerging to intermediate microinsurance at a low cost without attaching it to any other product or service. These models may leverage existing client bases (e.g. retailers) or reach out to a large number of people through clever marketing combined with low-cost passive sales strategies. This requires products to be sufficiently simplified to be sold through such channels. Examples of this model include: Retail client bases: Insurance is sold to the existing client base of a retailer focused on
the low-income market. The target market consists of the clients of the retailer (who
serves as the aggregator) to whom insurance products are sold either passively or actively by the sales personnel of the retailer. Public utilities: In Colombia, Codenza, an electricity utility company in Bogota, succeeded in converting most of its electricity clients to funeral insurance using a tickbox option on the utility bill. Low cost but limited success: The low-cost distribution of these models is appealing, however, the experience to date shows limited success beyond funeral insurance that can be
easily commoditised and where other players such as funeral parlours have made the
market, as described in the introduction to this section (using the derived demand model described in Section 4.3.3 above). While passive aggregators are, therefore, able to extend existing markets at lower costs, the evidence suggest that they are unable to make a market for products that low-income clients may be less familiar with. 4.3.5. Individual agent-based outbound sales Greenfields sales of insurance: This refers to the traditional model in which an individual agent sells insurance without being attached to another product. This is typically done
through face-to-face interaction with the client but it can also be done through out-bound
call centres. Agents also distinguish themselves from the other channels in that they usually provide advice on the appropriateness of the insurance products they sell. Although sales to groups, for example the members of a religious group, labour union or employer, and innovative use of technology can reduce the cost, this remains an expensive channel. As the insurance has to be sold on its own merit, much time needs to be spent with the client to inform them of the benefits. This is particularly challenging when the client has not been exposed to insurance before.
This model is unlikely to make significant inroads into the low-income market, unless it
moves away from the traditional agent model described to more non-traditional models such as MFIs or other groups (and their staff) acting as agents This is particularly the case where market conduct regulation increases the regulatory burden on advice-based sales, as in South Africa. 4.4. Impact of policy, regulation and supervision on market development The country studies show that regulation does influence the development of microinsurance markets both by its presence and its absence. Moreover, it is not only the details of legislation that are relevant, but also the general approach followed by policymakers and
regulators and how policymaking in the insurance space relates to other spheres of policy and regulation. In this section we summarise the impact of various features of regulation on microinsurance market development as observed in the sample countries. We start with three general features of a regulatory framework that may significantly affect market development, and then explore the impacts of specific aspects of regulation and its enforcement by using the structure of the regulatory framework discussed in Section 2.8. In each case the impacts are illustrated with reference to experience in one or more of the sample countries.
4.4.1. General features of the policy, regulatory and supervisory framework Regulatory approach impacts on market development: The basic approach followed by a
regulator in the design and implementation of regulation under its control may have a significant impact on the nature and level of market development. Two characteristics of the regulatory approach in particular affect market development: Pro-active or re-active: The Philippines and India have proactively developed a microinsurance policy and South Africa is doing so. In different ways all three of these actively encouraged or even pushed providers to enter the microinsurance space. Uganda and Colombia, on the other hand, have not created a special dispensation for
microinsurance and have followed a market-led approach in which the initiative was taken by the providers and no pressure was exerted by the regulator and supervisor. Facilitative versus exclusionary approach: A facilitative approach accommodates
market-led developments, allowing new models to evolve except where explicitly prohibited and choosing to intervene only when the risks posed become material enough to justify intervention. Financial regulation in the Philippines generally follows this approach. New business models are allowed to enter, with careful monitoring, even if no explicit regulatory space exists for them. Regulation is then gradually adjusted to
accommodate them if necessary. The exclusionary approach seeks to dictate what form development should take, prohibiting new models except if explicitly allowed in regulation. Regulation in, for example, India follows more of an exclusionary approach. In an environment of fast-changing models and technologies it is increasingly difficult for 66 the regulator/supervisor to lead market development and pick winners as the exclusionary approach requires. The result is that innovative new models are frustrated by the long process of opening the regulatory space to operate. Regulatory uncertainty may undermine microinsurance development: Regulatory
uncertainty disincentivises the entry of legitimate players into a specific market. The risk is that regulation may change, or be introduced, that may close down a specific model or space. If not appropriately monitored, models that operate in the grey areas of regulation
may raise the reputational risk for legitimate players to enter into the same space. Ironically the impact of both regulatory certainty and uncertainty is best illustrated by the same country, Uganda. After decades of having no insurance regulation at all, the regulatory certainty provided by the introduction of an insurance law encouraged a number of foreign insurers to enter the market. However, the new regulatory framework had some critical
gaps, creating uncertainty for example on the exact treatment of health insurance under the new law. This uncertainty has discouraged a number of potential providers of health insurance from entering the market (see Box 4) while leaving the room for other models to operate unregulated. Regulatory certainty can also be achieved under a facilitative approach and does not
necessarily require detailed regulation in all areas before market development can proceed. Clear policy in favour of market development may, for example, provide new entrants with sufficient certainty that their models are in line with governments view on market development even if regulation on a specific aspect remains uncertain.
Prudential issues addressed first: Before 1996, the insurance industry had no insurance
regulator and no effective supervision other than being nominally supervised by the Ministry of Trade. Even insurers unable to fulfil basic operational functions were allowed to operate and there was no compliance culture. Post-1997, the newly established Insurance Commission focused on developing a culture of compliance and on achieving its mission, The fact that the regulatory regime is so recent has had a number of impacts on the microinsurance market: The presence of regulation has encouraged entry of foreign players: 12 of the 20 insurers
that are active in the Ugandan market are foreign-owned and entered after insurance
legislation was introduced. Even though foreign ownership was not prohibited before, foreign insurers were reluctant to enter given the regulatory uncertainty and risk. Remaining uncertainties undermine market development: Despite the greater certainty created by implementing the insurance regulatory regime, the fact that the regulation is still so new has meant that some regulatory uncertainty remains. This uncertainty relates especially to two major areas: the demarcation of health versus other categories of insurance, and the demarcation lines between life and non-life insurance.
Lack of health insurance definition distorts market: The Uganda insurance law does not refer to health insurance. It is therefore usually written under a short-term insurance
licence. As it is not explicitly covered by regulation has, however, been exploited by some operators, most notably HMOs that provide health insurance outside of insurance regulation. On the formal sector side, the loophole has led to some reluctance by registered non-life insurers to enter the health space, should they thereby open themselves up to regulatory risk and face an unlevel playing field having to compete with the unregulated HMOs. This may also be preventing innovation in health microinsurance. Life versus non-life demarcation loophole creates unlevel playing field: Though
insurance is demarcated into life and non-life insurance and an insurer that does not have a composite licence must register as either the one or the other, some grey areas remain. One insurer, for example, is providing credit life insurance under its non- life licence. It justifies this on the basis that it only provides a pay-out to the client in the case of accidental death, which is a risk that may be written under a non-life licence. However, it provides a payout to the MFI for the outstanding account balance of the client irrespective of the cause of death. This creates an unlevel playing field for those insurers reluctant to engage in such grey area activities, which could strictly speaking be
regarded as illegal insurance practices even though the supervisor has not put an end to the practice, and in this way could be undermining competition in the credit life market.
Overall regulatory burden determines the need for microinsurance dispensation: Ultimately regulation dictates who may operate in a specific market and how they must conduct their business. Both intentionally and unintentionally, compliance with regulation imposes costs on businesses and may also exclude some, for example by preventing foreign ownership of domestic insurance firms, or prohibiting legal persons other than public/stock companies from conducting insurance operations. The degree of compliance costs and
exclusions determine the ultimate regulatory burden of a particular system. This burden tends to increase naturally over time as the sophistication of incumbent market players and products increase. If the overall regulatory burden is low, formal microinsurance, as opposed to informal market development, may be able to develop without further regulatory intervention. This is the case in Colombia where a low overall regulatory burden combined with a general inclusion policy meant that no explicit intervention around microinsurance was needed to
catalyse the development of this market. In contrast, where the overall regulatory burden is
high it increases the need for special policy or regulatory exemptions to encourage the development of formal microinsurance. In the sample countries such regulatory initiative has manifested in two forms or in a combination of these: (i) a dedicated (exempted) microinsurance space; or (ii) in some form of regulatory coercion pushing providers to enter this space (e.g. quotas or charters such as the case in India and South Africa). It must be noted that the absence of such special dispensations does not necessarily prevent microinsurance developing but tends to keep this development in the informal sector. 4.4.2. Financial inclusion policy and regulation
Financial inclusion policy and regulation can push microinsurance development, but longterm growth and scale depends on viability. Financial inclusion is an increasingly important policy objective for governments around the world. Four out of the five sample countries have some form of financial inclusion policy, in various stages and forms of implementation. Although not all of these policies (e.g. the National Microfinance Strategy in the Philippines
or the Opportunity Banking Policy in Colombia) make specific or detailed reference to microinsurance, they nonetheless provide important support for developing the microinsurance market. Increased financial inclusion in other financial sectors such as Informal and illegal insurance have evolved to fill the gaps
Entry and evolution of legitimated players into formal sector undermined
inclusion in general also sends a positive signal to entities that are looking to enter and extend their activities into the low-income market. Two main approaches to financial inclusion: Two categories of inclusion regulation were found in the sample countries: Push interventions: Both South Africa and India have implemented explicit financial inclusion interventions. In South Africa, this took the form of the Financial Sector Charter. In India, it took the form of regulated rural and social sector quotas. In both countries these interventions led to a special regulatory dispensation for microinsurance
that supports the quest for inclusion.
Supportive policies/pull interventions: In Colombia, the Opportunity Banking Policy does not place any obligation on financial institutions to pursue inclusion. Rather, it seeks to facilitate the provision of financial services to the currently unserved by creating a supportive regulatory environment and removing obstacles to inclusion. This, for example, led to the introduction of non-bank correspondents providing a low-cost channel for insurance premiums collection. Likewise, the Philippines government facilitates financial inclusion and microinsurance through its National Microfinance Strategy and public awareness campaigns supporting microinsurance.
Limits of inclusion policy: Inclusion policy is usually premised on the assumption that if
commercial insurance providers are introduced to the low-income market they will discover its potential, which will in turn will lead to market development beyond that which is compulsory. However, inclusion policy cannot indefinitely force providers to pursue unviable markets at any significant scale. While push regulation can force providers to enter a specific market space, its impact will be limited if initiatives are not put in place to also support the viability of the market. In South Africa, access targets for non-life insurers have proved problematic, as non-life products priced to achieve large scale take-up among the poor are
in many instances simply not viable from an insurers and, especially, an intermediarys point
of view. In India, the rural and social sector policy has thus far achieved limited microinsurance take-up beyond what is required in the relatively modest quotas suggesting that insurers cross-subsidise policies in these sectors to reach the quotas and have not yet shown that expansion beyond the quotas is viable. In both these cases, adjustments also had to be made to create a more supportive regulatory environment. Push and supportive initiatives could therefore be seen as complementary interventions. Regulators require mandate to support development: Even when an explicit or comprehensive inclusion policy is absent, its possible to support financial inclusion by
extending the regulators mandate to support market development. Regulators are bound
by the statutes under which they operate. This means that they can only operate and apply their resources based on what their official mandate allows them to do. If market development or financial inclusion is not part of that mandate, the regulator could be found to be acting outside of the law should it pass regulations or implement administrative actions that seek to develop the market. Traditionally, the mandate of most financial sector regulators was limited to stability and, to some extent, consumer protection. Increasingly regulators mandates are being extended to include other objectives, including market development. Indias Insurance Regulatory and
Development Authority provides a good example of a regulator that was given an explicit
development mandate. On the other extreme, the Ugandan Insurance Commission is an example of a regulator that has no explicit development mandate and therefore does not have the scope to consider financial inclusion as part of its policy obligations. 4.4.3. Prudential and institutional regulation High regulatory barriers undermine formalisation and entry: Prudential regulation seeks to ensure that insurers are able to meet their contractual obligations to their clients. This is done by setting minimum entry requirements, such as minimum levels of capital, and requiring compliance with prudential regulations governing the functioning of the insurer.
One outcome of prudential regulation is to limit entry into the market to providers that are able to manage insurance business appropriately. Unnecessary high regulatory barriers, however, undermine the entry and formalisation of potentially legitimate providers. Using regulatory barriers to compensate for limited capacity may be counterproductive: Regulatory barriers may be the result of general conservatism, unintentional regulatory drift or deliberate regulatory strategies to address specific concerns of the
regulator. For example, due to limited capacity, regulators and supervisors may be concerned about their ability to effectively supervise the sector and about the potential risk of insufficient supervision. Such supervisors may take a conservative approach and explicitly
restrict entry through artificially high capital requirements. In isolation, however, limiting entry does not necessarily stop informal insurance activities for the very same reason that motivated this approach: the supervisor does not have the capacity to monitor and control these informal activities. Increasing entry barriers to the formal sector where the supervisor has limited capacity may, therefore, simply result in a larger informal sector, rather than a more limited insurance sector. India, for example, has the highest minimum upfront capital
requirement of the sample countries ($25-million), with no second tier, exceptions or opportunity for smaller players to graduate to this level. This is a deliberate requirement by
IRDA to restrict the market to a few large commercial insurers. Entry and formalisation of
smaller (but potentially legitimate) players is, therefore, explicitly discouraged. The result of these high-entry barriers, however, was not to close down these activities but to keep them in the informal sector. Colombia India Philippines South Africa Uganda Regulatory barriers particularly affect microinsurance: The development of formal microinsurance is particularly affected by such deliberate entry barriers, as informal Other objectives may include market conduct regulation and consumer education as additional means of consumer protection.
In South Africa, the government is concerned about allegations of consumer abuse in
funeral parlours that self-insure. To protect consumers, it is important to bring such providers within the insurance regulatory net. Formalisation is therefore regarded as a necessary strategy to limit consumer abuse. This needs to be combined with active support for such parlours to assist them in making the difficult transition to regulatory status. Most of them would have to cede their insurance portfolios to registered insurers as they will be unable to comply with even the second tier of regulation proposed for microinsurance. Cooperatives that provide in-house insurance in the Philippines are not currently
supervised by the Insurance Commission unless specifically registered for insurance
purposes. This implies that risk is created for the consumer, and formalisation would therefore serve the goal of consumer protection. The importance of member-based entities with informal origins is powerfully illustrated in the transition of informal insurance schemes into the regulated MBA insurance market in the Philippines. These member-based entities are trusted by clients, making insurance take-up easier than for commercial insurers. As with the funeral parlours in South Africa, formalisation is not simple and needs the support of a dedicated backoffice and actuarial resource (provided by Rimansi) and additional regulatory changes to
incentivise formalisation (e.g. reduced capital requirements and the ability to build this up over time). Informal providers are often outside of the regulatory scope because of the limited capacity of the supervisor to enforce regulation and not the absence of regulation. It may, therefore, simply be beyond the capacity of a supervisor to formalise these entities through supervisory effort or decree. An alternative approach is to design the regulatory environment to encourage and support formalisation while gradually targeting enforcement at high-risk areas. Tiering and graduation supports entry, formalisation and growth of microinsurancefriendly
providers:
Tiering and graduation have been used in the sample countries to facilitate entry while still maintaining prudential standards. Tiering: This approach creates a lower tier of insurer subject to reduced regulatory burden but limited to lower-risk products. In the Philippines a separate tier was created for MBAs (and within that for microinsurance MBAs) that are subject to lower capital requirements than commercial insurers. In South Africa, friendly societies are allowed to write funeral insurance up to R7 50072 (about $940) under a lower-tier licence with reduced requirements. South Africa is also in the process of designing a dedicated microinsurance regulatory tier
In India tiering was only implemented for intermediaries and not for insurers. Graduation:
In this approach providers (usually informal providers seeking to formalise) who are not immediately able to comply with the full regulatory requirements are allowed to stagger or graduate their compliance over a set period or according to a set formula or procedure. Microinsurance MBAs in the Philippines may, for example, start with a lower capital requirement and build up their capital to the required level over time. This allows regulators to reduce entry barriers while still maintaining appropriate prudential standards.
As noted, take-up of the MBA licence was only achieved when this graduated capital
requirement was implemented. Graduation between tiers is also critical to ensure that successful smaller providers are able to evolve into full insurers. With friendly societies in South Africa graduation to full insurer status is undermined by the fact that the insurance legislation does not accommodate the member-based legal structure of a friendly society. This has resulted in some successful friendly society insurers stagnating as they were unable to graduate out of the restrictive regulatory environment for such societies. Discretionary approach may be difficult to manage:
In addition to explicit graduation,
discretion can also be given to the supervisor to allow entry for specific players/categories of players at a lower capital level and allow them to build this up over time. Although possible, the ad hoc nature of this process makes it difficult to manage with limited supervisory capacity. This option is technically available to the insurance supervisor in South Africa, but not used in practice due to concerns over the capacity to manage such an ad hoc process. In the Philippines the Insurance Commission also has the power to reduce upfront capital
requirements by up to half for cooperative insurers. There has, however, been no instance of such graduation so far, as no cooperative insurers have applied for it. Unlevel playing field introduces a bias against provision by potentially legitimate players: While tiering may be a useful tool to manage entry requirements, it can also create unlevel playing fields if not carefully designed based on risk. Following a risk-based approach,
entities writing the same kind of risk should face a similar regulatory burden. This is not the case in South Africa where friendly societies are allowed to write funeral insurance policies
up to R7 500 (approximately $940). Dedicated funeral insurers may write benefits up to R18 000 (approximately $2 250) but with regulatory requirements similar to that of a full life insurance licence. This is too onerous relative to the limited product portfolio they write. While the benefit caps on friendly societies reduce the risk compared to full funeral insurance licences, the regulation applied to friendly societies are reduced to such an extent that it may be too low to manage even the level of risk that remain at this benefit level. At the same time, the differentiated benefits mean that these societies cannot compete with formal insurers and are losing ground in the market. The current tiering system, therefore,
creates an unlevel playing field, achieving neither appropriate risk management nor supporting competition.
In Colombia, funeral parlours have an exemption from insurance regulation based on legal technicalities around the definition of insurance (see Section 3.1). This means that although they write products with similar risk features to funeral policies offered by insurers, they are not subject to the same regulation. This places commercial insurers at an unfair disadvantage and may discourage them from competing for this market. Unnecessary restrictions on institutional types may exclude legitimate providers: When
regulators follow an exclusionary approach (see Section 4.4.1) they may limit underwriting
(and intermediation) to specific, predetermined institutional types. This makes it difficult for new business models with different legal identities to enter the market. This approach effectively requires the regulator to be able to pick winners by deciding which entities will be better placed to serve the market. Such institutional restrictions do not always add value as they are not based on clear risk considerations. This affects member-based entities as well as commercial insurers. Member-based insurers:
When these entities are a feature of
society, member-based entities such as mutuals and cooperatives may play an important role in developing microinsurance. Regulatory environments, however, do not always provide the space for such entities to formalise their insurance operations, restricting them to informal markets. The Philippines has created an explicit regulatory framework to accommodate both cooperative insurers and MBAs. The overwhelming majority of formal microinsurance in the Philippines is provided by member-based entities. This is not without problems as at
least one of the cooperative insurers are under curatorship. Instead of excluding this category, the governments approach has been to support the improvement of management and governance of these entities. In Colombia, cooperative insurers have evolved to where they are able to compete with commercial insurers on an equal footing and are subject to the same regulatory
requirements. Sixty two percent of formal microinsurance in Colombia is provided by these insurers. In South Africa, informal member-based insurers are also significant in the microinsurance market (63% of the combined formal and informal funeral insurance
market). However, current regulatory structures do not provide a suitable route for such entities to grow and formalise themselves into insurers. Commercial insurers: These restrictions also affect commercial insurers. Microinsurance regulation in the Philippines benefits only member-based entities and does not provide space or incentives for commercial insurers to enter this market. While commercial insurers may not currently be interested in serving this market there is no reason to exclude them in regulation, thereby disincentivising potential interest.
The role of CARD in choosing MBA as the microinsurance vehicle: The MBA is the Insurance Commissions vehicle of choice for formalising and developing microinsurance in the Philippines. It is regarded as the most suitable organisational structure for microinsurance, and is the only institutional entity eligible for microinsurer status that enjoys a lower tier of minimum capital requirements. It is argued that this decision is based partly on the success
of CARD MBA, one of the MBA pioneers in the Philippines. CARD MBA showed how the MBA approach can use microfinance social networks, payment flows, financial information and management systems to reach a critical mass of members, reserves and capital. As of
December 2007 it had about 470 000 active members and US$16.5-million in assets. It paid out US$1.1-million in claims over the year. This robust current position is, however, the result of a turbulent history.
Unsustainable practices and consequent rehabilitation into the MBA form: In 1994, CARD, an MFI, established a Members Mutual Fund (MMF) among its members to cover its exposure on the loans of members in the case of death. In addition, it started offering basic life insurance. In 1997, it responded to the need to broaden the product offering by including a monthly pension for members older than 65, based on a minimal weekly
contribution. All of this was done without registration for insurance purposes, although
registration was mandatory under the Insurance Code. The possible impact on the institution of these in-house insurance services was, however, not adequately assessed. When such an assessment was eventually done, CARD realised that two years of a members contributions were needed just to cover one month of pension benefits receivable by such a member. This was clearly not sustainable. Fulfilling all its obligations would decapitalise CARD and could lead to bankruptcy. CARD sought advice from the regulator and towards the end of 1999 formed an MBA to manage/replace the MMF. The MBA is registered as a non- stock, nonprofit
legal entity owned and partially managed by the members. With the assistance of an
actuary, CARD MBA repackaged its existing product lines and developed new ones. It has also started to offer non-financial services. The MBA was therefore used as a vehicle to rehabilitate CARDs insurance operations and bring it within the formally regulated space. CARD MBAs subsequent success (and advocacy in the sector at large sharing their learning and providing support to other MBAs) has been instrumental in convincing regulators to provide sufficient regulatory space (through tiered capital requirements) for MBAs engaged in microinsurance. The success of CARD provided
an example to other MFIs that want to cater to the risk protection needs of its members.
While the MBA has existed as insurance vehicle since the Insurance Code of 1971, it has only recently started to feature as vehicle for microinsruance provision and the formalisation of MFI in-house insurance. This shows how the mere existence of a regulatory option in itself is not always sufficient to trigger formalisation. Some active work needs to be done by the regulator/supervisor in promoting it. Sound corporate governance allows the regulator to leverage non-traditional institutional types: Weak governance for a particular category of institution means that a much higher
regulatory effort is required to ensure compliance. However, excluding such institutional
types may impede development. Where the regulator has implemented measures to improve governance structures rather than excluding such institutions, a whole new category of entities became available to support market development. This is particularly relevant for member-based entities such as financial cooperatives that, for historic reasons, are often regulated under regulators not focused on, or geared for, prudential regulation. Examples of such cooperatives are those that first emerged in the agriculture sector,
In the Philippines weak governance of cooperatives has been problematic, with 65% of cooperatives registered with the Cooperative Development Authority no longer
operational due to mismanagement. Under the insurance code, cooperatives are allowed to write insurance but no additional governance requirements are placed on those that do this. Two cooperatives currently offer formal insurance, and one of these is under curatorship. In Colombia, improved cooperative regulation secured the continued existence of the cooperative environment even through the financial sector crisis of the late 1990s. Financial crises often trigger more appropriate regulation to strengthen the financial
sector. This includes better corporate governance standards, among others. As noted,
cooperative insurers are the dominant providers of microinsurance in Colombia. Market-driven mechanisms can also incentivise better governance. In India, MFI rating agencies and standards have ensured that MFIs also providing insurance improve their management and governance. This led to these entities obtaining underwriting for previously informal insurance portfolios (or risk being downgraded on their credit rating). Demarcation shapes provider models: In all five sample countries insurance regulation distinguishes to a greater or lesser degree between life, non-life and health insurance
products. Composite insurers are allowed, with concomitant increases in capital required, in
all but India and South Africa, but with some exceptions for microinsurance. The degree and certainty of demarcation has shaped the nature of insurance provision in these countries. For example, In Colombia, insurers may combine policies from the three categories (with concomitant increase in capital required), with the exception of individual life policies, under a single licence. This has allowed insurers to design products that cover both assets and life (including disability and health) risks in one family protection policy. Relaxed demarcation supports low-cost provision that meets market needs: Strict
demarcation increases the cost of offering a product that combines life, non-life and health
elements. It also restricts the cost efficiencies that may be gained from combined products. The microinsurance experience and focus group findings in the sample countries indicate a Individual life policies can only be provided under a life license. Both life and non- life insurance companies may, however, sell group life and health insurance. Insurance cooperativescooperative and companies have designed products that cover both assets and life risk (including disability and health) as an integral family protection plan. In this way, one insurer offers a so-called family protection policy at a premium of $4/month, providing $5 200 in life and disability cover respectively, as well as cover of $10 for daily hospital fees
and $2 600 for serious illness. Clients of an NGO specialised in microcredit are targeted for this policy. The Indian
focus groups indicated a preference for composite life and health products. As a result of the need for composite products, countries are moving away from strict demarcation in the microinsurance environment. This is already the case for Colombia, Philippines and Uganda. Indias microinsurance regulations are also allowing composite products but separate underwriting of the product and a life and non-life insurer is still required. In South Africa, the proposed microinsurance regime recommends a dedicated microinsurance licence that
will allow life and non-life risks to be underwritten by the same microinsurer. The rationale is
that both life and non-life products that meet the microinsurance definition are of a shortterm nature and, therefore, underwritten on a similar basis. There is also an explicit recognition that composite products may be required to ensure viability of low- premium products. 4.4.4. Product regulation Weak insurance definitions result in regulatory avoidance and arbitrage: In several of the sample countries weaknesses and gaps in insurance definitions have been exploited to avoid regulation, illustrating the need for clear definitions of insurance business:
Colombia: Funeral parlours have used the legal system to exploit weaknesses in the definition of insurance and to avoid insurance regulation. Philippines: Health and pre-need companies have avoided insurance regulation. Uganda: As health insurance is not defined in the insurance legislation, some Health Management Organisations are using this to provide unregulated insurance, arguing that they do not fall within current regulatory definitions of insurance. Regulatory definitions seek to use low-risk features of microinsurance products. As noted
(with some clear exceptions) in Section 4.1, the bulk of microinsurance products offered in the sample countries share features that help to limit the risk (prudential and market conduct) of these products. These features include: short-term contracts underwritten on a group basis, simplified products, generally predictable risks and limited benefit values. These
features are reflected when regulatory definitions are used to create a separate space for microinsurance underwriting (see tiering and graduation in Section 4.4): The Philippines use limited product definitions to create the space for MBA microinsurers.
In India the microinsurance definition is based on the same low-risk features but it is not used to create a second tier of insurers (for reasons explained in Section 4.4). These parameters of the definition are, however, used to create a second tier of intermediaries dedicated to microinsurance. South Africa has used these features to create a space for friendly societies and funeral insurance products. The microinsurance definitions proposed in a recently issued discussion paper on the future regulation of microinsurance explicitly seek to create a second tier of insurers and intermediaries with reduced regulation. 4.4.5. Market conduct regulation
The following drivers related to market conduct regulation emerge from the country experience:
Allowing multiple channels facilitates innovation and low-cost distribution: Section 4.3 highlighted the importance of innovative, non-traditional models for low-cost distribution channels a prerequisite for microinsurance development. When facilitative regulatory approaches (see Section 4.4.1) have accommodated such new models, they have supported innovation. In contrast exclusionary regulatory approaches limiting intermediation to specific and usually traditional models have undermined market development.
Country experience has shown that cross-selling with other financial services, such as those provided by banks or MFIs, facilitates market discovery and low-cost distribution. In the Philippines, India and Uganda, the MFI sector is a large distributor of microinsurance. This sector is virtually exclusive in Uganda. In general the growth of the microfinance sector has been a direct driver of the growth of microinsurance, primarily through compulsory credit life. Bancassurance is allowed in Colombia, the Philippines and South Africa.
In Uganda, restrictions on intermediation prohibit banks and MFIs from receiving a
commission when they intermediate insurance products to their clients. The result is that these channels are either not incentivised to distribute insurance or it results in
costly legal structuring to avoid regulation. This ultimately limits the value that the client may have received. It also undermines one of the few available distribution networks in the country that could be harnessed for microinsurance distribution. In India, distribution opportunities are limited because the definition of microinsurance agents (despite recently being broadened to include all non-profit entities) excludes key for-profit organisations with potential as distribution channels to low-income
clients. Such entities often have a broad customer base among the poor and in rural
areas that could be leveraged for low-cost insurance distribution. Furthermore, bancassurance is an important distribution channel for insurance in general, but also does not qualify for microinsurance agent status. Cross-selling with non-financial services is also an important way of creating (derived) demand for microinsurance. The insurance policy is sold with the underlying service (e.g. a funeral service) or product (e.g. a cellphone) that creates the demand for the insurance. The person who sells the insurance policy is therefore not an employee of a financial institution and would normally not be a registered insurance agent or broker. Whether the regulatory
system allows such intermediary models will shape the development of the market.
In countries where insurance distribution is limited to registered brokers/agents, such as Uganda, the scope for cross-selling with non-financial services to facilitate market development is limited. South African regulation does not limit intermediation to specific models but instead focuses on the functional requirements that any intermediary model should fulfil. This has supported the development of innovative models using, for example, clothing retailers and cellphones as distribution channels. In Colombia, alternative distribution is allowed as part of the direct sales and
insurance agencies categories of intermediation, the definitions of which are defined fairly broadly. Cooperative insurers are also allowed to use non-traditional
intermediation channels and subordinate regulation allows distribution via non79 traditional structures such as utility companies whose payment infrastructure can be used for premium collection. Regulations for microinsurance intermediation in India Microinsurance regime: In the quest to facilitate low-income market expansion in line with its development mandate and in light of the rural and social sector quotas placed on insurers, IRDA in 2005 issued a set of Microinsurance Regulations. These regulations define general and life microinsurance products according to minimum and maximum benefits,
minimum/maximum term of the policy and minimum/maximum age of entry, as well as certain simplicity requirements. For this category of products, the demarcation requirement
between life and non-life insurance is relaxed in that a composite microinsurance product may be provided as long as a life and non-life insurer respectively underwrite the life and non-life risks underlying the product. All sales of microinsurance products count towards insurers rural and social sector obligations. The regulations then create a specific category of microinsurance agents who may only distribute microinsurance products on behalf of registered insurers. Until recently such
agents were limited to NGOs, self-help groups and non-profit MFIs with a minimum of three
years experience working with low-income groups. In March 2008 the category was extended to all non-profit entities. Microinsurance agents are subject to lower training requirements and higher commission caps than traditional agents. They may also perform certain functions, such as the routing of premiums and claims through their books, not allowed for traditional agents. Each agent may only enter into a relationship with one life and one non-life insurer. Restricted space limits market expansion: Despite the concessions granted to microinsurance
agents, the impact of microinsurance regulations on market expansion has been
limited so far. This can partly be ascribed to the fact that the space opened up for microinsurance is relatively restricted: The concessions mostly relate to intermediation requirements and do not address the minimum capital constraint to the entry of dedicated micro-insurers; The definition of microinsurance agents, despite the recent adjustment, still excludes for-profit MFIs and rural banks, which are large potential aggregators of microinsurance clients; The fact that microinsurance agents may distribute only microinsurance products may
act as a disincentive for existing intermediaries to enter into this market;
The limit on the number of insurers that a microinsurance agent can work with has undermined their ability to offer the best combination of products to clients; and Commission capping, while at a higher level for microinsurance agents than for other agents, provides limited incentive for selling to such a low-premium market. Even though the microinsurance regulations, together with the quotas, have drawn attention of the market for microinsurance, and even though the relaxed training requirements and enhanced functions granted to microinsurance agents go some way in facilitating this category, the limited scope means the regulations have by and large not yet
become a vehicle for accelerated outreach to low-income clients. IRDA has therefore said it
is willing to adjust the regulations over time as the true market need is revealed. When enforcement capacity is limited, price controls may be counterproductive: Commission caps are typically motivated by consumer protection objectives. In practice, however, such caps are difficult to enforce. This leads to various forms of legal structuring to get around them rather than reducing the cost to the consumer. Commission caps also only control one aspect of the cost of the product rather than the total cost to the client. With the blurring of various institutions and intermediaries, it is also becoming increasingly difficult to distinguish between commission and other charges. With increasingly
complicated group structures that may extend beyond the jurisdiction of the supervisor, it
may be very difficult to enforce the caps. For example, international groups can make transfer payments within the group but outside the country. At the same time, realistic commission levels are required to incentivise the intermediation of low-premium products. Even though it may look like a high percentage, commissions on low-premium products may still amount to a small fee for the intermediary. In Uganda, South Africa and India caps are placed on the level of commission that may be paid to intermediaries for selling insurance policies, including microinsurance. Experience in
these countries shows that price limitations may be circumvented in various ways, such as loading the administration component of the premium, thereby undermining its intended effect while penalising compliant players. Furthermore the one successful insurance product in South Africa in the microinsurance market funeral insurance is also the only product exempted from commission caps. While this is not the only reason for its success, it has certainly contributed to formal players providing such microinsurance. The effect of market conduct regulation on transaction costs may distort intermediary models: Microinsurance, even more so than other insurance products, requires large
volumes to be sustainable. Market conduct regulation is a relatively new category of regulation aimed at regulating the intermediation process. It risks adding costs to every transaction, which undermines the scale benefits achieved by larger volumes. South Africa
and to a very limited extent the Philippines76 are the only sample countries where the insurance sales process (as opposed to the intermediary itself) is directly regulated. In the other sample countries, stipulations on who should register to intermediate insurance or what fit and proper requirements they should meet may apply. The way that products should be sold, the information to be provided in the sales process and the type of advice to
be provided to prospective clients are however generally not specified.
In South Africa the design of market conduct regulation, in the form of the Financial Advisory and Intermediary Services Act of 2002, has increased the cost of advice (as defined in the Act). This has had a major impact on the development of intermediary models in the microinsurance market. Essentially it has split the market into high-end, advice- based models and a low-end, tick-box models. Compulsion without disclosure and appropriate protection risks abuse: While there are risks to market development when market conduct regulation increases the cost of
intermediation, there are also risks of abuse when market conduct regulation is absent. This
Where agents or brokers are required to explain the nature and provisions of the contract to their clients, in particular the minimum disclosure requirements printed in the policy contract. It often provides the first point of contact with insurance for many consumers and, if applied properly, can act as a springboard for the development and distribution of additional products suitable for the low-income market. However, insufficient disclosure and limited incentives to ensure value to the client due to the compulsory nature of the transaction have undermined the value that this channel may offer and have also led to consumer abuse.
In South Africa credit life is the biggest microinsurance category next to funeral insurance. Concerns about consumer abuse and opaque selling practices in credit life insurance have, however, led to an enquiry into practices in the sector. This revealed several problems, including that premiums on compulsory credit life products are significantly higher than those of voluntary equivalents and very few people are aware that they have cover. These problems manifest in claims ratios of less than 10% in some cases, reflecting poor value to the consumer. In India and Uganda, the microinsurance market is dominated by compulsory credit life
insurance where the focus is still on the risk of the lender being insured rather than the
risk of the borrower (partly due to the unintended consequences of regulation as described in Section 3.5.4). The result is limited incentive to disclose this cover to the client or develop additional products and features to meet consumers needs. The extent to which credit life succeeds in triggering voluntary uptake of other insurance products also depends on the extent to which the credit provider is interested in crossselling insurance products to the clients. The Philippines is a good example of the growth of voluntary uptake off the back of credit life. This is driven by the fact that MFIs and MFI-MBAs which are sensitive to the needs of their clients started to develop new insurance products to ensure continued client loyalty.
4.4.6. Other regulation
Regulatory provisions other than those in the insurance regulatory framework can also have a far-reaching impact on the development of microinsurance markets. The country studies reveal the potential impact of tax laws, anti-money laundering controls and the regulation of national payment systems. Taxation can undermine the attractiveness and viability of microinsurance: Taxation may affect microinsurance through its impact on costs. Differentiated levels may also be biased for or against specific models or products. In the Philippines, insurers claim to be the most heavily taxed financial entities. All
insurers are subject to 35% corporate income tax (to be reduced to 30% in 2009). MBAs and cooperatives are exempted from such tax. In addition to the income tax, all life
insurance premiums are taxed at 5% and non-life insurance premiums are subject to 12% VAT. Documentary stamp taxes are also applied. In India, insurance agents have been subject to a 12.36% service tax since 2001. In practice, however, it is passed to the client by adding it to the premium. In South Africa, friendly societies will be encouraged to move to the proposed new microinsurance space that offers them several benefits. However, this will not happen unless the preferential tax treatment of friendly societies is not removed or at least
mirrored under the new microinsurance regime.
Anti-money laundering controls may create barriers and increase transaction costs: Microinsurance typically presents low money laundering or financing of terrorism risk. As a financial service, microinsurance may, however, be subjected to a countrys general antimoney laundering regime without recognition of its potential low-risk profile. This increases transaction costs and may create barriers to the take-up of insurance. In India, microinsurance agents have expressed concern about the difficulties of obtaining know-your-client (KYC) documents from prospective clients in rural areas, including the electoral identity card, ration card or electricity bill required as proof of
residential address.
In some jurisdictions, regulators recognise the low anti-money laundering/combating the financing of terrorism (AML/CFT) risk posed by insurance and implement measures that ensure that AML/CFT legislation does not hamper insurance market development. This is the case in the Philippines. Though insurance is subject to the Anti-money Laundering Act of 2001, the Insurance Commission Circular Letter No. 15 of 2007 lifted or reduced many of the KYC requirements for low-value insurance contracts. In South Africa, life insurance is exempted from the AML duty to identify clients and keep records. In Colombia, KYC stipulations until recently required a face-to-face interview
with a prospective customer as well as the filling out of a detailed form, presenting a
barrier to insurance uptake. This stipulation was, however, changed in June 2008 to exempt insurance from KYC requirements if: the insured value is equal to or lesser than 135 times the minimum monthly wage (about US$35 000) and if the maximum bimonthly premium does not exceed one twelfth of the minimum monthly wage (amounting to about US$21). This recent regulatory development recognised the low money laundering risk posed by insurance and especially insurance targeted at the lowincome market.
Efficient and low-cost payment systems are an important facilitator of microinsurance development: The structure and efficiency of the payment system is usually determined by a combination of bank and dedicated payment system regulation but may also involve other legislation such as that governing the telecommunications industry. It is mostly not within the direct control of the insurance regulator, but nonetheless has an important impact on the development of the insurance market. Microinsurance agents must enter into a deed of agreement with one life and/or one nonlife insurer. Until recently such agents were limited to NGOs, self-help groups and non- profit
MFIs with a minimum of three years experience in working with low-income groups. In
March 2008 the category was extended to all non-profit entities78. For-profit entities, such as rural banks and for-profit MFIs remain excluded (they are classified as corporate agents). Agent categories other than microinsurance agents may sell microinsurance but do not benefit from the concessions allowed for the microinsurance agents. However, a microinsurance agent cannot distribute any product other than a microinsurance product. A lack of co-ordination may unintentionally undermine microinsurance development: The development of the microinsurance market is influenced not only by insurance regulation
but also by the policies and regulations of several other regulators. Often the best intentions of the insurance regulator can be undone by seemingly unrelated regulations passed by a different regulator, and the development of the microinsurance market is hampered by a failure to co-ordinate. The country studies revealed a number of instances of co- ordination failure: In the Philippines insufficient supervision of pre-need companies has led to several
failures of these entities, increasing the distrust of insurance in general among the lowincome population. For this reason, there are pending proposals in the Congress that seek to incorporate pre-need plans under the oversight of the Insurance Commission.
In India, a lack of co-ordination between the RBI and IRDA on the receipts of premiums
by intermediaries (that is defined as deposit-taking by the RBI) prevents insurance intermediaries from bulking premiums on their books. Each premium must be paid over individually to avoid falling foul of the prohibition on deposit-taking under RBI regulation for entities that do not have a banking licence. This was never intended to hamper the premium collection activities of non-banks, but has been the unintended consequence. This restriction was lifted for microinsurance agents, but given the limitations of the definition of such agents, many potential low-income intermediaries are not benefiting from this exemption.
Co-ordination failure also characterises the provision of insurance by cooperatives in
South Africa. The Cooperatives Act that came into effect in 2007 was drafted without sufficient engagement with the National Treasury, which is responsible for insurance policy and regulation. As a result, the provisions for cooperatives to provide insurance under the Cooperatives Act require them to register as insurers. This, however, under the Insurance Acts, requires that entities be public companies. In effect, cooperatives would therefore need to sacrifice their cooperative form should they wish to provide insurance. Whereas the intent was (i) to create a new institutional form for communitybased
insurers and (ii) to reduce the burden of functional regulation on these
community-based insurers, both of these objectives failed as there was a lack of cooperation between the Department of Trade and Industry, which developed the Cooperatives Act, and the Treasury which is responsible for insurance regulation. A significant co-ordination challenge also arises when a government wishes to formalise a mainly informal sector of insurance providers (e.g. cooperatives in Philippines or funeral parlour insurers in South Africa). Blanket law enforcement is largely beyond the capacity of the insurance regulator. Dealing with recalcitrant operators, even if a conducive regulatory environment has been created for their formalisation, usually requires cooperation
between a number of government departments, including criminal law enforcement,
revenue authority, local authorities and health authorities (where funeral insurance is involved). South Africa faces this challenge as it seeks to clamp down on its large informal funeral parlour market. 4.4.7. Impacts related to supervision and enforcement A high regulatory burden combined with limited enforcement capacity incentivises informality: As noted in Section 4.4.3, when high capital or other regulatory barriers that make it difficult for players to enter the formal market are combined with limited enforcement capacity it incentivises the development of an informal market.
In South Africa, the limited formalisation options for member-based entities as well as
the limited capacity of the regulator have spawned a large informal market. There are estimated to be between 80 000 and 100 000 burial societies with only a few registered as friendly societies. Furthermore, a large proportion of funeral parlours are believed to offer insurance products not underwritten by regulated insurers. In the Philippines, limited enforcement capacity has resulted in the development of an informal cooperative insurance sector, despite legislation that has created the option for formalisation of these entities as cooperative insurers.
Microinsurance often evolves in regulatory and enforcement gaps: The natural
consequence of limited capacity in the sample countries is that some parts of the markets (particularly higher-risk segments) receive more regulatory attention than others. Reduced or absent regulation and supervision have (unintentionally) given some components of the microinsurance market the space to evolve. This has allowed the development of new models, but has in some cases also led to abuse. Regulatory forbearance: Examples include burial societies in South Africa or informal risk-pooling societies (damayan funds) in the Philippines that do not provide guaranteed benefits and are therefore regarded as outside the scope of insurance regulation (as it is
not deemed to constitute insurance). Burial societies make up an estimated 60% of the total market (formal and informal) for funeral cover. Some of the largest burial societies have evolved to the point where they are able to formalise their activities as friendly society insurers. In the same way, supervisory forbearance means that entities technically incorporated under regulation are not in practice supervised. This is the case when burial societies act as intermediaries selling formal insurers products to their members in South Africa. Though they should technically fall under the ambit of intermediation regulation, their
sheer number and perceived low risk of consumer abuse (as they are small membermanaged organisations) have prompted the supervisor to consider them as client collectives rather than as intermediaries, thereby exempting them from intermediation supervision. Most burial societies will not be able to comply with the FAIS regulation and the supervisor does not have the capacity to enforce this.
In India, many MFIs still conduct self-insurance without being supervised for insurance purposes. Ironically, it has been the market, through MFI ratings systems, that has put a damper on this practice, rather than a regulatory clampdown. The negative experiences of some of the focus group respondents with pre-need companies in the Philippines have undermined their trust in the insurance sector. It is
also estimated that at least half of the 22 000 cooperatives provide some kind of inhouse insurance, once again outside the reach of insurance supervision. 4.5. Impact of macro-economic conditions and infrastructure The development of microinsurance is also affected by the general macroeconomic conditions in a particular country. The following examples from the country studies are worth noting: Growth stimulates insurance take-up: Economic growth can lead to increased income levels
that in turn can stimulate insurance activity. In India the recent strong growth in the insurance sector is correlated to high levels of economic growth and increased incomes. Privatisation/liberalisation may increase competition: Insurance growth in India is also
driven by the recent privatisation of the insurance industry. Since 1999 the Indian insurance sector has grown from a single state-owned life insurance company and a single stateowned general insurance company (with four subsidiaries) to 15 life insurance companies and 12 general insurance companies. This has led to increased competition that has placed
downward pressure on prices and has stimulated innovation and new products. The effect of
liberalisation on the insurance industry can also be seen in Colombia, where the financial sector liberalisation efforts of the early 1990s increased competition to such an extent that insurers and banks started to target the lower-income end of the market in search of expansion. It must be noted that privatisation and liberalisation do not necessarily lead to increased financial inclusion as it depends on the broader economic context and the manner in which liberalisation is managed.
High levels of inflation may undermine the insurance value proposition: When policies are
not designed to cope with this, high levels of inflation will undermine their value proposition. This was the case when Uganda experienced hyperinflation in the 1980s. The destruction of the value of policies, combined with the devaluation of the currency, undermined trust in the insurance industry, leading to very low levels of uptake of insurance. In the Philippines, the failure of pre-need companies to manage the impact of high inflation on school fees has led to several company failures in this market. Apart from the direct loss to policyholders, this has greatly damaged the reputation of the general insurance industry.
Crises destroy trust but may lead to better regulation and increased competition: The financial sector crisis in Colombia at the end of the 1990s illustrates that a financial crisis can also be a positive force in shaping the microinsurance market by forcing a regulatory cleanup and the strengthening of cooperative regulation. Strong physical, social and commercial infrastructure aid microinsurance development Physical infrastructure, such as roads, mobile phone network coverage, the availability of retailer networks, a widespread post office or post-bank network and the general level
of urbanisation all provide opportunities for insurance distribution. The sample countries
exhibit varying degrees of urbanisation, but with the exception of the Philippines more than 40% of the population in all the countries live in rural areas. As payment system and other financial sector infrastructure tend to be centred in urban areas, the level of urbanisation is an important indicator of the likely distribution challenges for insurance providers. This is particularly illustrated in Uganda, where insurance evolution is made all the more difficult by the fact that the overwhelming majority of the population live in rural areas where the physical infrastructure is undeveloped.
Non-insurance financial infrastructure plays an important role in enabling insurance
transactions. This includes the banking sector footprint and the efficiency of the payment system, as well as the microfinance sector footprint. In India and Uganda premium collection in cash increases the cost of distribution. The Opportunity Banking Policy in Colombia is making it possible to harness small traders for premium collection through its non-bank correspondent initiative. Alternative distribution through the payment system of utility companies has also proven fruitful. In South Africa the extensive banking infrastructure, widespread POS device network at retailer chains and deep reach of mobile phones is opening up innovative distribution channels. Alternative
distribution infrastructure in turn creates opportunities for microinsurance expansion.
Social infrastructure can also determine microinsurance market development. The level of cohesion within communities influences the spread of mutual organisations. In most of the sample countries, such mutual organisations play an important role: either in the spontaneous development of an informal insurance market (for example burial societies in South Africa), or in the formalisation of microinsurance (e.g. MBAs in the Philippines or the cooperative insurers in Colombia). 5. Approach to carving out a microinsurance space
This chapter details how a regulatory space for the provision of microinsurance can be
carved out, based on the underlying risk of providing microinsurance. While this study clearly illustrates that the creation of specific microinsurance category in regulation is not a prerequisite for the development of a microinsurance market, most of the countries in this study have migrated to some form of microinsurance definition in their regulation to foster market development. The approach is illustrated in Figure 16. The objective is to limit risk in a step-by- step approach that will allow supervisors with limited capacity to effectively supervise the microinsurance market.
Microinsurance can be defined to reduce risk: Evidence from the sample countries suggests that there is a fair amount of consistency in the nature of microinsurance products that have emerged and that the features of these products tend to limit the underwriting risk of these products (see Section 4.1). It is, therefore, possible to use these features to develop a set of regulatory definitions for microinsurance that will limit the risk. That these features have Width = Risk All potential insurance products and providers Technical risk: Reduce risk by narrowing product definition. Most MI products can be defined to ensure
lower risk while still meeting needs of the poor 1. Defined set of lower-risk microinsurance products 2. Limitation on those who may provide or intermediate microinsurance 3. MI market supervised within supervisory capacity
Operational risk: Reduce risk by limiting providers to those who are capable of managing the risks. Because of lower-risk product definitions, the regulator can allow smaller and less sophisticated entities to underwrite and intermediate these products Supervisory risk: Reduce risk by limiting market to those that can be
supervised within supervisory capacity constraints. Supervisory
capacity ultimately sets constraints the market that can be effectively supervised. Having narrowed down the risk in 1 and 2 makes it easier for the supervisor to manage risk within capacity evolved without explicit regulatory restriction suggests that restricting products in this way should still allow insurers to meet the needs of low-income consumers. Limited product definition reduces operational risk: The limited underwriting risk resulting from the restricted product definition reduces the operational risk of managing a portfolio of these products. This allows them to be managed in a simplified manner and with lower capacity. Managing the risk of a portfolio of short-term products is, for example, a simpler
task than managing the risk of a whole-life portfolio. As a result, smaller entities may be able to underwrite such products. However, it must be noted that some level of restriction on entry will remain as minimum standards of risk management would need to be met by the potential insurers.
Reduced underwriting and operational risks in turn reduces supervisory risk: In the same way that the reduced operational and underwriting risk allowed for simpler management, it also allows for simplified regulation and supervision. As result, the supervisor may be able to allow a larger number of such entities to enter the market as these require less capacity to
supervise.
This is not a simple solution and will require careful, risk-sensitive design to implement effectively. Some of the issues and potential responses are highlighted below: There are other risks that need to be monitored, such as the risk from a geographically concentrated portfolio for microinsurers operating in a specific region. This could be addressed by reinsurance. Institutional supervision of specific types of entities may fall beyond the mandate of the insurance supervisor or its governing ministry (e.g. cooperatives are in some cases regulated by the ministry of agriculture or ministry of trade and industry). As a result, the insurance supervisor does not always have the mandate to ensure that these entities
are sufficiently regulated from an institutional and governance point of view. One way to
deal with this is to include some aspects of institutional regulation in the insurance regulation (for example setting minimum governance requirements that exceed that required by the basic institutional regulation). Product regulation may introduce its own set of capacity requirements and problems. Managing and evaluating the basic set of microinsurance products allowed may require a fair amount of capacity. Capacity constraints may frustrate market development by, for example, delaying product approvals. The system should be carefully defined to avoid this. File-and-use processes can avoid bottlenecks, and industry associations can
be tasked with developing the product definitions, which can then be ratified by the supervisor. The proposed new regulatory regime for microinsurance in South Africa
Background and rationale: South Africa is in the process of designing a dedicated microinsurance regulatory regime. The motivation for this policy move, driven by the National Treasury, has been two-fold: Need for an access-facilitating regulatory framework: On the one hand, government is committed under the Financial Sector Charter to remove any regulatory obstacles that may undermine industrys efforts to reach its Charter targets. It has also come to Treasurys attention that the institutional form for formal insurance provision is
currently constrained and that this may prevent some mutual-type organisations (most
notably burial societies registered under the Friendly Societies Act in South Africa) currently providing informal insurance cover from formalising. Concerns about consumer abuse: On the other hand, there have been numerous reports of consumer abuse in the low-income insurance market. Many funeral service providers are alleged to provide insurance illegally (i.e. without an insurance licence) and not to practice sound risk management or benefit pay-out practices, to the detriment of policyholders. Consumer abuse has also been reported in the credit life industry, where practices are often opaque, premiums as extremely high and many policyholders do not
even know that they are covered. These concerns have prompted Treasury to reconsider the regulatory framework with a view to extending the regulatory reach and encouraging formalisation. Regulation tailored to risk of microinsurance: The route taken for creating a dedicated
microinsurance framework has been to tailor regulation to the risk associated with microinsurance provision. This is in line with the regulators risk-based approach and ensures that no regulatory concessions are passed that will lead to unsound insurance practices. Definition to limit risk: The first step in creating such a framework is to define
microinsurance as a product category for regulatory purposes. This definition is crafted so as
to limit the product space to those products exhibiting lower risk characteristics. In the South African context, the proposed definition to limit both the associated prudential and the market conduct risk is: Benefits capped at +/- $7,000 Term of less than 12 months Limited to risk-only Allowing both life and non-life underwriting in a single entity Simple terms and conditions Not all low-income market products will qualify as microinsurance: Note that there will still be products of relevance to the low-income market, for example weather-related
agricultural insurance, which will fall outside of the definition of microinsurance for
regulatory purposes, based on their risk characteristics. These products can still be provided to the low-income market, but only by conventional insurers. Proposed dedicated regulatory framework for microinsurance: Once such a definition is established, regulation can be tailored to the microinsurance product category. A dedicated microinsurance licence is proposed to facilitate entry and competition, independent of 90 institutional form, and that will entail a tailored prudential as well as market conduct regime.
Details of the proposed regulatory regime: The following tailored regulatory framework has been proposed for microinsurance in South Africa. In defining these regulatory parameters, proposed concessions were tested on actuarial grounds, as well as with the regulator and industry role players: Underwriting requirements: Limited to microinsurance products as defined Upfront capital of +/- $0.5m, vs current: $1.5m life, $750k non-life Reserving based on simplified standard model Reduced organisational capabilities Minimum set of corporate governance requirements Registration open to public companies, friendly societies and cooperatives
Restricted investments of assets to limit risk Market conduct requirements:
Similar regime to current funeral insurance intermediaries: Reduced minimum skills level in favour of training requirements No advice required (but incentivised through commissions) Simplified and clear language disclosure Uncapped commissions Reporting to regulator for monitoring Regulatory review process underway. These proposals are contained in a discussion paper released by National Treasury for public comment during 2008. This is the first step towards the implementation of a dedicated regulatory framework for microinsurance.
6. Emerging guidelines for microinsurance policy, regulation and supervision
This section presents a set of guidelines for policy, regulation and supervision based on the cross-cutting findings presented in the preceding sections. The goal, purpose and principles such guidelines need to adhere to are first outlined, followed by an outline of the general regulatory approach underlining the proposed guidelines. 6.1. Goal, purpose and objectives The goal of these guidelines, which are based on the cross-country lessons emerging from the country findings, is to assist insurance policymakers, regulators and supervisors
(collectively referred to as regulators if not specifically distinguished) to design policy and
regulations and supervise compliance in a manner that will facilitate the growth of a microinsurance market in their countries. Microinsurance is defined as insurance that is accessible to the low-income population, potentially provided by a variety of different providers and managed in accordance with generally accepted insurance practices. This means that it should be funded by premiums and managed according to generally accepted risk-management principles. It therefore excludes social welfare as well as emergency assistance provided by governments. The purpose of growing microinsurance provision is to extend financial inclusion in the
insurance domain. The objective of financial inclusion is that individual consumers, particularly low-income consumers currently excluded from using formal financial sector services, must be able to access and on a sustainable basis use financial services that are appropriate to their needs and provided by registered financial service providers. Insurance provides clients with a market-based means to mitigate material risks that they face. Microinsurance must do the same for low-income consumers. Although informal community-based risk pooling mechanisms (those not registered with the insurance supervisor to provide insurance to the public) provide low-income clients with a risk mitigation option and need not necessarily be formalised if they present low risk, the
approach of these guidelines is to grow the formal microinsurance market. This can be done by (i) formalising existing informal providers of insurance (referred to in these guidelines as
formalisation), (ii) encouraging existing commercial insurers to reach out to lower market segments (referred to in these guidelines as outreach), or (iii) encouraging new entrants, both domestic and foreign, that are particularly focused on the low-income market. To develop microinsurance markets, regulators should pursue the following general objectives: Facilitate both outreach and formalisation, ensuring a level playing field for big and small players where they seek to serve the same market;
Promote products, providers and distribution channels that will trigger the favourable introduction of low-income clients to insurance and its benefits;
Adopt risk-based regulation by tailoring regulation to the distinctive risks posed by microinsurance products and intermediation; Minimise the regulatory burden on underwriting and intermediation. 6.2. Guidelines relating to policy on microinsurance and financial inclusion 6.2.1. Guideline 1: Take active steps to develop a microinsurance market Explanatory notes:
In most countries, developing a microinsurance market requires the extension of insurance
provision to client groups (notably low-income client groups) that are not currently served by formal insurers and with limited exposure to any other formal financial products. Insurers either consider these client groups unprofitable (or less profitable than other opportunities) or have not investigated serving these markets. As a result of regulatory drift or inadvertent regulation, insurers, both formal and informal, may also be subject to a high regulatory burden that imposes regulatory costs that make it unprofitable to offer low- premium products.
On the other hand low-income clients pose distinctive challenges that need to be overcome before they will make a voluntary purchase of an insurance product. Among others, low
knowledge and awareness levels mean that few low-income consumers are aware of the potential benefits of insurance. Furthermore, the high discount rate applied by low-income people causes them to place a low value on future cash payments, undermining the sales of life policies with future cash benefits. Low-income clients also show a disproportionately high distrust of insurers and insurance, requiring particular attention to product design, the sales process and claims payment. Yet poor people are much more vulnerable to the impact
of debilitating life events, asset loss and health setbacks. Many households that have clawed
their way out of abject poverty have been cast back into the most severe poverty through an event entirely insurable within their means. To overcome these behavioural challenges, microinsurance markets, more often than not, have to be triggered or made and will not arise through natural market dynamics. Guidance notes: (1) Confer a market development mandate on regulators on top of their normal supervisory mandate. This enables regulators to initiate market development actions without falling
foul of their statutory mandate. At the least, regulators should be required to consider and minimise the negative impact of regulation on market development.
(2) Understand the existing, as well as the potential, market, i.e. both the served and unserved sections of the population. (3) Consider both formal and informal providers. Informal products and providers usually indicate needs in the low-income market segment that are not being met by the formal market and reveal regulatory and other obstacles to formalising their operations. (4) Place information, especially representative market surveys about the extent and characteristics of unserved market segments, within the public domain. (5) Make a public commitment to the growth of microinsurance. Create general public
awareness about the potential for, and ways to secure, microinsurance. 93
(6) Allow space for market experimentation while monitoring risk to the market and consumers. Monitor general market development and respond with appropriate policy statements and regulatory adjustments. 6.2.2. Guideline 2: Adopt a policy on microinsurance as part of the broader goal of financial inclusion Explanatory notes: Public policy expresses the intent of government. Public and private sector actors alike take
their cue from the declared policy of the government in power. Explicit policy objectives
provide market players with the necessary security and guidance to invest with confidence when the regulatory framework may still be uncertain or in the process of development. This is often the case for microinsurance. Public officials, on the other hand, are sanctioned by public policy to spend public resources on microinsurance development initiatives. The policy formulation process also forces regulators to align microinsurance policy with other government policy objectives. These objectives can be supportive, such as a general policy to promote financial inclusion, or conflicting, such as imposing specific taxes on
financial transactions or even publicly funded social protection measures that undermine the provision of market-based risk mitigation products.
The relationship between microinsurance policy and the governments general approach to financial inclusion is particularly important. Experience shows that the development of microcredit and microinsurance are mutually supportive. While credit insurance assists debtors to discharge their debts in time of need or death, it also mitigates major risks for the creditor, thereby making the extension of credit more viable. At the same time the microcredit (or microfinance) sales process provides a ready, cost effective and, in the case of community-based microfinance institutions, a client-orientated channel to both develop
and market additional microinsurance products that meet the needs of low- income clients.
Similarly micro-savings, transaction banking services directed at low-income clients and money transfer services facilitate the intermediation of microinsurance. Guidance notes: (1) Formulate a microinsurance policy that is appropriate to the circumstances of the country. Avoid the adoption of template solutions from other countries unless these have been shown to meet the needs and resources of local market conditions. (2) Consult formal and informal market players, as well as other relevant government
departments. These may include other financial sector regulators, the revenue authority,
and institutional regulators (those responsible for the regulation and supervision of legal persons such as companies and cooperatives). (3) Locate the microinsurance policy within the governments broader approach to financial inclusion, to the extent that this exists. Co-ordinate policy initiatives, supervision and law enforcement with other regulators responsible for the promotion of financial inclusion. (4) Base the policy on sound information about the market and its evolution. Leave enough scope for the regulator to respond to market changes and demand-side challenges and to facilitate innovation.
94
(5) If a substantial informal market exists, the policy should facilitate both outreach by existing registered insurers and formalisation of informal insurers. 6.3. Guidelines relating to prudential regulation 6.3.1. Guideline 3: Define a microinsurance product category Explanatory notes: Microinsurance products require small premiums to be affordable to low-income clients. Profitable microinsurance operations therefore depend on least-cost underwriting and distribution80.
In jurisdictions where the overall insurance regulatory burden both prudential and market
conduct is low, the likelihood of achieving least-cost microinsurance operations within the existing regulatory framework is good. The development of a microinsurance market may then require limited or no regulatory intervention, but will still require active government encouragement. However, in jurisdictions where existing insurance regulation imposes a higher compliance burden or is more restrictive, it is less likely that least-cost underwriting and distribution can be achieved within the existing regulatory framework. In these jurisdictions a reduced compliance burden both prudential and market conduct - may be
necessary to trigger or accelerate microinsurance development. Such a reduced compliance
burden can be justified only on the basis of reduced risk. Invariably this requires the regulatory definition of a microinsurance product category that entails systematically lower risk. Microinsurance products tend to entail lower risk: (i) benefit values are lower, (ii) policy terms tend to be shorter often one year or less, (iii) the risk events covered are relatively predictable and the financial impact of each event relatively small, and (iv) the terms of the policy tend to be simple, avoiding complex underwriting processes. Most microinsurance
policies are sold on a group basis and do not require individual underwriting. Although not
all policies sold to low-income clients answer to these characteristics, most do. But using these parameters, a microinsurance definition can be crafted that entails systematically lower risk. The income level of the prospective policyholder is not considered a viable element of a microinsurance definition since the verification of individual or household income is too expensive and often of suspect integrity. The actual income levels of the policyholders will become relevant only if the policy premiums are subsidised by the state to a significant
extent. Under these circumstances governments will normally require more precise targeting of state support to the poorest sections of the community. The key parameters for a national microinsurance definition are the policy contract duration,
benefit cut-off level and types of risk events that are included. Policy contract duration has a significant impact on the underwriting risk of a particular product, with longer- term policies being more risky than short-term policies. The benefit cut-off level, or maximum value to be written under a microinsurance policy, will differ from country to country. In setting this maximum benefit, policymakers must take care not to set the level too low. Particularly in
countries where most of the population is unserved by insurance, the maximum benefit should be set as high as possible, constrained only by the inherent risk posed by the benefit size and the need for a lower compliance burden. The types of risk events to be included in the microinsurance product category should be determined by a number of factors, notably (i) the key risks low-income households face, (ii)
how the relevant risks are generally managed or underwritten by the industry, and (iii) the market-making and innovation dynamics prevalent in the particular insurance market. Both life and non-life risk events threaten low-income households and both should be included in the microinsurance definition. Life and non-life microinsurance policies tend to be
underwritten on the same basis (on a group, short-term basis) and thus justify similar treatment. From a market-making perspective, experience shows that most microinsurance
policies are sold on the back of other microfinance services or linked to the sale of a product or service, for example a mobile phone or a future funeral. To facilitate market making, these policies (such as credit life, funeral insurance and insurance for mobile phones) should be included in the microinsurance definition. Many low-income communities use informal risk-pooling schemes to mitigate risks, especially to cover funeral expenses. As long as these schemes do not provide contractually
guaranteed benefits, they fall outside the definition of insurance and thus also beyond the
ambit of microinsurance. Unless these schemes are subject to large-scale abuse or fraudulent practices, they should remain beyond the scope of insurance regulation. The limited supervisory capacity should instead be focused on insurance proper. Guidance notes (1) Determine the extent to which the current insurance regulatory burden inhibits the underwriting and/or distribution of insurance products that are appropriate for the lowincome market segment. This includes the extent of informal insurance provision and obstacles to the formalisation of informal providers.
(2) If the regulatory burden inhibits the growth of microinsurance (and cannot be reduced across the board), define a microinsurance product category with systematically lower risk that will justify reduced prudential and market-conduct regulation. (3) Define the microinsurance product category as wide as possible (in terms of both risk
events covered as well as maximum benefit levels) to enable maximum extension of insurance penetration and integration into the rest of the insurance market. Provide an easy mechanism to adjust benefit levels to keep track with inflation and market changes. (4) Restrict the contract term of microinsurance policies, for example to twelve months. The actual term should be set in line with industry practices and client needs.
(5) Set requirements to ensure simplicity of terms and easy communication thereof in the languages used by low-income clients. 6.3.2. Guideline 4: Tailor regulation to the risk character of microinsurance Explanatory notes: Establishing a microinsurance product category with lower risk (refer guideline 3) allows the regulator to tailor both prudential and market-conduct regulatory requirements to allow for lower-cost underwriting and distribution targeted at the low-income market. While a lower compliance burden is essential in a number of jurisdictions to ensure the viability of
microinsurance operations, the failure of such operations due to inadequate regulation, e.g.
inadequate solvency requirements, will undermine the growth of a microinsurance market. A balance needs to be struck between a necessary reduction in the compliance burden and the maintenance of sufficient standards to protect clients and maintain trust in the insurance industry. Regulators must consider tailored requirements, commensurate to the risks covered, complexity and size of proposed microinsurance operations, in the following areas: Capital adequacy, solvency and technical provisions; Prescribed standards on investment activities; Prescribed risk-management systems;
Prescribed underwriting systems and processes, including the extent and frequency of actuarial certification;
Demarcation between life and non-life lines of business, especially the extent to which insurers can underwrite both life and non-life policies within the microinsurance product category; Market-conduct regulation, including commission capping (see guideline 8 below); Regulators can reduce the regulatory burden in one or more of these areas, depending on their existing regulatory framework. Generally jurisdictions follow one of two approaches. Option 1 is to provide exemptions from existing obligations for a microinsurance line of
business. This is often chosen if the existing legislation confers sufficient powers on the regulator to promulgate exemptions or wide-ranging subordinate legislation (removing the need to approach the Parliament or Congress to pass amending legislation), Existing insurers or new insurers able to comply with the existing entry requirements are then able to offer microinsurance products under the reduced regime. This would typically include marketconduct concessions, for example exempting the microinsurance product lines from commission caps applicable to other lines of business, or allowing more and cheaper distribution channels to be used for microinsurance sales. The limitation of option 1 is that it
tends to limit the universe of microinsurance providers to insurers that are already licensed or new insurers who can comply with often onerous entry requirements. Option 2 is to create a second tier of insurance licence with entry and other regulatory requirements tailored to the provision of microinsurance (referred to as a microinsurance licence). This usually requires more extensive regulatory intervention than option 1, and also provides more scope than option 1 for regulatory intervention to promote microinsurance. Tailored capital, solvency and investment requirements can be stipulated to facilitate the entry of smaller institutions wishing to participate in this market. The regulator can prescribe
risk management and underwriting systems that are less costly and within the capacity of smaller operators. Moreover, since life and non-life microinsurance business is often underwritten on the same short-term basis, and because single channel distribution reduces cost and promotes positive insurance discovery, some jurisdictions are moving towards the removal of the strict demarcation between life and non-life business in the microinsurance sphere. The same provider is then allowed to underwrite both life and non-life microinsurance policies. Guidance notes:
(1) Consider the specific regulatory provisions (as opposed to the overall regulatory burden
refer Guideline 3(1)) that restrict the growth of microinsurance provision. (2) Decide whether appropriate exemptions to the key provisions will be sufficient to deal with the material restrictions or whether there is a need to create a new or second tier of regulation that provides specifically for microinsurance. (3) Design the microinsurance regulatory tier to be attractive to both existing registered insurers and potential new entrants, setting the entry requirements as low as is feasible, given the microinsurance risk profile, to facilitate new entry. (4) Develop risk-proportionate rules for microinsurance providers that are reflective of the
limited business risk and will enable the participation of smaller players that do not have the capacity to comply with one-size-fits-all regimes.
(5) Consider the need, within the microinsurance business line and if applicable to the jurisdiction, to maintain the strict demarcation between life and non-life insurers. If possible, allow a microinsurance licence holder to underwrite both life and non-life business. 6.3.3. Guideline 5: Allow microinsurance underwriting by multiple entities Explanatory notes: In developed countries many of the older insurance companies started out as mutuals, pooling resources to mitigate the risks of members (often low-income at the time). As these
institutions grew, the sophistication of the regulatory framework grew with them. Over time many of them converted into companies with shareholders rather than member- based mutuals. In low-income communities this process is repeating itself. Where this is part of the social structure of the country, member-based mutual-type institutions tend to fare better than traditional insurers in offering microinsurance, either through in-house schemes or as intermediaries for registered insurers. This is built on high levels of trust among members as opposed to the general absence of trust in commercial companies that seems to prevail in most developing countries.
This time, however, the new member-based institutions must make their way within an already sophisticated regulatory framework that imposes high compliance barriers. Existing regulation often makes it too onerous for these community-based mutuals to register as
formal insurers. Yet, most member-based institutions who underwrite their own policies rather than obtaining underwriting from registered insurers, will benefit from even limited levels of insurance supervision since many of these in-house schemes are unsustainable. Some of the most successful microinsurance operations - run by large registered insurers are those of secondary cooperatives, or insurers owned by primary cooperatives. They are
able to leverage the networks and member-bases of their owner cooperatives for costeffective distribution. In a similar way, member-based microfinance institutions use their 98 networks and detailed client knowledge to develop and sell some of the most innovative microinsurance products around.
The primary weakness of member-based institutions tends to lie in weak corporate governance and inadequate risk-management practices (for guidance on the latter, refer guideline 4(4) above). Corporate governance regulation is normally contained in institutional regulation, such as a companies act or cooperatives act, or in regulations issued by the institutional supervisors (as opposed to the functional supervisor responsible for insurance).
Guidance notes:
(1) Allow multiple legal forms to underwrite microinsurance. This must include not only share capital companies (stock corporations) or other legal forms appropriate for large commercial insurers, but also cooperatives and other mutual-type or member- based legal forms more suitable to smaller and community-based insurance operations. (2) Ensure that institutions that underwrite the same products are subject to the same regulatory requirements. This will ensure a level playing field conducive to a more competitive environment. This may require co-ordination with other government supervisors where the functional (insurance) supervision of the different legal forms falls
under different supervisors.
(3) Ensure that all institutions underwriting microinsurance are subject to corporate governance, accounting and public disclosure standards that are adequate to ensure compliance with the applicable insurance regulations. Where the standards contained in the current regulation of the different legal forms are inadequate, the necessary standards can be included in insurance regulation. However, note that microinsurance programmes have unique characteristics, which imply that they may not fit into traditional methods of accounting (IAIS, 2007b). According to the IAIS (2007b, par. 197): This does not preclude the necessity of well considered methods for determining current and projected values of assets, liabilities, income and expense. Appropriate
disclosures should be considered in the plan of operations. Regulators should consider the possibility of combining their regulatory approaches with other forms of general
purpose accounting, especially those simplified methods permitted for small and medium size enterprises in their jurisdictions. Generally, the purpose of the accounts should be a conservative and prudent presentation with a primary focus on policyholder protection. (4) Enable all microinsurance providers to access reinsurance. 6.3.4. Guideline 6: Provide a path for formalisation Explanatory notes:
Many countries have a high incidence of informal insurance provision, as opposed to informal risk pooling. These unlicensed providers have normally emerged in response to real
needs for risk mitigation within low-income communities. They also enjoy the trust of low income clients. Although they serve a valuable social and economic function, informal operations may be the source of consumer abuse and operations may fail due to inadequate risk management. Formalising these operations is in the public interest. However, the limited resources of insurance supervisors usually make this difficult to achieve. 99
Experience shows that the best way forward is to define a clear evolution path whereby
informal institutions can gradually and realistically meet the minimum regulatory requirements, including minimum capital requirements. Supervisors will in all likelihood also have to adopt a more entrepreneurial engagement with the informal sector to aid them along the way to formalisation or co-ordinate with other government functions tasked to do so. This may include the extension of amnesties or grace periods, capacity building support, including training of owners and managers, triggering consolidation activity or partnering informal operators with formal underwriters. Experience has shown that market-based organisations, especially microfinance rating
agencies (which tend to reduce the ratings of microfinance institutions with self- insured
insurance portfolios) and dedicated microinsurance support institutions can play a major role in formalising informal insurance operations. Throughout the formalisation process, the supervisor must be careful not to overreach its capacity or make idle threats. Both of these will undermine its credibility and thus the commitment of informal operators to regularise their operations. Guidance notes: (1) Define an evolutionary path whereby informal insurers that have the potential to
become registered entities for the delivery of microinsurance (refer Guideline 4) can formalise their operations. Such a regulatory framework for formalisation can include the following features: Allowing new institutional forms more appropriate for the informal providers operations to underwrite insurance (see Guideline 5);
Provide a tiered minimum capital and solvency structure, whereby insurers are also allowed to graduate to the minimum capital requirements over time at a prescribed rate. This will also help to avoid unintended regulatory drift; Mandatory underwriting of all or certain lines of business by larger insurers or reinsurers coupled with capacity building requirements pending the commencement of own underwriting operations.
(2) Take appropriate steps to both support and compel the formalisation process. This can include awareness campaigns, amnesties, capacity building and the catalysing or recognition of industry support organisations and market-rating agencies.
(3) Co-ordinate the formalisation drive with other state agencies, for example law enforcement agencies and revenue authorities, whose support is required to ensure compliance with the formalisation regime. 6.4. Guidelines relating to market conduct regulation 6.4.1. Guideline 7: Create a flexible regime for the distribution of microinsurance Explanatory notes:
Low-cost distribution is essential for successful microinsurance development. However, cost
is not the only criteria. Distribution channels should be able to actively sell policies to clients (see Guideline 8) and deliver policies as close as possible to where low-income clients live and work. Experience also shows that microinsurance uptake increases with the level of 100 trust that potential clients have in the distribution channel, be that a retailer with a trusted brand, a bank with which the person has an existing banking relationship, a public utility, or another institution such as a religious group or trade union of which the person is a member.
Not all of these intermediaries fit comfortably into the traditional broker/agent regulatory definitions. Neither can the traditional regulatory requirements applied to insurance intermediaries, such as fit and proper requirements, be transferred to these channels with the same ease and in a manner allowing for low-cost intermediation. Different approaches are required. Moreover, with the rapid evolution of the financial system, it is difficult to predict what new models are going to develop at what point.
Increasingly, new technologies are also being used for client communication, data collection, premium collection and even the payment of claims. These can include mobile telephone
networks, POS networks and the internet. Substantial benefits can come from allowing these
new distribution methods to grow and intermediate insurance for low-income clients. However, their inability to actively sell the product to the client restricts their ability to create new markets. As with other passive models, these technologies also pose their own risks of consumer abuse and mis-selling. Appropriate measures to control market conduct therefore need to be put in place. Guidance notes: (1) Allow multiple categories of intermediaries. Particularly encourage models that are able
to actively sell products (see Guideline 8) or at least are able to verbally disclose critical product information to the client.
(2) Avoid prescriptive regulation that restricts the design and nature of potential intermediaries beyond what is required for risk-management purposes. Business models and technologies are changing at an increasing pace and regulatory systems need to be designed to accommodate changing models. Increasing monitoring and reporting requirements can be utilised where the impact of models are not clear (see Guideline 9). (3) The underwriting party must have a formal contractual relationship with the intermediary that outlines the respective obligations of the parties. This bestows joint responsibility on the insurer to ensure that its policies are sold without consumer abuse.
An intermediary should, however, not be restricted to only one contractual relationship with a life or non-life insurer.
(4) There must be ease of consumer recourse. The underwriter/ intermediary must provide an acceptable consumer recourse option. At the very least the customer must be able to lodge a complaint and/or channel enquiries via the POS. 6.4.2. Guideline 8: Facilitate the active selling of microinsurance Explanatory notes: Microinsurance, similar to insurance in general, is sold rather than bought. Experience shows that voluntary microinsurance uptake is highest when it is actively sold, particularly with
another product or service, such as credit, goods purchased on credit, future funeral
services, mobile phones or other financial services such as banking services. In each of these 101 cases, with the exception of compulsory insurance, the insurance value proposition has to be explained to the client and an active sale made in order to achieve take-up. One-on-one sales processes may provide clients with good information on the product but are expensive and can easily push already thin-margin, low-premium microinsurance products into unprofitability. It is imperative to avoid market-conduct regulation that can make the individual sales process too costly. In many jurisdictions the traditional
agent/broker model that relies on dedicated insurance professionals to do the selling will be too expensive for microinsurance products. A particular challenge in the microinsurance sphere is overcoming the lack of knowledge
that most potential clients have of basic insurance concepts and products. This is best overcome by standardising or commoditising microinsurance products with simple terms and conditions. Some countries are developing a microinsurance standard, often referred to as CAT standards (fair Charges, easy Access and decent Terms), with which microinsurance products can be branded to facilitate easy recognition by clients. Some jurisdictions have resorted to some form of price control on commissions payable to
agents and brokers for services rendered in the intermediation of insurance policies.
Whereas a conceptual case can be made for such controls in markets with very limited competition, experience shows that institutions find many ways to circumvent overly restrictive commission caps. Moreover, commission caps can be particularly restrictive in the microinsurance environment. A capped commission on a small premium may lead to so small an actual payout to the agent/ broker that it does not justify his or her going out to sell the product. Guidance notes:
(1) Apply the lowest possible levels of market conduct regulation to the microinsurance
product category without compromising consumer protection (refer guideline 4). Specifically avoid market conduct regulation that imposes per transaction costs in favour of those that support developing the scale of distribution required by microinsurance. (2) Develop standard, simplified terms and conditions for microinsurance or catalyse the development of such standards by the industry. This does not only simplify the sales process but also ensures that the general level of knowledge and awareness based on a standardised vocabulary is raised with every sales transaction. (3) Ensure minimum disclosure of product and supplier information to the client. If possible,
encourage this to be done verbally.
(4) Avoid price controls on the intermediation process. As an alternative, require microinsurance providers to disclose agreed commission levels to the supervisor. 102 6.5. Guidelines relating to supervision and enforcement 6.5.1. Guideline 9: Monitor market developments and respond Explanatory notes: A regulatory regime tailored to microinsurance risk entails (i) a compliance regime as set out in the guidelines above (an adjusted regulatory burden, where necessary, in terms of prudential and market conduct requirements), as well as (ii) the supervision and enforcement of such a compliance regime. The latter is as important as the first, because it is
only through supervision and enforcement that a regulatory regime becomes effective. While effective enforcement of regulation by the supervisor is needed, the microinsurance
market at the same time needs space for innovation. A microinsurance regime needs to allow for the emergence of new products (guideline 3), new players (guideline 5) and new distribution channels and technologies (guideline 7). The supervisors task is therefore a balancing act: to implement enforcement in such a way as not to make conditions overly onerous on market players, while at the same time responding to areas of abuse through careful market monitoring. For this purpose, it is
important that minimum levels of information must be submitted to the supervisor. The
reality of limited capacity may also mean that some areas of the market may remain completely unregulated. Directing capacity to high-risk areas while monitoring unregulated areas for changes in risk profile may, therefore, be the only option available within resource constraints. Guidance notes: (1) Base the regulation and supervision strategy on a careful assessment of the areas of risk facing the consumer and the industry. (2) Prioritise supervisory capacity according to this assessment targeting high- risk areas and in line with the capacity of the supervisor.
(3) Complement this strategy with careful monitoring to ensure that supervisory
forbearance or prioritisation can be adapted to changing circumstances and risk experience. 6.5.2. Guideline 10: Utilise market capacity to support supervision in low-risk areas Explanatory notes: In an environment of constrained supervisory capacity, supervisory approaches drawing in the capacity of market participants and other entities may enhance supervision. This may take several formats and should be designed around the specific conditions and entities in the market. For example, the supervision of certain market players (such as primary
cooperatives) may be delegated to entities such as secondary/umbrella cooperatives
providing services to primary cooperatives. The supervision of tied agents may also be delegated to insurers when they have the incentive to ensure that agents are appropriately trained and behave in an appropriate manner. Such a strategy can reduce regulatory costs and capacity requirements as it does not require every single intermediary to register with, or be monitored by, the supervisor. If this is 103 designed to use existing business processes that are also in the insurers interest (e.g. agent training) the additional cost to the insurer could be limited. The incentive of being able to
use a wider pool of agents may also compensate for increased costs. Combined with appropriate reporting to the regulator, this will allow careful monitoring and intervention
where required. In this example, care should be taken to ensure that incentives for rigorous supervision are in place while, at the same time, the increased responsibility delegated to the insurer should not discourage them from using legitimate distribution channels. Delegated supervision is not the same as self-regulation. With the former, the authority for regulation and supervision is retained with the regulator and only some functions are delegated to the support agency. Self-regulatory systems are more complicated to design
and require specific criteria and incentives to be in place to ensure effective supervision. Guidance notes:
(1) Where feasible, according to the assessment of the risks posed by various spheres of underwriting and market conduct (guideline 9 (1)), delegate aspects of supervision of certain players (for example intermediaries) to certain other market players (for example insurers). (2) Clearly delineate roles and responsibilities and ensure that delegated supervision is part
of a coherent supervisory strategy rather than applied in an ad hoc manner.
(3) Ensure that the strategy followed limits the increase in regulatory burden for those entities entrusted with delegated supervision and that the strategy indeed decreases supervisory costs while remaining effective in communicating breaches to the supervisor. (4) Monitor the situation and back it up with an effective consumer recourse mechanism (refer to guideline 7) to ensure that a delegated supervision strategy does not put the consumer at risk.
Microinsurance also needs to be looked at in the context of the broker. Paying particular attention to the role of the intermediary and whether such role is
justified and viable where the margins are low and attention is focused on access and reducing the costs of distribution. In this regard the paper : Brokering change in the low-income market The threats and opportunities to the intermediation of microinsurance in South Africa Prepared for FinMark Trust and the Ford Foundation 12 October 2006 Authors: Hennie Bester Doubell Chamberlain Ryan Short Anja Smith Richard Walker is most instructive. . Although based on South Africa it has relevance for all countries in regard to the intermediary role in Microinsurance. Again I quote verbatim form the paper
EXECUTIVE SUMMARY
South Africa is faced with the challenge of extending insurance products to low- income individuals. The insurance sector recently started to act upon this realisation by re-examining the insurance needs of low-income households. This change in focus was triggered by a number of factors, including the access targets set in the Financial Sector Charter (FSC), non-insurer players entry into the low- income space for insurance and an increasingly contested high-income market. Although product development for this market can prove challenging, finding appropriate and efficient distribution mechanisms in serving the low-income market seems equally challenging. This study was commissioned with the goal of identifying and reviewing the threats to and opportunities for the intermediation of insurance to low-income (LSM 1-5) households in South Africa. The terms of reference of the study included a specific focus on the broker as an intermediary category and an assessment of the brokers ability to successfully sell insurance
products to the low-income market. The first section will briefly look at some of the fundamentals that are important for the discussion to follow. Following on from a summary of the findings we will note the market and regulatory trends
shaping microinsurance intermediation. From this we will identify three drivers of successful intermediation of microinsurance and finally answer the question can the broker re-invent themselves to serve the lower-income market? FUNDAMENTALS In this section we will briefly discuss what intermediation means, describe the intermediary framework that was developed in this study and note the segmentation of the low-income market into groups with similar distribution characteristics. Understanding intermediation. Distribution is not only limited to sales activities, but encompasses a variety of administrative and intermediation activities necessary to deliver the product to the customer. These activities include marketing, sales, premium collection, policy and client management, policy
administration and claims payment. In addition, these distribution activities may be conducted by various xi entities and the roles of specific entities may vary from case to case. The major components of the distribution channel are identified as the risk carrier, administration, intermediation and a technology platform. Intermediary framework. In order to assess the differential impacts of market and regulatory forces on different intermediaries, the first part of the study developed a framework within which to map various types of intermediaries. Taking into account each categorys distinctive features, five categories of intermediaries were identified: Brokers; Captive agents; Independent multi-function intermediaries; Captive multi-function intermediaries; and Organised low-income groups.
Segmenting the low-income market. On the demand-side, the study considered
the characteristics of the low-income market. The adult LSM 1-5 population is not a homogenous group (consisting of 19m individuals) and was, for the purpose of assessing distribution potential, divided into groups with consistent distribution characteristics. Two key factors, consistency and source of income and availability of formal point of access for insurers (e.g. workplace), were used to categorise the adult LSM 1-5 population into four groups. These groups varied from those that, from a distribution point of view, are: easy to reach; easy to reach, but where incomes are inconsistent and, as a result, product adaptations will be required; not easy to reach, but where incomes are consistent; and hard to reach. These groups were then described in terms of a number of characteristics relevant to distribution. With this information the study was able to evaluate the
distribution potential of the four groups and provide an overview of the size of
unserved markets within reach of existing formal and informal client touch points. xii SUMMARY OF FINDINGS This section will include the major findings of the report, as well as, some of the threats and opportunities to microinsurance intermediation. Opportunity: The review finds that a large number of unserved clients are within reach of existing formal and informal client touch points. In LSM 1-5 there are the following groups of people who do not have formal insurance: 4.2m people who have bank accounts; 3.3m people who have a pre-paid cell phone; 1.4m people who have store cards/accounts; and 2.2m people who are members of burial societies. As a result, for a large proportion of LSM 1-5, premium collection is not the main constraint to reaching the uninsured as they are already accessing other formal and informal networks that could serve as potential payment collection systems.
The significant numbers of people accessible through existing client touch points
shows that the FSC targets are well within distribution reach. Growing focus on the provision of microinsurance. In addition, both formal insurers and other organisations are actively targeting the low-income market. This is not only driven by the Financial Sector Charter (which only applies to formal insurers), but by perceived opportunities for profit in this market. It is thus an increasingly competitive environment and multiple delivery models are emerging. This leads to growing pressure on insurers to produce better value propositions and gain ownership of customer groups. New cost-effective distribution models are emerging, but have yet to show results. Traditional (and particularly advice-based) intermediation models have not been able to extend significantly into LSM 1-5 (even before FAIS) and have been limited to the banked and employed. Furthermore the cost modelling conducted as part of this review suggests a limited role for the advice-based sales model of brokers in LSM 1-5.
A number of new intermediary models are, however, emerging that are able to
reach LSM 1-5. These models are able to collect cash premiums, rely on passive, tick-of-the-box selling and, therefore, do not provide advice. Importantly, these xiii distribution channels extend beyond banked and employed clients and are, therefore, able to serve a large proportion of LSM 1-5. The emergence of the tick- box approach points towards the commoditisation of insurance. This means that the insurance product is no longer sold within a relationship, especially a relationship with a broker. It is sold as a commodity, i.e. a standardised product. In addition, there is a move to multiple contact points to deal with the distribution of the same product personal contact, cell phone, contact centre, retail or other point of contact. This trend to client-centric rather than broker-channelled communication has been facilitated by low-income consumers coming on grid, especially via cell phone uptake. The ability to communicate directly and immediately via a very popular medium (SMS) has increased the viability of non- debit order premium collection. Experience shows that significantly better
payment performance can be achieved by sending SMS reminders, which can be generated at very low cost. However, despite all of these improvements and
innovations, little penetration has been achieved beyond funeral insurance and it is not clear whether these new intermediary models will achieve take-up as they are faced with a number of limitations. Most critical is the concern over the level of disclosure provided in the sales process and the fact that these models employ a passive sales methodology expecting clients to approach the distribution points for insurance rather than the other way around. The entry of these new models could have a double impact. It is pushing market makers (brokers/agents) out of the market, but due to a passive sales methodology is not replacing the market making function previously fulfilled by brokers/agents. In addition, the lack of even disclosure in some models runs the risk of mis-selling and, as a result, a potential regulatory backlash. If the models currently providing no advice are allowed to continue operating in this manner, it could have negative repercussions for the market as a whole, especially for those models currently providing policy disclosure, but no advice.
Major risk for market players to generalise observable trends in funeral insurance to hold for non-funeral insurance products. There is an innate culturally-driven demand for funeral insurance in South Africa, particularly amongst the low- income market, where it is by far the largest category of insurance being used. Unlike other types of insurance, funeral insurance is, therefore, bought not sold. Products such as credit life insurance have achieved penetration based on compulsion and by being bundled with other products. It is unlikely to have achieved the same xiv penetration if it has been sold on a voluntary basis. Funeral and non-funeral products, therefore, require very different intermediation approaches to succeed in the low-income market. Whereas the former can rely on some form of passive selling, the latter requires active selling. Regulation has placed the cost of advice beyond that which can be afforded in the low-income market. Even before the
introduction of FAIS, traditional advice-based intermediation models had not been able to extend significantly into LSM 1-5. Given the cost of conducting advice-
based intermediation, there has been little commercial incentive for advice-driven intermediaries to pursue this market and the introduction of FAIS combined with the debate on commission restructuring is likely to remove the little incentive there was. Cost modelling conducted as part of this review suggests that it is unlikely that advice-based sales model of brokers will be able to profitably serve any significant proportion of LSM 1-5. Does active selling mean the same as providing advice? We argue that it does not. In fact, the regulatory review suggests that guidelines issued by the regulator implicitly also differentiate between selling and providing advice. However, given the lack of clarity on this distinction (due to conflicting regulatory signals from the FSB and FAIS Ombud), the market has effectively bifurcated into active, advice-based selling or
completely passive, advice-less selling. The result is, therefore, that the only active selling models operational in the market are, therefore, ruled out by increased regulatory cost of providing advice. This leads to a conundrum: To go beyond funeral insurance in the low-income market requires active selling (e.g. proactive human interaction). Yet regulation, by combining active selling with advice, is
making active selling more expensive and beyond the reach of the low-income
market. Unless some agreement can be reached on a definition of active sales, which does not equate to providing advice, this study concludes that it is unlikely that any take-up beyond funeral insurance will be achieved in the low-income market. And while non-advice is pushing advice out of the low-income, it is not clear that the regulatory space for non-advice will continue to exist. International microinsurance developments have not revealed any silver bullets that can be applied in South Africa, but confirm that multi-function models are required to achieve scale and viability at low premium levels. Traditionally, microinsurance in other countries has been distributed through microfinance xv institutions (MFIs). However, MFI models have not achieved success in distributing voluntary insurance and are limited to their members. Furthermore, international experience suggests that insurers are not guaranteed a permanent distribution mechanism through MFIs as there are also other options available to MFIs to mitigate credit risks, including becoming insurers themselves. In addition,
reinsurers are finding new ways of linking directly with microinsurance client groups and placing further pressure on the insurer to establish its value proposition. Significantly, none of the international intermediation models
reviewed relied on passive sales methodologies but employed varies means and mechanisms to actively sell products to potential clients. MARKET AND REGULATORY TRENDS SHAPING MICROINSURANCE INTERMEDIATION Based on the market findings and regulatory analysis, three trends are identified that are currently shaping the intermediary market: Trend 1: Opposing regulatory forces are increasing cost, bifurcating the market and risk closing down intermediation to low-income markets Regulation increases costs and these costs manifest particularly on channels providing advice and on smaller and less sophisticated intermediaries. The impact of the increased costs have not yet resulted in an exit out of the market as the focus, to date, has
been on registration and not yet enforcement. Furthermore, many of the lower- income intermediaries operate under the exemption provided to Category A intermediaries that will be ending in 2007. Indications from the industry are,
however, that a large proportion of the Category A intermediaries may not be able to reach compliance by the time the exemption period expires. Regulation bifurcates the market by allowing the option of non-advice selling. The space for non-advice intermediation has seen the entry of a number of new and innovative approaches, particularly by non-traditional intermediaries (e.g. retailers). The separation of advice and non-advice selling and the increased cost and difficulty of advice selling will result in advice-based channels being crowded out of the low-income market and companies pursuing the lower cost option of non-advice intermediation. These passive sales models have not yet been proven to be successful and may result in mis-selling if intermediation does not at least include verbal disclosure as a minimum requirement of client interaction. xvi
Given that the models attempting to serve the lower-income market are largely
non-advice-based and are crowding out advice-based models in this market, there is a substantial risk that regulatory rulings against non-advice selling may close down the only channels operating at the lower end of the market. Although the FSB has shown sympathy to the issue of access and have made adjustments to regulations to minimize the unnecessary costs on low-income intermediaries, the rulings of the FAIS Ombud are much more focused on consumer protection. As the interpreter of the FAIS Act the Ombud may not have the freedom to include access considerations in his rulings. The legal precedent set by current rulings of the FAIS Ombud (mostly on higher-income cases) suggests problems for the non-advice- based intermediary models and certainly raises questions on whether non-advice- based models will pass the FAIS test. Trend 2: Controllers of client groups are entering into intermediary and insurance markets Control over access to clients is increasingly emerging as a determinant of success in the low-income market for insurance. Controlling
institutions, such as low-income groups, have the power to negotiate the terms of the relationship with insurers. A large concentration of clients at one location
provides a volume proposition to insurers wishing to serve the low-income market, which could lower the costs of serving this market. In addition, using a trusted brand in the provision of insurance can help low-income groups to overcome the unfamiliarity and insecurity of a new financial services product. There is evidence that both client groups and insurers are trying to gain or establish ownership of the low-income client base. Evidence of client groups trying to reinforce ownership of low-income clients, include: the rise of organised low-income groups (e.g. burial societies like Great North Burial Society) in the insurance space; players with existing infrastructure and low-income client concentration entering the insurance intermediation market (e.g. Pep stores); and various institutions applying for long- and short-term insurance licenses (e.g. Legalwise and Real People Life). Insurers, in turn, are moving down the value chain by:
buying distribution channels (e.g. Momentum buying Sage); xvii
re-establishing or broadening agency forces through franchising and call centre- support (e.g. Metropolitan Lifes Retail Enhancement Initiative); developing broker support systems (e.g. Masthead initiative launched by Old Mutual); and changing their client focus from brokers to clients. Based on the review of intermediation models operating in South Africa, it is clear that models operating in the low-income market will rely on partnerships with entities that control access to client groups. To ensure their relevance in such relationships insurers will need to offer a clear and appropriate value proposition to low-income clients and to controllers of client groups. Trend 3: Brokers and advice-based models retreating to higher-income markets Brokers currently dominant in high-income market. The distribution of insurance products in South Africa developed in such a manner that brokers have become
the dominant intermediaries. Given the reliance of insurers on broker distribution, insurers cannot easily introduce alternative distribution channels or decrease the
prices of products sold through such channels. Such actions could effectively result in a situation where insurers start losing clients as brokers are able to simply move their clients to other insurers. This is particularly the case in the higher-income market where broker distribution is dominant. New distribution channels emerging that impact on high- and low-income markets. Technological and distribution model innovation have led to the introduction of new lower-cost captive and independent intermediary models. These models are likely to impact differently on low- and high-income markets: Broker dominance slows impact of new models in high-income market. New captive models (e.g. call centres) present the insurer with low-cost strategies that also provide control over access to the client. Given the broker hold on the higher- income market, insurers cannot easily switch to the new channels and, where they can, they are not able to reduce prices through the lower-cost channel without risking channel conflict. It is, therefore, expected that insurers will introduce new
channels gradually and without undercutting broker pricing. As it gradually builds up a client book in the new captive channels, the insurer will reduce its dependence on broker distribution. In addition, the proposed xviii move to fee-based independent advisors may result in further competition to the broker market. These models are unlikely to enter into the low-income market. New multi-function models rapidly entering low-income market. In the absence of dominant incumbent channels, low-income markets are rapidly adopting new (particularly multi-function retail and low-income group) models. These models utilise the no-advice space and will effectively exclude brokers from the low- income market (the little penetration they had). Initially the retail distribution
models may be limited to the lower-income market. In the long-run, they are likely to extend upwards into higher-income markets (similar to where they operate in the UK market), a market in which they are likely to find it easier to operate as people are familiar with insurance.
Long-term market share of broker under pressure. The implication of the above-
mentioned trends in the high- and low-income markets will be increasing pressure on overall broker market share. In the long-run, brokers may find themselves confined to serving a smaller, more specialised segment of the high-income market. DRIVERS OF SUCCESSFUL INTERMEDIATION OF MICROINSURANCE Leading on from the identified trends, three key drivers of successful intermediation of microinsurance can be identified: The ability to cost-effectively collect premiums, especially cash premiums, and pay benefits. This will be facilitated through the touch points referred to in the report, which, being multi-functional will help to reduce the costs by piggy-backing on existing infrastructure. Active selling through trusted personal interaction. Even more so than in the high-income market, insurance in the low-income market (with the possible exception of funeral insurance) has to be sold.
An appropriate product. While perhaps beyond the definition of intermediation, the nature of the product cannot be completely removed from the debate about
intermediation. In particular, three aspects of the product will impact on the ease and effectiveness of intermediation. Firstly, cover must reflect needs and, the value of the product and how it relates to risks faced by the poor, need to be effectively communicated as part of the intermediation process. Secondly, the risk has to be manageable. As a counterpoint to meeting the xix needs, it must be noted that some low-income risks cannot be insured simply because it is not possible for the insurer to manage within the low premium value. The intermediary often has to play a role in selecting and managing the risk underwritten by the insurer and the extent of risks to be managed is often inversely related to the size of the premium. Finally, the product must be sufficiently commoditised and/or simplified. The structure and complexity of products directly impact on the nature of intermediation required. Essentially, it is
argued that a simplified product with appropriate (calibrated) disclosure can substitute for advice. CAN THE BROKER RE-INVENT THEMSELVES TO SERVE THE LOWER-INCOME MARKET?
A central question posed in this study is whether it is possible for the broker to reinvent themselves and operate in the low-income market. In considering this question, this study has shown that: The bifurcation into advice and non-advice selling will result in non-advice selling in the low-income market and advice-based selling in the higher-income market. While the complete absence of disclosure will not be in the long-term interest of the market, the study has argued that advice, as defined by regulation, may be too costly relative to the benefit provided in the low-income market. Instead, it is argued that disclosure should be set as the minimum standard rather than advice.
The cost modelling exercise showed that brokers will find it difficult serving the LSM 1-5 market. Broker models are not playing a major role in the intermediation of microinsurance internationally.
This raises the question of whether the broker model is relevant to the low-income market. If the definition of a broker as an independent, advice-based sales model is used, this document argues that advice-based intermediation is not necessary and not feasible for the largest part of LSM 1-5. We conclude, therefore, that it may not be necessary for brokers to reinvent themselves to serve this market, as there are more promising avenues to pursue in other independent or captive advice models. 1 1. INTRODUCTION 1.1. BACKGROUND This document presents the findings of a review of threats and opportunities to the intermediation of microinsurance in South Africa.
Microinsurance can be defined as any form insurance that is targeted at, used by
and/or accessible by the poor1. Such insurance is relevant to the poor as they face many risks, which threaten their lives and their possessions and results in costly interruptions to the difficult process of asset formation. Formal insurance presents one risk mitigation mechanism which could support the management of these risks and smoothing the household asset formation process. Although largely still limited to higher-income consumers, insurers globally are slowly finding ways of extending their services to lower-income households. One of the key constraints has been finding appropriate and efficient distribution mechanisms. South Africa is no exception to this. Until recently, the South African insurance industry did not actively focus on the servicing of the low-income market (with some notable exceptions), although it has always served the low-income market by default. Funeral insurance, due to its low premium values and high take-up by the low-income market can be considered a form of microinsurance. In terms of the provision of funeral insurance, microinsurance amongst South African low- income households has quite a high penetration. Approximately 15% of low-
income2 individuals in South Africa have some form of formal funeral insurance, compared to 21% of all adult individuals in South Africa that have some form of
formal funeral cover (FinScope 2005). Compared to the take-up of microinsurance in other countries, penetration of funeral insurance in the low-income market is quite high. The low penetration of other formal insurance products3 in this market, however, has been the result of, firstly, a limited understanding of the financial needs of individuals with low-incomes and, secondly, the absence of glaringly obvious profit opportunities. However, the Financial Sector Charter (FSC)4, which delineates the financial sectors (including the insurance industry) obligations towards previously disadvantaged and low-income groups, has triggered a re-examination of poorer households financial needs. Other factors have also led to a renewed interest in the insurance market for lower-income households. The entry of non-traditional and 1 Microinsurance is not only limited to insurance for individuals, but also includes insurance products developed for and used to manage the risks of small
enterprises. Microinsurance also extends beyond the provision of insurance by microfinance organisations and could include all categories of providers
government, commercial entities and non-profit organisations. 2 For the purpose of this study, low-income individuals are those that fall in the Living Standard Measures 1-5. The Living Standard Measure (LSM) is a tool used to segment the wider South African market according to individuals' living standards. It uses location (urban vs. rural), ownership of household assets and access to services to group individuals into one of ten potential LSMs through calculation of a composite indicator (Eighty20, 2005). LSM 1 is the lowest LSM, containing the poorest individuals in terms of the composite indicator, while LSM 10 is the highest category and contains the wealthiest individuals if ranked according the composite indicator. 3 Other (non-funeral) life insurance and short-term insurance. 4 See Section 5. 2
non-insurer players has increased competition and may have hastened a race for the market, while higher-income markets are potentially becoming saturated, providing the search for new markets with greater impetus. Similar to international experience, distribution in South Africa is a major challenge to expanding access to microinsurance. The South African experience presents an interesting case study of the interplay between multiple (and sometimes conflicting) developmental policy objectives and commercial initiatives to extend
access to financial services. On the one hand, the Financial Sector Charter and new market opportunities are pushing financial institutions into the lower-income market. On the other hand, equally justifiable regulatory challenges around consumer protection and other distribution challenges are limiting the reach of commercial players and forcing a rethink of both policy and commercial strategies. The rest of the document is structured as follows: Section 2 presents basic distribution concepts and discusses the impact of product nature and design on intermediation models.
Section 3 provides information on the current intermediary market in South Africa, its key characteristics and distribution features.
Section 4 presents the findings of a market segmentation analysis illustrating that the low-income market is not a homogenous group, but that different demand segments with varying product needs and distribution characteristics can be identified. Section 5 provides an overview of relevant regulation and highlights the impact of these regulations on the intermediation market. Section 6 reviews international trends in microinsurance intermediation, highlighting interesting examples and drawing lessons for South Africa. Section 7 presents our findings on the major market and regulatory forces shaping the intermediary market and what this means for the future of microinsurance intermediation in South Africa. Finally, Section 8 concludes by summarising the findings and highlighting the threats and opportunities to microinsurance intermediation identified.
Before commencing with the analysis, we outline the scope and limitations of the study, as well as some nomenclature that will be used in the remainder of the document. 1.2. PURPOSE AND SCOPE Ultimately, the purpose of this study is to expand access to microinsurance for low-income households. In simple terms, this means improving the link between formal risk carriers and low-income customers. More specifically, the study
reviews the threats to and opportunities in intermediating microinsurance in South Africa. To achieve this within the scope of the project, the limits of the project had to be clearly defined to focus on: 3 Distribution. This is done within the context of the overall insurance market and products distributed and this context is noted where relevant. Intermediation models relevant to the low-income market. We limit our focus to products and institutions relevant to lower-income households (i.e. excluding corporate and commercial business and excluding intermediaries that currently do
not serve the lower-income market5). Although we acknowledge that government
does play a significant role in mitigating the risks faced by low-income households, our analysis is limited to the distribution of microinsurance by commercial entities and non-profit organisations. We also believe that black (or emerging) brokers operating in the lower-income market deserve particular attention as they operate at the cusp of the market and are likely to be the most drastically affected by regulatory changes. Further note that the terms of reference of the study also required a particular focus on the ability of the broker to serve the low-income market. The future of the emerging broker is thus given special consideration. Focus on long-term and short-term insurance (South African nomenclature for life and general insurance). While some regulation impacting on the intermediation of medical insurance is considered, the analysis is limited to mainly long- and short-term microinsurance products. This does not suggest that medical insurance is less important for low-income households, but rather that medical
insurance is a complex market requiring additional research that falls beyond the scope of the current project. Standalone and voluntary products rather than embedded and compulsory. Although not exclusively focusing on voluntary products, this was a particular
focus area. Standalone insurance (in contrast to embedded insurance products) is a major microinsurance challenge. Embedded insurance, due to its hidden nature and the way it is sold by many retailers in South Africa, is also not necessarily considered appropriate for the needs of low-income individuals. Insurance for individuals. The study considerers insurance for individuals (on their own or as part of groups) and not SME or business-specific insurance. 1.3. METHODOLOGY The information contained in this report was sourced through a variety of means. Meetings with industry players. Interviews were the most important and useful source of information for this study. A wide range of industry players, including insurers, retailers, intermediary industry associations (brokers and others),
administrators, regulators, insurance innovators and representatives of low-
income groups, were interviewed between January 2006 and June 2006. See Appendix E for a complete list of individuals and organisations interviewed. 5 Where relevant, we shall consider the potential of such institutions to serve the lower-income market even if they do not do so currently. Inclusion in the study will be based on the expression of any intention to enter the lower-income market. 4 Existing data sources. FinScope 20056 survey data was used to create a nuanced picture of the demand-side and the different groups within the low-income market. International review. The information contained in the international review was sourced with the support of Enterplan. The review is based on a review of existing literature and telephone interviews with a variety of experts and players in the international insurance market. 6 FinScope is a national household survey, underwritten and coordinated by the FinMark Trust. It is focused on measuring financial services needs and usage across the South African population. The FinMark Trust was created in March
2002 with funding received from the United Kingdom Department for
International Development (DFID). Its mission is making financial markets work for the poor. 5 2. UNDERSTANDING INTERMEDIATION 2.1. GENERALISED MODEL OF INSURANCE DISTRIBUTION Before proceeding with the analysis, it is necessary to clarify some terminology and provide basic context. Figure 1 presents a general model of insurance distribution as a basis for the rest of the analysis. Figure 1: Functional model of insurance distribution Source: Genesis Analytics adapted from Leach, FinMark Trust 2005 Distribution encompasses a variety of functions. Distribution is not only limited to sales activities and encompasses a variety of administrative and intermediation activities necessary to deliver the product to the customer. These functions include marketing, sales, premium collection, policy and client management, policy administration and claims payment.
Various institutional components and permutations. In addition, these distribution activities may be conducted by various entities and the roles of specific entities may vary from case to case. Figure 1 presents a picture of the generalised structure of insurance distribution. The major components of the distribution channel are identified as the risk carrier, administration, intermediation and a technology platform. The relevance of the breakdown of activities and institutions presented above is that different institutions and functions may be subjected to different aspects of regulation, different cost structures or different incentives and may, therefore, present specific challenges with regards to distributing microinsurance. Risk carrier: In the above diagram, the risk carrier is most often a registered insurer. This is the entity that in the final instance is liable for the risk. In some cases, the risk carrier may also be a protected cell company (PCC) (or cell captive as it is known in South Africa), which is a separate legal entity formed by joint venture between a registered insurer and other entity in the distribution channel (e.g. a retailer).
TechnologyRisk carrierAdministrationIntermediationCustomerMarketing, sales,
policy administration, claims payment, servicing by third partiesPolicy origination, premium collection, policy administrationDistribution channel 6 Administrator: Policy administration may be done at the level of risk carrier or intermediary or may even be outsourced to a specialised entity. In South Africa, significant cost reductions have been achieved by the insurer outsourcing the administrative functions to a specialised administrator entity. Intermediary: The intermediary is responsible for the activities that rely on client contact (e.g. policy origination) and may take a variety of forms including a direct sales division, captive or independent agents, retailers, etc. Technology: The technology platform may include a variety of technologies ranging from sophisticated electronic solutions using of cell phones to social technologies in the form of premium collection through self-help groups. Combination of institutional and functional options determines defining characteristics. Various permutations of institutional and functional make-up are
possible and the particular combination of institutional and functional structure and the relationships between the various components determine the ultimate features of a specific distribution model. 2.2. IMPACT OF PRODUCT NATURE AND DESIGN ON INTERMEDIATION MODELS Even though the focus of this document is on distribution, it is impossible to separate distribution from the industry structure and the nature of products distributed. Although there is no dedicated analysis of products distributed to
lower-income households in South Africa, product information is documented in the discussion of models and case studies. The characteristics of products distributed have a significant impact on the cost and nature of distribution mechanisms required and utilised. Embedded and compulsory vs. standalone and voluntary products. Embedded products refer to cases where insurance products are seamlessly (and often opaquely) integrated with other financial products or commodity sales. The most common example in the South African low-income market is credit life insurance on credit purchases of household goods. In contrast, standalone products are sold
as financial products in their own right and do not have to be combined with the
purchase of another product. While the former holds particular appeal to insurers (easy to achieve volume, low risk of anti-selection and low administration cost7), it has often been used to the benefit of the credit provider and insurer, rather than the consumer. Such insurance is often sold without the knowledge of the consumer, undermining the value it may have offered. Bundled products fall somewhere in-between these two categories where the insurance product is closely associated with another product, but not completely integrated. The distribution challenges for these different types of product combinations are quite different. Voluntary/standalone products are much harder and costly to distribute. Volumes are not simply achieved on the back of other product sales. Clients need to be sold on the value of the product and the insurer faces risk of anti-selection. Complexity of the product. Complex products require more costly and time consuming distribution methods. In addition, more complex products may require
higher levels of consumer education as the consumer is often unable to gain sufficient information and compare products.
Servicing requirements. Short-term insurance products may experience multiple claims over the life of the product and each claim may require some level of verification and the benefit paid varies depending on the level of cover and the level of damage incurred. In contrast, funeral insurance pays a fixed benefit on the death of the policyholder or covered person. 8 Care needs to be taken in classifying insurance products and complex or simple. Thus, for example, credit life with temporary and permanent disability, as well as retrenchment benefits, may in fact be a much more complex product than a pure life policy (usually classified as complex). Product complexity, in some instances, may refer to the complexity of the sale (whether advice from a broker is required), rather than the actual complexity of the product. 3. THE SOUTH AFRICAN INTERMEDIARY MARKET Key findings from Section 3
The intermediary market can be categorised into five distinct categories with distinctive features, reach and regulatory impacts: Brokers; Captive agents; Independent multi-function intermediaries; Captive multi-function intermediaries; and Organised low-income groups.
Traditional (and particularly advice-based) models have not been able to extend into LSM 1-5 and have generally been limited to the banked and employed. Cost modelling suggests a limited role for the advice-based sales model of brokers in LSM 1-5. A number of new intermediary models are emerging that extend beyond the banked and employed and are able to serve LSM 1-5. These models: Can collect cash premiums; Rely on tick-of-the-box selling and the brand of distribution partners;
Place control over access to the client group with the distribution partner (rather than the insurer); and Use technology in a simple, but effective manner. Although the new models will place the products within reach of low-income customers, it is not clear whether they will achieve take-up. Claims processes lag sales and premium collection innovations; Models provide product disclosure on demand rather than by default; Some models rely on existing, limited membership; Products still mostly limited to funeral policies; and Models employ a passive sales model. This section provides an overview of the current and emerging intermediary market for microinsurance in South Africa. As noted in Section 1, the review focuses on current or emerging models that are relevant for microinsurance distribution. The findings are presented in three parts:
Section 3.1 introduces and categorises various intermediary models. The purpose is to clarify the terminology used in the rest of the document, but also to consider the different regulatory and market characteristics of the various categories. Section 3.2 presents the findings of a cost modelling exercise assessing the viability of the emerging broker model under different scenarios and testing the feasibility of distributing the new Financial Sector Charter short-term and long- term insurance products through emerging brokers. 9 Section 3.3 concludes with an evaluation of the microinsurance distribution potential of the models reviewed. 3.1. MAPPING THE INSURANCE INTERMEDIARY LANDSCAPE In this section, the broad intermediary landscape in South Africa is categorised and discussed. The purpose of the categorisation exercise is to create an intermediary framework that allows for a more granular understanding of the market. More specifically, the categorisation of intermediaries will assist in illustrating how:
Regulatory impacts may differ across categories; Low-income impact may differ across categories
The relationships of the various categories with insurers may differ, allowing us to better explain changing power balances in the market; and Different categories may have different drivers of behaviour. Traditional brokers and agents have always been the dominant intermediaries in the South African insurance industry. A 2003 report estimates that independent brokers and tied-agent sales forces are responsible for more than 90% of total new insurance business production (Uys, 2003: 14). However, recently a host of other intermediaries, such as retailers, have also started distributing insurance. These changes are not unexpected as they mirror international trends (see Section 6). Nevertheless, recent changes in markets, technology and the regulatory environment warrant a re-examination of the various intermediary categories and specifically what they imply for the distribution of insurance. 3.1.1. CRITERIA USED TO MAP THE MARKET
Six criteria were used to categorise the intermediary market and distinguish
between different intermediary categories in South Africa. The criteria and their various meanings are explained below. Captive/independent: An independent intermediary is free to sell the products of different product providers, while a captive intermediary is limited (by contractual terms) to the products of one product provider. A captive intermediary is one that is either owned by the insurer or, through a joint venture, is bound to one insurer. Relationship with one insurer/many insurers: This criterion is distinct from the first criterion in that an independent agent may still opt for a relationship with only one insurer. While the first criterion relates to the contractual relationship, this criterion relates to the decision or choice of an independent intermediary to establish a relationship with one or many insurers. Client ownership: This criterion assesses whether the intermediary has control over the client base or control over access to the client base. Client ownership mostly resides with the party that controls access to the client. The level of control has implications for strategic actions that can be taken by intermediaries and
product providers. Where an intermediary owns its client base, it could move to a different insurer and take the client base with it. 10 Product ownership/innovation: The product can be owned by either the intermediary or the product provider. Ownership will mostly determine who drives the product innovation or design process. However, certain intermediaries might choose to be involved in the product design process even if they do not own the product. Private benefit/member benefit: Product sales and any income earned in the distribution process can be to the benefit of client(s) (see Category 5: Organised low-income groups) and thus for member benefit, or can lead to the generation of profits for private benefit (for the insurer and/or intermediary). Multi-function/sole function: Certain intermediaries sole function is selling insurance, while others combine the selling of insurance with other activities (e.g. the provision of funeral services, the provision of banking or other financial services, the selling of general retail products). This is relevant for low-income
intermediation as multi-function intermediaries are able to share costs amongst a broader range of activities. Using the above criteria, one can divide the intermediary market into distinct categories. In addition, the categories will also be matched with potential distribution groups emerging from the demand-side segmentation in Section 4. It is important to note that although certain criteria may be the same across a few categories, usually at most one or two criteria are important in distinguishing one category from the others. 3.1.2. CATEGORIES Applying the criteria discussed in Section 3.1.1, the following categories of insurance intermediaries can be identified in the South African market: Category 1: Brokers; Category 2: Captive agents; Category 3: Independent multi-function intermediaries; Category 4: Captive multi-function intermediaries; and Category 5: Organised low-income groups.
These categories are described in the sections to follow, where examples of each category are also provided. The categories are visually presented in Figure 2. In Figure 2, a dotted rectangle around the intermediary and product provider indicates a captive relationship, while the absence of such a line indicates independence. The number of functions performed by an intermediary (one or multiple) is indicated by the lines connecting the intermediary to the client and their relevant captions.
A note on the position of third-party administrators (TPAs). It is important to note that although third-party administrators can play an essential role in the distribution of insurance products, they do sometimes (especially in the provision of funeral insurance) form part of the intermediation chain for each of the categories. In this section, they are therefore not discussed as a separate intermediary category, since administrators can assist in the functioning of any of the intermediary 11
categories. In cases where administrators form part of the intermediation chain, they normally provide a link between the insurer and the intermediary.9 The
primary purpose of third-party administrators is to provide efficient and low-cost administration of policies. These services include managing policyholder records, receiving premiums, payment of claims, and so forth. The third-party administrator may also design the product and, although the risk is underwritten by an insurer, effectively manage access to the client base. In some cases problems have been experienced where the administrator illegally (fully or partly) self-insures the client base. It is possible to distinguish between two types of third-party administrators. Administrators operate in the life insurance environment, while underwriting management agents (UMAs) operate in the short-term insurance environment. In contrast to administrators that tend to handle purely administrative functions on behalf of insurers, the functions of the UMA go beyond that of the administrator as the UMA sometimes accepts risk and pays claims on its own (not merely on behalf of the insurer)10.
Defining likely reach of the categories. In the following sections and Figure 2, the
reach of each of the intermediary categories is indicated. In each instance, reach is defined in terms of specific LSM categories. The Living Standard Measure (LSM) is a tool used to segment the wider South African market according to individuals living standards. It uses location (urban vs. rural), ownership of household assets and access to services to group individuals into one of ten potential LSMs through calculation of a composite indicator (Eighty20, 2005). LSM 1 is the lowest LSM, containing the poorest individuals in terms of the composite indicator, while LSM 10 is the highest category and contains the wealthiest individuals if ranked according to the composite indicator. It is important to note that while more tailored segmentation tools such as the Financial Services Measure (FSM)11 are available and would have been more applicable to this exercise, we have stated reach in terms of the LSM as the FSC uses this segmentation tool to set its access targets12. We distinguish between two types or levels of reach. The shaded grey blocks in Figure 2 indicate reach in a post-FAIS environment, while the blocks containing
diagonal lines (in addition to post-FAIS reach) indicate LSM groups that were also reached in a pre-FAIS environment. Thus, blocks with diagonal lines indicate uncertainty about whether the intermediary category will be able to reach into that LSM group in a post-FAIS environment. 9 Some administrators, however, do not retain their traditional role and may evolve to become intermediaries or insurers in their own right. 10 According to South African legislation (Republic of South Africa, 1998a and
1998c), only registered insurers and reinsurers can carry risk. The acceptance of an unregulated risk component, as sometimes done by an underwriting management agent (UMA), raises concerns. 11 The FSM is a composite measure which divides individuals into one of eight tiers based on financial penetration (or take-up of financial services), attitudes to money, physical access to banks and their connectedness and optimism (FinMark Trust, 2005: 32). 12 The FSC specifies access targets in terms of LSM 1-5. 3.1.2.1. CATEGORY 1: BROKERS
Description. The broker is an independent intermediary, able to have relationships with as many insurers as it chooses to and with the sole function of selling insurance to clients. Access to the client is usually controlled by the broker, while the product provider or insurer is responsible for product development and innovation and also owns the product. Income is usually received in the form of commission. Furthermore, the broker represents the interest of the client and, therefore, provides independent advice, based on the clients specific needs and the characteristics of the various products available. See Box 7 for a brief discussion on the issue of broker independence. Products. Brokers can intermediate any type of insurance or financial product, although some choose to specialise in a product type, e.g. short-term insurance. Category examples and LSM reach. The LSM reach of brokers is dependent on specific broker examples. It is important to note that large corporate brokerages are not included in this discussion as they are not currently serving the low-income market and not likely to do so. Consequently, the discussion is limited to mainly smaller brokerages and
standalone brokers. Four broker examples are briefly discussed in the following paragraphs: the traditional broker; the emerging broker; the shared brokerage; and networked brokers. The traditional broker serves middle-and higher income clients on an individual basis and generally is able to quite easily comply with the educational
requirements of FAIS. In contrast, the emerging broker often derives from a low- income community, has fewer or lower qualifications than the traditional broker and generally sells simpler products. Box 1, below, describes the difficulties of finding a distribution mechanism for low-income products and the inability of the broker to successfully distribute these products. Box 1: Case Study: Cre8 and iKhaya Protector The example of Cre8s iKhaha Protector illustrates the impact of distribution challenges on attempts by the industry to create innovative products for the low-income market. Nature of the organisation. Cre8, the research and
development division of Alexander Forbes, can best be described as an insurance innovator delivering a range of services, including: Creating, marketing and managing insurance products and services; Managing a database of loss
(actuarial) information that can be utilised in insurance product development; and Providing skills development services in the area of underwriting. Creating a low- income product. Cre8 has for the last 18 months actively been trying to enter the LSM 1- 15 3 market with an appropriate product. It designed a home owners insurance product specifically for this market and has used local municipality facilities to assist with the placement. The main challenge has been successfully distributing the product to date only 6 policies have been sold (Botha & Small, 2006). iKhaya Protector. The product, iKhaya Protector, is specifically targeted at the owners of government subsidised entry-level homes with a minimum insurable value of R30,000 and a maximum insurable value of R100,000 (Cre8, 2005). The iKhaya Protector provides insurance for house structure only, as the risks associated with
this product first need to be thoroughly tested in the low-income market before venturing into other insurance product categories (such as household content).
Whereas two years ago, the owners of government-subsidised housing still had to pay a certain percentage of the market value of the house to purchase it and therefore had to have some source of income, payment is no longer required (Botha & Small, 2006). In many cases, the owners are unemployed and often also unbanked. Distribution. Originally the product was distributed through the KWASA Development & Housing Resource Co. that acted in the capacity of a brokerage. In order to limit sales and transaction costs, the product was sold at local ward meetings, allowing brokers to reach many individuals in one location (Botha & Small, 2006). However, the brokers had limited success as the policies have to be paid upfront and in cash. Upfront meetings was problematic as ward meetings were held in townships and all attendees were aware of the fact the brokers carried cash (as much as R30,000) with them (Botha, 2006a). After consultation with various municipalities, this distribution channel is no longer utilised. A key obstacle in distributing the product to lower-income clients was the absence or
limited realisation (due to limited financial education) by low-income individuals that the product offers them real value (Botha, 2006c). Cre8, subsequently,
entered into negotiations with the national governments Department of Housing about the possibility of the Department purchasing the product on behalf of government subsidised homeowners (Botha & Small, 2006). As the houses only officially belong to the individuals/owners after they have resided in it for five years, the houses remain the asset of national and provincial government for the first five years. Government thus has an insurable interest in these houses for their first five years of existence. However, Cre8 was recently informed that the Department of Housing will not be making any financial contribution to the rollout of this insurance product (Botha, 2006b). The idea underlying Cre8s negotiations with the Department of Housing was to gradually, during the first five years of residency, shift insurance payment responsibility from government to the homeowner. This period of migration would have provided an opportunity for consumer education. Homeowners would have been familiarised with the idea and importance of household structure insurance (Botha & Small, 2006). It was
thought that if the deal was successfully negotiated with government, it would
mean that the providers of iKhaya Protector would have access to a database of homeowners with whom it could interact after governments responsibility for ensuring appropriate risk cover on these houses ended (Botha & Small, 2006). Communication with clients (also for claims resolution) would have occurred through a contact centre, but premium collection remained an unresolved issue. Although cash collection of premiums is more suited to the economic profiles of the products target market, cash collection without the necessary infrastructure can be very expensive. Cre8 is continuing its search for appropriate distribution channel(s) for iKhaya Protector. 16 In addition to the lone traditional and emerging broker, brokers are also clustering to share in regulatory compliance costs. Brokers belonging to a shared brokerage form part of an institutional network of brokers, such as Masthead, established with support from an insurer13. Masthead was originally launched by Old Mutual in June 2004, but Metropolitan Odyssey, Auto & General and Sanlam are now also
participating in the initiative. According to media reports, Liberty Life is still
negotiating the possibility of joining Masthead (Gunnion, 2006). Such networks allow brokers to share in and thus limit the final impact of compliance cost. However, the impact of the shared brokerage on the brokers independence needs to be questioned. Whereas the shared brokerage is mainly driven and sponsored by insurers, another version of the shared brokerage is networked brokers who independently (without insurers involvement) cluster together to share the costs of certain compliance expenses and backroom administration activities. In order to share in these benefits, brokers have to pay a certain percentage of their income to the network. Like the shared brokerage, the network limits the negative financial impact of regulation such as FAIS. Box 2: Opportunity Internationals Micro Insurance Agency Opportunity International. Opportunity International is a network of microfinance organisations assisting low-income individuals in the elimination of poverty through the provision of financing for income-generating activities. It has operations in 29 countries in Africa, Asia, the Americas and
Eastern Europe and has managed to reach 850,000 borrowers (Leftley, 2006). It currently has an outstanding loan portfolio of $180m. In 2002, Opportunity
International started developing insurance products as a response to the needs of MFI clients in Africa (Leftley, 2006). In 2005, Opportunity International established the Micro Insurance Agency, with offices in a few countries. Rather than developing insurance products on a once-off basis for MFIs, the Micro Insurance Agency fulfils a more permanent role in the economy where it acts as broker/intermediary. Opportunity International is currently setting up a Micro Insurance Agency (MIA) office in South Africa. MIA to position itself as innovative intermediary focused on low-income market. The Micro Insurance Agency in South Africa will facilitate the brokering of deals between micro-finance organisations and other commercial organisations wishing to provide insurance to their clients, and insurance companies. As discussed in Section 3.1.2.5, South African microfinance organisations often find it difficult to negotiate directly with insurers due to limited experience in the insurance industry and/or lack of insurer intent. It has been explicitly articulated by these organisations that a type of catalyst
(organisational or individual) in making the initial connection with an insurer
would be very useful and eliminate many difficulties. However, MIAs function will not be limited to mere negotiations. It will also be involved in the market research process to identify the insurance needs of various organisations clients and to, with the cooperation of the insurer, create products able to fulfil these specific needs. In addition, it will handle all policy administration, removing the administrative burden from both the MF or other organisation and the insurer. Competitive advantage. Opportunity International has invested in the development of a sophisticated Insurers form the main drive behind shared brokerage initiatives as these initiatives generally enable them to regain some control over the independent broker network (see Section 7.2). management information system (MIS), that facilitates the easy and central management of all policies issued to MFIs and other partners through an eMerge server placed in Denver, with smaller eMBUs servers placed in the country of operation. Possible clients for the Micro Insurance Agency NGO microfinance
sector. As mentioned in Opportunity Internationals business case for a microinsurance intermediary in South Africa, the NGO microfinance sector in South Africa is relatively small, with only two financially sustainable organisations with sufficient scale for the provision of insurance two clients, SEF and Marang. SEF has decided to self-source its insurance (see Box 6) and will be starting the roll-out of insurance projects in September 2006. This only leaves one other microfinance organisations, Marang, to potentially utilise the services of MIA. Opportunity International also intends launching a commercial MFI in South Africa around the end of 2006 or early 2007. Once the client base of this MFI has been successfully established, MIA will sell insurance policies to the clients of the MFI. However, MIA staff members do not see the success of MIA being dependent on the take-up of policies by the commercial MFIs clients. A lack of possible partners in the NGO microfinance sector will require the MIA to move beyond its traditional business model and create partnerships outside of the MFI sector if it is to be successful. Commercial microfinance sector. Large commercial microfinance providers such as African Bank and Capitec will most likely be able to broker their
own deals with insurers and would not want to add an additional cost layer to
their product offering. This leaves the medium-sized MFIs14 as potential clients for the Micro Insurance Agency. However, in its business case for MIA in South Africa, Opportunity International mentions the risk of consolidation amongst the medium-sized MFIs. Consolidation implies achievement of economies in scale. Under such circumstances, the resultant MFI(s) will not require the services of MIA and will be able to negotiate its own deals directly with insurers. A further risk or difficulty in servicing the commercial microfinance sector is the fact that most of the loans issued by these organisations are for a term of only one month. This makes it very difficult to distribute funeral and non-credit life insurance to the MFIs clients. Retailers and cell phone banks. The business case for MIA also mentions the possibility of partnerships with banks using mobile technology, e.g. Wizzit Bank or MTN Bank, as well as partnering with retailers. In the latter case, it is argued that while large retailers such as Edgars and Shoprite most likely have the capacity to broker their own deals with insurers, other small retailers (no examples provided) might be more in need of assistance for the MIA. The same
argument that applies to retailers can also be made applicable to the banks using mobile technology. Wizzit Bank, for example, is already distributing funeral insurance (obtained from African Life) to the Apostolic Church and use two administrators to handle all policy administration. It is not clear where the MIA
would fit into such a structure, unless it is able to assist with policy administration at much lower prices than the current administrators. Although MTN Bank does not currently provide insurance to its clients, its Standard Bank affiliation means that it will have access to all Standard Bank insurance products and will not necessarily require a third party to help broker deals. Treatment of FAIS. It seems as if MIA, like most of the retailer insurance models, will be relying on the regulatory gap that has been created for tick-of-the-box selling. However, this selling approach and thus also the viability of the MIAs partnerships are at risk until the regulatory uncertainty around tick-of-the- box style selling. 3.1.2.2. CATEGORY 2: CAPTIVE AGENTS
Description. Captive agents are intermediaries that have an exclusive relationship with one insurer (i.e. contractually bound) and whose sole-function is selling insurance. The insurer is able to access the client15, but generally only interacts
with the client through the agent. The insurer owns the product and is responsible for product innovation and administration. The agent provides limited assistance with administration. Captive agents generally receive commission on products sold, although some insurers have salaried-agent forces. Most brokers start their careers as captive agents for a specific insurance company and after a few years, once they have built up a large enough client book, gradually start to transform themselves into brokers. This allows agents initial exposure to and learning within a supportive insurance environment, while also providing them the chance to establish relationships with a sufficient number of clients before establishing their own businesses. Products. Depending on the insurance company by which the captive agent is employed, captive agents sell any form of insurance. The nature of the employer company will determine in which insurance area the agent specialises. Category examples and LSM reach. The LSM reach of the intermediary
category of captive agents is dependent on specific agent examples. Four agent/agency examples (and their various LSM reach) are discussed: the traditional agent; the call centre agent; the franchised agency, e.g. Liberty Life; the tiered-agency force; and
the call centre-support agency force (e.g. the Retail Enhancement Initiative (REI), recently implemented by Metropolitan Life) Agents can sell their policies through a variety of communication channels. The traditional or doorstep agent is an individual who visits the prospective clients home or another venue of choice (e.g. worksite) and who then, through face-to- face interaction, tries to sell a policy to the prospective client. The reach of the traditional agent is generally limited to LSM 6-10, although the agent (especially in a pre-FAIS environment) would also be able to serve banked and employed individuals in LSM 5.
15 The insurer has full information on the client and contracts directly with the
client. If the agent leaves, the relationship continues and the insurer can initiate sales of other products to the client without going through the same agent. However, in most cases, the client prefers to continue the relationship with the agent, rather than the insurer. 19 Call centre agents are selling policies telephonically from in- and out-bound call centres, with initial interaction with the prospective client often initiated over the internet (e.g. the agents that work for direct insurers such as Outsurance, Dial Direct and 1LifeDirect). Given current regulatory requirements, call centre agents have the ability to serve banked and employed individuals in LSM 4-10, although call centre agents could probably also serve banked and employed individuals in LSM 3. Insurance companies are currently helping to establish a new form of agent the owner of the franchised agency. Franchised agencies receive financial support from insurance companies to either exclusively sell their policies or reach an insurer-specified sales target while allowed to also sell the policies of other
insurers. This agent example can be considered a hybrid between an agent and a
broker. Franchised agencies are provided with more independence than traditional agents, but more system and compliance support than the traditional brokerage. Franchised agencies operate from infrastructure situated outside the insurance company and mainly serve higher-income clients. Insurer systems and compliance support allow one-time brokers and former insurance agents to better handle increased regulatory compliance costs. These agencies are currently serving LSM 7-10. The tiered-agency force is a direct reaction to the financial impact of FAIS legislation on insurance intermediaries. A South African funeral insurer with a chain of captive funeral parlours is currently planning to create a tiered-agency force to support funeral insurance sales in and outside its funeral parlours. The tiered-agency force will operate through a distinction between primary and secondary agents. Primary agents will be FAIS registered and compliant and will be allowed to provide advice, while secondary agents will not be FAIS-registered agents and will simply be presenting a tick-of-the-box sales option to prospective
clients, as well as collecting premiums. The insurer intends having one primary
agent per funeral parlour. In principle, this idea is supported by a recent guidance note issued by the FSB on intermediary services and representatives (see Section 7.1). Although originally targeted at retailers and other intermediaries using tick- of-the-box selling, the interpretations contained in the guidance note are potentially just as applicable to the idea of the tiered-agency force. As regulatory compliance will be less onerous and costly for the secondary agent, this type of agent will probably be able to serve LSM 2-5. Some uncertainty around the tiered- agency forces ability to reach LSM 2 has been indicated in Figure 2 with a lined block (rather than full shading). The call centre-supported agency force is a recent innovation by insurers. The basic premise of the model is that centralised call centre support to traditional insurance agents will decrease the time spent with clients and increase the efficiency with which client details are captured. The agents visit prospective clients at their homes or other venues and after the policy sale has been closed, phone the call centre to provide the company with client information and
immediately effect policy cover. The Retail Enhancement Initiative (REI) provides call centre support (during the sales process) to brokers and agents selling Metropolitan Life 20
products. This support is intended to help intermediaries more easily comply with regulatory requirements in order to limit the negative impact of legislation on intermediaries. The REI also allows for underwriting to take place telephonically. More details on this agency example are provided in Box 3. The REI has the potential to limit the negative impact of regulations on intermediaries, thus allowing agents to serve lower LSM categories than they normally would. In addition, the REI is also of interest because it serves as illustration of insurers attempts to gain greater control over the client base (see Section 7.1 for more on this force). Box 3: Case Study: Metropolitan Lifes Retail Enhancement Initiative Metropolitan is one of South Africas three biggest insurance companies. Whereas originally it was focused on life insurance only, it has broadened its scope to include a range of financial services. Metropolitan provides life insurance,
employee benefits, asset management and health management services. The
retail division of Metropolitan Life, a wholly-owned subsidiary of Metropolitan, recently launched a Retail Enhancement Initiative (REI). What is the REI? The REI, the first such initiative in the world, provides call centre support during the sales process to brokers and agents selling Metropolitan Life products. It assists agents and brokers in registering a clients acceptance of a policy quote at head office and collecting detailed client information. The request for a new policy is made telephonically by the broker or agent phoning the Metropolitan Area for Customer Enrolment (ACE) Centre. The ACE Centre captures all policy details through information provided by both the intermediary and the client. This process takes place at no cost to the intermediary. In cases where underwriting is required, it is also completed telephonically. This will help to decrease the number of medical examinations and other tests required and will also assist Metropolitan in reaching clients in areas where these services might not be available (Metropolitan Life, 2006a). According to Metropolitan, international research has demonstrated that clients are more open and forthcoming about their health
status and other personal information if the risk is assessed through verbal
communication processes (Metropolitan Life, 2006b). REI process. The REI process seamlessly integrates into the broker or agents normal interaction with the insurance client. The intermediary first visits the client and conducts a financial needs analysis (FNA). Upon completion of the FNA, the intermediary presents a policy option(s) and quote(s) for the relevant policy selected. Once the client has accepted the generated quote(s), the broker/agent telephonically contacts the ACE Centre. The policy details and client information are captured by the staff in the ACE Centre and all information is voice-recorded. The client talks to the call centre agent after the agent/broker has spoken to the call centre. The voice recording acts as proof of the contract between the client, Metropolitan Life and the broker/agent. The final policy is accepted telephonically and on completion of the call (after acceptance of the policy), the policy is issued and cover starts. Benefits. The REI holds a number of benefits for Metropolitan Life. It is thought that it will lead to improved intermediary and customer service, better compliance enforcement, improved underwriting, a decrease in policy issuing time16 and a
reduction of the administrative burden placed on intermediaries (Metropolitan
Life, 2006a & 2006b). The latter will enable brokers and agents to spend less time with clients, thus allowing them to serve more clients. Metropolitan estimates that brokers will spend (on 16 In cases where all client information was available, policy issue time decreased form an average of seven working days to less than a day from completion of the purchase (Metropolitan Holdings Limited, 2005). 21 average) up to 40% less time with any specific client. Using the assumption that 25% of the time savings could be used to write more business, it implies 10% growth in earnings (Metropolitan Life, 2006b). Implementation challenges. With the initial implementation of the REI in Metropolitan Lifes direct writer distribution channel, the REI had a negative impact on direct writer business volumes. This is thought to be the result of change resistance and implementation challenges and it is expected that as REI stabilises, sales will increase. REI was only incorporated in the general intermediary channel during the first quarter of 2006
it is expected that the general intermediary channel will have the same initial
negative sales experience as the direct writer channel (Metropolitan Holdings Limited, 2006). Low-income market. The REI will enable Metropolitan to serve low- income clients in a more cost-effective manner. As the REI enables Metropolitan to overcome geographical and infrastructural constraints, agents and brokers selling Metropolitan policies will now be able to serve even very rural areas (Metropolitan Life, 2006b). Assessment. Although the REI does not reinvent the role of the agent, it assists agents in more easily complying with FAIS requirements. This allows agents to spend less time processing each clients policy application and, consequently, to see more prospective clients. Although it seems obvious that the motivation behind this initiative is to better deal with the impact of legislation such as FAIS, it is possible that it is an attempt by the insurer to gain greater control over the client base (see Section 7.2 for a discussion on this identified force). This is achieved through better collection of client information and the establishment of telephonic contact with the client. The client is thus given a
better idea of the face of the insurer as he/she not only deals with the representative (i.e. the agent or broker) of the insurer.
3.1.2.3. CATEGORY 3: INDEPENDENT MULTI-FUNCTION INTERMEDIARIES Description. Independent multi-function intermediaries are free to have relationships with as many insurers as they deem to offer adequate value and appropriate products to their clients. This intermediary is multi-functional in that it not only sells insurance, but also sells a range of services or products, such as retail products (clothing, food, etc.), funeral services and banking services. Since the client only interacts with the intermediary and often also views the intermediary as the product provider17, the intermediary controls access to the client and thus also owns the client. Although product ownership and innovation may still be handled by the insurer, multi-function intermediaries actively participate in the product design and are often initiators of products that suit their client base.
Products. Independent multi-function intermediaries can decide to sell one
product only (such as the funeral insurance policy sold by Shoprite) or to offer a variety of 17 Multi-function intermediaries have their insurance policies underwritten by insurers and some use their own branding on the policies sold. The branding of the multi-function intermediary could confuse the client about who the actual product provider is. retailers, e.g. Shoprite (a low- to middle-income retailer); banks, e.g. Standard Bank; and independent funeral parlous and funeral parlour associations. The general retailer model utilises over-the-counter selling of insurance products. Retail staff, who also perform other functions, are responsible for the selling of policies and premiums are collected in-store. Shoprite is a low- to middle-income retailer with a target market of LSM 3-8 (Shoprite Holdings Limited, 2005b). In 1999, a funeral policy underwritten by the HTG Life Ltd. was introduced at Money Market counters in all Shoprite stores. The Money Market counters are intended
to increase shopping convenience, facilitate customer loyalty and provide a range of transaction services, including payment of television licenses and municipal accounts with approximately 220 third parties represented at the counters (Shoprite Holdings Limited, 2005b). Shoprite is responsible for the marketing, selling and premium collection associated with the policy, while HTG Life handles policy administration, claims management and payout (Bates, 2005). Premiums are collected at the Money Market counters, which imply that even unbanked individuals are able to purchase the policy. Shoprite earns a fee on each policy sold. Money Market staff, who sell the policy, are not FAIS-registered agents and, therefore, cannot provide advice (see Section 5.5 for more discussion of what advice and disclosure entails). Customers can contact the HTG Life call centre to report claims and if they have any queries/policy changes. The product is not actively marketed to clients in-store and clients are expected to ask for the product at the Money Market counter. The passive selling approach, as well as the absence of financial incentives related to
policies sold for Money Market staff, has not facilitated high policy sales to date,
only 6,000 policies have been sold (Bates, 2005). See Genesis (2006) for more background on the HTG/Shoprite initiative. Banks sell insurance policies over the counter in bank branches and through separate bank brokerages. The over-the-counter sales in bank branches are
targeted at a lower- to middle-income market and insurance sales to this market normally take place when a client opens a bank account or performs another transaction in the bank branch. Bank brokerages serve the upper-middle to high- income market and are staffed by brokers able to provide advice to prospective client. Together these two sales channels are able to serve LSM 4-10. See Box 4 for a detailed discussion on funeral insurance products sold through Standard Bank. This specific intermediary is of interest due to its ability to easily reach some low- income individuals with funeral insurance, specifically those with bank accounts at Standard Bank. Although, theoretically, banks should be able to collect cash premiums, they only sell policies to bank account holders and deduct premiums via debit order. Claims are also paid into bank accounts. Independent funeral parlours and funeral parlour associations (similar to a large retailer with a
number of outlets) sell funeral insurance. For more information on funeral parlour associations and their role in negotiations with insurers, see the discussion on the Private Funeral Directors Association (PFDA) in Genesis Analytics (2005). Due to their extensive geographic reach (i.e. every small town has at least one funeral parlour) and ability to collect premiums in cash, independent funeral parlours are able to sell funeral insurance down to LSM 2. It is important to note that funeral parlours sell only funeral insurance. Also, funeral parlours tend to see themselves as selling funeral service and not necessarily funeral insurance. They do not view the insurance policy as a separate financial service, but simply a way of prepaying (and locking in clients) for their services. For this reason, they are often not skilled or educated in financial services and will find it difficult to comply under the FAIS Act. Box 4: Case Study: Standard Bank Standard Bank Insurance Brokers (SBIB) distributes short-term, funeral and credit-life insurance. SBIB sells short-term insurance directly to customers in the high-income market, whereas funeral and credit-life insurance are sold in cooperation with Standard Bank branches and are
generally targeted at the low-income market. Credit life insurance is a compulsory

product sold to individuals that have loans from Standard Banks Low-income Housing unit. For the purpose of this discussion, we focus on the distribution of funeral insurance (see Section 1.2 for an explanation of why we exclude credit life or embedded insurance from our focus). Distribution to low-income clients. Standard Bank actively targets funeral insurance at the low-income market. Its funeral plan is sold to Standard Bank clients that have E Plan and Plus Plan accounts. E Plan and Plus Plan accounts are targeted at individuals in LSM 4-7, earning an income between R1,200 to R6,500 (Jawuna, 2006). Since this product is only offered to individuals with bank accounts, SBIB is guaranteed a premium collection mechanism (debit order). However, the mere fact that the insurance company can utilise debit orders as premium collection mechanism does not imply that premiums are always regularly paid. There often is no money available in clients accounts and the policies are characterised by a 25% lapse rate (Brooke, 2006). The advantage of this collection mechanism is that it decreases collection costs and ensures some regularity of premium payment. Approximately 860,000 policies are currently active (Jawuna, 2006a). On average, Standard Bank sells
1,500 policies per day (Brooke, 2006). The funeral insurance sales process. The funeral plan is sold by consultants, normally responsible for the opening of accounts and general retail banking queries, working in Standard Banks branches. The consultants are trained to ensure that they understand the
products, assessed and, if proven competent, are accredited to sell and provide advice on funeral and credit life products sold directly to customers. The staff members are registered as Representatives, which means that they meet the necessary FAIS Fit-and-proper Requirements applicable to Category A18 agents. When clients open an The FAIS Act distinguishes between various categories of insurance intermediaries. Category A is subject to the lowest fit-and-proper requirements, but with severe restrictions on the type of products that can be sold (only funeral insurance). E Plan account at the bank counter, they are offered the option of purchasing the funeral plan. The computer system will prompt the consultant to offer the product
to the client. The consultant will tick the relevant box according to the customers response. The consultant will also conduct a simple financial needs analysis (FNA) for every prospective client to determine whether the client can afford the policy and/or whether the client already owns other funeral insurance products, as well as talk the client through the policy wording (Jawuna, 2006b; 2006c). Upon finalisation of the sale, the client receives a policy membership card with the call centre number printed upon it. Clients can change policy information in bank branches with the assistance of a bank consultant or through the call centre (Jawuna, 2006b). The call centre is manned by SBIB staff. In addition to in-branch sales, the call centre also undertakes outbound telephone campaigns during which it attempts to sell the funeral plan to existing E Plan clients who have not yet purchased the policy (Jawuna, 2006b). All contact centre agents are registered as representatives of the FSP (Jawuna, 2006b). Technology. Standard Bank frequently utilises telephones and cell phones in its interaction with clients. Clients can enact policy changes through the contact centre. Telephonic communication decreases the need for face-to-face interaction during the claims process. Once a claim is
lodged, all documentation required is explained to the client over the telephone so that the client will not need to visit a bank branch more than once (Brooke, 2006). An SMS is also sent to the customers to provide notification of unpaid debit orders etc (Jawuna, 2006a). Clients can then respond by ensuring that there is sufficient money in their accounts available for a premium payment. Costs. Insurance sales through a network of bank branches is characterised by lower costs than selling
insurance through other more traditional channels such as independent brokers or agents. The client is reached through a process of bank referrals and low-advice selling is employed. Cross-selling helps lower the cost of sales through greater client penetration rates. The most costly components of selling insurance through this intermediary are the creation and maintenance of a call centre and claims department (Brooke, 2006). Assessment. The bank model is only able to reach banked individuals. However, it has quite an extensive geographic reach and infrastructural spread in urban and peri-urban areas due to Standard Banks network of 746 branches (Standard Bank, 2005), although it does not allow for the servicing of deep rural areas. The easy access to individuals bank accounts
provides Standard Bank with a convenient and inexpensive premium collection
mechanism the debit order. Since all policyholders have bank accounts, there is no inconsistency between the way premiums are collected and the manner in which claims are paid. Successful claims can simply be paid into the clients bank account. Policy claims are simply paid into the bank account of claimants. Furthermore, clients are provided some advice (covering both needs analysis and disclosure) by the bank consultant upon the purchase of their funeral plan and can also contact the call centre for additional product and process disclosure. Although this model is limited to individuals banking with Standard Bank, the inclusion of advice on sales makes this an appropriate model for selling to the lower-income market and the combination with bank processes makes this cost- effective for the intermediary. 3.1.2.4. CATEGORY 4: CAPTIVE MULTI-FUNCTION INTERMEDIARIES
Description. Captive multi-function intermediaries are contractually bound to sell
the insurance products of only one insurer. This intermediary is multi-functional in that it not only sells insurance, but also sells a range of services or products such as retail products (clothing, food, etc.), funeral services or banking services. In some cases, the captive relationship takes the form of a joint venture where the intermediary has a vested interest in the success of the selected product. Although product ownership and innovation may still be handled by the insurer, some captive multi-function intermediaries have chosen to actively participate in the product design process (e.g. Pep Stores). By entering into a captive agreement with the insurer, the intermediary partly gives up his ownership of access to the client as the insurer will have full access to client details and can use this to sell products through other channels (e.g. call centre). However, this only applies to existing clients and the intermediary will remain important for future sales. Products. Captive multi-function intermediaries may sell one product only (such as funeral insurance sold by Wizzit Bank or captive funeral parlours) or offer a variety of insurance products (Pep/Hollard and Edcon/Hollard). Products could include
funeral, long-term and short-term insurance. Category examples and LSM reach. The LSM reach of captive multi-function intermediaries is dependent on specific
manifestations of this intermediary. Three examples of the captive multi-function intermediary (and their various LSM reach) are discussed: retailers, e.g. Pep/Hollard and Edcon/Hollard; captive funeral parlours; and banks, e.g. Wizzit bank. Two interesting retailer examples of this intermediary category are provided by the Pep/Hollard joint venture, formally launched in March 2006, and the Edcon/Hollard joint venture (Edcon Insurance Services), established in June 2001. The Pep/Hollard joint venture is discussed in more detail in Box 5. This example is interesting due to its ability to serve low-income clients through cash collection of premiums and its extensive branch network, servicing even small towns in rural areas. Retailers. It is important to note that there are distinct differences between the Pep/Hollard and Edcon/Hollard examples. In the case of Pep, a cash clothing
retailer, insurance products are sold on a cash basis to clients and clients are not obligated to buy any other product in order to obtain the insurance. Pep thus utilises a stand-alone insurance model. In contrast, Edgars and Jet, two clothing retailers that form part of the Edcon retail group, sell insurance only to
accountholders, utilising an accountholder model. This implies that clients have to be willing to purchase retail goods on credit before being able to purchase insurance products. As clients have to fill in a detailed application form on which a credit score is calculated before qualifying for a store account, Edgars and Jet have detailed client information available before selling insurance to clients. This 26 screening of insurance clients has probably led to better premium persistency (than will be achieved by Pep). Since Pep has no client information available (due to its cash-only nature), selling insurance affords them an opportunity to get to know their client base. Client information collected during this process can be utilised in the cross-selling of other insurance and/or financial products and in the design of better products. Collectively, Edgars and Jet are able to reach LSM 3-10,
while Pep is able to reach LSM 2-10. Funeral parlours. As mentioned, funeral
parlours have vast geographic reach and are able to collect premiums in cash. Due to these factors, captive funeral parlours are able to sell funeral insurance to LSM 2-6. However, their product range is limited to funeral insurance. Although it is expensive to set up funeral parlours, their core function (the provision of funeral- related services) allows potential cross-subsidisation of the distribution of funeral insurance. Banks. Wizzit Bank is a virtual bank that provides cell phone banking services specifically targeted at all unbanked individuals (16m) in South Africa. As the majority of unbanked individuals fall in LSM 1-5, Wizzit includes these individuals within its target market. The Wizzit bank account is opened by Wizz Kids, young individuals from low-income communities. The average Wizz Kid has completed matric (Richardson, 2006) and should thus be able to meet the general fit-and- proper requirements of category A agents19 (as required by FAIS) quite easily. The Wizz Kids are currently offering the funeral insurance product as part of the sale of the Wizzit bank account (to increase their earning potential on each transaction)
and are also selling the products to a large affinity group, the Apostolic Church, of which many members have opened Wizzit bank accounts (Richardson, 2006). One large obstacle to the extension of bank accounts (especially to low-income individuals) and, thus also of insurance products, is the Financial Intelligence Centre Act (FICA). Wizz Kids find it very difficult to deal with the address verification requirements of the Act (see Section 5, where this Act is discussed). Wizzit is potentially able to reach Wizzit bank account holders across LSM 1-10. Box 5: Case Study: Pep and Hollard Insurance Nature of organisations and relationship. Pep, a cash clothing retailer targeted at the low-income market, is a wholly-owned subsidiary of Pepkor. Pep has a branch network of 942 stores distributed across South Africa (Mller, 2006). Through a joint venture, Pep partnered with Hollard Insurance, a company offering both short- and long-term insurance through an array of distribution channels, to provide insurance to its customers. Their products and joint venture was formally launched on 21 March 2006 (Gunnion, 2006a). Target market and products offered. Three products, specifically targeted at individuals in LSM 2-6, were launched in the form of
insurance starter-packs. The products have a monthly premium of R19.99 each (Gunnion, 2006a). Clients do not have to purchase all three products and only have to buy the product(s) that they require. The initial product offering (it is possible that it will be expanded) includes the following products: Category A agents are only licensed to sell funeral insurance.
Family funeral insurance (R5,000 cover for the main member and spouse, less for children and double the benefit in the case of accidental death). Family personal accident insurance (R5,000 cover for the main member and spouse, less for children) Cell phone insurance (if the cell phone was purchased at Pep it is replaced with the same model, up to the value of R1,000). Marketing and sales. The insurance policies, with similar packaging to cell phone starter packs, are simply placed on the shelves of all Pep stores. When the customer pays for the package at the till, the cashier captures the policy number and a telephone number for the client. As the cashier is simply performing an administrative duty, he/she is not required to be a FAIS-registered agent. The Hollard call centre will phone the client within 36 hours to capture and verify all client information.
During this interaction with the call centre, a financial needs analysis (FNA) is not
completed, but the client can request disclosure or explanations on certain aspects of the policy (Inglis, 2006). The client is also able to phone the call centre on a call share number (at the cost of a local call). The cell centre/helpline is staffed by FAIS compliant personnel that are able to disclose product and process information upon request (Edwards, 2006). A cool-off period of 30 days applies during which the client can still decide to cancel the policy and claim the first premium back (Inglis, 2006). Claims payment. Hollard insurance will pay all valid claims on the funeral insurance product to a nominated bank account or (for unbanked individuals) through a nationwide network of burial societies/funeral parlours (Inglis, 2006). The personal accident insurance is paid out in exactly the same manner as the funeral insurance (Inglis, 2006). All claims on the cell phone insurance product are settled through Pep stores. When the claim has been assessed and deemed valid by Hollard Insurance, the claimant can collect a replacement phone from their nearest or most convenient Pep store (Inglis, 2006). The cell phone insurance policy does not offer the option of a cash payout as the
intention behind the insurance is to ensure that the claimant is in exactly the same position after the loss as before it (Inglis, 2006). Premium Collection. Clients receive a policy card with their purchase and are required to pay their monthly premium at a Pep store. During the transaction, the card with the policy number has to be displayed by the client and the cashier collects the money, while also recording the details of the client. If premiums are late, customers receive an SMS reminding them to pay their premium. A 30-day grace period is provided (Edwards, 2006). Remuneration. Pep sales staff do not receive remuneration for policies sold. Financial incentives are set in terms of the overall sales of a specific Pep branch, with staff being rewarded with bonuses when certain targets are met (Edwards, 2006). Pep receives a retail commission on all policies sold and the underwriting profits are shared with Hollard according to the arrangements of the joint venture (Edwards, 2006). Costs. This retail model is not burdened with high distribution costs. As all Pep infrastructure has already been established20 and sales staff are already in place, the only real cost (to Pep) is the addition of the three new products to the total Pep inventory of products (Edwards, 2006). The
products are not allocated a special position in the store and are simply placed on some of the open shelves, thus not implying additional display costs (Edwards, 2006). However, it is important to note that shelf space carries a particular premium in retail stores and that there might be some opportunity cost associated with placing the insurance product directly on the shelves. Assessment. Peps infrastructural capacity allows it to collect premiums in cash at any Pep store. The model is characterised by low distribution costs as the only real cost associated with the roll-out of the insurance product is the one- time addition of the three products to Peps inventory of products. The model is
structured in such a manner that disclosure is provided upon request, i.e. the client has to contact the call centre to clarify confusing aspects of the policy. Although the ability of the model to collect premiums in cash and its infrastructural reach augers well for its success as a low-income model, it only provides disclosure on request and therefore cannot be considered totally appropriate for the needs of low-income individuals. Furthermore, placing the onus of payment on the client by
expecting him/her to come in-store to pay the premium could lead to high(er) lapse rates. 3.1.2.5. CATEGORY 5: ORGANISED LOW-INCOME GROUPS Description. The organised low-income group that distributes insurance to its
members has recently established itself as a new intermediary category. The basic reason for the existence of the low-income groups is often not related to insurance21, but in most cases focused on the provision of credit (microfinance organisations) or the facilitation of savings (savings and credit cooperatives) or other financial services. Some of these groups are member-owned and all monetary surplus derived from their activities is used to the benefit of group members, e.g. stokvels. Others are, however, not owned by the members and all profits/surplus derived is reinvested to serve its members in the best possible manner (e.g. the Small Enterprise Foundation (SEF)). These groups are all client- facing and the intermediation of insurance is initiated as a client collective process
rather than by an existing intermediary or product provider. Although these groups normally have a relationship with only one insurer, the group is
independent in the sense that if the products of a specific insurer no longer meet the needs of its clients, it can move to another insurer. These groups, including burial societies, microfinance institutions, trade unions and even the apex body for a number of savings and credit cooperatives, identify the need for insurance amongst their members and react by establishing a relationship with the insurer of their choice. The group members form the clients of the intermediary and the group (acting as intermediary), thus owns the clients. The management staff of the group drives the product innovation process (with the help of the insurer) and products are tailored to meet the needs of the group members. Low-income groups receive an intermediation fee from insurers for their role in the intermediation process. In some cases, administration is handled by an external administrator while, in other cases, the low-income group takes responsibility for policy administration. Low-income groups often experience great difficulty in establishing a link with the appropriate insurer. They do not always have the
necessary skills to negotiate the terms of a contract with an insurer. In addition, it seems as if insurers may lack the interest and intent to actively try and meet the needs of such groups despite large member numbers. Insurers generally find it difficult to create products innovative enough to suit the needs of low-income
groups clients. However, this might be the result of the inability of insurers to see low-income groups as profitable clients. It is important to note that the intermediation role of low-income groups can evolve. Some low-income groups, such as burial societies, can move from a role where it provides informal insurance to its members to an intermediary role where it sells formal insurance policies underwritten and structured by a formal insurer to its members. In some cases, the low-income group can even evolve from an intermediary role to become an insurer in its own right. Although organised low-income groups (through their intermediary function) can catalyse consumer education processes and fulfil insurance needs amongst their members, they have limited reach in terms of number of clients as their insurance offering is restricted to members. International experience (e.g. India) has
demonstrated that although these organisations have some initial role to play in opening up the low-income market to insurance, they are not optimal in the
distribution of voluntary insurance over the longer run and are replaced by formal insurers selling directly to their members (see Section 6.2.1). Products. Low-income groups try to fulfil the most basic insurance needs of their clients first. For the examples discussed, this means first offering funeral insurance before extending the range of insurance products offered. Some of these groups offer credit life insurance to cover loans taken out from the group or sub-groups, while others (e.g. Lesaka) also offer short-term and legal insurance. Category examples and LSM Reach. The LSM reach of the intermediary category of low-income groups is dependent on specific manifestations of this intermediary. A number of examples of organised low-income intermediaries can be identified: burial societies, e.g. the Great North Burial Society; apex bodies, e.g. The Savings and Credit Cooperatives League of South Africa (SACCOL); a union-owned third-party administrator, e.g. Lesaka; and
microfinance organisations (MFIs), e.g. the Small Enterprise Foundation (SEF).
Burial societies. The Great North Burial Society is a large burial society, providing cover to between 15,000 and 20,000 members. It provided funeral cover underwritten by a formal insurer to its members, but due to regulatory constraints affecting this arrangement, is now considering becoming an insurer in its own right. Due to the nature of its membership, the Great North Burial Societys reach probably extends to LSM 1. See Genesis Analytics (2005) for more information on the Great North Burial Society. Apex bodies. The Savings and Credit Cooperatives League (SACCOL) of South Africa provides funeral and credit life insurance to its members. In addition to voluntary funeral insurance, it is compulsory for members (savings and credit cooperatives) of SACCOL to buy credit insurance from SACCOL to cover the full loan book. SACCOL has 40 savings and credit cooperates as members, representing 15 000 individuals. Of these individuals, 2,000 have opted to purchase funeral insurance. An informal client survey in 2003 found that the average monthly personal income of the individual SACCO members is
approximately R3,000. This implies that SACCOLs insurance probably reaches individuals in the higher low-income to low middle-income categories, i.e. LSM 4- 7. Third-party administrators are typically not member-governed, but operate to generate profit. One exception to this rule is Lesaka Administrators, with the clients being both owned by the administrator (i.e. not under the control of the insurer) and owners of the administrator. Lesaka is owned by a number of unions (essentially low-income employed groups), of which the union members form the client base of the administrator. It is, therefore, similar to a bargaining group through which the union members can negotiate underwriting with formal insurers and provide their own administration to reduce costs. This setup has ensured that the efficiencies gained through the administrator have been applied to the benefit of the client and has resulted in lower cost premiums to members than generally available in the open market. It does, of course, also benefit from the compulsory nature of the schemes provided through the unions, which have contributed to lower premiums (Genesis, 2005). Lesaka does not see itself as an intermediary, but rather as a product provider, since it designs its own products
(funeral and legal insurance) and then finds an underwriter who is willing to underwrite them. Premiums are collected in one of three possible ways: the
government payroll deduction system, private sector payroll deduction systems or through debit orders. Its products are currently underwritten by SAfrican and Old Mutual. Lesaka has 700,000 employed members spread over LSM 4-7, of which it is estimated that 80% have bank accounts (Le Roux, 2006b). International experience has demonstrated that microfinance institutions (MFIs) often form the initial catalyst for the provision of microinsurance. From an international perspective, there have been two main reasons why microfinance organisations have partnered with insurance companies to provide insurance to their members/clients. Firstly, MFIs may want to cover the risks associated with unsecured lending, for example, through the provision of insurance such as credit life and medical insurance for clients. This has been the main impetus behind the insurer, AIGs, involvement in microinsurance in Uganda. Secondly, insurers may want to partner with MFIs in situations where regulation mandates them to provide cover to a certain percentage of poor individuals, as the Insurance
Regulatory and Development Authority (IRDA) forces insurers to do in India (see Section 6.2.1). In South Africa, however, the MFI sector is much smaller than in
Uganda and India. This implies that even though South African MFIs could assist in distributing insurance to lower-income individuals, their impact will be limited to the number of existing clients. The main driver of the relationship is, therefore, the MFI seeking to provide additional value to its members. An interesting example of a South African microfinance institution, the Small Enterprise Foundation (SEF), is discussed in Box 6. SEF is currently in the process of finalising negotiations with an insurer that will allow it to distribute insurance products to its members. SEFs interaction with insurers demonstrates the difficulties that lower-income groups experience in connecting with insurers and issues that have to be addressed when developing products for the low-income market. Box 6: Case Study: The Small Enterprise Foundation (SEF) Nature of the organisation. The Small Enterprise Foundation (SEF) is a non-profit microfinance institution based in Limpopo. It is focused on the elimination of poverty and
unemployment through the provision of microcredit. This is achieved through two programmes the Micro-credit Programme (MCP) and the Tshomisano Credit Programme (TCP). While the first targets micro loans at very small, but existing enterprises, the second programme targets women who live below half the poverty line and are not already involved in business, but who want to start their own enterprises. In the case of the TCP, SEF starts its work within a specific community by first conducting a participatory wealth ranking (PWR). After
completion of the exercise, SEF field staff visit the poorest households to motivate women to start income generating enterprises. As these women do not have sufficient funds, microcredit becomes the means through which businesses are started. Given the nature of its credit programmes, SEFs insurance offering will be targeting individuals in LSM 1-5, although the majority of its clients can be classified as LSM 1-3. SEF utilises the Grameen Banks loan methodology by requiring potential members to form themselves into groups of five members. These groups are rigorously tested before being recognised as official groups. Upon achieving official group status, loans are issued (Lampe, 2006). The need for
insurance. Through focus groups with SEF clients, it was identified that the
primary insurance need of SEF clients is for funeral insurance. It was discovered that although clients require emotional and non-financial support (such as assistance with food preparation) at the time of a family members death, they also require a cash payout. Whereas burial societies do provide a small cash payout in the event of death, their main function is the provision of emotional and other support, while a funeral parlour policy provides for the funeral services. As households often need cash for the funeral itself or to sustain them after a breadwinners death, it was thought that a formal funeral insurance policy would help address this need (Lampe, 2006). The benefits of insurance. SEF concluded that the provision of funeral insurance to clients would help to (Lampe, 2006): Address the economic vulnerability of clients and prevent decline into poverty upon the death of a spouse or child; Mitigate the risk of debt arrears in the case of death in the immediate family; Improve client retention over the longer-term as SEF will be able to provide another service or benefit in addition to microcredit provision; and Create an additional revenue stream for SEF to improve its
financial sustainability. Upon completion of the focus groups, SEF decided that it wanted to offer insurance products to clients through acting as an intermediary that also performs some administrative functions (client information
collection and processing) and handles premium collection. Product requirements. During the focus group process, SEF clients indicated that they initially want a product that only covers the core family (member, spouse and children). At a later stage, they would consider adding other family members (such as parents and extended family) to the policy. SEF wanted as few restrictions as possible, packaged in a simple product. It approached a number of insurers for quotes on existing products, but found that products already available in the market had too many drawbacks for both SEF members and SEF as an intermediary (Lampe, 2006): Products generally were too expensive for SEFs clients; Some products offered a too drastic tiered-structure in terms of benefits, i.e. there was too large a difference between benefits offered to adults and children; Products had too many exclusions and restrictions (such as age restrictions) and too long waiting periods; and Product price structure allowed too small an administrative fee for
SEF to make the provision of insurance financially viable to the organisation as premium collection is an expensive process. Linking with an insurer. SEF experienced many difficulties in finding the right insurer and also the right
individuals within insurance companies to connect with. It experienced that many insurers were not receptive to offering products to low-income groups. SEF approached a number of insurance companies, with some never even replying to its request for quotes and/or a meeting. It found that an individual or organisation acting as a catalyst in finding the right insurer would have been useful (Lampe, 2006). Although SEF was aware of the fact that they could have utilised an intermediary such as a broker in finding the right insurer, it felt that this was not a feasible option (Lampe, 2006). SEF would still have to do most of the administrative work and a further consideration was the protection of client confidentiality. A broker would also have added an additional cost layer to the final insurance premium. The product. The product, as negotiated with the insurer that will be providing the funeral insurance, will offer three levels of cover for the core family (member, spouse and all legal children): Level 1: R3,000 cover for
member, spouse and children older than 15, half the amount for children aged 14 or younger. This entails a monthly premium of R20. Level 2: R5,000 cover for member, spouse and children aged 15 or older, half the amount for children aged
14 or younger. This entails a monthly premium of R25. Level 3: R10,000 cover for member, spouse and children aged 15 or older, half the amount for children aged 14 or younger. This entails a monthly premium of R45. Distribution process. SEF will be responsible for sales, premium collection, claims assessment and also payout. Premiums will be collected in cash by loan officers or staff collecting monthly loan repayments. All claims will be lodged through loan officers, who will also assess the claims. Claims will be paid in the form of a cheque, deposited directly into a bank account of the recipients choice or will be received through a Post Bank/MTN wire transfer. Other considerations. As SEF will not be offering the funeral policy to non-clients, it is concerned that individuals within the communities in which it is operating will try to access its microcredit products in order to access the insurance offered (Lampe, 2006). It was therefore decided that clients will not be
able to participate in the insurance offering until their second loan cycle has been
completed. When the individual completes a third loan cycle, she may continue to participate in the insurance even if she decides not take any further loans. This implies that the client will not always have to be in debt in order to keep participating in the insurance offering. This differs from the way other international MFIs have traditionally sold their insurance products. The issue of moral hazard will be addressed through SEFs careful group selection process used in the microcredit programmes. Dealing with FAIS. SEF intends merely presenting and not actively selling (it will not be providing any advice) the product to its clients. It will be selling the funeral product under the insurers Financial Service Provider (FSP) license and, consequently, will not need to register as an FSP. All loan officers involved in the sales process will be registered as agents of the FSP and will simply be using the tick-of-the-box sales method (Lampe, 2006). Assessment. While the provision of insurance through an MFI is laudable, international experience has demonstrated that MFIs often fail as insurance intermediaries due to the difficulty of integrating insurance processes with credit
processes and management. The absence of advice also does not augur well for the fulfilment of client needs. However, the products were only arrived at after
consultation with SEF clients and negotiations with insurers this at least assists in addressing the creation of appropriate products. Due to the economic profile of its microcredit clients, the insurance will mainly be targeted at individuals in LSM 1-3, although some clients could be classified as LSM 4-5. Although premiums will be collected in cash, this initiative will not be able to open up the low-income market to insurance. Nevertheless, it does provide a useful learning process to the benefit of intermediaries, insurers and clients, which could initiate the extension of access to insurance for a large number of individuals. 3.2. COST MODELS 3.2.1. PURPOSE OF THE ANALYSIS In considering what intermediation models are the most appropriate to serve low- income clients, it is necessary to generate some approximation of relative costs. This analysis attempts to quantify the costs of emerging brokers distributing insurance. It seems that the emerging broker model, due to its individual nature of
operation and the provision of independent advice, is the most expensive
distribution model. Estimation of broker costs, consequently, provides us with a rough idea of maximum costs when distributing insurance to the lower-income market and we assume that other distribution models are associated with lower costs. The purpose of the section is thus to understand whether the emerging broker model, in its current or in a variant form, is able to (in a financially sustainable manner) serve the low-income market. Alternatively, the purpose can be understood as to provide an assessment of the limits of the emerging broker distribution model. Given recent product developments in the low-income market, we have decided to use a proposed Mzansi short-term product (developed by 34 SAIA) and the CAT Standard funeral insurance product (developed by the LOA) to quantify the costs associated with distributing low-income insurance products through the emerging broker (see Section 3.1.2.1). 3.2.2. ASSUMPTIONS AND MODEL STRUCTURE
There are a number of issues that impact on the costs of a distribution model. In
this analysis, we have drawn on interactions with industry players to ensure that our assumptions regarding these issues are as realistic as possible. It must be noted that the model does not try to approximate the costs of the average emerging broker, but rather creates a frontier model. This means that we try to model the lowest realistic costs possible to assess the limits of products and markets that could be served by the emerging broker. The basic assumptions and structure of the model are noted below (The reader is referred to Appendix C for detailed information on models and assumptions): Start-up model. The model assumes that the broker does not have an existing portfolio of policies and is starting his/her business anew. Costs included in model. The model includes consideration of transaction costs incurred in selling or servicing policies, as well as overhead costs. Costs have been based on various submissions in response to the National Treasury discussion paper (2006) on commissions in the life insurance industry, and interviews with various players and service providers. The costs are aimed at modelling minimum costs rather than average costs. Accordingly, our
costs are mostly lower than costs reported in the submissions by intermediary and insurer representative bodies to National Treasury. Cost item assumptions. Detailed costs assumptions and related calculations are contained in Appendix C. Income received. Detailed income or commission assumptions are contained in Appendix C. Sales model. A variety of sale models were used in the modelling process and the results for these are shown in Table 1 and Table 2. Single broker selling individual policies only. The most basic model is based on a single emerging broker selling on individual basis only and assuming that the broker can sell 15 policies on average per month22. It is important to note that this is quite a liberal assumption and thus presents a best case scenario. Individual and group selling. This model assumes that, in addition to the 15 individual policies a broker can sell, he/she also sells to one group (assumed to average 30 individuals) every two months. Like the assumption above, this is a quite liberal assumption and presents a best case scenario.
Multiple brokers. We used a scenario of three brokers sharing infrastructure,
with each broker able to, on average, sell 15 individual policies and policies to one group every two months. Single broker plus runner. In addition to the three brokers of the previous model, we provide for three additional sales assistants for the broker. These assistants do not provide advice, but sell policies using the tick-of-the-box approach and, on average, sell 10 policies per month. Multiple brokers plus runners. This model extends the previous model to three brokers, each with three sales assistants. Products. To simplify the analysis, our models are based on the broker selling one of two possible products. Given recent product developments in the low-income market, we have decided to use a product based on the proposed Mzansi short- term product (developed by SAIA) and one based on the CAT Standard funeral insurance product (developed by the LOA). For more background information on the products used for the cost modelling, see Appendix C.
Lapsing/surrendering. Again to simplify the analysis, the models do not factor in lapsing, surrendering or claims on policies. It, therefore, presents a type of best case. Introducing these events will impact negatively on the models. Sensitivity
analysis. In order to test the sensitivity of our findings to specific assumptions, we conducted a number of sensitivity analyses which are presented in the summary tables and the discussion below. The scenarios used in the sensitivity analyses are: Double sales volume assumptions; Double sales transaction costs; Halve sales transaction costs; and Remove estimates of FAIS-related overhead costs (e.g. recurring compliance and training costs, annual registration fees, etc.)24. The discussion of findings deriving from our models is structured around the type of product sold. For each model variant and sensitivity scenario we present three outputs: Time to break-even. The number of months required for the broker to break even on monthly basis (i.e. in any specific month income exceeds costs). This does not
take into account the financing of any losses made leading up to the break-even month.
Volume at break-even. The number of policies in the portfolio at break-even. This is relevant to consider whether the model can realistically manage the portfolio. Cumulative loss at break-even. This shows total losses over the period leading up to the first break-even month25. 23 Industry players indicated that lapse rates in the low-income market can equal anything up to 50%. 24 The FAIS-related costs used in the model are based on assumed compliance with all the requirements of FAIS and not the actual level of compliance in the market. It seems unlikely that emerging brokers, in the standard model and in other models, will be able to sell the short-term product to the low-income market. The lone emerging broker selling to individuals does not appear to be a viable or financially sustainable option for serving the low-income market. It takes more than seven years (87 months) to break-even (where total monthly commission
received is greater than total costs) at which point, the broker has accumulated a debt of R380,873 (see Table 1). Although still not arriving at a favourable outcome, moving to a higher volume sales model (the group sales model) improves time to break-even and debt at break-even significantly. Break-even time is almost halved (although it still takes almost 4 years to break even) and
debt, although still substantial, is considerably lower at R216,425 (see Table 1). Of all models, the multiple-brokers-and-runners model appears to fare best. However, it still takes more than two and a half years to reach break-even, at which stage the broker has accumulated a debt of R186,957. The lag period to break-even and debt accumulated at break-even does not provide attractive market opportunities and will discourage entry into the emerging broker market. This is simply done on present value basis and does not take into account the cost of financing these losses. Including the financing costs will have a negative impact on the models.
Simply increasing (or doubling) volumes does not allow brokers to serve this market. An examination of figures derived from the sensitivity analysis on the doubling of policies sold per month leads to the conclusion that there is a ceiling or level of policies sold beyond which additional volumes do not provide any beneficial impact to the models. In the case of the runner and multiple-brokers- and-runners model, a position is reached where the financial position of the broker actually worsens when more policies are sold. The only model that really benefits from a doubling of the policies sold per month is the individual model. The reason why the addition of volumes or group-selling does not make a significant difference to the financial position of the broker is that a point is reached where the costs associated with the selling and, in particular, servicing of existing policies is greater than the commission that can be earned from a low-premium product.
Increasing premium levels significantly, results in a more favourable position for the broker model. Contrary to the effect of doubling the number of policies sold, the doubling of premium values does have a very favourable impact on the financial situation of the broker (Table 1). The doubling of the premium from R45 to R90 has the following impacts: The individual model is still unsustainable (and a large debt of R162,542 is accumulated), but time to break-even becomes more feasible (it decreases to 38 months) and the policy volumes at the break-even point more realistic (decreases to 570 policies). This demonstrates that when premiums are high enough, the broker (in its current form) is able to serve individuals. However, the premiums required for the broker to successfully serve individuals may be at levels that are only affordable at the upper-end of the low-income market or even beyond the low-income market. The group sales model and the multiple broker model become more feasible at a premium of R90, although debt levels are still high (R95,816 and R 67,972, respectively) and time to break-even is still long.
Note: If the premium is four times greater (this scenario is not shown in Table 1) than originally assumed (i.e. R180), most models (except the individual model)
break-even within 10 months, although debt levels are still higher than R30,000. This demonstrates the extent to which premiums would need to increase in order for these models to be feasible. It is important to keep the different Mzansi product options in mind when interpreting these figures. Some products are priced at more than R90 and arguably, intended for the upper end of the low-income market. However, even if these products would allow the emerging broker to operate on a financially sustainable basis, demand from the low-income market will be limited. Even an environment without the FAIS Act would not improve the brokers feasibility in serving this market. Although FAIS has a substantial impact on overhead costs (up to 20%), the impact of overhead costs on feasibility is
overshadowed by the continued impact of direct sales costs. If all FAIS cost
components were to be removed from total overhead costs, it only makes a marginal difference to the financial sustainability of the broker in selling the Mzansi product (compare the last column of Table 1 to the original column). The time to break-even is only marginally reduced and cumulative losses remain high for all models. Although the impact of FAIS on direct costs is not explicitly modelled, we can assume that the FNA and other reporting requirements imposed by the FAIS Act will increase the amount of time spent to complete an individual sale. FAIS may also translate directly into increased trips to see the client and an increased amount of paper that may need to be printed. To understand whether the brokers viability would increase if direct costs are reduced, we halved direct costs (see Table 1). The results indicate that even a significant reduction in the brokers direct costs does not improve the brokers financial position sufficiently.
Up-front, rather than as-and-when commission could create a more viable
situation for the broker. A scenario in which commission on the R45 premium is received at a 3.25% level on an up-front basis (the same payment structure as that of the funeral product) was also modelled (not shown in Table 1 or Table 2). This provides some indication of the difference in viability between an up-front and an as-and-when commission structure. While the individual selling model was not viable using these assumptions, the other models all became profitable after either the 7th or 13th month, with accumulated losses only amounting to between R25,000 and R42,000. This shows that selling of even a moderate to low premium product (R45) on an up-front commission basis allows the broker model to achieve a position of relative financial sustainability. This is not a suggested solution for the distribution of short-term microinsurance, but gives an indication of the power of up-front commission on the viability of the broker model. 3.2.4. RESULTS OF MODEL BASED ON LONG-TERM PRODUCT This section looks at the distribution of the funeral product. It is important to remember that, in contrast to the short-term product, an up-front commission
structure applies. Consequently, from the 19th month onwards the level of
commission earned does not change as the broker is selling the same number of policies thereafter and all commission is paid within the first 19 months after a policy sale (refer to Appendix C for a discussion of the commission structure). The current broker model will be able to serve the low-income market with higher premium products under an up-front commission structure. The first column in Table 2 illustrates the potential for the broker to serve the low-income market and, especially the upper end of the low-income market, through the sale of a R75 premium product under an up-front commission structure. As can be seen, even a model that serves only individuals is able to break even after 19 months, with cumulative losses totalling R42,610 (at a more manageable level if compared to the findings for brokers selling the short-term product26). The other models all reach break-even faster and at lower debt levels. If it is assumed that, in general, risk premiums for life products are higher than R75, Table 2 indicates
that the broker should be able to play a role in the low-income space and find the selling of these products viable. As mentioned, 3.25% is a very conservative commission rate for funeral insurance as commission rates are uncapped. If the
commission rate is set at 10%, all models are profitable in the first month. Note: A R75 premium for a funeral insurance product is probably too high for the average low-income client as a product providing the same levels of cover could be purchased for lower premiums at certain providers ( e.g. banks and retailers). Broker models will not be able to penetrate very deep into the low-income market with low premium values. As soon as the premiums are halved, the individual emerging broker never breaks even (see Table 2) and even the group model starts approaching high debt levels at break-even. In addition, the group model never really becomes strongly profitable (a monthly profit of R552 is the largest profit generated) and by the 44th month the model starts generating losses again. Only the variant business models seem like they may be viable in a situation where the premium is halved. This is especially true for the models where the overhead costs are shared by multiple brokers and debt levels at break-even
are approaching R30,000. We have not explicitly considered the financing options available for the reviewed models, but this may present a problem.
Variant broker business models may still be able to play a role in the low-income market even if selling, servicing and overhead costs were to increase. It is possible that selling, servicing or overhead costs were underestimated. To analyse the sensitivity of selling, servicing and overhead costs, these costs are doubled. All models, except the individual selling model (see Table 2) break even by the 7th month under each scenario. In addition, where the servicing costs are doubled, all models, except the individual selling model, break even with quite low accumulated debt levels. The removal of FAIS fixed costs creates a more viable situation for the emerging broker. When FAIS fixed costs are removed (up to 20% of total overhead costs),
the financial situation of the emerging broker becomes more viable. The lone emerging broker is able to break even after 13 months, while the number of
policies sold at break-even decreases to 195 and accumulated losses at break-even decrease to R27,556. The situation is even better with the individual broker selling to groups who breaks even after seven months with accumulated debt totalling only R9,106, while accumulated debt at the break-even point for the small brokerage or multiple brokers is only R 2,196. The runner and brokerage with runners models break even after one month, with no accumulated losses or debt. High sales volumes may assist in making the low-income market slightly more attractive. In a scenario of doubled sales volumes, all broker models (except the lone emerging broker) break even within the first month. However, the lone emerging broker only achieves break-even after 7 months and 210 policies sold, with an accumulated debt of R26,509. 3.3. CONCLUSIONS ON AND ASSESSMENT OF SELECTED MODELS This section concludes by providing an overview of the performance of a selected number of intermediation models on criteria relating to their potential for
microinsurance distribution as well as summarising the findings from the cost modelling. The evaluation of specific models is mostly focused on those models already
operating in the low-income market or on models that have the potential to serve this market. It does not constitute an exhaustive analysis of all the models operating in the low-income market. Traditional (and particularly advice-based) models have not been able to extend into LSM 1-5 and have been limited to the banked and employed. These models are shown at the top of Table 3 and fall in the broker and agent categories. There are some interesting model variations that reduce cost (also FAIS compliance cost) and improve the reach of some of the models (e.g. call centre support for agents and brokers in the Metropolitan REI model), but these models are still unable to penetrate significantly into LSM 1-5. Where models have been able to extend to the lower LSMs, this has been based on group sales, which were mainly limited to
larger employers. Most of these models are based on advice and the FAIS will
eventually reduce even the limited penetration in LSM 1-5 (darker shaded areas in Table 3). Cost modelling suggests limited role for advice-based sales model of brokers in LSM 1-5. The low value of products sold to the low-income market and inability to cope with significant volumes will make it difficult for the emerging broker in its current form to play a role in the low-income market. This conclusion applies to both the Mzansi short-term product and the funeral/long-term product. Emerging broker models operating under a complete as-and-when commission structure will not be able to serve the low-income market. Although the variants of the broker model achieve financial sustainability faster and at lower debt levels, it is possible that accumulated debt levels for an as-and-when commission structure will simply be too high to source financing.
An increase in premiums or commission levels affects the financial viability of the broker model the most. In the case of the short-term product, premium levels that were doubled decreased accumulated debt (compared to the original estimations), while also decreasing time to break-even and the number of policies at break-even, the most of all the sensitivity analyses. When commission levels were increased from 3.25% to 10% for the funeral insurance product, all models achieved break-even within the first month. This provides a clear indication of the difficulties faced by brokers in selling low-premium products to the low-income market. Although higher premium sales will allow the emerging individual broker models to be viable, it is likely that these higher premiums will be unaffordable to the low- income customer. Variants of the emerging broker business model seem to be able to serve at least the upper-end and possibly (under an up-front commission structure) lower into the low-income market. This is shown by the multiple-broker-and-runner-model,
which breaks even within 7 months when selling a R37.50 funeral product at a 3.25% up-front commission. Changes from an up-front commission structure to a mixture between an up-
front and as-and-when commission structure (a potential outcome of National Treasurys discussion paper) will threaten the ability of even the variant 44 emerging broker models to serve the low-income market. We are unable to comment on the extent of this at this stage. However, increased commission rates (especially for funeral insurance, which is uncapped) may allow a mixture of up- front and as-and-when commission structures to be feasible. Emerging brokers need to up-skill in order to survive in the market. On the short- term side, the market is already operating on an as-and-when commission basis. In order for emerging brokers to operate, even utilising the reinvented models, they will need to focus on higher premium business. On the long-term side, there is still uncertainty about the exact form that regulations will take. However, it seems as if regulations are going to force the market from up-front commissions to a
mixture of up-front and as-and-when commissions. We are not sure how far down this path things will go. What we do know, is that emerging brokers margins will be squeezed and that they will need to attract higher premium business. As a result, for both long- and short-term insurance policies, emerging brokers will only be able to obtain higher premium business with better skills. To increase their skills, they will require financial and other support from government and/or the insurance industry. Better skills will allow them to continue to operate as individual brokers or, more profitably, in some of the potential variant business models suggested in this section. The outcome for the low-income market is that these emerging brokers may be able to cross-subsidise a certain amount of low-
end sales with higher premium sales. As a result, the emerging broker may be able to play a limited role in the communities from which they derive from and which generally constitute the low-income market. A number of new models are emerging that extend beyond banked and employed and are able to serve LSM 1-5. These models are shown at the bottom
of Table 3 and fall in the multi-function and organised low-income group categories. They share a number of characteristics:
Ability to collect cash premiums. A key advantage of the new models is that they are able to collect premiums in cash28 or collect premiums through alternative means (to bank account or salary deduction). The result is that these models are able to serve the unbanked and those that fall beyond payroll deduction. An additional advantage of cash collection is the ability to collect irregular premiums, which will be critical for a large proportion of LSM 1-5 (see Section 4.6) Reliance on tick-of-the-box selling. Tick-of-the-box selling is where a model utilises a simplified sales process of simply ticking the relevant box or space on a form if insurance is required. The sale is conducted without advice. In a few cases disclosure and/or advice is available on request of the client, but it is 28 However, a concomitant disadvantage of the collecting premiums in cash is the possibility of higher policy lapse rates. 45
not part of the standard sales process. It often implies that the sale is completed (i.e. the client indicates that she wants to purchase the product) before any
disclosure or advice on the product is provided (if any disclosure/advice is provided at all). One benefit of the tick-of-the-box method to the intermediary is that the sale can be conducted by a non-FAIS registered employee (see Section 5.3.2). Only one of the models provide advice upon request (the tiered-agency force), while two of the models offer at least disclosure (microfinance institutions and captive cash retailers). A potential concern is that a number of the new models do not offer disclosure as part of the basic sales process but only on request of the client. This means that the client has to know what to ask for in order to obtain sufficient information on the product. This can generally be assumed not to be the case. Utilising brand trust and/or group affinity to facilitate sales. The new models all utilise some form of brand or affinity power to facilitate an easier introduction of its insurance products to the lower-income market. The leveraging of brand power not only helps to reduce certain intermediation costs components such as advertising, but also helps to facilitate trust by potential clients in the offered
insurance product(s). As clients are familiar with and trust the intermediary, it
takes less time to sell the product and clients are willing to make the purchase without requiring significant face-to-face interaction. This argument applies to a strong, visible retail brand (e.g. the retailer models). Similarly, trust, as found in low-income groups, can also facilitate insurance sales. Intermediary control over distribution channel. The nature of the relationship with the distribution partner means that access to the client in most of the new models is beyond insurer control. The intermediary or distribution channel generally controls access to the client and forces the insurer to partner with these institutions. However, for at least one of these models (the captive cash retailer) the insurer has managed to structure the partnership in the form of a joint venture, which means that the insurer is also able to gain access to the client through direct access to client information. While the retailer controls access to new clients, the insurer, therefore, is in a position to interact directly with the existing clients even if the relationship between the insurer and retailer breaks down. We return to the issue of controlling access to client groups in Section 7.2).
Simple, but effective use of information technology. A further key aspect of the new models is their simple, but effective application of technology for communication purposes. A number of the models utilise SMS reminders for clients who pay their premiums in cash and have cell phones or use systems of
phone-back disclosure where the call centre responds on a missed call or SMS. For at least three of the models29, a call centre is of central importance in communication with clients. 29 Tiered-agency, independent retailer and cash retailer. 46 Although the new models will place the products within reach of low-income customers, it is not clear whether they will achieve take-up. Although the new models hold much promise, they have not yet proven their success. Our review has revealed some critical limitations, which raises questions about the take-up that will be achieved through these models and the level of service that will be provided to low-income clients.
Claims processes lag sales and premium collection innovations. Although all of these models are able to collect premiums in cash, some have not been able to
reconcile cash collection with claims payment processes and often still require a bank account to pay claims. One solution, especially in the case of the retailer models, would be to utilise the existing infrastructure of the retailer to facilitate in-store cash payments. However, problems arising out of this solution, such as security risks and possible cash flow issues, would first have to be addressed. It is, however, obvious that this misalignment in the distribution process would first have to be addressed if the low-income market is to be served successfully. Disclosure on demand rather than by default. The fact that a number of the new models do not provide advice and only provide disclosure on request creates a substantial risk of at least some mis-selling to clients occurring. Low-income group models limited to membership. The models that are able to extend to the lowest LSM categories (microfinance institutions and other low- income groups), cannot extend beyond their core membership. Particularly MFIs
have limited membership and will only be able to intermediate insurance to their members. Distribution still limited to funeral policies. The only product actively being sold
(with the exception of Pep/Hollard) is funeral insurance. Although we note this as a limitation, the extensive reach of and familiarity with funeral insurance also means that clients understand basic insurance products and are aware of them. Passive model unproven in markets not familiar with insurance. One of the most critical limitations of the current low-income distribution models is that (along with advice), they have also removed active selling from their sales model. A number of the new models employ a passive sales model, which relies on clients to approach a counter or distribution point rather than a sales agent approaching a client. This model has not yet demonstrated its success in the low-income market. In the case of the HTG/Shoprite example, take-up of insurance policies to date has been very low. The Pep/Hollard model has not been in existence very long and it is thus too early call for a verdict on sales numbers. However, for the Pep/Hollard model, full integration with the sales
47
process30, incentivisation of sales at store level and contact centre sales support may result in more active promotion of the products. 30 In contrast to the Pep/Hollard model where insurance products are placed on open shelves in the stores, Shoprite sells insurance products from a separate Money Market counter in the store. 48 4. SEGMENTATION OF THE LOW-INCOME MARKET Key findings from Section 4 A large number of unreached clients in LSM 1-5 are within reach of existing formal and informal client touch points. 4.2m people in LSM 1-5 have bank accounts but no form of formal insurance. 3.3m people in LSM 1-5 have a pre-paid cell phone but no form of formal insurance. 1.4m people in LMS 1-5 have store account, but no form of formal insurance.
For a large proportion of LSM 1-5, premium collection is, therefore, not the main constraint in reaching the uninsured as they are already accessing other formal and informal networks which could serve as a potential payment collection system. All the alternative client touch points are still beyond the control of insurers and will rely on partnerships with institutions that control access to the client groups. 4.1. INTRODUCTION In this section, certain demographic and other characteristics of LSM 1-5 (or the low-income insurance market) are explored as part of the demand-side analysis. These characteristics were selected because they are able to provide some indication of: product characteristics required to succeed in the market; potential reach of insurance channels; distribution strategies that are likely to succeed in the low-income market; and likely insurance take-up.
Using the mentioned characteristics, the low-income market is segmented into groups or categories with specific profiles that have implications for how insurance is distributed to these groups. Although the categories and their descriptors do not allow us to measure actual demand for insurance, they do provide an indication of factors that could potentially drive demand and, consequently, allows us a glimmer of how the need for insurance (which we
assume is there) could be fulfilled by insurers. In addition, some statistics around current microinsurance usage in LSM 1-5 are explored. This section should therefore not be considered a demand analysis, but rather viewed as a demand- side analysis. 49 4.2. SCOPE OF ANALYSIS AND RISK CONTEXT Defining the low-income market. The FSC clearly states that insurers have to increase effective access and that this means (amongst other things) a sufficiently wide range of first-order retail financial products and services to meet first order market needs and which are aimed at and are appropriate for
individuals who fall into the All Media Product Survey (AMPS) categories of LSM 1-
5 (emphasis added). The FSC definition of the low-income market is thus posed in terms of LSM 1-5, an asset-based segmentation of the low-income market. In contrast, the Life Offices Association (LOA) uses a market categorisation based upon individual income, using R3000 as the upper income31. This implies that any individual earning a monthly income equal to or less than R3,000 would fall into the LOAs target market for the so-called CAT (Charges, Access and Terms) Standards products developed by the LOA to fulfil the targets set in the FSC. The income definition serves as practical proxy for LSM 1-5 as it is often difficult to determine an insurance clients LSM. An income-based definition of the low- income market relates directly to the issue of affordability of insurance products. Using such a definition, it is much easier to answer the question of whether, given a specific monthly household or personal income, households would be able to afford paying a certain monthly insurance premium. However, since the FSC Council has not officially changed or adapted definition of low-income market, this
analysis uses the LSM 1-5 definition of the low-income market. Risk in the low-
income market. Low-income or poor households are more vulnerable and exposed to adverse events. Vulnerability for this group is increased by uncertain or irregular incomes, the absence of an asset buffer and equally vulnerable social support structures. Not only are these households more vulnerable than other households, they are also more at risk. Low-income individuals normally live and work in environments with a higher probability of adverse events such as infection, accidents, theft and fire occurring. Strategies to deal with risk. Individuals within these households can choose between one of two main strategies to deal with risk. Risk mitigation strategies, including insurance, savings and credit, can be used before or during an event to limit the impact of the adverse event when it does occur. Coping strategies, such as withdrawing children from school to save on educational expenses or reducing other household consumption, are used after occurrence of the adverse event. Insurance is only one of a number of risk mitigation strategies and it will not be rational for all households to insure themselves against all possible adverse
31 Sid Kaplan, LOA Access Committee. 50
events, nor will households necessarily choose to insure (even if it is the rational choice). However, as insurance is the risk mitigation mechanism of choice for many households, it is necessary to understand the factors that determine and shape demand and also supply responses. Insurance usage vs. need. Insurance usage cannot be considered indicative of insurance demand. However, establishing true levels of demand for a product within any market is difficult. In the South African context, the problem of insurance demand measurement in the low-income market is exacerbated by the fact that products (to date) have not been designed to meet the needs of this market (with some notable exceptions). In addition, financial literacy within this market is also not very high and certain insurance concepts unfamiliar32. Given the difficulty of establishing the real demand of insurance within the low-income market, this section uses insurance usage figures derived from FinScope 2005 to provide some indication of demand. The meaning of derived numbers. It is
necessary to emphasise that the segmentation process utilised in this study and
the resultant discussion are focused on the demonstration of an approach, rather than on the absolute numbers or statistics derived from the approach. The proliferation of burial societies and relatively high usage of funeral insurance in the low-income market has supported an understanding of funeral insurance and its benefits. However, other insurance concepts, such as short-term insurance, are still largely unfamiliar to the low-income market. 4.3. THE CURRENT MICROINSURANCE MARKET The microinsurance market in South Africa is limited in products offered and penetration achieved. Figure 3 shows the usage of insurance and other financial products across LSMs as recorded by the FinScope 2005 survey33. Figure 3: Usage of insurance and other financial products across LSMs Source: FinScope 200534 Based on the information captured in the FinScope survey, a number of observations can be made on the current microinsurance market:
Only funeral insurance achieves notable usage. 27% of individuals in LSM1-5 indicated that they have some form of funeral insurance (including formal insurance through a big institution, insurance through funeral parlours,
insurance through employer or burial society membership35). An important and still unanswered question on the success of funeral insurance is whether the success achieved by this product is due to the characteristics on the supply-side (e.g. uncapped commissions) or simply because of the particular cultural demands around funerals in South Africa. In contrast to all other insurance products, funeral insurance seems 34 In Figure 3, short-term insurance is represented by the general insurance category. 35 For simplicity, we refer to burial societies in the same context as insurance products. Previous research, however, suggests that, although burial societies provide funeral cover, they do not provide insurance as defined in South African legislation as the benefits are not guaranteed. See Genesis (2004) for a more detailed discussion.
However, irrespective of the drivers of the successful take-up of funeral insurance, what is clear is that the products success in the low-income market will definitely contribute to the same markets receptiveness to other insurance products and they have now had some insurance exposure. Of the funeral insurance usage, a large proportion is through informal burial societies. Of the 27% that have any form of funeral insurance, about 60% are members of a burial society and about 50% are only members of a burial society (i.e. they did not use any of the other funeral insurance products). Although a proportion of these may refer to formal funeral insurance products sold through informal societies, this is still quite limited
and not expected to be a large component of the informal product usage. The bulk is still expected to be informal insurance products managed without any relationship with a formal insurer. In addition to showing the strength of the informal societies, this is also a demand signal for the need for products to manage risks faced by lower-income households. Of the formal insurance usage, the bulk is through funeral parlours. Exploring funeral insurance usage further, the bulk (30%) of usage in LSM1-5, outside of burial societies, is provided through
funeral parlours. From previous research (Genesis, 2004), this could be where the
funeral parlour acts as the agent of the formal insurer but in many cases, this also presents illegal insurance schemes run by funeral parlours without any relationship with a formal insurer. The data available is insufficient for the disaggregating of these two components or to provide estimates of the extent of illegal insurance. Qualitative research suggests that the self-insured component may be substantial. Other than funeral insurance use of formal life or general insurance products are restricted to the higher-income market. Figure 3 shows very limited usage of formal life or short-term (general) insurance below LSM 6. Of all individuals in LSM 1-5, only about 4% and 1% have, respectively, some form of formal life insurance or short-term insurance. Bank accounts exceed insurance penetration at lower-income levels. The absence of bank accounts is often given as the reason by insurers why they cannot access lower-income households (due to the cost and difficulty of collecting cash premiums). While it may be true that the absence of bank accounts complicate the
distribution question, Figure 3 shows that bank account usage exceeds usage of
formal insurance products. This suggests that the premium collection and claims payment elements of distribution may not be the primary barriers. In addition, take-up of formal bank products suggests a familiarity with formal institutions and possibly some level of financial literacy. The use of store cards suggests some potential of retailer distribution for extending the reach of formal insurance products. Although equally limited in LSM1-3, store card usage in LSM 4-5 exceeds formal insurance usage (if funeral insurance is excluded - of which the bulk is in any event distributed through funeral parlours) and suggests some potential for the distribution of other financial products through retailers. While 13% (2.4m people) of individuals in LSM 1-5 have a store card or account, 97% (2.4m) of the store card holders do not have general insurance, 79% (1.9m) do not have life insurance and 70% (1.75m) do not have formal funeral insurance. In addition, between 20% and 30% of store card holders in LSM 3-5 do not have a bank account. This presents a substantial and
untapped market within reach of the retailers. This is a conservative signal as it is
expected that insurance could be sold to a larger proportion of the retailers client base than may currently use or qualify for store cards or accounts. Even in the lower-income market, the bulk of formal life and short-term insurance is still sold through brokers and agents. While the question in FinScope 2005 on how insurance was bought is limited to the few individuals in LSM 1-5 who have purchased formal life or short-term insurance products (768,000 and 148,000 respectively), it is still interesting to note that 86% and 71% respectively reported to have purchased this through a broker or an agent. The distribution of formal funeral insurance was not explored by a similar question, but the analysis above suggests that the bulk of formal funeral insurance is sold through funeral parlours and that the component expected to be sold through broker or agents will be quite limited. The limited penetration of brokers and agents in the low-income market can probably be drawn back to low levels of profit achievable in this market through one-on-one sales (see Section 3.2). While the situation for funeral parlours is quite different from that of general retailers (primarily that funeral
parlours insure the service that they, in fact, provide), it also confirms the need of formal insurers to consider distribution channels such as retailers. Focus limited to LSM 1-5. Although Figure 3 visually presents insurance usage in LSM 1-10, the above discussion was focused on only LSM 1-5 as this is the category of interest for the rest of the section. 4.4. DEFINING THE DISTRIBUTION SEGMENTS Why segment? The adult LSM 1-5 population is not a homogenous group. This population (consisting of 19m individuals) can for the purpose of assessing distribution potential, be divided into groups. Two main indicators were selected to create easily identifiable distribution groups: banked status and source of income. These indicators were chosen as they relate to the following factors that have implications for the distribution of insurance to this market: consistency of income (mainly captured by source of income data); accessibility of income through payment system (captured by both source of income and banked status); and
current usage of formal financial services (captured by banked status).
Identifying groups. Using FinScope 2005 data, it was possible to determine the banked status (banked or unbanked) of the adult LSM 1-5 population. The same data was also used to construct five sources of income categories which were then applied to the same population: Company income: Individuals earning a regular wage or salary from a company. This source of income implies that insurers will most likely be able to access income through the payroll system and also employ worksite marketing in reaching these individuals. Job income: This category includes individuals earning a regular wage or salary from other individuals (e.g. domestic workers, farm workers). The fact that income is earned from an individual eliminates the possibility of payroll deductions. State grant or pension: Although the size of state grants or pensions might raise affordability issues in terms of insurance premiums, individuals in this group still earn a consistent form of income.
Other/irregular income: Individuals falling in this category are self-employed in either the formal or informal sector. Income can be derived from a number of sources, including the selling of goods and rent from a room or property. Unemployed: Individuals in this group have no regular source of income. However, this does not imply that they receive no income. Some income is received from sources such as family and friends and/or Lotto winnings. The combination of banked status and employment status thus segments the
adult LSM 1-5 population into ten groups or categories. Two key factors were used to then collapse the ten groups into four groups (visible in the table below): Consistency of income; and Availability of a formal point of access for insurers. Table 4: Clustering of the four groups Source Genesis 4.5. SALIENT FEATURES OF DISTRIBUTION SEGMENTS The table below contains salient features describing the four groups. These features, together with the two factors used to create the four groups, allow us to
create clear pictures of the nature of each group. Easy to Reach Flexible Premium Group Innovative Distribution Group Hard to Reach Group size 3.7m (19% of LSM 1-5) 2.6m (14% of LSM 1-5) 3.6m (18% of LSM 1-5) 9.4m (49% of LSM 1-5) Major age category 25-29 years 18-24 years 60-64 years 18-24 years Gender spread 45% female 52% female 66% female
46% female Geographic spread 55% urban 57% urban 40% urban 47% urban Banked status 97% banked (4% have Mzansi bank accounts) 100% banked (8% have Mzansi bank accounts) 100% unbanked 100% unbanked Major LSMs LSM 4 and 5 LSM 4 and 5 LSM 2-5 LSM 2-5
Major FSMs FSM 3-6 FSM 3-5 FSM 1-3 FSM 1-3 Household income R 2,644 R 2,651 R 1,204 R 1,627 Personal income R 1,837 R 1,081 R 605 R 254
Table 5: Demographic and economic characteristics of the four groups Source: Genesis calculations based on FinScope 2005 data
The Easy to Reach are waiting to be insured. Individuals in the Easy to Reach are similar in that they provide insurers with two possible points of access: bank account and/or payroll deduction. In addition, all individuals in the Easy to Reach earn a relatively consistent form of income. The formal points of access to this group, as well as its consistent income flows, makes it the easiest group (for insurers) to sell insurance to. This group has the highest average personal income of all the groups and the majority of individuals are clustered in the higher LSMs (LSM 4 and 5). In addition, individuals have a high level of financial sophistication if the Financial Services Measure (FSM) is viewed as indicative of level of financial sophistication. The Flexible Premium Group requires intelligent product design. The income sources of individuals in the Flexible Premium Group are more inconsistent or irregular than that of the previous group, but the group still provides insurers with a formal point of access through bank accounts. The fact that this group is 100% banked implies that a formal means exist through which
data on the income and expenditure of this group can be collected. However, the unstable income flows of the group mean that insurers will have to design insurance products that allow premium flexibility. This could, for example, be achieved by collecting premiums on a quarterly basis or designing products that requires only 9 out of a possible 12 premiums annually (with a choice on the
months in which payment need to take place). The Flexible Premium Group earns the highest average household income (R6 more than the Easy to Reach) and the majority of individuals is also clustered in LSM 4 and 5. However, average personal income is almost R800 lower than that of the Easy to Reach. Like the Easy to Reach, this group is characterised by quite a high level of financial sophistication as indicated by the fact that the majority is clustered in FSM 3-5. The Innovative Distribution Group stimulates insurance creativity. Individuals in the Innovative Distribution Group are similar in that their income flows are relatively consistent, but because they do not have bank accounts cannot be accessed through any formal points of contact. This implies that insurers will have to be particularly innovative in the design of distribution strategies and products targeted at this
group, with both premium collection and claims payment requiring specific
attention. The issue of product design is complicated by the low average personal income of the group and also low average household income. Fewer individuals are clustered in LSM 4 and 5 than in the previous groups and the group is characterised by a more even spread over LSM 1-5. LSM 2 is the largest category, with 31.4% of individuals falling in this bracket. Financial sophistication in the group is low, with more than 85% of individuals falling in FSM 1-3. The Hard to Reach tests the limits of insurance distribution. The Hard to Reach is characterised by irregular and small income flows and provide insurers with no formal point of access to individuals in this group. Average personal income is very small and although household income is higher than that of the Innovative Distribution Group, it is questionable whether these income flows are sufficient to The higher household income of The Hard to Reach compared to same income of The Innovative Distribution Group can be ascribed to larger household sizes.
4.6. REACHING THE FOUR GROUPS
In conclusion, this section provides a summary of our: evaluation of the distribution potential of the four groups; and an overview of the size of unserved markets within reach of existing formal and informal client touch points. 4.6.1. DISTRIBUTION POTENTIAL OF SEGMENTS Our assessment of the distribution potential of the four segments is summarised in Table 6. The four criteria38 used in this table are defined as: Likely receptiveness to insurance. This measure proxies the likelihood of demand for insurance by the uninsured by considering the take-up of formal and informal insurance products in the group as a whole (i.e. the current exposure to insurance). In groups with high take-up of either of these we propose that the likelihood of take-up of insurance by the uninsured is higher. Extent of informal contact. This measure rates the extent of interaction with informal networks as proxied by informal group membership. Any client touch point presents a distribution opportunity for insurance. In this case, we assess the
extent of informal contact as a potential distribution point for insurance. High
informal contact suggests that a strategy linking with informal groups may be effective. Extent of formal contact. This measure assesses the extent of contact of the group with formal client touch points (banks, airtime vendors, retail stores, etc.) Formal client touch points are even more convenient than informal client touch points as it is more structured and likely to be easier to link with formal insurance structures. High formal contact, therefore, suggests that the group is within easy reach of existing formal structures. Variety of distribution strategies available. This measure simply provides an indication of the feasibility of different distribution approaches in reaching a particular market. Specifically, we consider individual sales, group sales and over- the-counter distribution (e.g. through retailers). A high score on this measure suggests that the group is reachable through a variety of strategies.
Table 6: Evaluation of distribution potential of the four groups Source: Genesis
The evaluation of distribution potential is also captured in the discussions around certain conclusions below. The Easy to Reach and Flexible Premium groups are the most receptive to insurance sales. Using current insurance usage and financial sophistication as indications of likelihood of insurance take-up of receptiveness) of a group, most insurance take-up is likely to come from the Easy to Reach and the Flexible Premium Group. Formal insurance usage is the highest amongst The Easy to Reach39. The group also has quite a high level of financial sophistication, which indicates that financial literacy levels and levels of personal financial control could support insurance sales to individuals within the Easy to Reach. Approximately 71% of the group is clustered in FSM 3 and above (up to FSM 7). Of the four groups, the Flexible Premium Group has the second highest insurance usage40. High levels of financial sophistication also support the idea of receptiveness to insurance in this group 67% fall in FSM 3 and above (up to FSM 8). Both formal and informal insurance usage in the Innovative Distribution group is higher than
that in the Flexible Premium group. However, more than 98% of the Innovative
Distribution and Hard to Reach groups fall in FSM 1-3 raising questions about their receptiveness to formal insurance. Formal contact points extend well into the Easy to Reach and Flexible Premium groups, but is very low in the Innovative Distribution and Hard to Reach groups. Formal sector contact points such as bank accounts, airtime vendors and retail stores are used extensively by the first two groups. Almost 100% of individuals in these two groups have a bank account, a store account or a pre-paid cell phone. The latter two groups fall beyond the reach of these touch points. 39 Almost 25% of individuals in this group have a funeral policy with a large financial institution (or through their employer), while 15% has funeral cover through an undertaker or funeral parlour. Approximately 14% has some form of life insurance, while 8% has some form of medical insurance. 40 11% of this group has a funeral policy with a large financial institution (or through their employer), while 9% has funeral cover through an undertaker or funeral parlour. Almost 8% has some form of life insurance.
Even informal contact points in the Hard to Reach are limited. The level of informal contact points is distributed quite similarly across the first three groups, but much lower in the Hard to Reach group. Informal networks may, therefore, not provide access to this group. Passive models may provide access to Hard to Reach, but low receptiveness of this group questions the effectiveness of passive sales models. The first three groups have some potential for individual, group and over-the-counter (OTC) strategies. In the Hard to Reach, individual sales will not be cost effective and accessible groups are limited. Retailer strategies may place insurance products within reach of individuals in this group but their low current exposure to insurance raises questions over the effectiveness of passive sales models. 4.6.2. SIZE OF UNSERVED MARKETS WITHIN REACH OF EXISTING FORMAL AND INFORMAL CLIENT TOUCH POINTS A clear finding of this review is that there are a large number of individuals in LSM 1-5 who are not currently using any formal insurance but are within reach of
formal and informal distribution channels . While the preceding analysis noted
some findings on the propensity of such clients to take up insurance, this section shows the numbers of individuals within reach of specific channels. Specifically, we note the number of people within reach of touch points beyond the banking sector, where these touch points are not only sales points but could also collect cash/electronic premiums. Distribution segment Banked Pre-paid cell phone Store card/ account Burial society member 4.2m people in LSM 1-5 have bank accounts, but no form of formal insurance. This is a significant result as these individuals are already dealing with banks for financial services and having a bank account makes premium collection (i.e. debit order instead of cash collection) and claims payment far easier. In addition, banks have databases with extensive client information. This information can be used by providers in the design of suitable products for low-income clients. For example, by understanding the flows of money into and out of accounts, products with flexible premium payment options can be developed to fit in with such irregular flows.
3.3m people in LSM 1-5 have a pre-paid cell phone but no form of formal
insurance. These individuals regularly access airtime vendors, which could collect cash premiums and can be communicated with through cell phones. 44% of the Easy to Reach own at least one cell phone within the household and 36% of this group have their own prepaid cell phone. 51% of the Flexible Premium group have at least one cell phone within the household and 46% of the groups have their own prepaid cell phones. Beyond these groups, cell phone channels are especially relevant for the 1.5m individuals in the Innovative Distribution and Hard to Reach groups who are currently not banked. Partnerships with airtime vendors and cellular networks may also provide access to information on client behaviour that could be used to develop and target specific products41. The lessons from the Megatop/ITC e-Choupal model in India may be of particular interest to consider for this model (see Section 6). 1.4m people in LSM 1-5 have store cards/accounts but no form of formal insurance. Once again, this is a group of individuals who regularly access stores to pay accounts and purchase goods in cash. As a result, the lack of bank accounts is not a barrier in this environment and insurance
premiums can also be added to the account, which creates a near debit-order
system for premiums. Approximately 36% of The Easy to Reach has a store card or account, while 27% of the Flexible Premium Group has a store card or account. This implies that insurance premiums for more than a quarter of both these groups can be collected on an account basis when insurance is distributed through retailers. In addition, 400,000 individuals in the Innovative Distribution and Hard to Reach groups have a store card/account but are currently not banked. As with banks, retailers will have financial information (e.g. behaviour, card/account payment persistency) on their store card/account holders. This may be more limited for retailers than for banks, but will still be useful for insurance providers to keep in mind when designing appropriate products for this market. 2.2m people in LSM 1-5 are members of burial societies but have no form of formal insurance. The 1.5m individuals in the Hard to Reach and the Innovative Distribution Group are of particular significance. Firstly, the number of individuals in these groups that are members of burial societies provides an indication of the need for particularly funeral insurance, given that they are already using an
informal risk mitigation product. Secondly, of this group, 1.2m individuals do not
have a pre-paid cell phone or a store card/account. As a result, the burial societies present one of the only channels through which these groups can be reached. Despite the difficulties of linking with such informal networks, they remain a key access point for components of the market that fall beyond all other mechanisms. The Financial Sector Charter targets are within (distribution) reach. The FSC requires that 1.2m42 and 4.4m43 individuals should have effective access to short- term risk insurance products and life assurance industry products, respectively by 2014. Taking the number of currently banked people in Table 7 who do not have any form of formal insurance (4.2m) provides an indication that there are already large numbers of low-income individuals within relatively easy distribution reach. Furthermore, a large proportion of these individuals could be reached through the non-bank client touch points noted in Table 7. The FSC states that 6% of LSM 1-5 have effective access to short term risk insurance products and services (Financial Sector Charter, October 2003) by 2014, which effectively equates to 1.2m people in LSM 1-5 (FinScope 2005). The FSC
states that a percentage (to be settled with the life assurance industry) of LSM 1- 5 households have effective access to life assurance industry products and services (Financial Sector Charter, October 2003). This percentage has been settled at 23% of the LSM 1-5 adult population by 2014 (LOA Circular No. 108/2005), which effectively equates to 4.4m people in LSM 1-5 (FinScope 2005). 5. SOUTH AFRICAN REGULATORY FRAMEWORK FOR INSURANCE INTERMEDIATION Key findings from Section 5 Most insurance regulation is designed to correct information asymmetries and thereby empower and protect the consumer.
Regulation can be imposed on the market in three ways by regulating who may enter the market (institutional regulation), by regulating what products may be sold (product control regulation); and by regulating how products must be sold (functional regulation).
In South Africa, regulation is being driven by two policy goals: 1) empowering and protecting insurance consumers, and 2) simultaneously seeking to extend
access to insurance into the low-income market. These goals can and do conflict. Higher levels of consumer protection translate into higher compliance costs and a more expensive product which, in turn, makes it difficult to extend access. To date, regulation in the insurance intermediaries market has focussed on institutional and functional regulation this has created real costs for insurers and intermediaries. The acts that regulate the insurance and insurance intermediaries markets are the Long-term Insurance and Short-term Insurance Acts, 1998, the Medical Schemes Act, 1999 and the Financial Advisors and Intermediaries Act, 2002. Also relevant is the draft Privacy Bill and National Treasurys proposals on the restructuring of commission. Regulation is impacting directly on the intermediation of microinsurance by increasing the cost of intermediation, particularly for intermediaries operating in the low-income market; and
bifurcating the market into advice-based (mostly high-income) and non-advice- based models (mostly low-income). Conflicting regulatory objectives may result in the closing down of the only models serving the lower-income market. This section provides a review of the South African regulatory environment as it pertains to insurance intermediation. In particular, it focuses on potential challenges to the intermediation of microinsurance presented by the various pieces of legislation and changes currently occurring.
Section 5.1 describes the basic framework within which the review of regulation pertaining to intermediation is set. 63 Section 5.2 alludes to a policy lens framework which is used to consider the conflicts and trade-offs amongst the various pieces of legislation and policy behind the legislation. Section 5.3 outlines the key policy and regulatory documents impacting on the intermediary market and considers their likely impact . This analysis provides the
basis for considering the regulatory trends impacting on the intermediation of microinsurance as described in Section 7.1. 5.1. REGULATORY FRAMEWORK
Is there a need for regulation? Before discussing how regulation is applied to the insurance and insurance intermediary markets, it is worth asking the question why regulation should be applied at all. At the heart of insurance is the same simple transaction: a provider of a product sells it to a consumer. The product itself is a promise: that in return for the payment of a premium, and on the occurrence of a certain event, the provider will pay to the consumer an agreed benefit. Sometimes the product is distributed and sold through the intermediation of a third part. The difference between the provider and the intermediary is that the provider carries the risk of honouring the promise, while the intermediary is a conduit only, used for distributing the product and advising the client on the value of the competing products or competing providers. If the parties to this transaction are willing to
transact, why should the state intervene at all? This goes to the very heart of the role of the state in private markets. Regulation is not necessary for all private
transactions but, without going into a detailed defence of regulation, it can be of use where real-world markets are imperfect. Usually, this is where insufficient information is available to consumers to make economically rational decisions. In other words, the state intervenes to correct the flow of information so that more efficient and rational economic decisions are made. In the case of insurance, specifically, there is an extreme asymmetry of information between the provider and the consumer and, by implication, the intermediary and the consumer. Insurance is a complex product where the value of the product is not inherently visible to the consumer - insurance products are considered to be credence goods, i.e. where the quality is unknown even after the purchase has been completed. The consumer will thus only be able to assess the quality of the product purchased when a claim is made, at which time it is too late to affect the process. The information asymmetry is exacerbated by the absence of clear, comparable market prices. Most consumers will not be able to
assess whether or not the actuarial calculations underlying a specific policy have resulted in a fair price and, due to the complexity of the products and large variance in product features, consumers are generally not able to compare products. Also, insurance products carry a high cost of switching, so that where
consumers do become aware of a better product offering, or realise that they have bought an inappropriate product, it is difficult to switch without losing money already invested in a specific product. There is also an incentive for providers and intermediaries to hide as much information as possible (e.g. on risk and other implicit costs of the product) while promising high returns, because they face little short-term accountability. Another justification for regulation is that it is difficult for consumers to judge the quality of the provider (or intermediary) and to assess whether the provider has the long-term means and skill to honour its promise. Most consumers are not in a position to evaluate a companys or intermediarys financials. Moreover, insurance provision and intermediation have very low sunk costs of market entry. The business of providing both financial products and intermediary and advisory services can be entered at fairly low cost. In industries
where the sunk, irrecoverable costs of entry are high, such as auto manufacturing, the costs of reputational damage are likewise high. The insurance industry is, consequently, more hospitable to fly-by-nights. The consumer is thus at a severe disadvantage compared to the provider and intermediary. As a result, most insurance regulation is designed to correct the imbalance by empowering consumers with knowledge of the product, and knowledge of and trust in the financial integrity of the provider, and quality of advice and service given by the intermediary. How can the market be regulated? Given that there is a valid role for regulation in the insurance markets, the second question relates to how the market can be controlled. As we have seen, though the forms of the parts of the simple insurance transaction may vary, at the centre of every insurance transaction are the same roles: a product provider (the formal risk carrier), a product, a client and an intermediary. Breaking down insurance in this way helps us to see that there are three ways in which the insurance transaction can be regulated: the parties themselves can be regulated, the
product can be regulated, or the way the parties interact can be regulated. On this basis, we identify three types of insurance regulation: Controls on the type and quality of institution offering insurance, and the type and quality of the institution offering intermediation. We refer to this as
institutional regulation. It could also be called who regulation: who is permitted to provide insurance, who is permitted to distribute insurance, who is permitted to advise on insurance products and who may buy insurance? These controls normally apply on the supply side only - very rarely would a restriction be placed on whom may purchase insurance. Institutional regulation defines The characteristics of the institutions that are permitted to be active in the market and erects barriers of entry to those who cannot satisfy these characteristics. For example, under South African law, only a registered insurer may legally sell insurance. Those who cannot satisfy the registration requirements are excluded wholly from the market. Likewise, only registered intermediaries may legally
distribute insurance and offer advice on insurance products. Registered
intermediaries must meet certain fit-and-proper requirements, report regularly to the regulator and so forth. Those who cannot meet these requirements are also excluded wholly from the market. In effect then, the regulator, who is in a better position to judge the quality of these institutions, steps in on behalf of the consumer and excludes those players who fall below the quality threshold. The consumer can then feasibly trust the institutions in the market without having to conduct detailed economic research in every case. Controls on the methods and modalities that must be used in effecting the insurance transaction. We call this functional regulation. It could also be called how regulation: how a sale of insurance should proceed (what information must be disclosed to the client, what advice must be given and how it must be given, what paperwork should be involved, whether there should be a cool-off period,
how much remuneration should be paid to the intermediary); how claims should be processed; and so on. Controls on the products that can be sold. We call this product control
regulation. It could also be called what regulation because it regulates what can be sold: what features must be included in a product, what terms must be present, the minimum benefits, restrictions of premium levels and so forth. Product regulation has been virtually absent in the South African insurance market - an exception is the minimum statutory benefits prescribed for medical scheme products. Otherwise insurers have been free to design products according to the needs of the market. It will be useful to kept this framework in mind as we turn now to a description of the current regulatory framework in South Africa. 5.2. THE POLICY GOALS BEHIND INSURANCE REGULATION
What are the policy goals behind current insurance and insurance intermediary regulation in South Africa? As described above, the insurance and insurance
intermediary laws in most countries are driven with one main policy goal in mind: to inform, empower and protect consumers. This is particularly so in South Africa. The ANC administration views itself as having a firm role to play in correcting the wrongs of the past and in improving the lot of its largely poor and financially uneducated constituency. Prior to 1994, these consumers had very few benefits and rights; the insurance industry was the preserve of the educated and upper classes. Poor people who attempted to enter the formal insurance market, faced a complex environment where products were sometimes oversold by unqualified people, with too little disclosure, poor advice and with very little recourse to hold poor performance to account. Unsurprisingly then, the regulation we have seen implemented in the last decade has been very strongly aimed at empowering consumers, particularly low-income consumers. Consider for instance: The Long-term Insurance Act, 1998 (including the Policy Holder Protection Rules of 2001) (the Long-term Act). This is partly institutional regulation designed to
limit entry to the insurance market to appropriately capitalised and supervised
long-term insurers; and partly functional regulation designed to clarify the process of selling insurance and the rights of the consumer in that process. (Interestingly, it focuses very little on product control.) The Short-term Insurance Act, 1998 (the Short-term Act), which is partly institutional regulation designed to limit entry to the market to appropriately capitalised and supervised short-term insurers; and partly functional regulation designed to control how short-term insurance is sold, and to crystallise the rights of the consumer in that process. (It also focuses very little on product control.) The Medical Schemes Act, 1998, which is partly institutional regulation designed to limit the entry of providers of medical insurance as medical schemes, and partly functional regulation designed to control how medical schemes are sold. In contrast to the insurance acts, the Medical Schemes Act does also focus on product control it prescribes certain minimum benefits that must be included in every medical scheme product.
The Financial Advisory and Intermediary Services Act, 2002 (FAIS). This is the
most relevant act for the insurance intermediaries market. Until the late 1990s, the intermediaries market was not heavily regulated institutionally, functionally, or through product control. Intermediaries could enter the market with no formal registration or training, and operate with low levels of supervision and at relatively low cost. The products that were on the market were for the main part unregulated. Intermediaries were also relatively free to transact as they chose. Following a wave of consumer complaints about mis-selling and inappropriate advice, FAIS was introduced to regulate the advice-giving and intermediary service market. FAIS is a piece of institutional regulation that prescribes who may act as an intermediary and advice-giver, as well as functional regulation in that it regulates how advice and intermediary services must be provided. The Privacy Bill: The draft Privacy Bill (described below) will be a piece of functional legislation that empowers the consumer with a right to data privacy.
The National Treasury paper on commission restructuring (described below,
(National Treasury, 2005) is a policy document with implications for institutional and functional regulation as it may redefine who is allowed to give advice and how that advice must be given and charged for. Again, the thrust of this legislation is to improve conditions for the consumer. However, consumer protection is not the only policy goal at play in the financial markets. Government is also driving another policy goal: that of increasing access to financial services for low-income persons. This goal is most obviously manifest in the Financial Sector Charter (FSC)45 and the political pressure surrounding the whole black economic empowerment (BEE) process. In effect, the FSC forces insurers to sell insurance products to individuals falling in LSMs 1 to 5, a virtually untapped market. How do these two policy goals interact? Regulatory policy can never be all things to all people, and policy goals sometimes conflict with each other (see Genesis, 2004), as indeed these do. The rights and benefits that are provided to the consumer are not created without cost. They are established through positive
actions by insurers and intermediaries, which generate real increased costs.
Invariably, this is eventually passed back to the consumer in the form of higher premiums. This makes the other policy goal in question (providing poor people with access to financial products) more difficult to achieve. In effect, there are two opposing policy forces at work: one has the goal of extending access to financial products (which demands lower prices) while the other has the goal of increasing levels of consumer protection (which invariably creates higher costs and so higher prices). It is also important to note that (as noted in Section 3.1) regulation does not impact equally on all entities. In the case of the FAIS Act, it impacts more heavily on intermediaries providing advice than on those that do not. It is also interesting to note that while the introduction of FAIS has drawn intermediaries into the regulatory net, it is primarily insurers that will face the most pressure from the FSC as many of them compete for the lucrative business of managing governments financial assets. The trade-offs between these objectives is depicted in Figure 4.
The FSC is technically not part of regulation. It is a voluntary industry code
negotiated with government as observer. However, it does carry the threat of government sanction through potential denial of access to government business. There is also an implicit threat of government intervention in the market if the objectives are not met. Figure 4: The relationship between two policy goals Giving priority to consumer protection and empowerment can make activities and channels more expensive and these are likely to be replaced by new models that better suit the higher-cost environment. If one policy goal is to open access to insurance products, then it must be recognised that increasing consumer protection may simultaneously close down certain channels of providing that access 5.3. CURRENT AND FORTHCOMING LEGISLATION IMPACTING ON INTERMEDIARIES This section provides an overview of the regulation and potential regulation that has relevance to the insurance intermediary market. The direct impact of the
relevant pieces of legislation is noted. This cumulative impact is the creation of three regulatory trends which are discussed in the next section. 5.3.1. LONG-TERM INSURANCE AND SHORT-TERM INSURANCE ACTS
Both the Long-term and Short-term Acts, which are mirrors of each other, impose institutional regulation (controlling who may act as a long- and short-term insurer, as well as setting out their compliance and reporting duties) and functional regulation (setting out the methods and modalities that must be used when effecting an insurance transaction). Both long-term and short-term insurers are obliged to register with the FSB in order to legally sell insurance. Long-term insurers must provide R10m start-up capital, and short-term insurers R5m. They must maintain approved ratios of capital, liabilities to assets, and long-term insurers must also employ an actuary to ensure that policies are actuarially sound.
The insurance acts also contain terms relating to the structure and levels of
commission that may be earned by an intermediary. Commission is capped at a statutory limit contained in the regulations. For instance, the commission on an individual life product or health and disability product is capped at 3.25% while commission on the sale of short-term personal lines insurance (insurance sold to a natural person) is capped at 12.5% and motor insurance is capped at 20%. Funeral products have been left unregulated and commission on such products is thus uncapped. The Long-term Act also includes the Policyholder Protection Rules (PPR) which were introduced in 2001 to regulate disclosure requirements (functional regulation). The PPR stipulates that an insurer and intermediary must have a written agreement, and such an agreement may only be entered into if the intermediary is registered under FAIS.47 Impact on intermediaries: The obvious effect of the insurance acts is to control the price of intermediary services, i.e. intermediaries cannot charge above a certain price threshold for their services even if they wish to.
5.3.2. FINANCIAL ADVISORY AND INTERMEDIARY SERVICES ACT FAIS is a classic piece of consumer protection legislation that regulates the financial advice and services industry. With the introduction of FAIS the intermediary market changed (in a relatively short space of time) from one with virtually no barriers to entry, low compliance duties and negligible accountability, to one with significant barriers to entry, new reporting and compliance duties and substantial penalties for non-compliance (institutional regulation). It also imposes standards for the provision of advice and the conducting of intermediary services (functional regulation). A positive outcome of FAIS is that the quality of intermediary serving the market is improving, and so, in time, will the quality of financial advice. This should enhance long-term public trust in the use of financial products, and encourage citizens to save and insure. On the down side, the consumer benefits enabled by FAIS have been associated with increased costs, which have been borne by the intermediaries themselves. FAIS raises the cost of intermediary business in four ways:
During the course of our research no policymaker or official could explain from a
policy perspective why assistance business has been left uncapped. It may be that there is lower risk of consumer abuse in this market because benefits are strictly limited (a maximum of R10, 000) and premiums are relatively small. It may also be because policymakers recognised that funeral insurance is widely and enthusiastically used by lower-income consumers and they did not want to remove the intermediary incentives to go out and provide a socially and culturally important insurance. FAIS increases barriers to entry: In the pre-FAIS era, almost any person could become an intermediary; by contrast, FAIS excludes many potential entrants. Any person, natural or juristic, who provides advice or intermediary service or both (as they are defined in the Act) in respect of a financial product, must first be registered with the regulatory body (the Financial Services Board (FSB)) as a licensed financial services provider (FSP). The applicant must demonstrate certain fit-and-proper characteristics i.e. show that s/he is of good character, has a
minimum level of education and experience, and is operationally and financially
sound. Applicants who are unable to convince the regulator of these requirements are excluded from the market absolutely. Others will have to invest in further education and training. These requirements increase the costs of entering the market appreciably, and raise new barriers to entry (institutional regulation). FAIS raises infrastructure costs: Whereas an intermediary was once able to run a business quite informally, now the intermediary is required to put in place a minimum level of infrastructure, including a fixed business address, communication facilities, a typing and photocopying service, an adequate filing system, a bank account and another bank account for client funds. The increased infrastructure raises costs directly (institutional regulation). FAIS raises compliance and reporting costs: Any FSP with more than one key individual or representative must appoint (or employ externally at its own
expense) a compliance officer who must report annually to the FSB. In addition, the FSP must maintain full accounting records and must (at its own expense) appoint an external auditor to audit the financial statements and report to the FSB.48 The provider is also obliged to pay an annual levy to the FSB. These compliance and reporting duties add significant costs to the business of an intermediary (institutional regulation).
FAIS raises transaction costs: FAIS introduces many duties for the intermediary when dealing with a client. Among these are the duty to supply factually correct information and to confirm this in writing upon request, to disclose the nature and extent of any remuneration, to deliver documents to the client for safekeeping (this potentially inhibits the use of cell phone sales or other paperless models of distribution) and, where financial advice is given, to conduct an analysis of the clients financial needs. These additional duties increase the transaction costs for intermediaries (functional regulation).
FAIS impact on intermediaries: The institutional regulation terms of FAIS increases barriers to entry into the market, and pushes up the costs of operation. The functional regulation terms pushes up the costs of giving advice. 48 Section 19 of FAIS. The FSB has relaxed this requirement in respect of Category 1 FSPs (general FSPs) who do not receive or hold clients money as assets or who do not receive premiums. Such intermediaries do not need to have their financial statements audited by an external auditor but would still need to provide unaudited financial statements to the registrar. See Board Notice 96 of 2003. To assist, the FSB has provided intermediaries with a pro-forma version of what financial statements should look like. 5.3.3. THE NATIONAL TREASURY PAPER ON CONTRACTUAL SAVINGS IN THE LIFE INSURANCE INDUSTRY
In March 2006, National Treasury produced a discussion paper (National Treasury, 2006) that proposed inter alia changes to the structure of commission on long- term products. While most of the paper is focussed on savings products, risk products are loosely included. The paper is a discussion piece only, but it presents a policy view that may result in changes to legislation with far-reaching effects on intermediaries. The proposals include: A move to a hybrid commission structure: Currently, commission on long-term products is paid upfront. The paper proposes a move to a hybrid system where part of the commission will be paid upfront with the balance paid over the term of the policy on an as-and-when basis. If intermediaries are forced to forgo upfront commissions in favour of a hybrid commission structure, the most telling effect will be on short-term cash flow. It is debatable whether all intermediaries will be able, or will wish, to bear the disruption in cash flow until they are able to build up a sufficiently large as-and-when book to restore flows. Even if an interim model were introduced to bridge the change-over, as has been suggested, the proposals
will reduce the incentives of independent intermediaries to either enter or to
continue to operate in the market. Worse affected will be small independent intermediaries (agents, by contrast, would probably be able to rely on the transitional sponsorship of their insurer employers49) and those operating on low margins, namely lower- income brokers who have less resources to carry the break in cash flow. The potential impact of changes in the commission structures were noted in the cost models discussed in Section 3.2. The payment of ongoing commission to an intermediary should be conditional upon ongoing support to the policyholder, and the policyholder should be able to switch intermediaries and redirect commission to another intermediary. In effect, this will allow a client to switch intermediaries mid-stream. Intermediaries will be forced to maintain high standards of client service and follow-up care. This will bring benefits to the consumer at least with respect to investment products. However, it will also raise intermediary transaction costs while introducing cash flow vulnerability for intermediaries.
An intermediary will have to disclose to the client whether he is an insurer agent, (who can either be tied or independent) or an independent financial advisor. The distinction is that insurer agents will be remunerated by the insurer only, while independent financial advisors will be remunerated by the client only. Insurer agents will not be able to call themselves advisors or to provide advice - only independent financial advisors will be able to do this. This proposal turns the FAIS regime on its head because FAIS already licences intermediaries who, once licensed, are qualified to give advice. The National Treasury paper removes that right, placing the fulcrum under the source of payment rather than the qualifications of the intermediary no matter how qualified an intermediary, if payment comes from an insurer, then the intermediary cannot be said to be giving advice. The independence of the broker The impact of incentives on independence. The broker (in contrast to a captive agent) represents the interest of the client and is,
therefore, thought to provide independent advice, based on the clients specific needs and the characteristics of the various products available. Accordingly, commission is paid by the client as it is a reward for representation. However, the fact that it is paid out of the clients premiums but via the insurer has led to some confusion about who is actually paying the broker. Although it is true that the payment is taken from the clients premium and that the client is, therefore, technically paying for a service provided, it is necessary to note that the client does not negotiate the price for the service with the broker. This is done by the insurer, which means that the insurer is actually (possibly rightly) seen as the payer of the commission. Certainly, the fact that the insurer mostly sets the level of the commission (rather than the client) supports concerns over the true independence of the broker and whether they truly represent the interest of the client. Consideration should be given to the establishment of higher standards of intermediary education through a new accreditation system. It is not clear
exactly what the new accreditation system would look like or whether those
already qualified under FAIS would have to re-qualify under the enhanced system. Until there is more evidence of improved disclosure, consumer education and competition in the insurance market, regulation of commission should remain in place. Treasury proposes that intermediary commissions should stay capped for now. Potential impact on intermediaries: If implemented, the Treasury proposals will not be positive for insurance intermediaries, at least not in the short-term. They increase regulatory duties on intermediaries, while keeping commission capped. They also threaten short-term cash flow and add new accreditation criteria. This is not good news for an industry which is already aging and whose members, even before the proposed regulatory changes, operate on a cost/benefit ratio that has not been attracting many new entrants into the industry. At the same time, the rational intervention cannot be argued away. Care should be taken, however, to
implement the proposed policies in such a way to minimise cost and take into account the varied nature of the products and intermediaries considered. 5.3.4. THE PRIVACY BILL
In South Africa the right to privacy is protected by both the Constitution and the common law but there is no formal legislation in place to enforce privacy as it relates to consumer data. This will change with the introduction of the Personal Information Protection Bill (the Privacy Bill), currently being drafted by the SA Law Reform Commission, which is expected to become law in early 2007. This is a proposed piece of functional regulation. The Bill regulates the collection, storage and processing (use) of personal information by the public and private sector. Information can only be used if the consumer gives his or her consent. So-called special personal information relating to religion, race, politics, health and sexual activity, will require the express consent of the client. Other personal information can be processed where either express or implicit consent is given. Consent would
be implied, for example, where the information is obviously necessary for the performance of a contract to which the person is willingly party. The Bill is of particular interest to the long-term insurance industry because insurers and
intermediaries hold detailed financial, medical and personal information about their clients. Financial intermediaries, acting on behalf of their clients, access this information for the purposes of financial planning. At the very least the Bill will require the FSP to make sure that before any information is used, the client has expressly or impliedly given his consent, and in the case of special personal information, that the client has given his express consent. The obligation will be on the intermediary to ensure that it takes appropriate measures to ensure the safety and integrity of information so gathered. In addition, the client will be entitled to obtain information held by an intermediary free of charge. The expense of providing the systems to honour these requirements will be carried by the intermediary. Where a client feels information has been used without consent s/he will be able to lodge a complaint with the proposed statutory body, the Information Protection Commission (IPC) to which the intermediary will be obliged
to answer. Notably, the Bill will also prevent the purchasing of client databases
without the express consent of each person in the database. This will inhibit the operation of some insurers who rely on such purchases to gain access to new clients. The final act will thus strengthen the position of those who already have access to client databases e.g. retail account databases, and will strengthen their position as owners of access to these clients. Impact on intermediaries: The Bill, as proposed, will require intermediaries to revise their processes and systems to comply with the bill. This will require additional compliance spending. 5.3.5. MEDICAL SCHEMES AND THE LIMS PROCESS Private medical scheme membership in South Africa is currently the preserve of the wealthy and middle classes. The government, eager to extend private medical scheme membership to lower-income groups, constituted a consultative process in 2005 to consider the introduction of a low-income medical scheme (LIMS). It is
envisaged that the product that develops out of this process will be available by 2008. Most of the focus in the LIMS process was on product design and only limited thinking seems to have been applied to the question of distribution. The final report on LIMS50 concludes that the best way to distribute the LIMS product
would be through use of brokers and employers, although strong reasons for this choice are not given. No alternative models have been seriously considered at this time (Clarke, 2006). Of particular interest to this review is the potential of improving distribution models by increasing the variety of products that can be sold by a single intermediary. Would it be feasible, then, for potential lower-income insurance brokers to cross-sell LIMS in order to boost revenues? We believe this is unlikely for four reasons. Firstly, the LIMS product will be made available at between R150 to R200 per month (Broomberg, 2006). While this is considerably cheaper than schemes which offer the prescribed minimum benefits (which start from around R350 per member per month), it is still considerably higher than the lower-level insurance
products considered in this report, which range in premium from R20 to R75 per month. Accordingly, there will be limited overlap between the two markets.
Secondly, an intermediary cross-selling medical schemes and insurance products would be obliged to hold dual accreditation in terms of both the Medical Schemes Act (no person may act as a broker for a medical scheme unless the Council for Medical Schemes (CMS) has granted accreditation) and FAIS (a person selling a medical scheme product must register as a FSP with the FSB). A broker thus accredited would be considered well qualified and is unlikely to focus on serving the less profitable low-income market. 50 Consultitative Investigation into Low Income Medical Schemes, Final Report, 7 April 2006 Thirdly, to register with the CMS the broker must have a high school education and a minimum of two years experience. Applicants without the necessary experience may apply as long as they have a matric and can show they will serve
two years apprenticeship under a fully accredited broker. The matric requirement
would exclude some FAIS Category A (See Appendix A) insurance brokers (who are required to have only a Standard 8), and brokers who do have a matric would need to find an accredited medical schemes broker to be apprenticed to for two years. This would be discouraging for most insurance brokers. Finally, in terms of the Medical Schemes Act, a broker can earn, for each member s/he introduces to the scheme and continues to service or advise, a maximum of R50 per member per month or 3% of contributions per member per month, whichever is the lesser.51 This is paid on an as-and-when basis. A broker selling a LIMS product would thus earn around R4,50 per member per month (for a R150 product), which is not enough to entice brokers into this market. In the consultative process around LIMS, a broker focus group assured the task team that the LIMS product could be distributed by brokers without increasing the statutory cap of 3% commission. However, at this rate, it is unlikely that the intermediary service would include the higher levels of advice and follow-up services normally expected for health products (Broomberg, 2006). In other words,
at the current statutory cap brokers will not likely choose to distribute the LIMS product and, if they did, it would be on condition that after-sales service and follow-up would be minimal. This would not be conducive to keeping up policy
persistency because medical health products require a greater degree of follow-up care which, in turn, may lower the long-term credibility and feasibility of the LIMS product. Impact on intermediaries: There will be no impact on existing insurance intermediaries but the accreditation required and commission capping under the Medical Schemes Act would make it difficult for low-income insurance intermediaries to cross-sell LIMS products to boost income. The cumulative impact of the regulatory environment and new developments described above are resulting in significant changes in the market. These changes are described in Section 7. 5.4. OTHER LEGISLATION AND POTENTIAL LEGISLATION
In addition to the above legislation, there are other areas of regulation which do
not directly pertain to the intermediation of insurance but may, nonetheless have an impact. These regulations are in the process of being finalised or implemented and the full implication is, therefore, not clear. We highlight the legislation and its potential impact below, but it would require further research to establish the exact impact it will have on the intermediation of microinsurance. 5.4.1. THE NATIONAL CREDIT ACT The National Credit Act (NCA) became effective on 1 June 2006. The aim is to regulate the granting of consumer credit by all credit providers, and the Act sets a new framework for every credit transaction ranging from mortgage loans to microloans. The policy goal behind the legislation is to empower consumers by regulating and rationalising the credit industry in order to prevent reckless lending, misleading disclosure, anti-competitive practices and the high costs of credit. The Act establishes a National Credit Regulator who will ensure that the credit regulations are enforced. Although the Act is effective from June 2006, it is
only partially applied at present its introduction has been staggered to allow
credit providers to come to terms with the reforms gradually. Full implementation will occur by end of 2007. Even though the definition of credit agreement specifically excludes a policy of insurance, the Act does hold some relevance for the insurance industry regarding credit life insurance. Where credit is given, the provider may require the consumer to take out credit life insurance, or in the case of a mortgage bond, house insurance on the structure of the mortgaged building (as was the case under the Credit Agreements Act which the NCA replaces). The NCA, however, makes it clear that the consumer cannot be expected to take out insurance at an unreasonable cost having regard to the actual risk at stake. Moreover, where the credit provider proposes use of a particular insurer, the consumer must be given, and informed of, the right to choose an alternate insurer. What does this mean in practical terms? In the past, credit providers were able to pressure applicants to take out cover offered by an insurer of their choice - often this was the lenders own subsidiary insurance company. The credit applicant
would then have credit and insurance payments rolled into one monthly bond
repayment. The NCA requires financiers to inform applicants of their right to take an insurance policy with an insurer of their own choosing. These obligations will apply to all credit providers the consumer must be given the right to choose the insurance. The credit provider may not charge any surcharge or fee on the insurance payments. Impact on intermediation: The impact of the NCA on insurance intermediation is not yet clear as the relevant sections of the Act is subject to quite varying legal interpretations and has not been fully enforced. In principle, the NCA should increase competition between insurance providers, because a credit provider will no longer be able to embed an insurance product in a credit agreement to the extent that the client may not even know about it (as is often the case with credit life policies53). Theoretically, this opens up the opportunity for competing insurance products to be offered or intermediated to credit clients. The eventual impact, however, depends on whether the intentions of the Act stand up to the
emerging legal interpretations. This will only be tested once the Act is fully enforced. 5.4.2. RICA The Regulation of Interception of Communications and Provision of
Communication Related Information Act (Act 70 of 2002 (RICA)) requires that cell phone service providers register the identities of new and existing customers who buy SIM cards. Subscribers will be required to show their ID books and provide proof of their home and postal addresses. The law aims to curb crime by allowing police to intercept cell phone communications. It comes into force on 1 July 2006. From that date, SIM cards can only be activated after full identity details have been provided. There are great concerns in the telecoms industry that it will prove impossible to register the 33 million cell phone subscribers in South Africa, some of whom are without ID books or proof of residence. Cell phone companies are likely to encounter similar problems in identifying and verifying the identity of their clients as did the banks under the FICA legislation. Impact on intermediation: This legislation has the potential to undermine the use of the cell phone as a channel of
distribution of insurance products, especially in the low-income market, as it is low-income consumers who will have the most difficulty proving identity and
residential address details. On the other hand, once the registration process has been completed, it will be possible to link a specific cell phone to a persons identity, which might assist in the development of models which rely on secure channels of communication. The development around RICA should be monitored closely to assess the impact on the use of cell phone technology in the distribution of financial products. 53 See Genesis (2006) for a discussion of embedded credit life policies sold through furniture retailers 78 5.4.3. NATIONAL TREASURYS PROPOSALS ON RETIREMENT REFORM In late 2004, Treasury published its recommendations for the future of retirement savings in SA. The aim of the reform is to help South Africans make adequate provision for retirement by improving the regulation and governance of established retirement funds, and by providing greater access to retirement saving
mechanisms for the informal sector and low-income earners. For this latter
purpose Treasury proposed the creation of a National Savings Fund (NSF) a fund for people who earn irregular income (i.e. not in formal employment) or are in formal employment but earn less than the tax threshold. These persons would be able to make intermittent contributions to the fund, which will probably be managed by the private sector but overseen by the government. Impact on intermediaries: Few details are provided in the paper and no firm policy direction has emerged. The paper does not actually clarify whether the NSF will be an intermediated product or not, so it is difficult to assess its impact on intermediation. If we assume the NSF, as a basic and cheap form of saving, is not to be intermediated to keep costs down, then it may be the case that the fund entices some low-end consumers away from broker-sold policies. Even so, the impact is likely to be peripheral to risk intermediation as it concerns savings products only. It may have some impact on intermediaries who sell both risk and savings products but this is tenuous until the reforms are crystallised.
5.5. ADVICE AND DISCLOSURE
Our concluding findings on the overall impact of regulation on the development of the intermediary market will be discussed in Section 7. However, it is necessary to note some findings on the definition, value and cost of advice at this point. The issue of advice is central to the current impact of regulation on development of the intermediary market and the cause of some confusion and conflict. Further research will be required to develop recommendations, but what is clear is that some clarification around the issue of advice is required. The following three specific issues are of interest here: Firstly, we argue that the definition of advice needs to be clarified. Importantly, a distinction needs to be drawn between advice, disclosure and consumer education. Transaction-based advice cannot compensate for consumer education. Secondly, this needs to be reflected in the distinction drawn between advice- giving and non-advice-giving intermediaries. Currently, regulation distinguishes
between advice-based sales and non-advice-based sales and the latter does not include disclosure. For the lower-income market, there is, therefore, currently a trade-off between advice with limited (or no) access (due to the cost 79 of providing advice) or access without any advice. We argue that the latter
position holds some risks for both clients and insurers. While it may be acceptable not to require advice in sales to lower-income households, we argue that disclosure remains essential. Both for the protection of the consumer and the profit interest of the insurer and intermediary. Thirdly, we argue that the independence of advice issue raised in the National Treasury discussion paper may not be critical to the low-income market. 5.5.1. WHAT EXACTLY IS ADVICE? Regulation currently distinguishes between advice-based and non-advice-based sales. By implication, it defines what information provided during a sales process is not considered to be advice. We propose that a more clear distinction should be drawn between different types of information provided during the insurance sale
process. When an insurance intermediary interacts with a client, information is passed from intermediary to client. At least three types of information can be distinguished: advice, disclosure and consumer education. Advice. Advice constitutes the passing of information which not only informs a client of the financial products available to him or her, but is also coupled with express
guidance and a recommendation as to which type of financial product or which specific product is best suited to the clients needs. A definition of advice is given to us in law which concurs very closely with this - the FAIS Act defines advice as: any recommendation, guidance or proposal of a financial nature furnished, by any means or medium, to any client or group of clients in respect of the purchase of or investment in any financial product. (section 1) The key part of this definition is that a recommendation, guidance or proposal must be given to the client. Disclosure. Disclosure is not as neatly defined in law as advice is, but we venture that all information that is not considered advice, but which is germane to the client and which the client could reasonably expect to
know of and be told before entering into a contract of insurance, would fall into
this category. For this reason it could also be called contractual information. It would include: Overarching factual information describing what the contract does and broadly what the rights and obligations of the parties are, including a description of the 80 premium, a reasonable explanation of the nature of trigger events, the benefits s/he can expect, and who the beneficiaries will be. Factual information about the procedure for entering into the contract. Specific factual information on the administration of the contract, for example, when, where and how premiums must be paid; if and how premiums will increase; and how and to whom the benefits will be made available. Relevant information about exclusions and caveats that the client would reasonably want to know about. This information is relevant if it would lead the client not to enter into the contract, or to seek to enter it on different terms.
Information about the nature of the relationship between the intermediary and the product provider; an indication of nature and extent of intermediary remuneration; and what charges the client can expect to pay in addition to the premium. Any other information that is given without making any express or implied recommendation, guidance or proposal. The objective of providing disclosure information should be to put the client in a position in which he or she reasonably understands the terms of the contract before entering into the contract. A simpler transaction, say the sale of a soft drink, would not require this information because it would be implicit that the client reasonably understands the terms of transaction because they are simple.
However, because insurance is a) a more complex product than a soft drink and b) a credence good where the value of the product is not immediately tangible or obvious and is known only to one of the parties, and c) it may lead to a long-term obligation for the client, it is appropriate that the client can expect a higher level of disclosure than in a more simple transaction. Consumer education. The third
type of information that may be imparted by an intermediary to a client is generic knowledge about financial products in general. An example would be information about the concept of insurance and how a generic insurance product works. In environments of low financial literacy (as is expected to be the case in the low- income market), consumer education may be very important. However, care should be taken on how this is provided. Based on the current experience, we argue that the insurance transaction (although contributing to consumer
education through disclosure and education) should not be relied on for consumer education. This does not suggest that it does not have value to the client, but simply that it is not feasible to provide this within reasonable cost given the small size of the transaction, and also that the intermediary should face no legal obligation to impart to the client consumer education (as opposed to disclosure or advice). 81 5.5.2. WHEN IS ADVICE REQUIRED AND WHO CAN PROVIDE IT?
FAIS is explicit that where an intermediary provides advice, he must be registered
as a FSP or representative (as we have seen, registration is a costly process) and is obliged to carry out a needs analysis. FAIS is not explicit about what must be done to satisfactorily conduct a needs analysis or under which circumstances advice is required. It only requires that the FSP, prior to providing the advice in question, must take reasonable steps to seek from the client information about his financial situation, product experience and objectives, and must then conduct an analysis of the information, and identify the products that will be appropriate to the clients risk profile and needs. The FSP must also take reasonable steps to ensure that the client understands the advice given and is in a position to make an informed decision.54 Beyond these general pointers, there is little guidance for intermediaries on exactly how a needs analysis should be conducted. This has created some confusion in the market. Intermediaries have been left to form their own interpretation of the law. In complex (and higher-value) cases, for example, where the client wishes to structure an entire retirement plan, the trend in the market is to conduct an holistic or full needs analysis, that is, one that takes
account of all the particulars of the clients circumstances across a range of financial products. Where the clients needs are simpler (and of lower value), for example, she wants to buys a single funeral policy, the tendency is to conduct a simple or single needs analysis, alternatively to avoid giving any advice and so not conduct a needs analysis at all. Opposing views of FSB and FAIS Ombud on when advice is required. The FSB has shown itself to be sympathetic to the view that only a simple needs analysis is required for simple products and that advice is not always required. It has, however, shied away from putting out an official guidance note, presumably to avoid civil claims from disgruntled consumers who feel their needs analyses, although technically sufficient, were not in fact appropriate. In contrast, the rulings of the FAIS Ombud suggest that the requirement for advice is based on the needs of the client and not the nature of the transaction. This issue will probably only be settled definitively through the determinations in time of the FAIS Ombudsman. The Ombuds initial determinations appear at odds with the FSBs view. The Ombud previously ruled (in Stephenson v Nedbank) that a FSP
must always conduct a needs analysis where giving advice and that this cannot be a superficial assessment. However, the facts of the Stephenson case concerned a complex investment product, and whether the Ombud will take the same view of
needs analysis for low-premium, simple risk product is yet to be established. This is discussed in more detail in Section 7.1. 54 Part VII (8)(1) of the General Code of Conduct, Board Notice 80 of 2003 82 5.5.3. THE TRADE-OFF BETWEEN ADVICE AND ACCESS Based on the above, we argue that a situation where a ruling by the Ombud results in advice being required for all insurance transactions holds negative implications for access and may not be in the best interest of the consumer. At the same time, we argue that a situation where all low-income insurance transactions are conducted without even sufficient disclosure is, similarly, not in the interest of the consumer. In terms of the cost-benefit trade-off, we propose that the simplification of products in addition to appropriate disclosure and the 30 day
cool-off period provided under the Policyholder Protection Rules will be sufficient to assure informed decisions at reasonable cost. 5.5.4. INDEPENDENCE OF ADVICE In addition to the above, the National Treasury paper suggests introducing a distinction between independent and other types of advice. The question is whether this is relevant for the lower-income client group? As argued above, we
propose that disclosure is much more important than advice and that appropriate and simplified disclosure would present a much better cost-benefit position than insisting on advice for all transactions. The extension of this argument to the independence of advice is clear. We propose that if additional costs will be incurred to introduce new categories of advice, that this will not provide significant additional value to the client group most affected, the poor. 5.6. CONCLUSIONS AND RECOMMENDATIONS Regulation is being driven by two policy goals: 1) empowering and protecting insurance consumers, and 2) seeking to extend access to insurance into the low- income market. Unfortunately, these two policy goals can, and do, conflict. On the
one hand regulation has improved the levels of consumer protection admirably.
On the other, and as a by-product of the improved consumer protection, costs of insurance intermediation have increased and continue to do so. At the same time, incentives to operate in the market are falling. Regulation is impacting directly on the intermediation of microinsurance in two ways: by increasing the costs of intermediation; and by making the provision of advice more expensive thus bifurcating the market into advice-based (mostly high-income) and non-advice-based models (mostly low-income). This trend is explained in the next section. What seems clear is that, under these conditions, traditional means of intermediation (a broker) will not successfully reach the low levels of the market. Secondly, low-income income intermediation, to the extent it does or could exist, will not occur with the provision of high levels of advice. If policymakers or the Ombud do insist on minimum levels of advice with every sale of insurance, then
models currently serving the lower-income market will close down. The challenge from a regulatory perspective, then, is to find policies that either: bring the cost of intermediation down or create more incentives to serve the lower-income market, or allow a level of advice or disclosure that is sufficiently limited that it does not push up the price of intermediation unduly, but sufficiently generous so that the low-income consumer understands the insurance product he or she is buying; or a combination of the above two. What changes can be made to the regulatory environment to achieve this? Commission could be deregulated to encourage intermediaries to sell lower- value policies. A number of intermediary groups have been lobbying for this. However, in light of comments on deregulation in the Treasurys commission
paper, this is unlikely to occur in the foreseeable future and at least until such time as Treasury is satisfied that disclosure standards and consumer education have improved significantly. Beyond agreeing that at a graduated approach to deregulation is the correct one to follow, we are not able to comment on the
medium-term effect of deregulation of commission without further study of other jurisdictions and sectors where deregulation has been implemented. Lower the barriers to entry and compliance duties (set out in FAIS) for intermediaries selling low-value products. This could defeat the object of the Act, which was, in fact, designed with the intention of keeping certain intermediaries out of the market, and of ensuring those in the market comply with certain
minimum standards. We recommend, therefore, that exclusion and costs incurred in compliance with the Act (as the FAIS department moves from registration to enforcement and the grace periods for Category A applicants expire) be monitored. A cost benefit analysis of FAIS is required. Deal with the issue of advice. The expensive part of FAIS concerns the giving of advice - not only must advice-giving intermediaries be registered as FSPs or representatives, but an advice-based sale requires the completion of a needs analysis which pushes up the transaction costs. Potential mitigants of this problem are:
Clarification is needed on what constitutes minimum compliance for a basic
needs analysis. Some brokers do not see lower-income selling as viable because they assume a full needs is required in every circumstance. There is confusion in the market about what constitutes advice and thus when a needs analysis is required, and when disclosure alone is sufficient. The definitions of what constitute advice, disclosure and consumer 84 education need to be clarified, and a clear distinction drawn between the three concepts. Non-advice based, tick-of-the-box selling that is accompanied by full and meaningful disclosure should be allowed but clarity must first be given as to what constitutes full and meaningful disclosure. It is in the interest of the insurance and intermediation industry to draft a Code of Conduct around minimum disclosure on non-advice sales (especially if it is lobbying for deregulated commission structures (see first bullet)).
Although his mandate is to act in consumers interests rather than to expand access, the FAIS Ombud should be sensitised to the threats posed by a clamp down on tick-of-the-box selling. Ensure that different accreditation regimes (e.g. FAIS and Medical Schemes) are similarly aligned for products of similar complexity, so no unnecessary duplication takes place. Finally, there are three pieces of young or embryonic legislation that need to be monitored and assessed as they develop: RICA should be closely monitored to assess the impact on the use of cell phone technology in the distribution of financial products. The developments around Treasurys commission restructuring proposals need to be monitored closely. There is currently some uncertainty as to what the proposals mean for risk-based intermediation. More research will be needed on the impact of the proposals on impact on intermediaries, particularly those serving the low-income market.
The developments around the NSF need to be monitored. It is not clear yet if the NSF will be intermediated or not. If it is, it presents a potential opportunity for intermediaries. If it is not, it could undermine part of their existing client base. 85 6. INTERNATIONAL TRENDS IN THE INTERMEDIATION OF MICROINSURANCE Key findings from Section 6: The MFI-linked partner-agent model is more suitable for the distribution of compulsory microinsurance products than voluntary products. Insurers are not necessarily guaranteed a permanent distribution mechanism through MFIs as, there are also other options available to MFIs to mitigate credit risks. Mutual insurance models have been utilised by consumer groups as an alternative way to distribute insurance to their members. This is usually in response to a lack of perceived value offered by insurers. Insurance can be successfully distributed to low-income individuals through the innovative use of existing infrastructure. However, if complex technology is employed during the sales, premium collection or servicing processes, the
intimidating nature of the technology (to low-income individuals) can be overcome through use of a trained intermediary. The UK experience has demonstrated that as a minimum level for customer protection at least full disclosure is required. As part of the review of microinsurance intermediation in South Africa, an international review was conducted to consider interesting models emerging from other countries, the potential lessons that could be identified for South Africa and to contextualise the development of the South African intermediation market within emerging global trends. This section presents the findings of this analysis by: providing a brief overview of intermediation models globally as context for the discussion; highlighting three prominent examples of intermediation models and considering their relevance for South Africa; reviewing the historical development of intermediation in the UK and the impact that regulation has had on this market; and
based on the above, drawing out key lessons for the intermediation of microinsurance in South Africa. 86 6.1. MODELS EMERGING
From an international scan, four basic distribution models used for the delivery of microinsurance products to low-income individuals were identified. The key features of each of these models are as follows: MFI55-linked partneragent (that corresponds with our concept of the low- income group): The partneragent model is one where the insurer uses another organisation to distribute insurance products to the agents captive clients. Generally, in microinsurance distribution, these agents are MFIs and other forms of NGOs; the common factor being the agent already provides some form of financial services to its clients. The insurer is responsible for product development and pricing, and the agent is responsible for sales and service. Perhaps the best known example of this model is the partnership of AIG with MFIs in Uganda, offering group-based credit life policies. Opportunity International (OI) is
developing and beginning to deliver a similar model, engaging with mainstream
insurers to design and deliver assurance products to its customers. See Box 2 for a description of Opportunity Internationals Micro Insurance Agency and its intended role in South Africa. Captive agent (that directly corresponds with our concept of the captive agent): The captive agent model is one where the insurer recruits and manages a direct sales force to sell and service the insurance products to low-income clients. The insurer is responsible for product development and pricing, as well as sales and servicing. This model enables insurers to maintain control of the business56. Examples of the captive agent model are Delta Life Insurance (Bangladesh) and, having changed from the MFI-linked partner-agent model, Tata-AIG (India) and CLICO (Ghana). Mutual insurer (that corresponds with our concept of the low-income group): The mutual insurer model is a variation of the partner-agent model in that the agents57 (and sometimes also clients) have a stake in the ownership of the insurer themselves. Most commonly, cooperatives, credit unions and other formal and
informal mutual organisations that are already offering financial services choose to adopt this model. There is significant participation and interaction between
insurer and its clients and this has had significant advantages in terms of shaping insurance product design, and facilitating client service. Examples of this model include TUW SKOK (Poland), the CARD network (Philippines), Servi Peru, Columna (Guatemala) and, on a smaller scale, MUSCCO and its member SACCOS in Malawi. 55 For simplicity we refer to MFI-linked partner-agent model, but this includes NGOs, cooperatives and self-help groups. 56 It has to be noted that even with agency forces, the insurer is not able to retain full control over the client. It is typically found that agents start selling other products as well after a few years and, therefore, make the transition to broker. The largest extent of control is provided through a direct sales call centre, where the insurer retains the primary relationship with the client and also full information on its clients. 57 In the case of TUW Skok, the insurance is distributed by individuals that are members of the cooperatives union. 87
Independent intermediary (that corresponds with our concepts of the broker and independent multi-function intermediary): The independent intermediary sells and services insurance products on behalf of many insurers, but does not carry any of the insurance risk. In many environments, broking licenses require significant capital outlays and special requirements in terms of staffing, training of field staff and other aspects. The greatest advantage of the independent intermediary is the choice of insurers and products offered to clients. The best known example of the independent intermediary model is Megatop/ITC (India) and Servi Peru (Peru)58. It is important to note that while TUW SKOK (Poland) is classified as a mutual insurer, it can also be considered an independent intermediary as it provides clients a choice between different insurance products also offered through its brokerage. Globally, the following trends and conclusions have emerged around the four generic models described above: The MFI partner-agent model central to initial entry of the low-income market. Globally, the MFI-linked partner-agent generally forms the entry point for a
commercial insurer into a new low-income market/country. Given that premium
income from individual low-income clients can be as little as $ 0.0859 per month and margins per policy written are low, commercial insurers have favoured this approach in order to achieve scale and commercial viability as quickly as possible. Scale and viability can be ensured by offering the products on a compulsory basis only. A major initial driver of the use of this model have been MFIs wishing to cover the risks of unsecured lending, as in Uganda, through compulsory and group insurance, such as credit life and other products that mitigate lending risks. However, to succeed, MFIs must also have access to a large customer base, backed by good systems. For insurers, the low start-up costs are an incentive because there is no need to invest in market research and customer acquisition. This model can be readily rolled out60 to other MFIs, especially if there is a well- developed microfinance sector. Although appealing in some contexts and particularly for market entry/exploration by the insurer, the MFI-linked partner agent model has not been without problems. Particular difficulties in making the model work both to the
benefit of the insurer and the MFI has seen insurers exploring alternative models and/or MFIs extending into the provision of insurance. See Box 8 for a discussion on the limitations of the MFI-linked partner-agent model. 58 Opportunity International (OI) is about to launch a microinsurance brokerage
which will identify, develop, deliver and administer insurance for any organisation wishing to provide assurance to its low income customers/clients. OI will not accept any risk, but negotiate with commercial insurers who will underwrite the actual products. 59 This example derives from India. 60 AIG has successfully rolled out its boiler plate products to 26 MFIs in Uganda and recently to other parts of East Africa. Reinsurers now also offering microinsurance. It is important to note that reinsurers have also recently started extending microinsurance to MFIs. As reinsurers are only allowed to offer their products and services to legally licensed insurance companies, some reinsurers have established shell companies with legal insurance licenses in a number of countries. MFIs can, consequently, purchase the
required reinsurance from these subsidiaries insurers of these holding companies. This implies that, in addition to the possibility of self-insurance, MFIs choices in terms of possible insurance providers are growing. Insurers exploring alternative distribution through direct sales. While the MFI- linked partner-agent model appears to be well suited for distribution of mandatory group microinsurance products, the demand for voluntary insurance products from MFI clients, coupled with problems that MFIs have faced to distribute these products has seen insurers turn to alternative models. Tata-AIG (India), Delta Life Insurance (Bangladesh) and, from 2006 onwards, GLICO, have discarded the MFI-linked partneragent model and established their own (low- cost) community-based captive sales forces to deliver insurance to low-income clients. The driver for establishing the captive agent model also stems from a
growing belief among insurers that insurance can be sold in a commercially viable manner to low-income people. An additional driver is the desire of commercial insurers to retain control over the front-end distribution process, which only the captive agent model can provide. (See Section 7.2 for a discussion on the drive by
insurers to regain control over their distribution networks in South Africa.) The captive agent model appears best suited for use when insurers wish to: sell voluntary insurance products in volume to the poor, especially in high population density areas; exercise close control over agents because of the specialised nature of the products, particularly investment products (pension and savings related); establish a dedicated delivery channel with low fixed costs, where local community people are used as captive agents.
MFIs/NGOs/Cooperatives extending into the provision of insurance. Likewise, the mutual insurer model is typically used in contexts where: a well developed cooperative/credit union network exists that requires a range of needs-based insurance services mandatory and voluntary61; the cooperative/credit union network has good systems and administration; and Mandatory and voluntary products can be distributed through the same network. Mandatory products help to cross-subsidise voluntary products and enhance the overall financial viability of the insurer.
insurance distribution through this network is managed separately from other financial services, but with significant intermediary involvement in product design and distribution. Independent intermediary utilised in contexts where client aggregators realise negotiation power and avoid exclusive relationships. The independent intermediary model does not appear to be common; and only two examples were identified during the course of this review. This is perhaps not surprising because insurers and mutual societies have, to date, had little interest in setting up brokers when they can sell direct or through partners to customers62. MFIs/NGOs/SHGs have typically had to enter into captive agreements with the insurer to incentivise the insurer to tailor products to the needs of its members. Increasingly, however, client aggregators are utilising their negotiating power to retain independence, also in South Africa. Furthermore, the emergence of new independent intermediaries has found receptive markets where MFIs/NGOs/SHGs have had difficulty negotiating mutually beneficial agreements with insurers and where
sophisticated client management systems where not available. (See Box 2 of
Opportunity Internationals Micro Insurance Agency which intends facilitating the structuring of insurance agreements between insurers and client groups (including MFIs) in South Africa.) It appears that this model seems to be suited to contexts where: the prospective independent intermediary has access to a large captive market through a well established channel/platform that already distributes other products; there are diverse client groups that require several types of voluntary insurance products and the range of products/insurers required is high; the intermediary can provide system support to the MFI/NGO/SHG; where increased levels of interest by insurers in microinsurance has resulted in client aggregators benefiting from a more sophisticated intermediary that can broker the relationship with one or more insurers; and microinsurance distribution can be managed separately from other business activities.
In summary. The global review indicates that the MFI-linked partner-agent model
is the most common entry point for commercial insurers into low-income markets, usually through MFIs that offer a large and captive client base on which an insurance portfolio can be built. However, the evidence suggests that for delivery of voluntary insurance products to low-income clients, commercial insurers are moving away from the MFI-linked partner-agent model and choosing the captive agent model (Delta and Tata-AIG). Mutual insurance models are a special niche, and are used when there is strong credit union/cooperative network and their Two specific cases of mutual insurers establishing brokerages include TUW Skok and Servi-Peru. However, at least in the case of TUW Skok, the brokerage served only a temporary purpose in providing life insurance until TUW Skok was able to purchase a life insurance license. clients require delivery of a range of mandatory/voluntary products63. The independent intermediary model is often not the model of choice as insurers can sell directly to clients. However, the independent intermediary model has been of
use in situations where MFIs/NGOs/SHGs have experienced difficulties negotiating mutually beneficial transactions with insurers and these organisations wanted to provide clients with a range of products. 6.2. EXAMPLES OF INTERMEDIATION MODELS This section will review three examples of the microinsurance intermediation models discussed in the previous section: The use of MFIs as microinsurance intermediaries (or the MFI-linked partner- agent model). Specifically, we consider the varying experience of AIG in Uganda and India to gain an understanding of the limitations of the MFI model and conditions under which MFIs could be successfully utilised for intermediation. This is particularly relevant as MFIs in South Africa are in the process of incorporating insurance into their product offerings to members and are considering the various options available to them. The experience of mutual insurers and the intermediation approaches applied by mutual insurers. Here we consider the experience of TUW SKOK in Poland. In particular, we consider their rapid development over the last 15 years and the
intermediation lessons learnt during this time. There are a number of cooperative
bodies in South Africa of which some are considering incorporating microinsurance in their offering to members. The lessons from TUW SKOK may be useful in guiding this development. The experience with innovative and technology-based independent intermediation models in developing countries. We review the ITC/Megatop model of distributing insurance through grain trading technologies in India. Specifically we focus on understanding the impact of technology, regulation and relative costs in shaping the development and success of this model. This is not an exhaustive list, but focuses on highlighting the most interesting examples found and those with some relevance to South Africa. 63 Recent thinking among industry practitioners suggests that when planning new low-income insurance schemes, sponsors should first focus on determining who will be responsible for different insurance functions such as product development; sales and distribution; administration; and carrying the insurance risk. Thereafter it is necessary to assess the fit of the various delivery channels with these
requirements, rather than opt for a distribution model that seeks to fit these key business considerations into the (constraints of) the particular model. 6.2.1. THE MFI-LINKED PARTNER-AGENT MODEL: INSURANCE DISTRIBUTION THROUGH MFIS IN UGANDA AND INDIA-64 As mentioned, for many insurers the MFI-linked partner-agent model forms the entry point into the microinsurance industry. In this section, we explore the
differing experiences of one particular insurer, the American International Group (AIG) in two countries, Uganda and India. The American International Group (AIG) and MFIs. The partnering of the international insurer, the American International Group (AIG), with MFIs in Uganda and India has achieved varying levels of success in these two countries. While AIGs partnerships with MFIs in Uganda proved to be successful from a financial perspective, AIG soon realised that it would not be able to meet insurance targets set by the Indian regulator through only the utilisation of partnerships with MFIs in India.
The Ugandan experience driven by MFIs rather than AIG. In Uganda, MFIs
approached AIG out of their own accord to hedge their credit risk by obtaining specifically credit life insurance. In 1996, FINCA Uganda (then the largest MFI in Uganda) requested assistance from AIG in the development of a risk product that could assist households in recovering from the financial shock associated with death. Although AIG initially rejected FINCAs proposition, the arrival of a new managing director at AIG led to the development of a group accident policy65, specifically for FINCA (McCord, Botero & McCord, 2005). In 1999, the same product was offered to an MFI in Tanzania and this led to the expansion of the product to MFIs in other African countries. From the very beginning, there was thus a direct demand for credit life insurance products by MFIs to cover the lives and credit risk of their clients. This direct demand, together with a relatively uncompetitive insurance market in Uganda, has contributed to the financial success of AIGs microinsurance business. AIG in Uganda derives approximately 10% of its total business from microinsurance.
AIGs Ugandan microinsurance success also due to the compulsory nature of the products. The fact that the MFIs only distribute the credit life product on a compulsory basis has definitely contributed (if not formed the main reason for) AIG Ugandas success in partnering with MFIs. The captive market (due to the compulsory nature of the products) ensures that AIG is able to achieve critical
mass on the credit life products and avoid the prohibitively high transaction costs associated with selling on an individual basis. In addition, the fact that the policies 64 This section was prepared based on web-based material from CGAP Good Bad Case Studies, as well as Enterplan, DFID and FDCF monitoring reports from Tata- AIG, and discussions with Tata-AIG Staff/Megatop/ITC/MFIs in India. 65 Serving the same purpose as credit life insurance, but classified as a group accident policy as it is written under the short-term insurance sections of the general Insurance Act. Recently, AIG has experienced that MFIs are starting to evolve in their search for ways to mitigate credit risks. Although Ugandan insurance regulations (specifically the Insurance Statute of 1996) prohibit MFIs from providing their own insurance if
they do not have an insurance license (McCord, Botero & McCord, 2005), in recent years some MFIs have discovered regulatory loopholes that are enabling them to effectively self-insure. Some MFIs are changing into small banks and deposit-
taking institutions and, under these circumstances, are opting to self-insure. These MFIs often choose to underwrite only the better risks and try to have the poorer risks underwritten by AIG, a less than optimal situation from the insurers perspective. These actions by MFIs are forcing AIG to extend their distribution network in Uganda to other organisations such as credit and savings cooperatives. The Indian experience driven by regulation. In contrast, in India the Insurance Regulatory and Development Authoritys (IRDA) Obligations of Insurers to Rural or Social Sectors Regulations of 2002 forces insurers to meet certain targets on the sale of insurance policies to rural clients (Roth & Athreye, 2005). AIG was not allowed to obtain a license to do business in India unless it partnered with a local company. Consequently, a joint venture between the Tata Group, one of the largest corporate groups in India, and AIG was formed. In order to meet the
government targets, the resultant joint venture, the TATA-AIG Life Insurance
Company66, partnered with The Bridge Foundation (a microfinance wholesaler) in 2001 to distribute insurance policies through the wholesalers network of MFIs. Although partnering with MFIs enabled TATA-AIG to enter the microinsurance environment, it soon realised that distributing microinsurance through only MFIs would not enable it to reach the rural access targets set by the Indian government as MFIs in India are limited in both quantity and quality (Roth & Athreye, 2005). Furthermore, not all MFIs have the capacity/motivation to perform the critical roles required for distributing tailor-made voluntary products. Tata-AIG thus established a low-cost direct sales model in 2003. This low-cost model, built on Tata-AIGs learning from the field, uses a Community Rural Insurance Group (CRIG) strategy, whereby local opinion leaders are used to distribute and service the voluntary insurance products. Apart from cost advantages and local presence, the CRIG model, by virtue of using opinion leaders, is associated with social acceptability and access to local information on clients, both of which are very critical in selling, distributing and servicing microinsurance products.
Generally, MFIs are able to provide an environment in which trust (of the clients in the organisation) acts as social lubricant in the selling of financial services. However, the MFI-linked partner-agent model, especially in the distribution of
voluntary products, suffers from a number of limitations, discussed in Box 8 below. Box 8: Potential constraints on distributing voluntary insurance through MFIs Lack of appropriate internal controls with many MFIs. In several markets, microfinance clients are increasingly seeking tailor-made voluntary products (endowment-type individual policies), which require special expertise, skills and motivation. For MFIs, insurance is not their core business and distribution of voluntary insurance as a secondary/tertiary product will not work, as significant after-sales service and support is required. As the agency relationship for voluntary insurance involves decentralisation of critical roles traditionally performed by the insurer and, given that MFIs neither have the capacity nor motivation to perform such roles, they are unsuited to act as agents for such voluntary products. This is illustrated by the experience of Delta Life Insurance
(Bangladesh) Tata-AIG (India) and GLICO (Ghana). Significantly, all are
mainstream insurance companies that see a great business potential in servicing low-income clients with a range of choice (voluntary) products. Insurance premium money can be adjusted towards loan delinquency. The experience of Delta, CARD and Tata-AIG indicate that mixing credit risk with insurance is fraught with difficulties loan delinquency can result in late payment of insurance premiums, as, for the client, there is very little to distinguish between the loan and insurance product, which are delivered through the same channel and managed by the same sales force. Where loan delinquency has been serious, loan officers have shown a tendency to collect these first, even at the expense of premium payments. In fact, there are cases in India where loan officers have used insurance premium payments made by clients towards loan repayments, as a result of which clients have become delinquent with regard to insurance payments. Clients may view insurance premiums as an additional cost to accessing a loan. especially, for voluntary products, whose premiums tend to be higher than the run of the mill social protection products traditionally distributed through MFIs. Some clients
tend to view the higher premiums as an additional cost to accessing a loan such
a perception again has naturally worked against MFIs and their core business and hence, there has been a reluctance on the part of some MFIs to distribute voluntary products. Discussions with Tata-AIG and some MFIs in India reveals that this has been a problem as clients have tended to view loan repayments, compulsory savings deposits and voluntary insurance premiums as a serious financial pressure. Limited insurer control and the absence of incentives for loan officers could lead to poor sales and post-sales performance. The distribution of voluntary products through MFIs means that the insurer does not have control over the priorities of the agents. Consequently, insurance can become a secondary or tertiary product in the product range of the MFI. Furthermore, when MFIs take the role of insurance agents, the loan officers are the main channel for delivering information to clients on the value, costs, benefits, and need for voluntary insurance. Since insurance is not the loan officers primary concern and they often receive no direct incentives for products sold, this could form a hindrance to insurance sales and the deepening of customer relationships (McCord, Botero &
McCord, 2005). Insurance clients often have to deal with untrained loan officers, not particularly knowledgeable about insurance. Related to the point above, loan officers are often not interested in expanding their scope of knowledge on the
insurance products as they do not view it as their primary responsibility within the MFI. In cases where loan officers do receive training, it is limited. This does not contribute to the broadening of client knowledge on the policy claims procedures, e.g. what forms are needed to claim, etc (McCord, Botero & McCord, 2005). Long delays with claims settlements. An efficient claims settlement process is of great importance when dealing with low-income clients. However, long delays often rise from the insurers side when processing and assessing claims. Claims can be rejected because of issues beyond the control of the MFI or client or due to complex or inappropriate exclusions. The actual payout can be delayed because of lack of access (on the clients side) to a bank account or simply due to the multiple links in processing the claim that can lead to lost information or other delays (Churchill, Ramm & Namerte, 2005). Lack of coverage between loan cycles. Although insurance linked to credit (credit life) can mitigate risks, it is
generally only a temporary situation with cover ceasing when the loan or credit is repaid (Churchill, Ramm & Namerte, 2005). Despite these limitations, MFIs and other organisations that have access to large numbers of potential low-income clients are likely to remain an important entry point into this market for commercial insurers for the foreseeable future67. 6.2.2. MUTUAL INSURER: TUW SKOK, POLAND
The credit union movement in Poland was revived in the 1990s during the political transition, led by Solidarity, a former trade union turned political party. During this decade, Polish credit unions underwent very strong growth to the extent that at the end of 2002, the network of credit unions formed the third largest financial network in Poland (Churchill & Pepler, 2004). The revival of the credit union movement in Poland led to the realisation by the credit union apex body, the National Association of Cooperative Savings and Credit Associations (NACSCU), that soon insurance (for the provision of credit and to safeguard savings) would be required if the network was to be sustainable. NACSCU has to ensure the safety and survival of its credit unions through the provision of a credit risk mitigation
mechanism. It realised that private insurance companies were not offering a
competitive value proposition and that the products of other insurers were simply priced too high (Buczkowski, 2006). It therefore decided to self-provide insurance to the cooperatives (Buczkowski, 2006). Phase 1 Provision of mutual insurance through establishment of insurer. The initial drive to insure credit unions part of the NACSCU was launched in 1993, when the Foundation for Polish Credit Unions68 (FPCU) and CUNA Mutual, an US credit union insurer, established Benefit, a life insurance company (Churchill & Peppler, 2004). The two organisations contributions to the initial capital base 67 and for brokers if these service providers enter this market. 68 The Foundation for Polish Credit Unions is a tax-exempt arm of the Polish credit union movement (Churchill & Peppler, 2004). 95 provided the FPCU with a 10% share, while CUNA Mutual held the remaining 90% share. The basic development of the TUW SKOK models is shown in
Figure 5. As noted in the figure, Benefit provided three insurance products to the credit union market (Churchill & Peppler, 2004): loan protection insurance; life savings insurance (entitling the beneficiary to earn two or three times the savings of the depositor, in the case of the depositors death); and funeral insurance.
Phase 2 Broker added to extend product offering. In 1994, the FPCU also decided to establish Asekracja, a brokerage company, in order to provide insurance products that were not available from Benefit to the credit unions market. Although Benefit was generating surpluses, its financial position was undermined by the fact that the capital requirements for Benefit were Euro-denominated. Given high Polish inflation rates and the depreciating Polish Zloty, the capital requirements of Benefit had to be constantly replenished. This eventually undermined the success of the insurer and in 1997 CUNA Mutual bought out the FPCUs share in Benefit and sold the company to a foreign insurer attempting to enter the Polish market.
Phase 3 Acquisition of insurers to continue underwriting union products and
extend into underwriting of life insurance. After the sale of the share in Benefit, NACSCU and the FPCU evaluated their strategic position and decided to offer the insurance targeted at the credit unions themselves, while arranging for life insurance to be sourced from other insurance companies and distributed via their brokerage. NACSCU, TUW SKOK and the FPCU, consequently, purchased TUW Praca, a failing mutual insurer, in August 1997 and transformed it to TUW SKOK, the Cooperative Savings and Credit Union Mutual Insurance Company. TUW SKOKs insurance license only enabled it to provide insurance to meet the needs of credit unions and, to a limited extent, that of union members69. The personal insurance products sold via the credit unions to credit union members, include (Churchill & Peppler, 2004): accidental death and disability insurance; homeowners or tenants insurance; and _____insurance providing cover against financial losses due to the unauthorised use of debit cards.
69 The insurance license did not allow TUW SKOK to underwrite life insurance products. 96
Although credit union members were still able to buy life insurance via NACSCUs brokerage, TUW SKOKs inability to underwrite life insurance became increasingly problematic. In August 2003, Metropolitan Life Poland was purchased in order to obtain a life insurance license (Churchill & Peppler, 2004). Since the purchase of the life insurance license, the brokerage is no longer distributing the insurance products of other life insurance companies and only distributes motor insurance as this specific market is extremely competitive in Poland (Buczkowski, 2006). The motor insurance products can therefore be obtained at competitive rates from the rest of the insurance market. At present, TUW SKOK utilises three main distribution channels, i.e. agents positioned in the credit cooperative branches (there are approximately 1,600 distributed across Poland), a call centre and the internet. Of these three channels, the credit cooperative branches are by far the most popular (Buczkowski, 2006). At the end of March 2006, the cooperative
network had a total of 168,000 individual member policyholders (Buczkowski,
2006). Negative impact of intermediary regulation mitigated by special clause. In 2004, intermediary regulation requiring self-employed insurance agents to undergo 200 hours of training, provided by the insurance companies whose products they sold, was implemented (Buczkowski, 2006). This regulation could potentially have had a very negative impact on the distribution of TUW SKOKs insurance products. However, a special clause contained in the legislation limits the training requirements for insurance agents distributing tied-products (e.g. credit life insurance) to 50 hours. As up to 90% of TUW SKOKs insurance products can be considered tied-products, the negative impact on the organisation was not as severe as it potentially could have been (Buczkowski, 2006). TUW SKOK model characterised by two aspects which are not ideal for the South African environment. Despite its general lessons for low-income or other affinity groups considering becoming insurers, two factors militate against trying to make the TUW SKOK experience directly applicable to South Africa:
Premiums are not collected in cash. All credit union members are required to
have savings accounts. This substantially eases premium collection as monthly premiums are simply deducted from the savings accounts by the credit union and paid over to TUW SKOK (Churchill & Pepler, 2004). A passive sales process, which is less than ideal when trying to extend insurance to the previously uninsured, is utilised. Agents in the various credit unions do not go out to actively sell the policy, but wait for members to enquire after the products (Churchill & Pepler, 2004). In the South African environment, where many low-income individuals are not familiar with insurance and its benefits, this sales approach will not necessarily be successful. 6.2.3. INDEPENDENT MULTI-FUNCTION INTERMEDIARIES: THE USE OF E- CHOUPALS AND SANCHALAKS BY ITC/MEGATOP ITC/Megatop provides interesting lessons for South Africa in the utilisation of relatively simple technology to create a multi-function platform for the selling of insurance to the rural poor. The ITC/Megatop model consists of four components:
the insurers the brokerage the e-Choupal; and the sanchalak
These four elements are discussed below. ITCs diversification drive provides the basis for insurance distribution. ITC Limited is one of Indias largest private companies. It has a market capitalisation of more than $13 billion and an annual turnover of $3.5 billion. Although it currently has business interests in a variety of products and sectors such as cigarettes, hotels and agri-business, it initially mainly focused on cigarettes and tobacco. It started diversifying its business in the 1970s when it purchased interests in the hotel industry (ICFA Centre of Management Research, 2002). However, ITCs diversification process gained new impetus in the 1990s when the Indian government started contemplating restrictions on smoking in public places and the advertisement of cigarettes and tobacco (ICFA Centre of Management Research, 2002). Today, ITCs agri-business division generates a substantial percentage of Indias foreign exchange. During the last decade, it has
earned more than $2 billion. The use of technology and, more specifically, e-
Choupals, in the creation of a distribution network in rural areas has been central to ITCs success in the agricultural sector. Technology facilitates a wide distribution network. An e-Choupal consists of a computer with an internet connection, strategically placed in rural villages or areas (Prahalad, 2005: 335). ITC initially developed this network of e-Choupals to assist in the distribution of information (in the local language) on weather and market prices, scientific farm practices and risk management. The e-Choupal network is also used to support the sale of farm inputs and to buy agricultural produce directly from farmers (ITC, 2006b). Currently, it serves more than 3.5m farmers in approximately 31,000 villages through 5,200 e-Choupal kiosks in six Indian states (ITC, 2006b). In addition to the agricultural products such as herbicides, seeds, fertilizers, and soil testing services sold through e-Choupals, financial services, specifically insurance services and credit, has also been added to the products distributed. Investment-related products are yet to be launched (Arunachalam, 2006d). Initially
only simple endowment and moneyback insurance products were introduced. In the second year of operations, weather insurance was also launched. It is estimated that insurance sales total 10% of all marketing services conducted through the e-Choupals (Arunachalam, 2006d). ITC uses a brokerage to serve the lower-income market. Megatop Insurance
Services is a wholly-owned subsidiary of ITC. It is a brokerage that distributes the insurance products of a number of insurers through the sanchalaks (see below) and e-Choupals in rural villages. The provision of sufficient client choice is of central importance in Megatops distribution approach and, hence, the choice of broking model. It is important to note that ITC, since it wanted the e-Choupals positioned as an independent distribution network for information and other products, purposefully did not extend into insurance provision itself and elected to establish a brokerage. Table 8 details the participating insurers and their various products. By March 2006, 30,000 policies had been sold by Megatop via the e-Choupals (Arunahalam, 2006d). In contrast to South Africa where life risk products and, specifically,
funeral insurance, are the most popular insurance products in the low-income market, the most popular products sold through the e-Choupals are simple
endowment and money back products, while the weather and health insurance are becoming increasingly popular (Arunachalam, 2006d). Insurance Company Type of Product Product Names LIC of India Unit-linked (savings product) Bima Plus Future Plus Jeevan Plus Moneyback70 Jeevan Anurag Bima Gold Pension plan Jeevan Nidhi ICICI Prudential Life Insurance Co.
Educational risk plan Smart Kid Money back Cash Back Endowment Save 'n Protect ICICI Lombard General Insurance Co. Accident Personal Care National Insurance Co. Health Family Health Care Product Package (consists 2 or 3 products)71 Multiple Cover Package Policy TATA AIG life Insurance Co. Term
Jan Raksha Whole Life Money Back Mahalife Endowment Subh Life Moneyback MSP21
Table 8: Insurance products intermediated via Megatop e-Choupals. Source: Arunachalam, R.S., 2006c. Personal communication. Insurance consultant. 06 June 2006. The Sanchalak as representative of an insurance brokerage. The sanchalak, a specially selected and trained local farmer, is central to the success of the e- Choupals as distribution network and is responsible for all products and services distributed through the e-Choupal. The e-Choupal is placed in the living room of the sanchalak, eliminating the need for special infrastructure to house the e- Choupal (Prahalad, 2005: 336). The sanchalak is normally a well-trusted farmer
from the community, able to read and write and neither rich nor poor (Prahalad,
2005: 337; Arunachalam, 2006c). After selection, the sanchalak receives training from the nearest ITC office and product training from the various product providers (Prahalad, 2005; 337). In India, it is required that insurance agents receive a certain level of training. In the case of ITC/Megatop, this training is provided by Megatop. The sanchalak is compensated according to the number and size of transactions processed through the e-Choupal (also the insurance transactions) and it can vary from e-Choupal to e-Choupal, depending on the specific mix of products and transactions (Arunachalam, 2006d). 70 Moneyback products are risk products providing cover for a fixed amount. If no claims are made, the client receives 20% of the sum assured as the end of a 5 year payment period and at the end of the total policy term, receives a bonus accrued during the period. 71 The Multiple Cover Package Policy, provided by the National Insurance Company, provides cover for household structures and content, cattle, cycles, tractors, two heelers, health and any commodities in the field during the harvesting process from damage.
It is important to note that the ITC/Megatop insurance model is not a passive sales model waiting for the clients to come to the sanchalak. The sanchalak actively meets with prospective clients, generates leads and closes sales (Arunachalam, 2006d). Access impact. It is estimated that 40-45% of the
individuals using the e-Choupals for agricultural services and products (and also insurance) are very poor, while another 15-20% can be classified as poor. (Arunachalam, 2006c). The majority of Megatops insurance clients are first-time insurance users (Arunachalam, 2006c). Although ITC/Megatop initially focused on insurance sales to only captive clients like farmers and farmer groups, it has been requested by the Indian government to expand its focus to also include other marginalised groups such as women in self-help groups (Arunachalam, 2006c). Prospective clients do not need to be users of of the agricultural services and products provided through the e-Choupal in order to purchase insurance. The role of advice. As Megatop is a broker with relationships with many insurers, the client is offered a choice of products. The sanchalak is mandated to offer product choice to the client and therefore introduces the client to the full array of insurance
products available. During this process, the sanachalak will highlight the
advantages and disadvantages of each product and try to relate it to the farmers financial situation by matching client needs with the relevant products. Premium collection and the distribution of benefits extend beyond bank accounts. Premiums have to be collected in cash as the majority of insurance clients are unbanked. The sanchalak collects all premiums in cash from insurance clients in the local village or area and then takes it to the nearest ITC office or centre, usually located within 15-20 kms of the sanchalak (Arunachalam, 2006c). Once a claim is lodged and verified, or the policy has reached maturity (in the case of an endowment or savings policy), the claim is processed in less than two weeks and sent to the nearest ITC centre or office, where the sanchalak or insurance client/recipient can then collect the benefit (Arunachalam, 2006c). Success factors. Several factors have contributed to the success of the sanchalaks and e-Choupals as insurance distribution channel: Multi-function nature of the intermediary. Both the sanchalak and the e-Choupal fulfil multiple functions. The sanchalak is able to make a reasonable living because
he not only sells insurance, but processes a variety of transactions for which fees are received. The cost of technology is justified (from a financial perspective) because it is used for more than one purpose and soon starts paying for itself72. Related to the multi-function nature of the intermediary is the fact that a client concentration strategy is utilised. Many
farmers and other individuals interact with the sanchalak on a daily basis for other non-insurance purposes (e.g. the ordering of agricultural products). During these interaction processes, they are offered the opportunity of purchasing insurance. Gradual introduction of technology. Computer technology can be intimidating, even for well-educated and wealthy clients. Initially, ITC simply established the e- Choupals as gathering spots in rural villages where agricultural information was distributed to farmers by ITC representatives. This allowed them to gradually familiarise themselves with the ITC brand. After three months, a farmer asked for how long ITC representatives would still be sent out in person, as he was aware that a computer could provide the same type of services as the ITC representative (Prahalad, 2005: 336). ITC viewed this as an indication that it could start the
rollout of information technology and it triggered the up-scaling of the e-Choupals (Prahalad, 2005: 336). ITC therefore used a gradual approach to roll out the technology. Furthermore, insurance was only introduced to the array of product offerings after farmers and other groups were already familiar with the e- Choupals. As the sanchalak acts as interface between the client and e-Choupal, illiterate clients are not directly exposed to an unknown technology. Promotion of premium persistency. In order to improve premium persistency,
regular electronic premium reminders are generated before the premium due date and sent to the sanchalak via the e-Choupal. The sanchalak is then able to follow up and collect the premiums from the client(s) (Arunachalam, 2006a). 6.3. REGULATION SHAPES THE MARKET: THE EXPERIENCE OF THE UK Relevance to South Africa. This section considers the experience of the UK market and, specifically, the impact that regulation has had on the intermediation of insurance. Although the UK insurance market is much more advanced than South Africa, similar regulatory approaches are utilised in South Africa and it would, therefore, be useful to consider the impact these regulations have had on the UK
market. Independent brokers only emerged from the 1950s. Distribution of
insurance products in the UK changed markedly during the last half of the 20th century. Up to the 1950s, insurance products were distributed through captive agents, with each insurer (including mutual insurers) having a network of tied- agents selling their products exclusively, often on a doorstep basis. From the late 1950s onwards, independent brokers began to emerge. This distribution channel grew rapidly and by the 1970s, brokers held some 30% of the distribution market, rising to a peak of some 70% in the late 1980s and early 1990s. 103 Direct and captive channels encroaching on broker sales. Today, brokers73 continue to comprise the largest distribution channel for all insurance products in the UK, particularly pension, life and other investment products. However, industry statistics for 2004 show that the proportion of general business being extended through brokers amounted to only 55% and is expected to fall further in future. By contrast, direct sales (telephone and Internet) as a proportion of total sales increased to 28% in 2004, particularly sales of general products (property and
assets). Sales through banks and other financial institutions (credit life and
mortgage linked products), which are also viewed as direct sales channels, have increased to 7%. The proportion of sales going through these two channels is expected to continue growing74. Brokers had role to play in provision of advice on complex products. Brokers emerged from the late 1950s onwards in response to the development of more complex investment assurance products (commonly linked to pensions and mortgages) and the demands of wealthier clients for independent advice. These clients traditionally consulted their legal advisers or accountants on insurance matters, but the newer products required a greater understanding of insurance matters than these traditional (financial) advisers possessed. Brokers did not charge for the provision of advice, this cost being covered by commissions. Indeed there has been a history of free advice in the insurance industry, which persists today, even among wealthy individuals and corporate customers75. There were no regulations governing the operations of brokers until 1977 when the Insurance Brokers (Registration) Act which set up a self regulated industry registration
council and required all brokers to register with this industry body. Technology has facilitated recent distribution developments. Technology, in particular the growth of and increasing low cost of communications and the continuous drive to reduce costs (primarily staff costs) has led to some significant developments in the distribution of insurance products in the UK over the past 15-20 years. Prominent among these are: Growing direct sales (often telephonic and Internet sales) as more cost-effective methods of reaching customers (in comparison to face-to-face Brokers in UK are defined as being independent of any particular insurer or product and able to offer advice. Although there may be small definitional differences, classification of brokers in UK, other countries and South Africa is basically identical. In the UK, this group comprises traditional independent brokerage businesses, Independent Financial Advisers (IFAs), mortgage advisers, and a wide range of retail and other service providers who now offer insurance products alongside and as a value addition to their core business proposition. Examples include white goods and furniture retailers and motoring organisations.
Association of British Insurers (ABI) statistics. 75 Some industry insiders argue that the quality of advice would be enhanced if clients were obliged to pay as a matter course. encounters) originated. This development also led to the emergence of new insurers and brokers who solely operate in this space. Emergence of a form of the partner-agent model through which banks and supermarkets (in particular) have sought to use their highly visible brands and large captive markets to sell insurance. In the case of banks, insurance has been sold in order to mitigate lending risks, particularly investment products associated with mortgages and life cover linked to personal loans. In the case of supermarkets, insurance has been confined to simple products such as life cover, and asset and property cover (investment products being considered as carrying potential reputational risk). This practice is known as white labelling. The products are branded with the name of the business that is making the sale, but are actually vanilla products of and underwritten by mainstream insurers. Sales
through these channels are cost-effective for the insurers concerned, as the agent is required to invest in promotion, selling, applications and (at least initially)
premium collection. Equally, consumers appear not to be interested in the identity of the insurer that is carrying the risk, their relationship and trust are vested solely in the branded product distributor. Stronger insurance regulations. The UK regulatory regime has been substantially strengthened over many years from the 1970s onwards. As of early 2005, the insurance is regulated by the Financial Services Authority (FSA) which supervises the entire financial sector. All insurance companies, brokers and intermediaries have to meet demanding new standards of professionalism and competence. Today, insurance providers, including broker and agent channels, are obliged to provide consumers with: clear minimum policy disclosure information, such as key fact-based documents setting out the premiums; commissions payable and other charges;
terms of the policy, any exclusions and to notify and explain these to customers before completing the sale. It is necessary to note that the above does not constitute advice in our view (see Section 5.5). Customers now have the right to cancel a policy within 14 days without penalty. Brokers are also obliged to undertake and pass professional examinations in order to undertake advisory work, the level of qualification determining the type of advice that can be offered. Consumer protection regulation increasing compliance costs. Although the new
regulation provides consumers with greater transparency, it is increasing costs for insurers. To comply with the new regulation, insurance companies have to update computer systems, introduce new documentation, and retrain staff. It is unlikely that insurance companies will bear the full cost of these activities, but will pass the cost onto the consumer through increased premiums78. New regulations have larger impact on brokers than captive agents and direct channels. It is too early to assess the impact of these widespread changes on distribution channels, but
industry opinion suggests that these new regulations will impact more on brokers and other intermediaries, particularly small businesses, offering a range of products and services to customers on a personal basis. The new regulatory regime is likely to further stimulate the growth of direct sales channels,
particularly as insurers can better control and manage their sales and distribution networks. 6.4. KEY FINDINGS 6.4.1. MFI-LINKED PARTNER-AGENT MODEL This model links with our low-income group category of intermediaries as described in Section 3. Although the case study is focused on the MFI sub- component of this group, we shall also highlight the relevance of findings for other low-income groups (e.g. cooperatives, NGOs, burial societies, etc.) where relevant. The key findings on this model are: Successful models developed around compulsory credit life insurance. These models initially developed around compulsory credit life insurance tied to the credit provided by the MFIs. This model worked well as the product was embedded with the credit product, did not require
much additional administration and did not require the MFI staff to sell the product. The major appeal of this model was quick access to a large and captive client group that could be reached through existing MFI infrastructure. A drawback is that it does not allow for the intermediation of insurance to non-MFI members. Experience with voluntary products not as successful. The next phase of development was where these models were extended to also intermediate voluntary insurance products that were not directly linked with or related to the credit products. The evidence on this, although not conclusive and dependent on the nature of the product sold (see below), suggests the experience with voluntary products has been less successful. There are a number of reasons mentioned for this: 78 Some brokers and insurers have said the cost of regulation will increase premiums by up to 20%. Other experts maintain that competition will continue to keep prices down. 106
Firstly, and most importantly, the voluntary sales process required additional
effort and skills on the part of MFI staff and systems as it is not part of the credit process. The evidence suggests that the additional process does not fit well with the credit processes and that MFIs have had difficulty managing this. Special effort and skills relating to the microinsurance product is required through the whole lifetime of the product, especially for endowment/savings/health products. Consequently, MFIs typically do not want to engage in the sales of high transaction cost voluntary microinsurance products as returns are minimal, even more so in environments with capped commissions. In summary, MFIs are unlikely to be good intermediaries for voluntary microinsurance products that call for a great deal of effort. Secondly, the voluntary nature means that scale is more difficult to achieve and that there is a higher risk of anti-selection. Thirdly, there is a conflict of interest in an MFI distributing its own credit product as well as an insurance product of an insurer. If the client is under financial pressure, the MFI will tend to allocate premiums to the credit repayment rather
than to the insurance, leading to lapses in policies (some other constraints of the MFI intermediation model are noted in Box 8). The result is that the insurers have tended to explore other models for voluntary products. Regulatory environment impacts on the exact relationship between insurer and MFI. This applies to both insurance and intermediation regulation.
In less stringent regulatory environments, the relationship between the MFI and insurer may be more difficult to maintain in the long-term. In countries with weak insurance regulation, MFIs may utilise the room provided to underwrite themselves. In some instances, this has been the case in Uganda. While insurers may find benefit from an on-going distribution relationship with MFIs, in the case where regulation on underwriting is not as clear (or less onerous), MFIs may opt to self-insure (partly or fully) instead of partnering with the insurer. This is particularly the case where MFIs become more sophisticated and build up their own balance sheet. It is important to note that choosing to self-insure is not in line with international best practice and occurs because the MFI perceives the
risk/reward balance to be in its favour79. This may not necessarily be an objective evaluation
In countries with limited intermediary regulation, the MFI plays a larger role in all functions of distribution (selling, collecting premiums, administering the policies, paying claims, etc.). Where intermediaries are more regulated, this may limit the ability of the MFI to fulfil some intermediation functions without incurring potentially substantial regulatory compliance cost. The FAIS 79 However, this perception is not always correct and in these instances, NGOs risk insolvency. 107 legislation in South Africa is an example of quite stringent intermediary regulation that requires intermediaries to be registered with minimum levels of education, conduct business in manner specified in the Act and report regularly on business conducted (see discussion in Section 5.3.2). In summary, some of the direct implications for South Africa are:
The distribution of voluntary insurance products (e.g. funeral insurance) through MFIs (e.g. SEF) may face some of the same constraints as found in other jurisdictions (noted above). Care should be taken to address these constraints in the proposed models. Insurers are not guaranteed a long-term willing distribution partner in MFIs as
they may opt to become insurers themselves, could potentially access reinsurance as described above or may simply choose to remain independent (i.e. can move between insurers). To date, the discussions between insurers and MFIs (also other low-income groups) seem to focus on captive models (supposedly necessary to entice the insurer to adapt products to the needs of the MFI), but it may actually be in the interest of the MFI to retain independence to ensure that the on-going relationship with the insurer is mutually beneficial80. 6.4.2. COOPERATIVE/MUTUAL INSURANCE The international review found that the distribution of insurance through a network of financial cooperatives is a relatively common model and holds some lessons for emerging cooperative insurance movements in South Africa.
Insurers need to improve and demonstrate value proposition. The development of the TUW SKOK experience over the last 15 years highlights the risk insurers are
facing of potentially large parts of their client groups opting to self-insure through cooperative structures. TUW SKOK explored the avenues of, firstly, owning their own insurance companies and, secondly, acting as intermediary for other insurers and eventually mainly opted for the first route rather than the second. The main reason for this was that, in terms of regulation, it was possible for them to do this (i.e. comply with insurance regulation). Relationships with other insurers would also not have ensured sufficient value for members. The establishment of a brokerage was, arguably, from the very beginning only seen as an intermediary step to the 80 It must be noted that the nature of the product needs to be taken into account when considering the relative success of these models. Parametrically triggered insurance products (e.g. crop insurance which pays out a fixed amount if the rainfall varies by a specified amount and which does not require complicated claims investigation and management by the MFI) may be quite usefully
distributed through MFIs. The main reason is that the risk of anti-selection is
addressed by the basic nature of the product and that the MFI is mainly used to sell the product and possibly to collect premiums, but do not have to administer the product eventual self-provision of all relevant insurance and allowed TUW SKOK to offer a value proposition to its members while achieving its final goal. Insurance offerings may also facilitate growth of apex bodies. We already see some of the early signs of such considerations in South Africa where client groups are considering entering into the insurance environment (see Section 7.2.1). It has largely been attributed to the perceived lack of value that insurers have brought to the various client groups and the unwillingness of insurers to adapt models and products to suit the needs of the client. In addition, apex bodies see the provision of insurance as a way of building their own credibility and value proposition to their members, something that is still important to establish for these bodies. Although the introduction of insurance in the TUW SKOK example can not purely be ascribed to this factor, it has certainly contributed to the re-establishment of
the credit cooperative movement in Poland under the National Association of Credit and Savings Unions (NACSCU). 6.4.3. E-CHOUPAL The e-Choupal was included in the review because it presented an interesting example of an independent commercial distribution channel utilising new
technology and existing commercial infrastructure. It, therefore, falls within the multi-function intermediary category (see Section 3.1.2.3). The key insights to note are: Utilisation of existing infrastructure. The e-Choupal was not established purely for the distribution of insurance. Instead, the insurance distribution function was added to an existing commercial and technological platform. In addition, the overall technology model was gradually introduced with the sanchalak as guide to interaction with the technology. Clients are not simply required to utilise the computer-based sales model to purchase insurance, but instead the sanchalak uses the platform to guide clients through options and eventually execute the transaction. Active sales and marketing. The e-Choupal is not a passive sales model waiting for clients to approach the sanchalak for insurance. Instead, the
sanchalak actively markets the products to potential clients. Independent intermediary. The e-Choupal is set up as an independent intermediary.
ITC/Megatop do not own their own insurance company and do not have ties to particular insurance companies whose products are intermediated through the e- Choupal. This was considered essential to ensure the e-Choupals credibility as information provider (its original primary purpose) and independent intermediary of insurance products. Relevant for South Africa is to consider whether similar infrastructure exists that could be adapted to distribute insurance. Two examples can be noted: Spaza shops: Spaza shops provide a large distribution network that is already utilised for other commercial distribution. It is, however, not franchised or centrally organised and, unlike the case with ITC/Megatop, negotiations would have to be done with individual spaza shops. Nonetheless, the increased introduction of point-of-sale (POS) devices (in effect, a communication network) in
spaza shops for transaction purposes may present interesting opportunities and a more centralised point of interaction. Airtime vendors: Airtime vendors are probably closer to the e-Choupal model as they are already centrally organised through the various cellular networks and their airtime sales systems already provide an extensive and advanced communication technology platform. Also, the additional benefit is that all clients have cell phones that can be used in the interaction with the insurance provider (ranging from payment reminders to eventually cell phone-based premium payments) 6.4.4. DEVELOPMENT OF UK REGULATION AND IMPACT ON MARKET The need for advice vs. disclosure. As described in Section 5.5, we distinguish between advice and disclosure. This is essential as there is a much greater cost and effort attached to providing advice than there is to providing product
disclosure. The question that arises, therefore, is whether disclosure is sufficient to ensure informed sales and consumer protection or whether this requires advice. The experience of the UK suggests that, while advice is not necessary, at least full
disclosure and a cool-off period are required to prevent misselling and also to
ensure that premium persistency is improved as clients understand what they are buying. 6.4.5. OTHER GENERAL CONCLUSIONS Integrate technology to enhance efficiency of front-end processes. Technology has been integrated into processes close to the customer so as to reduce costs. Such a strategy has helped channels to overcome disadvantages of distance, remoteness and high transactions time/effort and ensure greater and timely responsiveness to customers. Several examples exist and these include Megatop, Tata-AIG, TUW SKOK, Servi Peru, and CARD. Access captive markets to lower costs. Existing platforms/clients, such as MFIs, NGOs and SHGs have been tapped to reduce initial search, information, 110 screening, promotion and marketing costs. Insurers in all the major models81 have accessed existing captive markets or existing client bases. Transfer management of front-end processes closer to customers. Specifically, insurers
have shifted management of front-end business processes to staff closer to the
customers, to ensure better service, both in terms of speed and quality. This shift of front-end business processes has been backed-up by use of technology, standardisation and simplification of processes and capability building. Some of the key processes which have been shifted include: initial client selection; awareness creation/education; marketing and promotion; proposal filling and support documentation; premium collection, and initial claims assistance and follow-up. Use existing market infrastructure to access selected markets. Local people have been engaged as staff/agents to reduce costs, and gain access to local information because they are already accepted and trusted within their various communities. The most significant examples are in the direct sales model - Delta, Tata-AIG and now GLICO. Megatop has likewise used sanchalaks, local farmers/opinion leaders, in the same manner, as have other cooperative/mutual insurers, such as COLUMNA. In addition, there are many benefits associated with using individuals part of the relevant organisational structure, e.g. the use of members of credit unions as agents by TUW SKOK.
81/ While Tata-AIG has clearly moved away from the partneragent model, the
CRIGs sell to established self-help groups and other such captive markets that may be available locally. 7. MARKET AND REGULATORY TRENDS SHAPING MICROINSURANCE INTERMEDIATION IN SOUTH AFRICA This section combines the analysis presented in the preceding sections, to construct and describe three trends that will shape the intermediation of microinsurance going forward. Opposing regulatory forces are increasing the cost of intermediation, bifurcating the market into advice and non-advice components and risk closing down emerging microinsurance intermediation models; Controllers of client groups are entering into intermediary and insurance markets; and Broker domination will delay introduction of new models in high-income markets, but new captive models and independent microinsurance intermediation
models may undermine broker power and relegate brokers to high-income niche markets. These trends are described in more detail below. 7.1. TREND 1: OPPOSING REGULATORY FORCES ARE INCREASING COSTS,
BIFURCATING THE MARKET AND RISK CLOSING DOWN INTERMEDIATION TO LOW- INCOME MARKETS The regulatory changes described in Section 5 are dramatically impacting on the intermediation of insurance and is leading to three key trends in the market: Trend one: The cumulative impact of regulation, especially since the introduction of FAIS, is increasing the costs of entering and operating in the market, especially for low-income brokers, while the looming National Treasury proposals are decreasing incentives. The harsher regulatory environment is reducing, or will reduce, the number of intermediaries in the market. Basic economic theory suggests that in a market where barriers to entry climb, costs of operation increase and incentives to remain fall, a number of suppliers will be either barred from entering the market or will
choose to exit it. We expect both to occur in the intermediary market. Some
moderate exclusion of intermediaries has already taken place (630 applicants out of 14,500 have been declined a licence by the FSB82). This represents 4.3% of applications. However, many more will soon be excluded - the intermediaries who have applied for registration are largely those who expected to be approved and there are likely large numbers of weaker candidates who are simply ignoring FAIS.83 A pattern of wholesale exit is not yet evident in the market for two reasons: FAIS (and other laws) are not strongly enforced, yet: The FSB has a small inspectorate with limited capacity. Where it does locate and report offences, the report is handed to the authorities for criminal prosecution and they are generally not well informed about financial legislation. Where prosecutions have been successful, the court sanction has also been small (as little as a R500 fine). However, with the FAIS registration processes drawing to a close, the FSB is preparing to move the bulk of FAIS staff from the registration department into compliance and enforcement. This will improve enforcement. Moreover, as the
new regulatory regime gains acceptance the market will begin to self-regulate.
Insurers will simply refuse to sell business through intermediaries who are not FAIS compliant. At this point, most unlicensed intermediaries will be forced to exit the market. Grace periods are still running: Moreover, grace periods concerning minimum education requirements for Category A applicants (those who sell funeral insurance only) are still running and anecdotal evidence suggests that large groups of these providers will not be sufficiently skilled by the expiry date in September 2007 to retain a licence. Unless grace periods are extended, they will also be obliged to exit the market.84 The harsher regulatory environment impacts more on lower-income and smaller intermediaries than on upper-income and larger intermediaries. FAIS is generally gaining acceptance in the market and, in many quarters, is seen as a welcome development, particularly by intermediaries serving the upper-end of the insurance market, most of whom have no trouble passing the fit-and-proper requirements, meeting compliance duties and paying the FSB levy. They see FAIS
as a good way to clean up their profession. Given the more sophisticated nature of the market that higher-income brokers have been serving, they have already been forced to follow procedures and disclosure requirements similar to that which FAIS has now formalised. At the bottom end, the brokers would have
followed substantially less formal procedures and would have to make the biggest adjustments to their systems and processes to comply with FAIS. The small and emerging brokers serving the lower-end of the market may find it comparatively difficult to comply with the fit-and-proper educational requirements, to pay for a compliance officer and auditor, and to carry out financial needs 83 Interview with Warren Neale, Head of FAIS registration on 09 February 2006. 84 When FAIS were announced in 2002 an appeal was made by funeral insurance intermediaries (Category A applicants) for more time to comply. According to the FSB, nearly 30% of brokers that applied for Category A licenses required exemption on these grounds. The FSB agreed to provide a three year grace period,
which is due to expire in September 2007. Interview with Warren Neale, Head of FAIS registration, on 09 February 2006. 113 analyses. The increased compliance costs may, in some cases, be enough to undercut the narrow margins they make. What options do such intermediaries have? They could: i) Exit the market.
ii) Try to move up the income chain to increase revenue (this will be difficult owing to their narrow skills and marketability base). iii) Try to increase turnover this will lead to the emergence of more group selling to burial societies, stokvels, trade unions etc and a greater use of client concentration strategies. However, this may also be limited for less sophisticated and emerging brokers as they will be competing with the better resourced agency forces of large insurers.
iv) Try to migrate to a tied-agency, or direct marketing sales force to take
advantage of the assistance an insurer can provide in complying with regulation. This is unlikely to be an attractive option for most brokers. v) Cope with heightened regulatory costs by consolidating into networks or groups or by joining compliance support service bodies. These already exist - some are intermediary-led type bodies e.g. Luasa, while others are insurer-led and sponsored e.g. Masthead. Typically, these bodies offer support from around R100 p.m. for basic compliance assistance up to R2,500 p.m. for a full compliance service including an external compliance officer. Of the above-mentioned options, only the last has been observed at any scale. It, therefore, looks like the first-order coping strategy of brokers is to organise themselves into networks to reduce compliance costs. This may change once the enforcement of the FAIS Act kicks in. Trend two: The increased regulatory cost of providing advice, will lead to the bifurcation of the market into two types of distribution: advice-based selling and
non advice-based selling. Regulated advice-based selling limited to high-income market. The placing of additional regulatory requirements on the provision of
advice means that, in effect, providing advice has become more expensive (both in direct cost and in terms of the heightened risk). This can be recovered in high premium business, but in low-premium business the provision of advice may not be feasible (unless conducted at very high volumes which, in turn, is biased against individually-tailored advice). The result is that the market is being bifurcated into two camps: one formed around advice-based sales and focussed mostly on upper- end, higher-premium sales, and one formed around non-advice based sales at the lower-end of the market. New models emerging in the low-income market to exploit regulatory space for non-advice based selling; these are unlikely to make use of traditional brokers. A further result of the separation of advice-based and non-advice-based selling is that brokers are unlikely to play in the advice-less (and low-income) market for three reasons:
Brokers tend to see their core value proposition as the provision of advice85 and would not want to move to advice-less selling. In the mind of the client, the broker is someone that advises. Even advice-less sales by a broker would, therefore, be perceived as advice-based by the client, which would lead to regulatory risk.
A broker who incurs the cost of being regulated as an advice-provider, would not be interested in selling lower-value advice-less policies. Most importantly, brokers will have to compete with low-cost no-advice models. Models that can rely on not providing advice will be adopted by insurers for the lower-end market. For example, a client will be sold insurance by being asked if they wish to purchase insurance, and simply being asked to tick a box or indicate in the affirmative. No advice is given with this sale. This method is increasingly used by retailers to sell credit and other forms of insurance. The obvious advantage to the supplier is that no advice (as defined in FAIS) is being offered, and consequently, there is no need for the staff member to be registered as a representative.
Trend three: Regulatory rulings against non-advice selling may close down the only channels operating at the lower-end of the market. With the introduction of the FAIS Act and the concomitant increased regulation of advice-based selling, a number of questions have been raised on what exactly constitutes advice, when a financial needs analysis is required and in what form, and who needs to be registered under FAIS as intermediaries. Specifically, questions have arisen on the legality of so-called tick-of-the-box selling, which emerged in reaction to the increased costs of advice-based selling and in an attempt to avoid the regulatory cost incurred under FAIS. In order to guide the market on these issues, the FSB has issued guidance notes. In addition, legal interpretations of the FAIS Act are also provided through the rulings of the FAIS Ombud. However, these two interpretations of the FAIS Act are not always aligned and in some cases, we argue, are contradictory. This not only leads to confusion in the market, but risks undermining the intermediation of insurance to the lower-income market.
FSB: Needs analysis only required when providing advice and advice is not
required in all insurance sales transactions. Read to the letter of the law, it is. The In fact, this document argues that the broker business model is defined by its independence and the provision of advice (see Section 3.1.2.1). General Code to FAIS is clear that a needs analysis is only required where advice is being furnished (see Part VII (8)). Advice, as defined in the Act, means giving a recommendation, guidance or proposal of a financial nature, but it excludes merely factual information given about the procedure for entering into a transaction, or in relation to the description of a financial product, or in answer to routine administrative queries, or factual, objective information given about a particular financial product. Thus, an intermediary who makes no recommendation or provides no guidance to lead the client one way or the other, is not providing advice (and is not required to do so under FAIS) and would not need to carry out a needs analysis. Put practically, an intermediary who asks a client Would you like to buy funeral insurance? and allows the client to decide
without guidance whether he wants the insurance or how much cover would be
appropriate or even which of two competing products is the better for the clients needs and so forth, would not be giving advice (and is not required to do so under the FAIS Act). The intermediary will therefore not need to conduct a needs analysis or be registered as an intermediary. This begs the question: would the intermediary need to be registered as a representative on the grounds that selling a policy, collecting cash and so forth constitutes an intermediary service? The answer is, arguably, again no because the definition of representative in the FAIS Act specifically excludes a person who acts only in a clerical, administrative or subordinate capacity and who does not use judgment. As long as the person offers no guidance or recommendation, and acts only in an administrative or clerical or subordinate role which does not require the application of judgement or does not lead the client into any specific transaction, the person will not be acting as a representative, as defined, and will not have to be registered as a representative. This is also the view presented in a recent FSB guidance note.86 The guidance note not only provides an attractive gap for the retailer tick-of-the-box model but, for
such sales, explicitly removes the need to register intermediary staff as
representatives or to conduct a needs analysis effectively manoeuvring around two costly parts of FAIS. It is important to note that the fact that no advice is provided does not necessarily mean that no information or disclosure is provided to the client. The non-advice activities noted in the guidance note allows the intermediary (who is not required to be registered as representative) to provide full product disclosure to the client. FAIS Ombud: Whether advice is required or not is determined by the need of the client rather than the nature of the transaction. The FAIS Ombud may take a different view on that presented above. In a recent case87, he took what, in effect translates into an anti-tick-of-the-box position. The facts were as follows: The complainant purchased a VCR at a furniture store, and discovered later that credit life insurance had been taken out and added to the purchase price. He alleged he was unaware of the insurance purchase and had not wished to purchase credit insurance. It became apparent that he had, in fact, signed the insurance form, but at the time no effort had been made to explain to him that he was purchasing
credit life insurance or to question whether it was appropriate in the circumstance. The Ombud found that the stores behaviour was in contravention of FAIS and pointed out that the implication is that any sale of insurance, even if bought via tick-of-the-box, must be accompanied by a needs analysis (and hence advice) to clarify at least if the purchaser already has insurance or wishes to purchase insurance. Other anecdotal evidence also suggests the Ombud favours needs analysis (and hence advice) even on tick-of-the-box products. The Ombud has been quoted as saying: The insurer cannot spend two minutes talking about insurance cover exclusions over the phone can the consumer really get to grips with the complexity of the product in this time? and When we ask a complainant if he knows what he has signed off, it becomes clear he didnt in fact know what he was signing off. Making sure the client understands is the way to go. 88 Market entry into non-advice space. Whether the tick-of-the-box model is in compliance with FAIS is, therefore, still a moot point but a number of players have taken a view that it is and have rushed to launch
tick-of-the-box models. The matter will be eventually be decided by the Ombud (whose rulings will supersede the position of the FSB on the FAIS Act) and his
pronouncements on tick-of-the-box selling both formally and anecdotally have not been positive towards non-advice selling. If he were to rule that a needs analysis must be done for every sale of insurance, it would in effect remove the regulatory space for non-advice selling and will throw the viability of the tick-of-the-box selling in serving the low-income market into disarray. In combination with the fact that advice-based models may be forced out of the low-income market (through increased regulatory cost of providing advice and competition by no- advice models) the potential closure of non-advice selling in the low-income market may leave this segment of the population completely unserved. The regulatory impacts described above are depicted visually in Figure 6. Figure 6. Trends in the market caused by regulatory environment Source: Genesis 7.2. TREND 2: CONTROLLERS OF CLIENT GROUPS ARE ENTERING INTO INTERMEDIARY AND INSURANCE MARKETS
Based on the interviews and interactions we have had, three issues are clear in trying to distribute insurance to the low-income market: The needs of the low-income market have largely not been met;
Insurance is an unfamiliar product and is, by and large, provided by institutions that are not well trusted in low-income communities; and Regulatory environment increases cost of intermediation, particularly at lower- income market Exit of intermediaries. Intermediaries look to other markets, and to group and client concentration models Bifurcation of market Brokers and advice Advice-less tick-of-the-box Threatened by Ombud rulings High-incomeLow-income FAIS increases the cost of providing advice Intermediaries consolidate and join support networks Advice-less with full disclosure Distribution of insurance to groups of customers is essential in lowering/limiting costs. As a result, in order to notably reach and serve the low-income market, a force is emerging that will be fundamental in shaping the distribution of insurance going
forward: client ownership will determine the position of providers in the low-
income market. Client ownership can either mean actually controlling access to a group of low-income customers (e.g. SEF) or, given the nature of the interaction of the institution with a group of customers, providing a point of concentration to effectively access a group of low-income customers (e.g. PEP): Controlling access to client groups is important as it provides an immediate advantage to the controlling institution over and above other players. The controlling institution may come in a number of forms and has the power to negotiate the terms of the relationship (see discussion on SEF in Section 3.1.2.5) and may even have the potential to become insurers themselves (see discussion on Lesaka in Section 3.1.2.5) if they control sufficient numbers to support this step. Finally, as a result of the lack of insurer control, it forces insurers to offer a greater value proposition through more suitable products and services for low-income customers. Concentration of low-income customers is important in that it will allow the targeting of groups.
This may be through customer databases or merely through the general
interaction of the individuals with the group and, will in turn, provide a non- Greenfield/volume proposition for insurers in entering the low-income market. Group distribution is easier and often provides more cost effective access to the low-income market, which is beneficial for both the provider and the customer. For the provider, group distribution allows the opportunity to drive down costs and improve the viability of serving the low-income market. Where the group is formulated around the provision of another service/good, it will allow for sharing of infrastructure and cross-subsidisation of costs. Although the lower costs arising from shared infrastructure and cross-subsidisation will not necessarily be passed through to the client, group distribution does facilitate access to a largely underserved low-income market. The unfamiliarity and insecurity of low-income consumers towards insurance may be overcome by presenting solutions through groups that are both familiar and trusted in the market. Given the discussion in Section 7.1, it seems like
adviceless/tick of the box models will be used predominantly in targeting the low- income market. These models will have a better chance of take-up/success if they are offered through either trusted groups or a trusted brand. There is already evidence of this force in the market. Players are already making moves to gain or cement their ownership of a low-income client base in order to realise the benefits of control and/or concentration.
Figure 7: Movements of players to gain or reinforce low-income client ownership Source: Genesis Analytics As shown in Figure 7, there is, on the one hand, the movement of client groups and intermediaries up into positions of intermediation or provision of insurance. On the other hand, there are insurers acting against this in trying to move down into intermediation and/or gain control of client groups. 7.2.1. CLIENT GROUPS AND INTERMEDIARIES MOVING UP OR INTO INSURANCE VALUE CHAIN
There are three sources of evidence for the movement of client groups and
intermediaries up or into positions where they are reinforcing and trying to benefit from their ownership of low-income client groups. These are: The rising of organised low-income groups Players with existing infrastructure and low-income client concentration entering the intermediation market Institutions applying for short-term and long-term insurance licenses Rising of organised low-income groups. Low-income groups refer to the phenomenon where low-income groups are aggregated through client-facing networks (i.e. mutuals, cooperatives, NGOs or developmental MFIs). Such groups include large microfinance institutions89 (e.g. SEF), co-operatives (e.g. SACCOL), burial society groups and associations (e.g. Great North Burial Society), stokvel associations (e.g. SACCOL) and unions and union-owned institutions (e.g. Lesaka). On the one hand, a number of these low-income groups are realising that there is a need amongst members for insurance, particularly funeral insurance, and coupled with their significant numbers, have decided to become insurance
intermediaries. On the other hand, certain of the low-income groups already have experience intermediating insurance and have the potential to reach really significant numbers of low-income customers, are going a step further and registering for their own insurance license. A point to note is that although a
number of these groups are member-owned and for member benefit, the intention to enter the formal insurance sector, either through intermediation or as an insurer, has allowed the opportunity for profit institutions to enter with the support of such institutions. Players entering the intermediation market. Beyond organised low-income groups, there are other players entering the insurance value chain. These are players with an existing infrastructure that penetrates geographically quite widely and who already have low-income client ownership or concentration. At this stage, these groups tend to play an intermediary role, but down the line there is the possibility of these groups obtaining insurance licenses. These are institutions that exist explicitly to make loans to poorer households, in order to help households start or pursue income generating activities with the ultimate goal of assisting such households in their path out of poverty. As a result,
these organisations are not loan sharks and have a broader social mandate than just trying to make a profit out of loaning money. At present such players include the retailers (e.g. Shoprite, Edgars and Pep) who have opted to either maintain total ownership, and use the insurer to provide underwriting, or share ownership by entering joint ventures with the insurer. Cellular providers have a strong potential to also enter this space. It is important to note that the impending Privacy Bill will make it difficult for databases to be acquired by the third party, thereby, further empowering these client owners over insurers. Institutions applying for short-term and long-term insurance licenses. Recently there has been an increase in institutions applying for both short-term, e.g. CIB (a brokerage), Legalwise (a UMA) and Kaizer Chiefs (an affinity club), and long-term (e.g. a micro-lender called Real People Life) insurance licenses. Some of these institutions have previously played a role in intermediation and others are trying to benefit from their large group of members/clients who are un- or underserved. Pressure on current formal providers intermediaries and insurers. As a result of client groups and other players moving up or into the insurance
value chain there is a potential loss of market share for insurers (to those players applying for insurance licenses) and for intermediaries who face greater competition from other players moving into the intermediation space. The ultimate result is a loss of control over distribution channels to those who are carefully moving to reinforce or gain ownership. Consequently there will be pressure on both current providers (intermediaries and insurers) to develop an appropriate value proposition in order to access the low-income market. This value proposition must be both in terms of appropriate products for the needs of low-income consumers and provide sufficient benefit for owners of these customers. Insurers are, however, not accepting this loss of control and are themselves employing strategies to regain ownership of the client. 7.2.2. INSURERS MOVING DOWN INSURANCE VALUE CHAIN
Four strategies employed by insurers. Insurers are employing four strategies to try and regain client ownership:
Buying distribution channels. This will allow insurers direct ownership of the
distribution channel through the purchase of an agency force (e.g. Momentum buying Sage) or alternative channels (e.g. Sanlam buying Channel Life). Reconsidering agencies through franchising and call centre supported agents. An agency force provides the insurer direct ownership of the channel. The franchised agent is a model that falls somewhere between a broker and a traditional agent. This model allows agents greater independence and attracts brokers who are struggling on their own to cope with compliance and other costs. In both instances, the insurer either maintains ownership (e.g. a more independent agent does not move to a totally independent broker position) or regains ownership of the distribution channel (e.g. a previously independent broker coming back into the net). Call centre-supported agents is a move to maintain/increase the effectiveness of the agent model given the increased regulatory burden created by FAIS (see Box 3). It allows agents the opportunity to get on with the business of selling, whilst compliance is to a large extent managed by a call centre.
Developing broker support systems. As discussed in Section 7.1, the broker model is under, and will be under, increasing pressure to operate in the post-FAIS regulatory environment. As a result of this, and the necessity to maintain the broker channel, certain insurers have developed broker support systems one of these being the Masthead initiative launched by Old Mutual. Such an initiative will help maintain the small/independent brokers who find it difficult to operate with increased compliance and other costs. At the very least, broker support systems will retain the goodwill of brokers who are supported and may even allow the insurer the opportunity to exercise some control over broker distribution channels. By offering a very reasonable service such an initiative will also discourage the formation of broker networks, which in themselves would take away some channel control from the insurer. Changing client focus from brokers to customers. There has been mention, particularly in the short-term industry, of insurers changing their client focus from brokers to customers. Although the customer has always been recognised as important to the business of insurance, in most cases these customers could only
be accessed through the broker. As a result, the client focus of the insurer was on
the broker who had the ability to link insurers with customers. With the advent of new technologies, insurers are realising that they no longer have to depend on brokers to access and serve the customer. Instead they are able to reach the client directly without the broker and as a result the value of the customer is now recognised as key. One example of this is the use of call centre operations by insurers, as a direct link between the insurer and the customer. Now the insurer is able to retain control of clients and client information without the need for a broker. Regulations favouring insurers re-gaining control. Although the Privacy Bill makes it difficult for databases to be acquired, certain regulations are favouring insurers in re-gaining ownership over distribution channels: The first of these is FAIS and the impact it will have on small/independent brokers (see Section 7.1). As these brokers feel the squeeze of FAIS, they will welcome the broker support systems or the potential franchised agent opportunities. In addition, FAIS imposes an increased level of disclosure
regulation which makes the insurer more visible in the selling process. As a result, customers will be more aware of the product provider, which may to an extent strengthen ties between the insurer and customer. The PPR allows the insurer to regain control over outsourced administrator channels. At the very least, this entails obtaining client information and, similar to the increased levels of disclosure imposed by FAIS, allows more clarity about the actual identity of the product provider. Finally, commission capping still protects the smaller and, to an extent, larger insurers from the more powerful and lager brokerages and broker networks. 7.2.3. IMPLICATIONS FOR DISTRIBUTION TO THE LOW-INCOME MARKET As discussed, there are client groups and intermediaries moving up or into insurance value chain, while insurers are simultaneously moving down the insurance value chain. The ultimate goal of both these movements is to try to regain or reinforce and benefit from a position of client ownership. At this stage, it is uncertain who may come out on top and have access to the low-income client
base. What we can say, however, as the implications for low-income insurance distribution is that:
Firstly, there has been a fundamental shift in the way the market operates which will be in favour of those who own the client base. Secondly, there is greater competition in the low-income market, which will be positive for both affordability and access to current and potential low-income clientele. Finally, the models that the insurer can own, however, generally rely on serving banked and formally employed clients. Keeping in mind the discussion in Section 4, a large majority of potential low-income clients are not banked nor formally employed. As a result, the insurer will ultimately be dependent on other client owners for significant low-income market penetration. Putting this all together, it is clear that increased competition for insurers and more demanding client groups will mean that insurers will have to offer a clear and appropriate value proposition in order to play a role in the low-income market. Insurers will ultimately not be able to control distribution channels to the
extent they may hope and will need to, through other client groups, develop partnerships or joint ventures in order to penetrate the low-income market. 7.3. TREND 3: BROKERS ARE RETREATING TO HIGH-INCOME MARKET This section presents a story on the changing position of brokers in the intermediation of microinsurance. 7.3.1. ESTABLISHMENT OF BROKER DOMINANCE
Move towards broker distribution. During the initial stages of the South African insurance industrys development, brokers and agents were the only distribution channels available to insurance companies. Insurers realised that the broker represented a lower cost channel than the agent as the company did not need to invest in the development of the broker, nor provide him/her with additional financial support. Brokers were remunerated with sales commission effectively paid by the client, although hidden as part of the total premium. As this realisation became stronger, insurers gradually started to migrate their sales force from a predominantly agent force to a predominantly broker force. The lower distribution
costs benefited insurers, but were accompanied by a gradual loss of control over
the client base. This was an inevitable consequence of the migration from agent- to broker-distribution. Current position of broker dominance. As already mentioned, a 2003 report estimates that independent brokers and tied-agent sales forces are responsible for more than 90% of total new insurance business production (Uys, 2003: 14). Although the exact level is debatable90 and may vary for different companies and different market segments, it is clear that currently the majority of all long-term and short-term insurance business is written through brokers91 and particularly large brokerages that control access to the client and, consequently, have substantial power over insurers. Commission capping under the current regulation provides some protection for the insurer against the market power of the brokers. This creates a situation where, although the insurer controls the price, the broker effectively owns the client. The gradual establishment of broker dominance (in terms of proportion of premiums intermediated) is depicted in Figure 8.
90 A research report by Swiss Re (2004) estimates that brokers share of personal lines non-life (i.e. short-term) distribution in South Africa was only 50%. 91 In 2004, short-term insurance companies were selling their products through a total of 24,280 brokers, while long-term insurance companies had a total of 26,598 brokers (PricewaterhouseCoopers, 2004). It is important to note that these numbers are not addable as overlap is possible. Figure 8: The establishment of broker dominance Source: Genesis Dependence on broker distribution may delay the passing on of lower costs (in the form of lower premiums) to clients. Given the fact that the majority of short- and long-term insurance clients are effectively controlled by brokers, insurers cannot simply start utilising alternative distribution channels. Furthermore, some brokerages are part of large financial services groups where it is not in the interest of the group to cannibalise its broker channel, even though it has other distribution channels available. The above argument is evidenced by the fact that a large South African short-term insurer cannot sell its short-term products at
lower premiums through its direct call centre channel as it will sour the
relationship with its broker channel. The insurer is therefore selling its short-term products through its call centre at the same premiums its brokers are selling it at. Although the short-term insurer is not necessarily complaining about the situation as it is earning broker-level commissions on products sold directly, cheaper products could have led to an increase in products sold and, depending on the elasticity of demand, greater revenue and profit. It is important to note that the figure is not based on actual statistics, but merely serves to illustrate the increasing market share of brokers relative to agents over recent decades. Insurers may prefer hedging their sales risk through utilisation of a multi-channel distribution strategy. Traditional broker Traditional agent2006New multi-function channels New agency channels Relative market share+/- 1960
7.3.2. NEW MODELS EMERGING
Technological innovation and distribution model innovation have led to reduced intermediation costs and the introduction of an array of new (captive and multi- function) intermediary channels (as discussed in Section 3). Agency intermediary models serving the higher-income market. The new agency intermediary models that are emerging include contact centre supported sales agents and direct call centre sales agents (inbound and outbound calls). These channels offer insurers lower cost distribution strategies than traditional agents and brokers, while being able to compete with broker sales as they can serve the traditional brokers market, e.g. the educated, high-income individual. Since the new channels are captive (owned by the insurer), it enables insurers to regain control over clients, while also cutting costs. However, it is important to note that these models might not be able to serve low-income clients, as they: do not allow for cash collection of premiums; have limited geographic reach; and
mostly target employed banked individuals that receive regular income flows, or employer groups that provide the option of payroll deduction. Multi-function intermediary models serving the low-income market. Rather, it is the new, multi-function intermediary models that allow individuals in the low- income market to be sold insurance. These models include insurers partnering with retailers (through joint ventures, or other arrangements) such as the Pep/Hollard and Edcon/Hollard initiatives. These models generally rely on the power of at least one retailer brand and the trust that it instils. Due to infrastructural capacity of low-income retailers, the models often have vast geographic reach. The extensive infrastructure also implies lower distribution costs, while enabling the final link in the distribution chain (e.g. the retailer) to collect premiums in cash. In addition, client concentration forms a key feature of the models. 7.3.3. IMPLICATIONS OF BROKER DOMINANCE AND NEW MODELS FOR INSURERS Given brokers control over clients and their position of power over insurers choice of distribution channel, insurers would want to employ strategies that
allow them to regain client control while slowly mitigating broker power. The
emergence of two new types of distribution models, due to technological and model innovation, provides insurers with two possible strategies to achieve the above goals, while also lowering distribution costs. Insurers may reduce premium values of products sold through lower-cost channels (or price discriminate) if certain conditions are in place. In order to reduce the premiums of products sold through lower-cost channels, insurers need to be able to price discriminate94. If it is assumed that the insurer contemplating such a strategy does have market power (whether by lack of competition or simply the complex nature of the product), it means that price discrimination can be quite easily implemented by selling the same product at different premiums to different markets through different average cost distribution channels. This would allow the insurer to not jeopardise existing channels while it is gradually regaining control over or access to its existing client base (currently under broker control). If price discrimination is successfully achieved, it will not only allow insurers to generate client volumes not otherwise attainable, but also aide in the establishment of
lower-cost distribution channels that can eventually start to eat into the broker channels market share. Insurers may adopt lower-cost channels without
decreasing premiums. However, rather than attempting to price discriminate, a first-order strategy for incumbents is to adopt new agency distribution channels to reduce the distribution costs (and increase insurer profitability), but retain premiums at broker levels. Cost savings are thus not passed on to the client. The appeal related to non-price aspects of the new distribution channels (e.g. the convenience of telephone sales), may allow the insurer to initially increase its client base without reducing premiums. 94 Price discrimination is defined as the ability to set prices so that the difference between average prices and average costs varies between different sales of either the same good or closely related goods (Church & Ware, 2000: 160). Price discrimination in an insurance context would simply mean that an insurer is able to sell the same product at different prices through distribution channels with different average costs. Two preconditions are required for a strategy of price discrimination to be successfully implemented. Firstly, the insurer needs to have
market power and, secondly, resale or arbitrage of the sold product should not be possible (Church & Ware, 2000: 160). Whether the first condition holds for all insurers is obviously debatable. What is, however, clear is that insurance, due to the fact that it is a credence good, is not a product that can be easily arbitraged. 7.3.4. HIGH- AND LOW-INCOME MARKET BEHAVIOUR
Depending on the markets which insurers choose to target, insurers will select one of the two strategies discussed above. The implementation of both discussed strategies hold implications for the continued dominance of brokers as a distribution channel in the insurance market. Whatever strategy selected, the new agency channels and multi-function intermediary channels will gradually encroach upon brokers market share, as depicted in Figure 9, below. Figure 9: The rise of new intermediary models Insurers choosing to focus on higher-income clients will generally select the second strategy discussed. This will allow them to increase client share (see Figure 9) without reducing premiums and also to sell products through lower-cost
distribution channels (in addition to its broker channel). However, if insurers choose to actively target both the low- and high-income markets, the price
discrimination strategy would be more appropriate. These insurers will be able to price discriminate by charging lower premiums in the low-income, non-broker dominated market by distributing through the new lower cost, multi-function intermediaries. As brokers are currently not actively serving the low-income market, there will be no real resistance to the use of the new multi-function intermediary channels. The regulatory separation of advice and non-advice markets (see Section 5) also supports the strategy of price discriminations, as it naturally excludes brokers from the low-income market, where advice-less selling takes place. Brokers are unable to compete in the market for advice-less insurance. Not only do they not want to (they actively choose to be in the advice business), but the premium levels of advice-less insurance products do not facilitate individual or face-to-face selling. Furthermore, brokers have already invested in being able to provide advice during the sales process (through the purchase of their FSP licenses, educational
qualifications obtained and other skills learned in the industry). Due to these
restrictions, brokers will be forced to focus on serving the high-income market as they cannot sell advice-less products. This implies that the low-income market will have to be served by channels utilising advice-less selling processes, while the high-income market will be served by brokers, able to provide independent advice to their clients. 7.3.5. MARKET OUTCOMES New entries will overtake broker-dependent insurers due to lower pricing. The entry of more insurers and other players into the low-income market is forcing incumbents to utilise low-cost models and pricing. The rise of branded players, such as the Pep/Hollard initiative, is also hastening the negative impact on broker- dependent insurers and increasing the need for reaction by incumbents as higher brand trust facilitates faster take-up of new products. While broker-dependent market players (such as Santam and Old Mutual) are constrained in terms of their
pricing (i.e. cannot simply decrease premiums), the new entrants are able to sell products at the lowest possible premiums. Low-income models could prove to be a Trojan horse. While it seems as if new models in the low-income market do not really pose a threat to brokers in the high-income market, the entry of insurers and other new players into the low- income market could in fact prove to be a Trojan horse for the high-income
market. Initially, entry into the low-income market provides insurers a chance to perfect their low-cost distribution models and strategies before also targeting the high-income market. If this proves to be true, the brokers market share will be encroached upon from all sides (see Figure 9). Some advice will continue to be provided by brokers in the high-income market. Insurers serving the high-income market are constrained to their traditional behaviour by the phenomenon of broker power. Although the impact of new, non-traditional distribution channels, such as retailers, on premium levels will occur slowly, broker market share will eventually be encroached upon by new players and the expanded scope of initial lower-income entrants. It is very likely that South Africa will be following the
United Kingdom experience, where brokers, due to the entry of new players, are now only serving a small, quite specialised segment of the high-income market. Broker market share is decreasing and will continue to do so. The above trends imply that the proportion of insurance business sold by brokers will gradually decrease. Although part of this change will be attributable to the creation of a
bifurcated insurance market through the unintended consequences of regulation, decreasing broker market share is an international and inevitable trend. This trend actually forms part of a broader development around the blurring of lines between client groups, intermediaries, insurers and re-insurers. Particularly, insurers are experiencing the same pressure with entry by client groups and intermediaries into the insurer environment while at the same time re-insurers are finding ways of accessing client groups directly. 8. OPPORTUNITIES AND THREATS TO INSURANCE INTERMEDIATION
Given the discussion in the preceding sections, this section will present some of the opportunities and threats to insurance intermediation in South Africa. 8.1. OPPORTUNITIES TO MICROINSURANCE INTERMEDIATION 8.1.1. EXISTING CLIENT TOUCH POINTS PROVIDE ACCESS TO SIGNIFICANT MARKET A number of distribution opportunities for both insurers and intermediaries were highlighted in Section 4. Table 7 showed the number of LSM 1 to 5 individuals who do not have formal insurance, but who are accessible through existing relationships with the formal sector and/or other networks. These include: 4.2m people who have bank accounts; 3.3m people who have a pre-paid cell phone; 1.4m people who have store cards/accounts; and 2.2m people who are members of burial societies. Importantly, both banks and retailers will have databases with extensive client information, including financial information (e.g. behaviour, card/account payment persistency) about their customers. This information can be used by providers in the design of suitable products for low-income clients. Retailers,
airtime vendors (to purchase airtime) and potentially burial societies will be in a
position to collect cash premiums. This is especially important for the substantial numbers in LSM 1 to 5 who are not banked or employed in a company where premiums could be respectively debited or deducted. And burial societies remain a key point through which to access the 1.2m individuals who are not banked and do not have a pre-paid cell phone or a store card/account. In addition, the overall use of burial societies by people in LSM 1 to 5 who have no form of formal insurance is a good indicator of the need for, particularly, funeral insurance and, potentially, their propensity for other forms of insurance. The significant numbers of people accessible through existing client touch points shows that the FSC targets are well within distribution reach. 8.1.2. NEW DISTRIBUTION MODELS EMERGING A number of new models are emerging that extend beyond banked and employed and are able to serve LSM 1-5. These models fall in the multi-function and low- income group categories and share a number of characteristics:
Ability to collect cash premiums. A key advantage of the new models is that they are able to collect cash or collect premiums through alternative means (to bank account or salary deduction). The result is that these models are able to serve the unbanked and those that fall beyond payroll deduction.
Reliance on tick-of-the-box selling. The new models rely on tick-of-the-box selling without advice. Utilising brand trust and/or group affinity to facilitate sales. The new models all utilise some form of brand or affinity power to facilitate an easier introduction of its insurance products to the lower-income market. Intermediary control over distribution channel. The nature of the relationship with the distribution partner means that access to the client in most of the new models is beyond insurer control. Simple but effective use of information technology. A further key aspect of the new models is their simple, but effective application of technology for communication purposes. 8.2. THREATS TO MICROINSURANCE INTERMEDIATION
The threats highlighted here are threats to access to microinsurance rather than to the market share of any particular models. 8.2.1. CONSUMER PROTECTION OVERRIDES ACCESS OBJECTIVES
The combination of the increased regulatory cost of advice-based models and the introduction of less expensive non-advice models is forcing traditional advice- based models out of the low-income market. The retailers and other emerging low-income intermediaries are relying on tick-of-the-box selling. However, there are indications that the legality of this practice could be questioned and eventually closed down by rulings of the FAIS Ombudsman. Uncertainty around tick-of-the- box selling thus poses a very real threat to the ability of existing models utilising this practice to serve low LSM categories. If tick-of-the-box selling is indeed shut down, it could leave a large un(der)served gap in LSM 1-5. Many of the low-income models in Section 3.1 only work because of their ability to sell policies using a tick-of-the-box method (with some models only offering advice or disclosure on demand) and because they are able to utilise
unregistered sales staff. A very real risk exists, therefore, in the possibility that the FAIS Ombudsman may move against non-advice selling. Even if the Ombud does not extend rulings on non-advice-based sales explicitly to the lower-income market, the uncertainty and potential brand risk may be a sufficient deterrent to firms considering entering these markets. 8.2.2. NON-ADVICE MODELS DO NOT ACHIEVE TAKE-UP OR RESULT IN ABUSE If regulatory space for tick-of-the-box selling remains, there are two other remaining risks: Passive sales models do not achieve take-up. The success of new low-income models is yet to be proven. These models employ passive sales methodologies which rely on the client approaching the distribution point rather than the other way around. Although the new models will place the products within reach of low- income customers, it is not clear whether they will achieve take-up. This will have a double impact. It will push market makers (brokers/agents) out of the market,
but cannot replace the market making function previously fulfilled by brokers/agents.
No advice models result in mis-selling and regulatory backlash. The emerging low-income models are relying on the absolute lowest cost methodologies, selling insurance (in some cases) without even the most basic disclosure. Some of these models offer no advice or disclosure or only disclosure on request. The absence of even minimum levels of disclosure in some of the models is at risk of resulting in mis-selling and, as a result, a potential regulatory backlash. If the models currently providing no advice are allowed to continue operating in this manner, it could have negative repercussions for the market as a whole, especially for those models currently providing policy disclosure, but no advice. 8.3. CAN THE BROKER RE-INVENT THEMSELVES TO SERVE THE LOWER-INCOME MARKET? A key question in the terms of reference to this study was whether brokers (independent intermediaries conducting advice-based sales) could re-invent
themselves as intermediaries of microinsurance. In considering this question, this study has shown that:
The bifurcation into advice and non-advice selling will result in non-advice selling in the low-income market and advice-based selling in the higher-income market. Regulatory costs are increasing on advice-based models and, going forward, regulatory and policy changes are likely to increase this divide. While the complete absence of disclosure will not be in the long-term interest of the market, the study has argued that advice may be too costly relative to the benefit provided in the low-income market. Instead, it is argued that disclosure should be set as the minimum standard rather than advice. The cost modelling exercise showed that brokers will find it difficult serving the LSM 1-5 market. Although there are some avenues to consider in improving the efficiency of the broker distribution model, these are unlikely to allow it to extend to any significant degree in the LSM 1-5 market.
Broker models are not playing a major role in the intermediation of microinsurance internationally.
The counter question emerging from these findings is whether brokers should, in fact, try to re-invent themselves as intermediaries of microinsurance? If the definition of a broker as an independent, advice-based sales model is used, this document argues that advice-based sales are not necessary and not feasible for the largest part of LSM 1-5. Our view is, therefore, it is not necessary for brokers to reinvent themselves to serve this market and that there are more promising avenues to pursue in other independent or captive disclosure-based models. 9. CONCLUSIONS
This document presented a review of the threats and opportunities for the intermediation of insurance to low-income households in South Africa.
Intermediation is simply defined as all the interactions, processes and flows required to establish the relationship between the risk carrier and the client. 9.1. SUMMARY OF FINDINGS Opportunity: The horse is at the water trough. The review finds that a large number of unreached clients are within reach of existing formal and informal client touch points. For a large proportion of LSM 1-5, premium collection is, therefore, not the main constraint to reaching the uninsured as they are already accessing other formal and informal networks that could serve as a payment collection system. Growing focus on the provision of microinsurance. In addition, both formal insurers and other organisations are actively targeting the low- income market. This is not only driven by the Financial Sector Charter (which only applies to formal insurers), but by perceived opportunities for profit in this market. It is thus an increasingly competitive environment and multiple delivery models are emerging. This leads to growing pressure on insurers to produce better value
propositions and gain ownership of customer groups. New cost-effective models
are emerging, but have yet to show results. A number of new intermediary models are emerging that are able to reach LSM 1-5. These models are able to collect cash premiums, rely on passive, tick-of-the-box selling and, therefore, do not provide advice. The emergence of the tick-box approach points towards the commoditisation of insurance. This means that the insurance product is no longer sold within a relationship, especially a relationship with a broker. It is sold as a commodity, i.e. a standardised product. In addition, there is a move to multiple contact points to deal with the distribution of the same product personal contact, cell phone, contact centre, retail or other point of contact. This trend to client-centric rather than broker-channelled communication has been facilitated by low-income consumers coming on grid, especially via cell phone uptake. The ability to communicate directly and immediately via a very popular medium (SMS) has increased the viability of non-debit order premium collection. Experience shows that significantly better payment performance can be achieved by sending SMS reminders, which can be generated at very low cost. However, despite all of
these improvements and innovations, little penetration has been achieved beyond funeral insurance and the new models have yet to show results. Major risk for market players to generalise observable trends in funeral insurance to hold for non-funeral insurance products. There is an innate culturally-driven demand for funeral insurance in South Africa, particularly amongst the low- income market, where it is by far the largest category of insurance being used. Unlike other types of insurance, funeral insurance is, therefore, bought not sold. Products such as credit life insurance have achieved penetration based on compulsion and by being bundled with other products. It is unlikely to have achieved the same penetration if it had been sold on a voluntary basis. Funeral and non-funeral products, consequently, requires very different intermediation approaches to succeed in the low-income market. Whereas the former can rely on some form of passive selling, the latter requires active selling. Regulation has placed the cost of advice beyond the level which can be afforded in the low- income market. Even before the introduction of FAIS, traditional advice-based intermediation models had not been able to extend significantly into LSM 1-5.
Given the cost of conducting advice-based intermediation, there has been little
commercial incentive for advice-driven intermediaries to pursue this market and the introduction of FAIS combined with the debate on commission restructuring is likely to remove the little incentive there was. Cost modelling conducted as part of this review suggests that it is unlikely that advice-based sales models like of brokers will be able to profitably serve any significant proportion of LSM 1-5. Does active selling mean the same as providing advice? We argue that it does not and that this distinction is necessary to allow intermediation in the low-income market. The regulatory review suggests that guidelines issued by the FSB implicitly also differentiate between selling and providing advice. However, given the lack of clarity on this distinction (due to conflicting regulatory signals from the FSB and FAIS Ombud), the market has effectively bifurcated into active, advice-based selling or completely passive, advice-less selling. The result is, therefore, that the only active selling models operational in the market are ruled out of the low- income market by the increased regulatory cost of providing advice (noted above). Given the conflicting regulatory views on the requirement of advice, the regulatory
space for non-advice models may be closed down. This leads to a conundrum: To go beyond funeral insurance in the low-income market requires active selling (proactive human interaction e.g. E-choupal). Yet regulation, by combining
active selling with advice, is making it too expensive and beyond the reach of the low-income market. Unless some agreement can be reached on a definition of active sales, which does not equate to providing advice, this study concludes that it is unlikely that any take-up beyond funeral insurance will be achieved in the low-income market. International microinsurance experience does not provide easy solutions but yields some insights. It confirmed that multi-function models are essential to achieve scale and viability at low premium levels. Specifically, existing infrastructure such as airtime vendors and spaza shops may present opportunities. It showed that models depending on MFI distribution have not achieved success in distributing voluntary insurance and that only a limited range of insurance products have been successfully distributed to the poor. Successful products have
been limited to simple life insurance products and asset insurance categories
where the claims are parametrically triggered (e.g. weather insurance) or simple to assess. Furthermore, international experience suggests that insurers are not guaranteed a permanent distribution mechanism through MFIs and other client/affinity groups. Other options are becoming available to these groups to mitigate credit risks, including becoming insurers themselves. In particular, reinsurers are finding new ways of linking directly with microinsurance client groups placing further pressure on the insurer to establish its value proposition. Significantly, few of the international intermediation models reviewed relied on passive sales methodologies but employ various means and mechanisms to actively sell products to potential clients. 9.2. DRIVERS OF SUCCESFUL INTERMEDIATION OF MICROINSURANCE Based on the above analysis, we propose that there are three drivers that determine the success of microinsurance distribution. 1. The ability to cost- effectively collect premiums, especially cash premiums, and pay benefits. This is
facilitated through the touch points referred to in the report. The facilitators here are two-fold: the proliferation of point-of-sale (POS) infrastructure in low-income areas
(retailers, airtime vendors, spaza shops with POS devices etc) where payments can be made; and cell phone infrastructure through which regulatory compliance can be administered and regular client interaction can be facilitated at low cost (e.g. reminded to make premium payments). Both of these are critical and all of these touch points are multi-functional, which helps to reduce costs by piggy-backing on existing infrastructure. However, the touch point by itself is not sufficient to ensure success. 2. Active selling through trusted personal interaction. Even more so than in the high-income market, insurance in the low-income market (with the possible exception of funeral insurance) has to be sold. This requires:
Active selling of some form sufficient to create the market for the insurance product.
Trusted intermediary: These are likely to be some form of affinity group, trusted brand or a trusted individual as part of a multi-function channel (as per the e- choupal). Calibrated information requirement to allow the distinction between advice and selling/disclosure: In trying to ensure consumer protection, FAIS has placed a definition (and thereby a cost) on advice which is beyond the reach of low-income customers. This is not dissimilar to the experience with prescribed minimum benefits under the regulation of medical schemes. To allow the active selling required, the information to be provided as part of the sales process needs to be defined in calibrated packages related to the complexity (see below) and value of the product. This will require providing regulatory clarity on the definition of advice as opposed to other information provided during the sales process. Caveat: There is a risk that attaching a regulatory definition to selling/disclosure as differentiated from advice, may in fact impose regulatory cost on this activity as in
the same way as has been done for advice. It may, therefore, be better to define advice accurately and to leave what is not advice unregulated. The right incentives: Those doing the selling need to be driven by the right incentives, i.e. some form of commission or performance related bonus. Interestingly, individual airtime vendors or spaza owners may be easier to incentivise than retail store clerks conducting insurance sales as part of their general responsibilities. 3. Appropriate product. While perhaps beyond the definition of intermediation, the nature of the product cannot be completely removed from the debate about
intermediation. In particular, three aspects of the product will impact on the ease and effectiveness of intermediation. Cover that reflects needs. The product must meet a relevant need and be competitive in how it meets it. There are alternative risk mitigation mechanisms to insurance (e.g. savings and credit). Accepting that the poor face certain risks does not necessarily translate into wanting or needing insurance. Related to the requirement for active selling, the value of the product and how it relates to risks
faced by the poor need to be effectively communicated as part of the intermediation process.
Manageable risk. As a counterpoint to meeting the needs, it must be noted that some low-income risks cannot be insured simply because it is not possible for the insurer to manage within the low premium value. The intermediary often has to play a role in selecting and managing the risk underwritten by the insurer and the extent of risks to be managed is often inversely related to the size of the premium. Moral hazard is particularly difficult to manage for low-income products and the successful products have been those where the client has little incentive to abuse it (or strong disincentives for abuse) and/or the risk could be managed at low cost. Beyond life insurance, there are relatively few examples of such products. Parametrically triggered products such as weather insurance present a classic example as the risk event is beyond the control of the client and it is easy to assess. Other general insurance products (e.g. household content insurance) present significant challenges in this regard.
Sufficiently commoditised and/or simplified. The structure and complexity of
products directly impact on the nature of intermediation required. Essentially, it is argued that a simplified product with appropriate (calibrated) disclosure can substitute for advice. Three issues are at stake here: Firstly, the ability to sell with ease a product which is universally understood. Airtime is a good example. The development of CAT standards is a move in this direction, as is the Mzanzi account in the banking arena. This standardisation generally reduces the need for advice. It also means that many stakeholders are reinforcing the same marketing message, which contributes to consumer education. Secondly, the ability to pay benefits with ease. The triggers for payment are standardised making it easier to understand as well as to assess. Thirdly, a standardised product which is also regulated in some form (regulation of the what) presents an alternative or complimentary approach to consumer protection where control of the process (the how regulation referred to in the regulatory review) is very difficult or prohibitively costly in a particular market.
9.3. CAN THE BROKER RE-INVENT THEMSELVES TO SERVE THE LOWER-INCOME MARKET? A key question in the terms of reference to this study was whether brokers (independent intermediaries conducting advice-based sales) could re-invent
themselves as intermediaries of microinsurance. In considering this question, this study has shown that: The bifurcation into advice and non-advice selling will result in non-advice selling in the low-income market and advice-based selling in the higher-income market. While the complete absence of disclosure will not be in the long-term interest of the market, the study has argued that advice may be too costly relative to the benefit provided in the low-income market. Instead, it is argued that disclosure should be set as the minimum standard rather than advice. The cost modelling exercise showed that brokers will find it difficult serving the LSM 1-5 market. Broker models are not playing a major role in the intermediation of microinsurance internationally.
This raises the question of whether the broker model is at all relevant in the low-
income market. If the definition of a broker as an independent, advice-based sales model is used, this document argues that advice-based intermediation is not necessary and not feasible for the largest part of LSM 1-5. We conclude, therefore, that it is not necessary for brokers to reinvent themselves to serve this market and that there are more promising avenues to pursue in other independent or captive advice models. The following document was compiled by the authors of the Five country case study as referred to above . This document is the Indian case study portion of that 5 country case study undertaken. Again we quote verbatim from the case study itself: Indian case Study
The objectives of this project were to map the experience in a sample of five developing countries (Colombia, India, the Philippines, South
Africa and Uganda) where microinsurance products have evolved and to consider the influence that policy, regulation and supervision on the development of these markets. From this evidence base, crosscountry lessons were extracted that seek to offer guidance to policymakers, regulators and supervisors who are looking to support the development of microinsurance in their jurisdiction. It must be emphasized that these findings do not provide an easy recipe for developing microinsurance but only identifies some of the key issues that need to be considered. In fact, the findings emphasize the need for a comprehensive approach informed by and tailored to domestic conditions and adjusted continuously as the environment evolves.
Authors: Sanjay Sinha and Swetan Sagar Executive Summary
The sheer scale of the Indian low-income market creates enormous scope and need for microinsurance. Potential voluntary demand is strong, particularly for micro health cover. A strong political imperative exists for financial inclusion, resonating in regulation that mandates low-income market expansion, as well as a dedicated microinsurance space. Yet the actual extent of microinsurance penetration in India remains very small. The legacy of a state-owned insurance monopoly still looms large. Private insurers as well as the insurance regulatory authority are very new and have found it difficult to prioritise
microinsurance in the face of other pressing concerns. The regulatory strategy to compel insurers to reach down-market has triggered some interest in the low-income market, but rarely beyond that required by law. Furthermore, general insurance regulation as well the specific provisions for
microinsurance impose restrictions that contribute to the fact that microinsurance has achieved limited success thus far. Context With a population of around 1.1bn, India is the second-most populated country in the world. In recent years, strong GDP growth has been experienced. Yet poverty remains high, especially among the 70% of
the population that resides in rural areas. Government nationalised the insurance industry in the 1950s and it was only liberalised in 1999 to allow private insurers. Since then insurance premiums have grown rapidly on the back of new entry. Yet the two state-owned insurers remain the largest insurers in the market. India is unique in that the government plays a proactive role in providing insurance to the very poor (those below the $1/per day threshold) through various social security programmes and subsidised insurance schemes. Therefore the microinsurance market in India should largely be regarded as the lowincome population living on more than $1/day. Regulatory framework for microinsurance
Microinsurance distribution space created. India is one of the first countries in the world to have
introduced micro-insurance regulation. This comprises a product definition, based on which a category of microinsurance agents is then created for the distribution of microinsurance, subject to more favourable regulatory requirements, but limited to non-profit entities such as NGOs or self-help groups. The dedicated microinsurance space has therefore been limited to the distribution/market conduct side.
Impact of regulation on the market. As discussed in this report, this regulation has been welcomed as an innovative move to maximise insurance outreach. While the two years elapsed since the introduction of this measure are insufficient to reach a definitive conclusion on the long term impact of the regulation, initial experience and considered feedback from insurers, aggregators and others provides a sufficient
understanding of the impact of the regulation to enable some analysis. Such an analysis has been
undertaken in this report. The net result can be summarized based on the diagram below. 9 Figure 1. Framework for micro-insurance regulation Note: Figure adapted from Finmark Trust/Genesis Analytics synthesis presentation. No prudential space for microinsurance results in market restrictions. Conscious of the relatively recent experience of insurance regulation and the lack of its own capacity to implement a strong regulatory regime, the regulator the Insurance Regulatory and Development Authority (IRDA) has limited the scope within which micro-insurance may be offered (see dark shaded areas of the figure above). Since
the regulators capacity to supervise is limited, legal activities in the insurance (particularly microinsurance) space have been restricted to the types of insurers that are deemed to have appropriate operational governance. These are corporate entities with substantial (>$25 million) capital investments to the exclusion of smaller, specialized, standalone insurers and also small cooperative insurers. These
large companies do not have an intrinsic interest in the bottom of the pyramid market since they expect costs to be high and revenue volumes to be small. Thus, their inclination is to ignore micro-insurance, if possible. However, the rural and social obligations imposed by the regulator have forced these companies to look seriously at the BoP market as a quid pro quo for being allowed to function in the
commercial/urban insurance market. Regulatory capacity Operational governance Product design and delivery exclusion offor profit NBFCs as MI agents exclusion offor profit NBFCs as MI agents exclusion of standalone and small cooperative insurers constriction caused by skepticism about BoP market centrifugal force resulting from
rural/social obligations 10
Regulation not necessarily tailored to risk. Yet micro-insurance is defined as cover that (at $750) is actually less than the national GDP per capita for general insurance and 1.4 times GDP per capita for life insurance. Thus the actual level of risk for the insurer is relatively small. A more risk-based approach would enable strict governance requirements to substitute for close supervision and facilitate the expansion of the micro-insurance space to specialized standalone and cooperative insurers (thus covering the light shaded areas of the figure above). The recent decision to permit (not-for-profit) Section 25 companies to become micro-insurance agents has added to the potential for this space to
expand but the actual appointment of such agents by insurers is constricted by extensive market
conduct rules, especially commission caps, limitations on the number of insurers an agent can deal with and the central banks restrictive approach that defines any amounts collected by MFIs on behalf of a client as deposits (that Section 25 companies are not allowed to take). And, for profit NBFCs remain excluded from this space despite their outreach to over 7 million microfinance clients who constitute a ready market for micro-insurance. As a result, considerable energy has been devoted by these MFIs (as aggregators of microinsurance clients) to the by-passing of the market conduct rules established by the regulator resulting in the delivery of the micro-insurance service at a higher cost than necessary.
Characteristics of the microinsurance market
The net result of this situation is illustrated in the picture of the micro-insurance market in India presented in Figure 2. The study team estimates that some 14 million adults are covered by life microinsurance in India. In a country with some 120 million families living on less than $2 a day, this is a very small proportion of the potential micro-insurance market. Figure 2. Coverage of micro-insurance in India High share of compulsory products; low share of microinsurance agents in distribution. An overwhelming proportion of microinsurance in India is provided as compulsory credit-life insurance through aggregators such as MFIs, rural banks and cooperative banks. A significant amount of health cover is
provided through MFIs and cooperative health insurers also but much of this cover occurs by default 11 by virtue of an individual being a member of, borrower from or other service user of the aggregator. Since aggregators are mainly institutions that are ineligible to become microinsurance agents, only a small proportion (20%) of micro-insurance in India is estimated to be distributed through agents with the remaining amount being sold through aggregators that earn service fees rather than commissions. The commission structure being controlled, even well known NGOs eligible to become microinsurance agents often decline to do so, preferring instead to negotiate (higher) service fees for enabling the sales of the insurer.
Endowment products dominate voluntary sales. Overall, voluntary life insurance is sold mainly as endowment products where the insured has the satisfaction of getting some money back at the end of the term rather than simply seeing the premium consumed by the insurance company if there is no occasion to make a claim. Low informality. Even in the informal market, most of the cover provided is by registered NGOs or cooperatives (such as the Yeshasvini Trust in Karnataka) that run in-house insurance programmes. These programmes are usually facilitated or subsidized by the government or other donors and therefore have some form of official oversight. There are virtually no completely informal insurance programmes known to be operating in India.
Consumer awareness as restriction on market development. The overall size of the Indian microinsurance market is restricted by a general lack of awareness of the benefits of insurance amongst the low income segments of the population. Given the high levels of vulnerability and the limitation of the governments nascent social protection schemes to the 60 million families living below the poverty line, there is a substantial role for awareness creation about insurance amongst the population. Awareness creation in India is a role for the regulator who is also charged with developmental responsibilities and who has the financial resources (but not yet the will) to use these resources boldly in the larger interests of the public. The regulator has generated supply-side interest in microinsurance via a special
set of regulations coupled with the rural sector obligation imposed on insurers. Combining this with creating demand-side interest in micro-insurance would go a long way in furthering the interests of
economic inclusion and reducing vulnerability amongst large segments of the low income population. 1. Introduction This document presents the findings from the Indian component of a five- country case study on the role of regulation in the development of microinsurance markets. The objectives of this project are to map the experience in a sample of five developing countries (Colombia, India, the Philippines, South
Africa and Uganda) where microinsurance products have evolved and to consider the influence of policy, regulation and supervision on the development of these markets. From this evidence base, crosscountry lessons are extracted that seek to offer guidance to policymakers, regulators and supervisors who are looking to support the development of microinsurance in their jurisdiction. It must be emphasized that these findings do not provide an easy recipe for developing microinsurance but only identify some of the key issues that need to be considered. In fact, the findings emphasize the need for a comprehensive approach informed by and tailored to domestic conditions and adjusted continuously as the environment evolves.
The project is majority funded by the Canadian International Development Research Centre (www.idrc.ca) and the Bill and Melinda Gates Foundation (www.gatesfoundation.org) along with funding and technical support from the South Africa-based FinMark Trust (www.finmarktrust.org.za)4
and the German GTZ5 (www.gtz.de) and BMZ6 (www.bmz.de/en/). FinMark Trust was contracted to design and manage the project. Together with representatives of the IAIS, the Microinsurance Centre and the International Cooperative and Mutual Insurance Federation (ICMIF) the funders are represented on an advisory committee overseeing the study. 2. Analytical framework This study applies a number of lenses to the evolution of microinsurance markets in the five countries.
These lenses, collectively referred to as the analytical framework, in turn inform the synthesis of drivers
and findings in the cross-country report. The full analytical framework is contained in Appendix 1. It covers: The financial inclusion framework The goal of microinsurance, namely increased welfare for the poor through risk mitigation to reduce vulnerability. The definition of microinsurance, namely insurance managed according to insurance principles, in exchange for a premium, that is accessed by or accessible to the low-income market. The parts of the insurance value chain covered, including underwriting, administration and intermediation/distribution.
The distinction between formal and informal insurance and intermediation.
The categories of risk identified, namely prudential risk, market conduct risk and supervisory risk. A typology of public policy instruments, namely policy, regulation and supervision. 4 Funded by the UK Department for International Development DFID. 5 Deutsche Gesellschaft fr Technische Zusammenarbeit GmbH. 6 Bundesministerium fr Wirstschaftliche Zusammenarbeit und Entwicklung - Federal Ministry of Economic Cooperation and Development 13 An overview of the insurance regulatory scheme (most notably financial inclusion policy or regulation, prudential regulation, market conduct regulation and institutional regulation) Please refer to Appendix 1 for a detailed analysis of each of these areas. 2.1. Methodological approach
The structure of the analysis is as follows:
Understanding the microinsurance market. The microinsurance market is described in terms of: (i) the various players (corporate and mutual/cooperative, formal and informal) active in the lowincome market; (ii) the products available and any low-income market product innovations; (iii) usage among the low-income population of formal and informal insurance products; as well as (iii) distribution channels employed in the low-income market and any distribution innovations. These findings are used to conclude on the key characteristics of the microinsurance market. Focus group research was used to identify the need for and understanding of insurance among the target
market. This included an investigation into the risk experience, provider, product and channel preferences of the focus group participants, as well their trust in the insurance market in general. Understanding the insurance regulatory framework. Furthermore, the study gives an overview of the
insurance regulatory framework, in general and as pertaining to microinsurance. Drivers of microinsurance. In light of the above, it seeks to draw out respectively the non-regulatory (market, macroeconomic and political economy context-related) and regulatory drivers of the state of microinsurance. These drivers are synthesised in the cross-country document. Conclusion. The drivers are used as the basis for highlighting conclusions on the development of the market, the impact thereon of regulation and other factors and the way forward for microinsurance
policy, regulation and supervision.
The methodology consisted of desktop research as well as consultations with industry role players, regulators, supervisors and other stakeholders. It involved: Traditional demand and supply mapping Qualitative focus group research Regulatory and policy analysis Controlling for context and the distinctive evolution of the broader insurance market 2.2. Project scope The scope of the study covers all life and non-life insurance products targeted at the low-income market, including savings products provided by insurers (endowments) where it includes an element of guarantee. Pure savings products and retirement savings products are excluded from the scope of the
study, as is government social welfare and social security provision.
Indemnity health insurance is an extremely important product for the low-income market, but is often regulated and supervised differently to other insurance business and is a complex field, intricately linked 14 to health service provision. It was therefore excluded from the overall scope of the cross-country study, with the exception of India, where it is included in the analysis below. This is due to the important role that such insurance plays in the microinsurance market in India. The study covers all categories of providers and intermediaries, including informal markets. 3. Microinsurance in India 3.1. A historical perspective of insurance in India 3.1.1. Life insurance
The history of life insurance in India dates from 1818 when this instrument was conceived means to
provide risk cover to the families of Englishmen then serving in India. The Bombay Mutual Life Insurance Society, the first Indian owned life insurance company, was established in 1870. It was the first company to charge the same premium for both Indian and non-Indian lives. The Oriental Assurance Company (life business) came into being in 1880. Several frauds which occurred during the 1920s and 1930s sullied the image of the insurance business in India. By 1938, 176 insurance companies had been established in India. The insurance business grew at a faster pace after independence in 1947. Indian companies strengthened their hold on this business but, despite the growth, insurance remained primarily an urban phenomenon.
In 1956, the Government of India brought together over 240 private life insurers and provident societies
under one nationalised monopoly corporation and the Life Insurance Corporation of India (LIC) was born with the enactment of the Life Insurance Corporation Act, 1956. Nationalisation was justified on the grounds that it would generate the much needed funds for rapid industrialization. This was in conformity with the Government's chosen path of state led planning and development. 3.1.2. General insurance The general insurance business in India, traces its roots to the Triton Insurance Company Limited, the first general insurance company established by the British in Calcutta in 1850. The first Indian company,
the Indian Mercantile Insurance Ltd was set up in 1907. This was the first company to transact all classes of general insurance business. The general insurance business continued to thrive under the private sector till 1972. The cover provided by the general insurance companies was, however, limited to organized trade and industry in large cities. The 107 insurers of the general insurance industry were nationalised in 1972 and amalgamated and grouped into four companies National Insurance Company, New India Assurance Company, Oriental Insurance Company and United India Insurance Company. These four companies were structured as subsidiaries of a holding company, the General Insurance Company (GIC). 15
3.1.3. Insurance legislation in India
The Indian Life Assurance Companies Act was enacted in 1912 as the first statute to regulate the life insurance business. The Indian Insurance Companies Act came into being in 1928 to enable the government to collect statistical information about both life and non-life insurance businesses. These pieces of legislation were consolidated and amended by the Insurance Act in 1938 with the objective of protecting the interests of the insuring public, both in the life as well as in the non- life sector. The General Insurance Council, a wing of the Insurance Association of India, framed a code of conduct for ensuring fair conduct and sound business practices in 1957. The Insurance Act, 1938 was amended
to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up in 1968. 3.2. Insurance in the Indian financial landscape
Efforts to enhance the provision of micro-insurance services have become an important talking point if not necessarily a prominent feature of the Indian financial landscape in recent years. Its implications for reducing economic vulnerability amongst the low income strata of the population has, in any case, ensured that micro-insurance is recognised as an essential aspect of financial inclusion. It is from this perspective that micro-insurance is defined for the purpose of this study as insurance that is provided to the low income segments of the population in accordance with generally accepted insurance
practices.
It is commonly accepted that such services need, at the current level of minuscule micro-insurance outreach, to be provided under more favourable conditions than does the normal insurance service. To the extent, that this becomes a privileged service, thereby, its users are limited by the small size of the products available. By their very design, these products are unsuitable for anyone with larger needs. In an international context, the clients of the micro-insurance service can be depicted within the truncated diamond now commonly used by commercial organisations in India to analyse the market.7 As Figure 3 shows, the envisaged space for micro-insurance lies in the strata of the population earning
between $1-2 a day per capita, though it covers more of the upper stratum than the lower one. It is assumed that the less than one dollar a day stratum is more in need of social security than insurance. 7 This significantly modifies the income pyramid used by Prof CK Prahalad to depict the market in developing countries, see Prahlad, 2004. 16 Figure 3. Income diamond prevalent in the Indian economic landscape Source: Adapted from Athreya, V, 2007. Tata AIG Life Insurance Company presentation at the Munich Re Conference on Microinsurance, Mumbai, November 2007. 3.3. Insurance penetration India is characterised by a relatively low but increasing insurance penetration. Insurance penetration in
India, at 3.5% of GDP in 2006 is very low compared to the average of 9.2% for industrialized countries
but higher than the average of 2.7% reported for emerging markets.8 It has grown fast over the past few years, however, increasing from 1.93% in 1998-999 to the present level. The life insurance business in India is growing particularly strongly with premiums registering an average growth of 25% per annum over the five year period 2001-02 to 2006-07 (as shown in Table 1) while general insurance registered a growth of 17.6% per annum.10 2001-02 ($ million) 2002-03 ($ million) 2003-04
($ million) 2004-05 ($ million) 2005-06 ($ million) 2006-07 ($ million) Growth rate Life Insurance
LIC 10,380 11,876 14,037 16,332 20,176 24,419 18.7% Private insurers 57 241 693 1,680 3,352 7,442 165.2% Total Life 10,436 12,117 14,731 18,012 23,528 31,860 25.0% Private/total 0.5% 2.0% 4.7% 9.3% 14.2% 23.4% Growth rate/year 16.1% 21.6% 22.3% 30.6% 35.4% General Insurance GIC subsidiaries 2,483 2,939 3,174 3,250 3,550 3,953 9.8%
Private insurers 97 293 502 763 1,191 1,860 80.4%
Total General 2,580 3,233 3,676 4,012 4,742 5,814 17.6% 8 Swiss Re, 2006. 9 IRDA, 2001. 10 Years in this report are typically double-barrelled to reflect the Indian financial year; 2006-07 refers to April 2006 to March 2007. Figure 1.1 Income diamond prevalent in the Indian economic landscape Upper income >$6/day Middle income $2-6/day Low income <$2/day Very low income <$1/day Micro-insurance space 17 2001-02
($ million) 2002-03 ($ million) 2003-04 ($ million) 2004-05 ($ million) 2005-06 ($ million) 2006-07 ($ million) Growth rate
Private/total 3.8% 9.1% 13.6% 19.0% 25.1% 32.0% Growth rate/year 25.3% 13.7% 9.1% 18.2% 22.6% Total premiums 13,017 15,350 18,407 22,024 28,270 37,674 Life/total 80.2% 78.9% 80.0% 81.8% 83.2% 84.6%
Table 1. Growth and distribution of premium income in India Source: IRDA Annual Reports for the respective years
Part of this high growth over the past few years is attributable to the high (over 8%) growth of the GDP during this period but some is also on account of the entry of private insurance service providers since 2001. These have more than doubled their life insurance business every year since inception while their general insurance business has also grown at around 80% per year. The public sector has grown at a more sedate pace on a substantially larger base. As a result the private sector now accounts for around one-third of general insurance premiums collected in India and nearly 25% of life insurance. The high growth of the life insurance market means that its dominance in the insurance field has actually
strengthened in the recent era of policy liberalisation from around 80% at the turn of the century to nearly 85% now. This is partly an indication of the extent to which the Indian market associates insurance with long term household savings as opposed to immediate risk mitigation.11 Until the advent of policy liberalisation, the provision of formal micro-insurance in India was virtually non-existent. Along with economic growth and permission to the private sector to offer insurance services has come an enhanced interest in ensuring that the benefits of insurance services reach the excluded, low income sections of the population. The regulator, the Insurance Regulatory and Development Authority (IRDA), has sought to ensure the provision of microinsurance services virtually
as a quid pro quo for according the formal service providers the permission to operate in the insurance
sector. This has led to the introduction of obligations for the provision of services to the social and rural sectors of the economy and to the development of (apparently more liberal) regulations for the provision of micro-insurance services than those applicable to normal insurance. In response, some attention has started to be focussed on micro-insurance services that are growing in terms of the numbers of individual policy holders but which continue to be minuscule both in terms of the proportion of population covered and the overall premiums collected. 3.4. Limitations of this study A distinction is made in this report between insurance and social security schemes. While both microinsurance
and social security are essentially in their infancy in India, micro-insurance is a little better
advanced in terms of having a formalised structure and more systematic thought devoted to its design than social security schemes have been able to receive so far. This report covers the considerations and regulations governing the design and intermediation of micro-insurance in detail and describes nascent 11 An issue that is discussed further in Section 3. 18 social security schemes for the very low income segments of the population, essentially in passing. The aim is to fill out the picture in relation to financial services for risk mitigation for the poor in India. The regulator in India the IRDA has expressed an active interest in learning more about the effects of
its guidelines and regulations on the provision of micro-insurance services and this has added to the importance and potential utility of this exercise. Since this report is devoted to considerations that determine micro-insurance regulation, a more detailed coverage of social security schemes has not been attempted. 3.5. Report structure The following four sections of this report cover the following Section 4: An overview of the insurance regulatory framework in India, in terms of the insurance
legislation and its relevant characteristics. Understanding the insurance regulatory framework more broadly is key to developing the principles for ensuring that the framework facilitates microinsurance as extensively as possible.
Section 5: The current market for micro-insurance in India. It delineates the providers, intermediation, products offered and uptake of micro-insurance, in order to discuss the key features and trends characterising the market. Section 6: Emerging from the previous two sections, the drivers of microinsurance outreach in India, specifically establishing the non-regulatory and regulatory drivers. From these findings, Section 7 concludes 4. The insurance regulatory framework in India 4.1. Overview of insurance regulation
The insurance sector in India is regulated under the Insurance Act, 1938 and the IRDA Act, 1999. The Insurance Act, 1938 defines four categories of insurance life, fire, marine and miscellaneous. In
general, two categories of insurers are licensed life and general (covering the last three product
categories). Insurers are not allowed to offer life and general insurance together (although the regulator has relaxed this somewhat for the micro-insurance environment). Health insurance may be provided under either a life or a general insurance license. 4.1.1. Registration requirements and joint ventures with foreign partners Every insurer seeking to carry out the business of insurance in India is required to obtain a certificate of registration from the Insurance Regulatory and Development Authority (IRDA) prior to the commencement of business. The pre-conditions for applying for such registration have been set out under the Insurance Act, the IRDA Act and the various regulations prescribed by the IRDA.
The applicant has to be a company registered under the Indian Companies Act, 1956. The aggregate
equity participation of a foreign company (either by itself or through its subsidiary companies or its 19 nominees) in the applicant company cannot exceed 26% of the paid up capital of the insurance company. This rule applies to life and general insurance start-ups. Separate companies would have to be established if the applicant were to conduct more than one business. An Indian promoter has been defined by the IRDA (Registration of Indian Insurance Companies) Regulations 2000 under Section 2(g) which inter alia permits a cooperative society to form an insurance company. There is no provision for establishing a Mutual Insurance company in India at present.
4.1.2. Minimum capital requirements
The current regulation requires a minimum capital of Rs100 crores ($25m) to establish an insurance provider irrespective of the type of product offered. This is far higher than in countries such as South Africa and represents a significant barrier to entry. It could impede the growth of micro-insurance because of the adoption of a one-size fits-all policy (treating micro-insurance on par with commercial life and non-life insurance). By comparison, private companies in the telecommunication sector in India were allowed to operate liberally along with the state owned telecommunication companies BSNL and MTNL resulting in the exponential growth of mobile telephone use making telecommunications accessible even to poor families in both rural and urban areas.
4.1.3. Cooperative insurers
Cooperative insurers are allowed but must comply with the full regulatory load and entry capital requirements. Just one cooperative insurer has been established so far; the IFFCO- Tokio General Insurance Company, which was established in 2000, specializes in agricultural insurance even though it transacts other general insurance business as well. 4.1.4. The Insurance Regulatory and Development Authority (IRDA) Act, 1999 In 1993, a Committee chaired by former finance secretary and Reserve Bank of India (RBI) Governor R N Malhotra was formed to evaluate the Indian insurance industry and recommend measures for its future direction. The Malhotra Committee was set up with the objective of complementing the reforms
initiated in the financial sector. The reforms were aimed at creating a more efficient and competitive financial system suitable for the requirements of the economy in an era of structural changes. The
committees report, submitted in 1994, laid down a road map for the growth of the industry in a competitive environment. The committee stressed the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic impetus. For this purpose, it proposed the setting up of an independent regulatory body, the Insurance Regulatory and Development Authority (IRDA). Reforms in the insurance sector were initiated with the passage of the IRDA Bill in Parliament in
December 1999. Since its incorporation as a statutory body in April 2000, the IRDA has ensured the framing of regulations and registering of private sector insurance companies. As an independent statutory body, the IRDA has put in a framework of globally compatible comprehensive regulations. The 20
Authority has also been providing support systems to the insurance sector with the launch of the IRDA online service for issue and renewal of licenses to agents. The approval of institutions by IRDA for imparting training to agents was intended to ensure that the insurance companies have a trained workforce of insurance agents to sell their products. 4.1.5. Insurance Association of India, Councils and Committees
All insurers and provident societies incorporated or domiciled in India are members of the Insurance
Association of India (Insurance Association). There are two councils of the Insurance Association, namely the Life Insurance Council and the General Insurance Council. The Life Insurance Council, through its Executive Committee, conducts examinations for individuals wishing to qualify as insurance agents. It also fixes the limits for actual expenses by which the insurer carrying on life insurance business or any group of insurers can exceed the prescribed limits under the Insurance Act. Likewise, the General Insurance Council, through its Executive Committee, may fix the limits by which the actual expenses of management incurred by an insurer carrying on general insurance business may exceed the limits as
prescribed in the Insurance Act.
Both these Councils, function as a type of self regulatory organization (SRO) for the life and general insurance wings of the industry. 4.2. Current issues 4.2.1. Detariffing Until recently, the pricing of insurance policies in India was undertaken with the approval of the Tariff Advisory Committee within a comprehensive set of guidelines established by it. This meant that there was, effectively price control that was exercised by a committee of professionals. Premium had to be determined within the parameters established by the committee. It has now become accepted that, in order to improve the efficiency of the insurance market, there is a need to introduce good underwriting
practices as well as to deepen and widen the market. For this purpose, the IRDA had announced its intention of detariffing the general insurance business from 1 January, 2007. Detariffing means that the pricing of insurance policies is left to the individual insurance companies concerned to decide and offer premiums based on their own analysis and perception of risk. This decision to undertake detariffing was a historic one after the opening up of the insurance industry to private participation. To this end, the IRDA had laid down a road map for the smooth transition from a regulated market to a non-regulated market. The Authority held discussions with various stakeholders, issued detailed guidelines on file and use procedures, stressing the need for transparent underwriting
procedures and assigned roles and responsibilities for the insurers on different functions besides
impressing upon them the importance and need for the maintenance of a data base. It has been increasing its own capabilities for overseeing the file and use of products. 21 The Authority faces a challenge in moving towards detariffing as there could be hiccups in the early stages. Detariffing motor insurance affects the public at large. As the average policyholder does not understand the principles of pricing insurance products, it becomes difficult to convince clients in case there is an increase in the price. In the long run consumers will benefit as it is believed that deregulation increases efficiency and lowers prices through healthy competition. However, ensuring that the benefits
reach the consumer is a challenge for the Authority.
During 2007, general insurance tariffs were partially deregulated. Discounts could, for the first time, be offered with prudential limits on the discounts made. As a result, premium rates on fire, engineering and motor (own damage) insurance are reported to have fallen by 35-40%. From January 2008, the prudential limits have also been removed and insurers have the freedom to decide appropriate rates. Third party vehicle insurance premiums continue to be controlled but health insurance cover has now been deregulated. This is widely expected to lead to an increase in insurance premiums on medical insurance. According to Mr CS Rao, Chairman of IRDA, Earlier, insurers were able to offset losses on
medical portfolios with the gains from fire and engineering portfolios. But that cushion is not available now this could prompt them to widen the base in the medical insurance segment...But it is also true that premium amounts cannot remain at the same level. It has to increase depending on the claim, costs of medical treatment and the longevity of the person concerned.12
The IRDA intends, however, not to allow insurance companies to refuse medical cover purely on the grounds of claims made in the previous year (even if higher premiums had to be charged); continuity would be ensured. From 2008, the approach of the IRDA is that the regulator will concentrate on solvency issues while allowing the insurance councils to act as self-regulatory bodies in addressing
matters related to market conduct. The immediate impact of this full deregulation has been so sharp that property insurance rates are reported to have fallen as much as 75-80% on the very first day (1 January 2008) of free pricing in the non-life insurance market.13 4.2.2. Consumer protection The protection of policyholders interest is an important function of the Authority. The Authority has set up a grievance cell in its office and is pursuing with the insurance companies the expeditious disposal of policyholders' grievances. Grievances of a general nature are discussed in the Authority and, if need be, clarifications are issued. However, developing the market keeping in mind the policyholders interest is a complex issue. This is a general issue facing all the insurance regulators across the globe.
The standardization of concepts, policy forms in simple language, moving towards acceptable
accounting standards, bringing transparency in business operations and disclosure of financial statements of the insurance companies are some of the actions which the Authority is taking at present. These will help in moving the insurance industry towards adopting good practices and will help both the insurers and insured as it reduces information asymmetry to a large extent. 12 Chairman of IRDA, CS Rao in Economic Times, 2007. 13 Economic Times, 2008. 22 4.2.3. Development role of the Authority This is another challenge for the IRDA. In order to ensure that relatively poor people also get the benefit
of insurance, the IRDA introduced micro-insurance regulations in 2005. The Authority relaxed some of
the conditions for insurers in the case of these products. These regulations have been seen by other national regulators as a novel concept and they are keenly watching Indias experience. The idea of these regulations is to encourage insurance companies to introduce appropriate products at an affordable price for the low income people. The aim is to increase the present low level of insurance penetration in India. The detariffing process is not of direct concern for micro-insurance. Since Indias micro-insurance guidelines were seen as part of the process of liberalizing the regulation of the insurance sector no
attempt was made, in the first place, to regulate tariffs on micro-insurance products. 4.3. Policy and general 4.3.1. The evolution of micro insurance business in India
The evolution of the micro-insurance business in India can be gleaned from three sources 1. The Life Insurance Corporation Act, 1956 which, for the first time, enunciated the concern of the government towards the disadvantaged, low income population, especially those living in rural areas. The Acts statement of objects and reasons declared To ensure absolute security to the policyholder in the matter of life insurance protection, to spread insurance much more widely and in particular to the rural areas and as a further step in the direction of more effective mobilization
of public savings, Government have decided to nationalize life insurance business in India. (emphasis added).
2. The Insurance Regulatory and Development Authority (Obligations of insurers of rural social sectors) Regulations was promulgated by IRDA in 2002. Under this regulation, the insurance companies were obligated to procure insurance business on a quota basis from pre-defined rural areas and social sectors. Rural areas are defined by the Census of India as places which simultaneously satisfy or are expected to satisfy the following criteria: A minimum population of 5,000 At least 25% of the male working population engaged in agricultural economic pursuits and
A population density of at least 400 per square kilometer (1,000 per square mile). In these areas, life insurance must account for 5-16% of total policies from Years 1-5 of the operation of a new
life insurance company, and for general insurance 2-5% of the total gross premium underwritten in Years 1-5. The social sectors are defined as unorganized workers, economically vulnerable or backward classes in urban and rural areas. Here, each insurer has to maintain at least 5,000 policies in Year 1 23 rising to 20,000 in Year 5, for both life and general insurance. This is regardless of the size of operations. The obligation details as set out in the Regulations are:
(a) Rural sector obligations
In respect of life insurers In respect of general insurers 5% in the first financial year; 7% in the second financial year; 10% in the third financial year; 12% in the fourth financial year; 15% in the fifth year (of total policies written direct in that year) 2% in the first financial year; 3% in the second financial year; 5% thereafter (of total gross premium income written direct in that year) 6th to 10th year - 18% to 20% 6th to 10th* year - 5% to 7% (b) Social sector obligations In respect of all insurers
5,000 policies in the first financial year; 7,500 policies in the second financial year; 10,000 policies in the third financial year; 15,000 policies in the fourth financial year; 20,000 policies in the fifth year. 25,000 to 55,000 policies for 6th to 10th year
The outcome from these quota requirements is not clear. Companies failing to fulfil the targets in this area could face financial penalties and in the event of repeated violations, the insurers could lose their license. Since the uninsured population to be reached is really vast, these obligations could be considered more in the nature of creating greater awareness than imposing an onerous obligation. Some of the private insurers have, as a result, worked on strategies based on the notion
that the poor are a viable business proposition which would give them the reach and potential
business in the future. The state insurers, having been in the field for a long time, do not seem to face any problems in fulfilling their quotas. 3. The latest in this process was the introduction of the micro-insurance regulations in November 2005. The concern of the regulator was to make appropriate products available for low income families as was also reflected in the IRDA report for the year 2005-06. A discussion of these regulations forms the core of this report. 4.3.2. Other policies This section discusses some of the related concepts and policies which have synergies with the microinsurance regulations.
Financial inclusion policy 24
The Reserve Bank of India (RBI) the banking regulator, has initiated a series of measures to promote financial inclusion in order to increase the reach of the banking system to disadvantaged and low income groups of the population in rural as well as in urban areas. Among the recent initiatives are the development of a no frills bank account, the introduction of bank facilitators, and bank correspondents enabling the use of organizations like Post Offices, cooperatives, Farmers Clubs, insurance agents, Village Knowledge Centers, Agri-business Centers, vegetables sellers and tiffin carriers (dabbavalas) as intermediaries for providing banking services including the identification of borrowers,
creating awareness about savings, promotion and nurturing Self Helps Groups as well as post-sanction monitoring. The issuance of electronically readable cards in the hands of no frills bank account holders which can be used by banks correspondents at the time of the transaction is expected to promote greater
financial inclusion amongst the unbanked sections of the population. With barely 34% of its population engaged in formal banking, India has the second highest number of financially excluded households in the world at about 135 million, said a recent report of the Boston Consultancy Group (BCG).14 Initiatives are also being undertaken to reform the financial cooperative sector and two financial
inclusion funds have been established to focus on developing business as well as supporting the introduction of appropriate technology for the purpose.
From the perspective of financial inclusion, almost all retail banks, whether in the public or private sector, are now engaged in collaborations with life or non-life insurers for introducing bancassurance. The financial inclusion initiatives, such as no frills banking, if pursued vigorously, could expand the microinsurance market both in rural and urban areas as the footprint of the banking sector expands. For now, these efforts are at a nascent stage and the impact of the bancassurance initiative will only become apparent some 3-4 years from now. The National Bank for Agriculture and Rural Development (NABARD) is a prime mover of micro-credit in
the country. NABARD is working on formulating an appropriate strategy on financial inclusion. NABARD is the proposed regulator for MFIs who are also active in the area of microinsurance. Some of these are
non-bank finance companies (NBFC) that have been excluded from the purview of the microfinance legislation a matter that affects the pursuit of micro-insurance. As part of the Government of Indias thrust on inclusive growth, a committee was appointed by the Ministry of Finance in June 2006 to assess the financial services and systems in the country and to devise and recommend measures that would promote financial inclusion. The committee, chaired by another highly respected former Governor of the Reserve Bank of India, Dr C Rangarajan, submitted its report to
the Government in early February 2008. Its recommendations included a raft of measures for the
banking and cooperative sectors. When analysed dispassionately, these consisted mainly of exhortations to the financial institutions to do their job in a more inclusive manner, opening of branches in under-served areas and of target setting such as the opening of 250 zero balance accounts per rural 14 Sinha, J and A Subramanian, The Next Billion Consumers A Road Map for Expanding Financial Inlcusion in India, Report by Boston Consulting Group, November 2007. and semi-urban branch per year rather than of any real incentive or progressive programmes to facilitate inclusion. Subsequently, the Finance Minister in his budget speech for 2008, announced the
acceptance of a few of these recommendations but, to informed observers, the net result is unexciting. Presence of informal and unregistered underwriting at community level Accurate data on the penetration of formal and informal insurance products is not available. Some insurance protection, especially in the area of health insurance, is provided by MFIs or other aggregators. Some of the MFIs who were earlier offering insurance cover informally have now switched over to formal insurance coverage, as discussed in the following section. The current insurance law does not provide for a lower compliance regime for community-based or smaller cooperative insurers. Social security insurance schemes The employees working in the organized sector get the following risk cover: Disablement Workmens Compensation Act, 1923
Employees State Insurance Act, 1948 Death Workmens Compensation Act, 1923 Employees State Insurance Act, 1948 Maternity Maternity Benefit Act, 1961 Employees State Insurance Act, 1948 Old-age Income Security and Pension Coal Mines P. F. & Bonus Scheme Act, 1948 Employees P. F. & Miscellaneous Act, 1952 Assam Tea Plantations P. F Scheme Act, 1955 Seamens Provident Fund Scheme Act, 1955 Funeral Employees State Insurance Act, 1948
Of the estimated 397 million workers in India formal and informal, agricultural and non-agricultural the above social security coverage benefits only 8%.15 In addition to the above legal coverage other
state and central government initiatives for the weaker sections of society include the Aam Aadmi Bima Yojana (Common mans insurance) which is administered by the Life Insurance Corporation of
India (LIC) and the Universal Health Insurance Scheme (UHIS) 2004 administered by the central government (refer Appendix 2 for details. 4.4. The Micro-insurance Regulations, 2005 Regulations on micro-insurance were officially gazetted by the IRDA on 30 November 2005. The salient features of the regulation are presented below 15 Singh, Sharad & Meraj Ashraf, Alternative Mechanism of Social Protection for Unorganised Sector in India, Conference Proceeding, 2007 extracted on 9th December 2007 http://www.issa.int/pdf/warsaw07/PTT/24Singh.ppt.
4.4.1. The regulation defines micro-insurance products
The regulation provides definitions of micro-insurance products covering life and general insurance General micro insurance product means any health insurance contract, any contract covering the belongings, such as, hut, livestock or tools or instruments or any personal accident contract, either on individual or group basis, as per terms stated in Schedule-I appended to these regulations. Life micro insurance product means any term insurance contract with or without return of premium, and endowment insurance contract or health insurance contract, with our without an accident benefit rider, either on individual or group basis, as per terms stated in Schedule-II appended to these regulations.
micro-insurance policy means an insurance policy sold under a plan which has been specifically approved by the Authority as a micro insurance Product. micro-insurance product includes a general micro-insurance product or life insurance product, proposal form and all marketing materials in respect thereof. Every insurer shall be subject to the file and use procedure with the IRDA. No one other than insurer be it a micro-insurance agent or anyone else can underwrite a microinsurance proposal. Rural business transacted under micro-insurance by an insurer will be counted for quota fulfillment both for rural as well as social sector obligations. 4.4.2. It promotes the extensive use of intermediaries The micro-insurance regulations promote extensive use of intermediaries by the insurers for selling and
servicing various micro-insurance products. The regulation also creates a new intermediary called the
micro-insurance agent. The regulation clearly defines MI agents and has imposed minima in terms of the number of years of experience (at least 3) of working with low income groups. It also emphasises the need for such agents to have appropriate aims and objectives, a good track record, transparency and accountability stated in the bye-laws with demonstrated involvement of committed people. This has been done in order to prevent the engagement of unscrupulous operators in the activity. However, the onus for the selection of appropriate MI agents and their capacity building lies with the insurance company.
Intermediary: The micro insurance agent, can be a Non-Governmental Organization (NGO), MFI or other
community organization such as Self Help Groups (SHG) appointed by an insurer to distribute microinsurance through specified persons. Micro-insurance agents enter into a deed of agreement with the insurer. They abide by the code of conduct defined by the IRDA and attend 25 hours of training (down from 100 hours originally required for conventional insurance agents but now reduced to 50 hours) in the local language at the expense of the insurer. There is no qualifying examination, unlike the case of ordinary insurance agents. According to the regulation, Non-Government Organization (NGO) means a non-profit organization registered as a society under
any law, and has been working at least for three years with marginalized groups, with proven track record, clearly stated aims and objectives, transparency and accountability as outlined in its
memorandum, rule, by-laws or regulations as the case may be, and demonstrates involvement of committed people. Self Help Groups (SHG) means any informal group consisting of ten to twenty or more persons and has been working at least for three years with marginalized groups, with proven track record, clearly 28 stated aims and objectives, transparency and accountability as outlined in its memorandum, rules, by-laws or regulations, as the case may be, and demonstrates involvement of committed people.
Micro-Finance Institutions (MFI) means any institution or entity or association registered under any
law for the registration of societies or co-operative societies, as the case may be, inter alia, for sanctioning loan/finance to its members. IRDA has recognized four categories of intermediaries: brokers, agents, corporate agents, and Microinsurance (MI) agents. Categories other than MI agents may sell micro-insurance but they do not benefit from the concessions allowed for the MI agents. However, a micro-insurance agent shall not distribute any product other than a micro insurance product. The regulation provides for MI agents to perform the following functions Collection of proposal forms Collection of self declaration from the proposer that he/she is in good health. Collection and remittance of premium
Distribution of policy documents
Maintenance of registers of all those insured and their dependants covered under the microinsurance scheme, together with details of name, sex, age, address, nominees and thumb impression/signature of the policyholder. Assistance in the settlement of claims Ensuring nomination to be made by the insured Any policy administration service 4.4.3. The regulations attempt to manage the cost of intermediation A cap has been put on commission, between 10 and 20% of premiums per year according to type and mode of insurance payment, which is in excess of what conventional agents would normally earn. The rates of commission applicable to MI agents are: Life insurance business General insurance business
Single Premium policies 15% of the single premium
Non-single premium policies 20% of the premium for all the years of the premium paying term 15% of the premium The commission rates prescribed above are more liberal than the 60% (of a single years premium) payable under ordinary business in the case of life insurance and 10% in the case of general insurance. This is based on the logic that an MI agent has to perform a number of functions which mainstream agents do not have to undertake. MI agents may thus receive commission at different rates from those applicable to other intermediaries. The commission structure is, however, changed to remove up-front payments in favour of payments upon the performance of certain functions. For group insurance
products, the insurer may decide the commission subject to the overall limits specified by IRDA. 29
MI agents may route premiums and claims payments through their books (such as receive individual premiums and pay it over as one amount). This is not allowed for other intermediaries and is considered important in managing the cost of intermediation. 4.4.4. Collaborations between life insurers and non-life insurers The regulations allow for the bundling of life and non-life elements in one single product provided there is clear separation of premium and risk at the insurers level. Where an insurer carrying on life insurance business offers any general micro-insurance product, he shall have a tie-up with the insurer carrying on
general insurance business for this purpose, and subject to the provisions of section 64 VB of the
Insurance Act (governing the remittance of the premium amount to the insurance company), the premium attributable to the general micro-insurance product may be collected from the prospect (proposer) by the insurer carrying on life insurance business, either directly or through any of the distributing entities of micro-insurance products. In the event of any claim in regard to general microinsurance, the insurer carrying on life business or the agent shall forward the claim to the insurer carrying on general insurance business. The same arrangement holds true for life claims faced by nonlife vendors of a micro-insurance product. In both cases, the respective primary first insurer would
render all assistance in claim settlement by coordinating with his opposite number. 4.4.5. The limitations of the micro-insurance regulations
The impact of the MI regulations is likely to be limited for a number of reasons: Definition of MI agents: The regulations define MI agents to include NGOs SHGs and MFIs. The definition of MFI is, however, limited to societies, trusts and cooperatives societies and thus excludes a large proportion of MFIs operating through other legal forms (like for-profit and not-for- profit companies). The result is that all profit-driven corporate intermediaries as well as some of the largest aggregators in micro-insurance are currently excluded from benefiting from the MI regulations. Though the formalisation of MI agents as a type has been welcomed by the insurance companies as a positive
beginning, the exclusion of MFIs registered under the Companies Act16 is viewed with concern (as discussed in Box 1). Box 1. The restrictive definition of micro-insurance agents and the regulatory conundrum All the insurers covered during the study were of the opinion that the scale of operation in microinsurance is very important for the insurance company to offer sustainable products. The current regulation seems to have overlooked this aspect as the organizations that have scale NBFCs and
Section 25 (not-for-profit) Companies have been left out. As a recent analysis by M-CRIL shows, as much as 80% of the clients covered by MFIs are served by such companies so their exclusion from the
list of organisations eligible to be selected as micro-insurance agents, actually limits the outreach of
MI products in the short term.17 Not only is outreach an issue but the selling and servicing of MI products requires good systems and capacities which are relatively limited with NGOs (that are not 16 Non-bank finance companies (NBFCs) and not for profit companies (known as Section 25 companies). 17 See M-CRIL/MIX, 2007. In the long run, such clients can be reached in other ways, but the restriction adds to the degree of difficulty entailed in the task. 30 accustomed to financial transactions) and non-corporate MFIs since all the best MFIs transform into companies.
Since insurance companies prefer not to invest in developing the systems and technology of MI
agents, they would rather work with organizations that already have these. To the extent such capacities are available, these exist mainly with NBFCs and Sec-25 Companies which are not allowed to act as MI agents. This is why most private insurers have not been able to identify MI agents so far. Further, even if IRDA regulations allow NBFCs and Sec-25 Companies to act as micro-insurance agents there is a restriction from the RBI (which regulates finance companies) on the collection of savings in any form or even routing of payments through the institutions account books. In practice, this is another regulatory constraint on the collection and remittance of premiums by such organisations.
Limitation on the number of insurance companies an MFI can work with: The MI Regulations restrict a MI agent to working with one life and/or one general insurer respectively. This is problematic and does not
accommodate models currently used in the MI market. Most insurers do not want to underwrite all risks and tend to specialize in particular types of risk. For example if a MI agent is tied to specialized health insurer, they cannot work with another general insurer to sell other asset insurance products. Know Your Customer (KYC) / Anti Money Laundering (AML) Norms: Micro insurance agents have expressed their concern at the difficulties faced by them in accessing KYC documents from proposers in rural areas, such as electoral identity card or ration card or electricity bill which are generally accepted
as proves of residence.
Commission capping: MI commissions are capped at 20% per annum for life across the term of the policy. Non-MI products typically pay commission on a front-loaded basis with 30- 35% in year one with 7% in year 2. The up-front structure provides little incentive for renewals, particularly as premiums have to be collected in cash/ cheque. At the same time 20% may not be enough to incentivise sales. It is a common (but illegal under Section 48 of the Insurance Act) practice for agents to use the higher first year commission to give a discount to policyholders in the first year. Some thought would need to be given to the minimum absolute cost to sell a policy and the commission structures needed to ensure
that this could be covered. Lapse rates of 30-40% are much higher for MI than traditional policies. This
is because the cost/effort of premium collection/renewal exceed the commission. Besides, the incidence of the service tax of 12.36% payable by the agents is a further point of dissatisfaction for the MI agents, especially considering the long distance travel they have to make in rural areas to procure and service business. The view of insurance companies on commission caps is presented in Box 2. Box 2. Views on commission caps There have been mixed views on this provision; some insurance companies as well as aggregators feel that it is a good step that has allowed agents to earn a higher proportionate commission than other
insurance agents (who are limited to a total of 60% of the annual commission over the entire term of the policy). Others are of the opinion that micro-insurance commissions should be flexible and the insurance companies should be allowed to decide these on the basis of product experience. In this context, any cap on the commission on MI products could be restrictive and result in limiting the growth of this type of product. The regulation, at the same time, does not address the sharing of commissions to specified persons/sub-agents and there is a high chance of them being exploited by 31 the main MI agent. Overall, the commissions allowed are regarded as not remunerative because of
the small average size of MI policies meaning that the MI agent would have to attain scale to become sustainable.
Conflicting regulations: Enabling provisions introduced in the MI regulations are undermined by restrictions in RBI regulations. For example, the insurance regulation allows receipt of premiums in the form of money instruments (not cash), which must be remitted within 24 hours. RBI in 2002, however, issued regulations stating that certain types of NBFCs (including most MFIs) may not route any premiums through their books. The implication is that the NBFC intermediary must make out demand drafts for individual transactions and send them to the insurer. Significant efficiencies can be gained if
these intermediaries were to be allowed to process all the payments through their systems and make a single payment to insurers. Rural Regional Banks (RRB) and Cooperative Banks: It is worth further examination as to whether RRB who have been given the status of corporate agents and the cooperative banks can be brought into the ambit of MI agents in view of their outreach in rural areas. 4.4.6. However the micro-insurance regulation has been facilitative in Limiting the training requirements of MI agents: The MI Regulation has been facilitative in terms of
reducing the mandatory training requirements for insurance agents from 50 hours to just 25 hours in the case of MI. Most insurance companies have welcomed this move but feel that the technological
innovations in developing better systems at the level of the MI agent and real awareness creation
amongst potential clients/policy holders are a much larger challenge that would go a long way in developing the micro-insurance market.18 Allowing MI agents to take greater responsibilities: The regulator has allowed MI agents to take up greater responsibilities than are permitted to mainstream agents, for example, the collection of premiums on behalf of the insurance companies and the servicing of claims. IRDA believes that if the MI agents are able to carry out these functions effectively, it will help in minimising the transaction costs that the insurance companies have to incur, thereby leading to lower premiums for the clients in the long run.
Treating benignly apparent infringements of the regulations by community-based organisations: There are restrictive entry norms for organizations that are explicitly licensed to provide insurance to the general public. Insurance companies need a large amount of start-up capital of Rs100 crore (~US $25 million) to get a licence from the IRDA. This entry norm is applicable for community based insurance as well if they want to underwrite risk. IRDA has treated the existing cases of in- house insurance with benign neglect. 18 Like capturing and maintaining actuarial data, remittances, issuance of ID cards (particularly for micro-health insurance) and use of mobile devices for collection of payments/providing recepts 32
Essentially, this approach is dictated by the relatively limited experience and low supervisory capacity of
the IRDA. Compared to the vast numbers of people in need of social protection in India, the coverage provided by both formal and, even more so, by community insurance programmes is so low that the role of regulation seems fairly limited. The creation of a two-tier space where the insurance companies are regulated and supervised and community insurance is not is de facto recognition of this fact. The IRDAs approach is that it is pointless to have regulations that are not properly enforced as long as community insurance agencies provide cover to a limited population that is clearly defined (either geographically or socially or through other forms of association), they can be allowed to function
without being regulated. It is here that the regulations are not very clear for MFIs or NGOs, where the membership cannot be clearly defined. Although generally limited within a geographical territory, the scale of some MFIs or NGOs is significant and spans across several states. 4.4.7. Taxation issues By a notification of 16 July 2001, the Government of India brought insurance auxiliary services under the ambit of Service Tax. The following important definitions and references are relevant in this context.
As per section 65(31), insurance auxiliary service means any service provided by an actuary, an intermediary or insurance intermediary or an insurance agent in relation to general insurance business and includes risk assessment, claim settlement, survey and loss assessment. Taxable event and scope
of service means any service provided to a policyholder or insurer by an actuary or intermediary or insurance intermediary or insurance agent, in relation to the insurance auxiliary service.
The service providers are insurance agents, insurance surveyors and loss adjusters, actuaries and insurance consultants. In the case of insurance surveyors and loss adjusters, actuaries and insurance consultants, the service is provided mainly to the insurance companies (insurer) while in the case of insurance agents, the service is provided to both the insurer and the policy holder. Service Tax is liable to be paid by the insurance auxiliary service provider except in case of insurance agents. Insurance agents normally do not charge the policyholder. However, the insurance company pays the agent a
commission (usually as a percentage of the insurance premium) on a periodic basis. In the case of an
insurance agent, it has been provided in the Service Tax Rules that the person liable to pay Service Tax will be the concerned insurance company who has appointed the agent.19 However as practised by the companies, no service tax is paid by the agents. The service tax is payable by the person whose life is assured and the current rate is 12.36 % on the premium paid to the life insurance companies. If an agents accumulated commission for the year reaches Rs20,000 ($500), tax is deducted (at source) by the company at the rate of 11.33% ( as prescribed by the income tax rules) from the commission of the agent. 19 Notification no. 5/2001-ST refers. (Ministrys F.No.B-11/1/2001-TRU dt.09.07.2001)
33
The service tax on premiums adds to the price of insurance. An assessment of the impact of this tax on the cost of micro-insurance is needed. From the perspective of inclusion, enabling the penetration of insurance services to low income people and in rural areas, there could be a case for exempting microinsurance from the payment of service tax. 4.4.8. Concluding remarks The IRDA Regulation of 2005 can be viewed as an important step towards expanding micro-insurance in India. However, critics argue that this regulation is very narrow because it focuses on just one approach, the partner-agent model. They also argue that there should be greater flexibility with the companies for
putting out suitable and market driven micro-insurance products without being circumscribed by the present restrictions on products and other features. The supervisor could recommend to the
government that the capital requirements for health insurance be reduced by half to increase the number of health micro-insurance operators. A similar approach could also be considered for promoting micro-insurance. The new micro-insurance regulations show one path to enhancing distribution efficiency, by a partial relaxation of training and remuneration norms and by the bundling of products, without compromising the risk-taking ability of a commercial insurer. However, on balance, the present regulatory framework
for micro-insurance is weighed in favour of prudential operations rather than using regulation as a vehicle for ensuring accelerated outreach of micro-insurance in India. 5. The microinsurance market in India
This section provides an overview of the micro-insurance market in India, covering the service providers in the market, the distribution models employed, the products offered and their uptake amongst the low-income population. Salient features of the market are highlighted and discussed from the perspective of maximizing insurance coverage. The market in India is overwhelmingly formal since informal insurance systems are relatively unknown in the country. While traditional systems of insurance do not extend beyond the small degree of guaranteed return provided by such devices as
RoSCAs, other (mainly) NGO-managed community based insurance systems provide more significant
benefit to those covered. While there are a few dozen such efforts around the country, their focus is almost entirely on health risk and the overall numbers of those insured by such systems are still minuscule relative to the large proportions of the population that do not (at present) have any form of risk cover. Box 3 summarises the main findings that emerge from the discussion in this section. Box 3. Key features of the micro-insurance market in India Product characteristics. Micro-insurance products in the market have short policy contract terms and are overwhelmingly (but no longer exclusively) underwritten on a group basis. A number of
the new products offered by formal insurers may be individually under-written but the numbers of such policies is still minuscule even relative to the low overall outreach of microinsurance. Demarcation. Formal insurers are required either to provide life or non-life insurance exclusively though health insurance may be provided by either category of insurer. Community-based insurance systems are largely limited to health cover. 34 Health prominence. Health insurance is prominent in community-based systems because health risk is generally seen as potentially the most devastating type of systemic risk likely to upset the lives and economic livelihoods of the low-income population. Formal microinsurance schemes
are yet to cover health in any significant way on account of the difficulties of ensuring service delivery and the dangers of moral hazard in a highly informal health service provision network. Low outreach of community-based insurance. Community-based health insurance systems
managed by NGOs are available but, except in a couple of cases, has minuscule outreach. The limited prudential risk vis--vis payments made by the covered population means that the regulator has not yet taken a significant interest in these. Dominance of loan linked products. This is the largest product in the market driven by the compulsion of borrowers to purchase insurance schemes mainly to provide protective cover to the MFIs
Micro-insurance category. The advent of separate micro-insurance guidelines provided by the
insurance regulator has seen the launch of new micro-insurance products in the formal market. New distribution models. Rural and social sector obligations imposed on formal insurers by the market regulator have compelled insurance companies to experiment with new distribution models through NGOs, MFIs and the rural banking network. Adviceless selling. Micro-insurance is sold overwhelmingly without advice while the higher end of the insurance market is served by brokers providing advice. Micro-insurance agents are specifically restricted to working with a single life and single non-life insurer. 5.1. Insurance providers dominated by government owned companies but the private sector is increasingly active
Formal insurance service providers the insurance companies that are legally registered with the
government and supervised by the industry regulator, the Insurance Regulatory and Development Authority (IRDA) dominate the insurance market in India. Micro-insurance is in its infancy in the country but growing fast through the activities of the formal insurance companies under the impetus provided by the rural social sector obligations imposed by the IRDA. A considerable effort is now being made by these companies to design innovative products but even more so to experiment with distribution channels. It is generally thought that efficient and effective distribution channels hold the key to reducing cost in the delivery of micro-insurance services. This will enable an overall reduction in
the premium charged by micro-insurers, leading to greater uptake of the supply of such services being offered. There are also cooperative and community-based insurance systems but, apart from the cooperative-linked Yeshasvini Trust of Karnataka, these are managed mainly by a few dozen NGOs in the south and west of the country, providing a relatively small number of people with limited forms of health cover. In addition, with increasing economic growth in India, the government has become concerned about the exclusion of the low-income population from the growth process. Within the liberal democratic framework of Indias political economy the engagement of the government with social protection and
economic inclusion is seen as inevitable across the political spectrum ranging from right-wing nationalist opinion to far-left Marxist-oriented political thought. It is this framework that makes the governments engagement in social protection measures for the low income segments of the population inevitable. 35 It is within this framework that the government is increasingly turning its attention to insurance as a form of social protection. This has led to the launch of a number of country-wide pilots for health and/or life insurance for the poor and even some experiments with state-wide schemes. While the challenge for the insurance companies is to discover viable distribution models, that for the government
is to gear its delivery mechanisms to ensure that the benefits of the cover are not negated by information asymmetries and misappropriation. In most government social security/insurance schemes
the covered population is largely unaware of the existence and terms of the policy. This is compounded by misappropriation resulting from ineligible people being able to claim benefits or from other forms of moral hazard made possible by inefficiencies and corruption in programme implementation. Figure 4 below maps out the micro-insurance market in India. 36 Figure 4. Representation of the microinsurance market in India Source: authors In the figure, the micro-insurance space refers to the low income families for whom micro-insurance
products are intended. The institutions within the space work directly with low income families while
the private and government owned insurance companies are external entities that offer services to the micro-insurance clients through partnerships with those within the space. The community institutions working directly with micro-insurance clients are MFIs (registered under various acts refer Appendix 4 other NGOs (not involved in finance), financial and non-financial Cooperatives, SHGs and community based organizations (CBOs) as well as government agencies responsible for social security programmes. While most of the micro-insurance activities are in collaboration with the insurance companies a number are independently managed by the community institutions and some are government
promoted schemes as well. Some of the government insurance programmes are also managed by NGOs and, in a few cases, the government has actually bought cover for low income families from insurance companies. The broken arrows (above) show the linkages among various organizations providing microinsurance
services to low income families. These are discussed in detail in the sections that follow. The diagram also shows that micro-insurance is just a small proportion of the rural and social sector obligations which are easily fulfilled by serving the middle and upper income classes in rural areas. IRDA regulates and supervises the functioning of only the formal insurance companies and regards community organizations as outside its purview.
5.1.1. Formal sector insurance still dominated by government-owned companies but increasingly obliged to experiment with micro-insurance
Despite the recent advent of the government into insurance as a social security mechanism for low income families, the formal insurance companies20 are still the dominant providers of insurance services in India. In March 2006 there were 15 companies registered with IRDA for providing life insurance and 20 All companies private and government-owned that are licensed and authorized by IRDA Micro-insurance market in India Rural & social sector Micro-insurance IRDA Private
sector insurers Public-sector Government insurance programmes MFIs Cooperative s Community based programmes NGOs SHGs 37
12 general insurance companies (Table 2 and Table 3) along with two specialist public sector insurers,
the Export Credit Guarantee Corporation and Agricultural Insurance Company. This industry structure
has emerged out of a public sector insurance monopoly that consisted of a single life insurance company, the Life Insurance Corporation of India (LIC)21 and four general insurance subsidiaries of the General Insurance Corporation (GIC).22 The insurance monopoly was ended in 2000 when the IRDA relaxed the barriers to entry specifically for the purpose of attracting private and foreign companies into the insurance sector. As Table 4 shows, the size of the insurance sector has grown rapidly over the past few years. Premium underwritten in 2005-06 ($28.05 billion, Rs126,234 crores) was 2.76 times that in 2000-01, at an annual
growth rate of 22.5%. However, the industry continues to be dominated by the public sector companies with LIC accounting for nearly 85.8% of life insurance premiums and the four subsidiaries of GIC
underwriting 73.7% of the general insurance business. The life insurance segment of the market is substantially larger than general insurance with the former accounting for nearly 84% of the total premium underwritten.23 As the table shows, apart from LIC there are only two really significant insurers in the life insurance segment with the general insurance associates of the same companies also being the two significant private sector insurers in that segment of the market. GIC is the only re-insurer registered in India.
21 Originally formed in 1956 by nationalizing and merging 240 private insurance companies for the stated purpose
of countering high levels of insurance fraud and improving the spread of insurance across the country for better economic security of the public. 22 Non-life insurance companies were nationalized in 1972. 23 Information on the number of policies is not available but discussion with insurers suggests that this analysis would not change much if the number of policies was used. 38 Table 4 (a and b): growth and size of the Indian insurance sector (a) Growth of the insurance sector in India since the entry of the private sector Rs crore 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 (estimated) Annual
growth rate Life Insurance
LIC 49,822 54,628 63,168 75,127 90,792 105,000 16.1% Private insurers 273 1,110 3,120 7,728 15,084 30,000 156.1% Total Life 50,094 55,738 66,288 82,855 105,876 135,000 21.9% Private insurers 0.5% 2.0% 4.7% 9.3% 14.2% 22.2% General Insurance GIC subsidiaries 11,918 13,520 14,285 14,949 15,976 17,000 7.4% Private insurers 468 1,350 2,258 3,508 5,362 7,800 75.6% Total General 12,385 14,870 16,542 18,456 21,338 24,800 14.9% Private insurers 3.8% 9.1% 13.6% 19.0% 25.1% 31.5% (b) Size of the insurance sector in India, 2005-06 Life insurer Total General Total premium in India Rs crores Proportion Insurer Rs crores Proportion LIC 90,792 85.8% National 3,524 17.3%
ING Vysya 425 0.4% New India 4,792 23.5% HDFC Std Life 1,570 1.5% Oriental 3,527 17.3% Birla Sun Life 1,260 1.2% United 3,155 15.5% ICICI Prulife 4,261 4.0% Sub-total 14,997 73.7%
Kotak Mahindra 622 0.6% Royal Sundaram 459 2.3% Tata AIG 880 0.8% Reliance 162 0.8% SBI Life 1,075 1.0% IFFCO TOKIO 893 4.4% Bajaj Allianz 3,134 3.0% TATA AIG 573 2.8% Max New York 788 0.7% ICICI LOMBARD 1,583 7.8% Metlife 206 0.2% Bajaj Allianz 1,272 6.2% Reliance Life 224 0.2% Cholamandalam 220 1.1% Aviva 600 0.6% HDFC CHUBB 200 1.0% Sahara 28 0.0% Shriram Life 10 0.0% Private total 15,084 14.2% Sub-total 5,362 26.3% Total 105,876 100.0% Total 20,359 100.0%
1 crore = 10 million; Rs1 crore = $0.25 million 39
Segregated information on the provision of micro-insurance by the corporate sector is not available. However, the indications from information available from a few companies responding as part of this study indicates that, during 2006-07, the micro-insurance business of these companies represented less than 1% of their total turnover. The IRDAs micro-insurance guidelines were, of course, released only in November 2005, so it is too early to comment on the micro-insurance performance of these insurance companies. However, as late as September 2007, there were only 12 microinsurance products registered with the IRDA by 6 companies. Currently there are no formal insurance companies focused
exclusively, or even extensively, on the micro-insurance market but the rural and social sector obligations have compelled the companies to take a close look at the microinsurance market and there is an increasing degree of experimentation with it. The distribution channels employed by the insurance companies for extending micro-insurance are discussed in Section 5.2. 5.1.2. Community insurance schemes informal cover As indicated above, there is a variety of community and cooperative insurance schemes available in the country. A survey undertaken by the International Labour Organisation (ILO) in India identified about 50
such schemes. These are listed in Appendix 5 and summarized in Table 5 below. It is apparent from the table that virtually all of these are health insurance schemes with a few having add-on under-writing of
life, housing and/or productive assets. The schemes vary in size from the 1.5 million beneficiaries of
Karnatakas Yeshasvini Trust to relatively small schemes with just a few hundred persons covered. The insurance is offered either directly by NGOs/cooperatives or in partnership with (effectively re-insured by) insurance companies. Region No. of agencies Types of Agencies Coverage States Areas of intervention Risks
covered Total clients North 4 NGO MFI TPA CBOs State Government Chattisgarh, Madhya Pradesh Mix of rural and urban Health care with riders including maternity, life, accident, income loss,
disability, accidental death, productive assets, housing and daughters marriage 308,353 East 8 West Bengal, Orissa, Bihar Predominantly rural 1,779,630 West 11 Maharastra, Gujarat, Rajasthan Mainly rural & pockets of urban 365,811 South 28 Andhra Pradesh, Karnataka, Tamil Nadu & Kerala Mix of rural and
urban 2,630,301 51 12 5,084,095 Table 5. Health insurance schemes in India
In a number of cases the aggregator provides insurance to its members directly and the risk is not necessarily passed on to an insurance company. These are often referred to as in- house insurance providers (see Figure 5). Thus, the aggregator becomes the underwriter in this model. The model is based on the original historical idea of insurance, which was initially insurance provided by mutual liability institutions known as mutuals to a limited member base. 40 Figure 5. The in-house insurance model
In the context of micro-health insurance, the aggregator in the in-house insurance model may be an NGO, an MFI, an SHG, a cooperative or any other community institution having a significant member base among low-income families. There are a few examples of in-house insurance in India. Some of
these in-house programmes have received support from the government as well in the form of subsidies. The case of the largest of these, the Yeshasvini health insurance scheme in Karnataka is described in Box 4. The insurance regulations in India do not specifically allow, such agencies to provide insurance services but (as indicated in Section 4), apparently on account of the importance of such schemes for the low income population, the regulator ignores the provision of micro-insurance schemes
by community-based organisations treating them with benign neglect. Box 4 Yeshasvini health insurance scheme24
The Yeshaswini Insurance Scheme for farmers in Karnataka is the most often quoted example of a mutual/community insurance scheme in India. For a premium of Rs90 per person per annum (of which, Rs30 ($0.75) was initially contributed by the state government), the scheme provides health insurance cover of upto Rs200,000 ($5,000) per year for surgeries in identified hospitals. The scheme also covers out-patient consulting costs at the network of hospitals. However, this is limited to doctors fees and the cost of diagnostic services; the cost of medication is not covered. The Yeshasvini Scheme was the initiative of Dr Devi Shetty, a renowned cardiac surgeon who runs a
hospital in Karnataka and has pioneered telemedicine in rural areas. By the end of March 2004, the scheme had 1.6 million subscribers all of them farmers spread across 27 districts of Karnatakas 30 districts and by the end of 2004, the outreach had increased to 2.2 million. However, in the third year of the operation of the scheme (2005), when the state subsidy was stopped and the premium was increased to Rs120 per person (for adults), the membership had dropped to 1.5 million by October 200525. The scheme has linkages with a network of public sector and private hospitals across Karnataka state. As of March 2004, the scheme had 118 linked hospitals. This case is discussed in more detail in Appendix 2 24 Kuruvilla, et al. 2005. The Karnataka Yeshasvini Health Insurance Scheme for Rural Farmers & Peasants: Towards Comprehensive Health
Insurance Coverage for Karnataka? 25 www.microhealthinsurance-
india.org/content/e22/e341/e713/update2_october2005.pdf Aggregator (Coop/MFI/NGO/SHG) Low income families Premiums Claims Provider Direct reimbursement in cashless health schemes 41 In discussion with the study team, a number of insurance experts have suggested that this model works
best when the ownership and management are both vested with the community. Where the assistance of qualified persons is required (if the members of the community institution do not have the capacity to manage the programme, due to the technicalities involved in product design, fund management and
investment), such persons could be hired as employees. The governance structure of such a community owned institution would have to consist of democratically elected members and all employees hired for day-to-day management would report to the Board. It has been suggested that this community-elected Board should decide on the admission of new members and also on the sanctioning of claims. This would avoid the risks of adverse selection and moral hazard. 5.1.3. Social security a growing effort at economic inclusion
Social security insurance (also referred to as pension linked products) is available in the market, mainly for the middle and upper income segments. These products are mostly linked to mutual funds and are
known as Unit Linked Insurance Products (ULIP) with life cover. Efforts to provide social security to low income households/unorganized sector enterprises are at a nascent stage. There have been government initiatives both at state and national levels26 for below poverty line (BPL) households but these have had limited success, so far, due to the lack of client education and information as well as inappropriate product design. Recently the Unit Trust of India (UTI) has initiated a pension scheme by launching a Retirement Benefit Pension Fund, followed by ICICI Prudentials Micro Systematic
Investment Plan (MSIP) for low income households. These are believed to be the only investmentoriented schemes available for promoting inclusion (of low income households) in the economic and
capital market growth of the country. Though such schemes are beyond the scope of this study, a brief note on these is provided in Appendix 2. The experience of the Bihar State Co- operative Milk Producers Federation Ltd in implementing a micro-pension scheme is presented in Box 5. Box 5. Micro pensions The COMPFED experience Bihar State Co-operative Milk Producers Federation Ltd (COMPFED) is constituted of five Milk Producers Unions (MPUs). It has around 300,000 members and reaches 5,500 villages in Bihar state. In September 2006, COMPFED launched a micro-pension scheme for its members. Under the scheme
the members of the MPUs contribute Rs100 per month towards the UTI- Retirement Benefit Pension
Fund up to the age of 55 years and are then eligible to receive regular cash flows as pensions after they reach the age of 58 years. This is a unit linked policy and, therefore, the pension amount depends on the NAV of the fund at the time the client attains the threshold age of 58 years. Until now 40,000 members of MPUs have opted for this scheme. While members of the MPUs have welcomed this scheme there has also been a demand for insurance schemes for life and health. COMPFED plans to introduce an insurance package for its members in the near future. These would be add-on schemes offered along with the micro- pension scheme
provided by the UTI Mutual Fund. The members will have to pay an additional Rs30 per year per
member. The insurance will cover life with an accident rider and health rider. This will be a term policy covering risk for one year Rs100,000 cover for accidental death, Rs25,000 for normal death and Rs10,000 for medical treatment. This risk will be underwritten by the National Insurance 26 These include schemes old age pension scheme and family benefit scheme introduced under National Social Assistance Programme (NSAP) state initiatives like pension scheme for poor craftsmen by Andhra Pradesh Handicrafts Development Corporation Ltd (APHDCL) 42 Company (NIC) on a group basis and the policies sold by the UTI Mutual Fund through COMPFED.
The terms of business between UTI Mutual Fund and NIC as well as between COMPFED and UTI
Mutual Fund have been fixed and the proposal is currently under the consideration of the Securities and Exchange Board of India (the stock market and mutual funds regulator). The product will be launched when approval has been obtained. The Government of India (GoI) has also launched its new social security initiative Aam Admi Bima Yojana (Common Persons Insurance Programme) for poor families that do not own agricultural land. The Finance Minister, in his budget speech set aside Rs1,000 crore ($250 million) to subsidize and extend death and disability coverage to an estimated 15 million rural and landless households. Under
the programme, which translates into an insurance plan for the common man, the state and union governments are expected to bear the premium of Rs200 for every policy holder who is insured to the
extent of Rs50,000 ($1,250) in case of natural death and Rs75,000 ($1,850) in case of an accident. The government owned Life Insurance Corporation of India (LIC) has been appointed manager of the fund.27 In addressing the gathering of international participants at the Munich Re Micro- Insurance Conference in Mumbai (on 13 November 2007) the Finance Minister of India announced that this was one of the most ambitious social security plans of the Government of India (GoI) and is targeted to reach 10 million persons by October 2008. In addition, there is accident insurance of Rs50,000 ($1,200) for 64 million
holders of the farmers lines of credit (known as Kisan Credit Cards) and to a few million holders of the artisan28 credit cards. 5.2. Distribution mainly through microfinance institutions as partners or agents of formal insurance companies The limiting features of micro-insurance products low premiums, on the one hand, and (relatively) high transaction costs (for insurers), on the other make it necessary for these products to be offered
through special vehicles that have been variously described as nodal agencies29 or aggregators. These are agencies that already have access to and commercial or financial relationships with large groups of low-income families in a certain geographical area. These agencies form an essential part of the delivery
mechanism for micro-insurance in India. Typically, these agencies are Microfinance Institutions (MFIs) Non-Government Organisations (NGOs) Self-Help Groups (SHGs) or associations of SHGs Co-operative societies Other community benefit institutions
In addition to the above agencies, other organizations or persons who have regular interactions with low-income families such as seed distributors, fertilizer distributors and Panchayati Raj Institutions 27 Budget 2007. http://www.livemint.com/2007/03/06022252/LIC-wants-clarity- on-Rs1000-c.html 28 Micro-entrepreneurs engaged in production/processing activities. 29 Ahuja, Rajeev. 2005. Published in the India Insurance Report: Series I. Micro- insurance in India. Birla Institute of Management and Technology, Greater Noida.
43
have also been targeted for delivery of micro-insurance products. Recognising the importance of such aggregators, IRDA has referred to them as micro-insurance agents in the Micro- insurance Regulations, 2005. However, the definition of agents has been restrictive as discussed in Section 6.2.2 because of exclusion of MFIs registered under the Companies Act. While the most common form of delivery is the partner-agent model, which is also encouraged by the regulatory framework, some NGOs and MFIs also provide in-house insurance (discussed in Section 5.1.2), by collecting premiums from their members. The partner-agent model was being practised by insurance companies much before its formalisation by the IRDA micro-insurance regulations. As
discussed in Section 4.4, the regulations provide for three forms of aggregators NGOs, MFIs and SHGs to be facilitators for providing insurance (life and non-life) products to low- income households in the country. The regulation has allowed insurance companies to identify such aggregators and provide mandatory training on insurance products and delivery (of at least 25 hours) to their staff to enable them to act as MI agents. The figure tries to encompass all types of partnerships of insurance companies with aggregators
including health insurance. The aggregators are responsible for selling the policies (life and non-life) to their clients, collect premium, transfer it to the insurance companies and process claims.
For health insurance, in addition to the partnership with the aggregator a medical service provider is also involved and sometimes also a TPA for administering claims payments. However, in most cases the aggregator acts as the TPA for the insurance company. In the partnership model, the insurers that
underwrite the risk remain in the background while the aggregators are the public face of the companies. This became evident during the field survey; the clients of MFIs were found to be aware of the terms of the microinsurance purchased by them but not of the identity of the insurer. In fact it was only the public sector LIC due to its long history as a provider of insurance services in India that featured prominently as a company known by the respondents (see Appendix 3) Figure 6. The partner-agent delivery model for micro-insurance
Direct reimbursement in cashless schemes Medical Service provider Insurance company Aggregator (MFI/NGO/SHG) Low income families Premiums Premiums transferred Claims routed through aggregator TPA
44
Though the partner-agent model is the most common channel adopted by the insurance companies to market their micro-insurance products, it is surprising that apart from LIC (which has around 2,500 registered MI agents see LIC experience in selling micro-insurance products through micro-insurance agents in Appendix 2) none of the other companies partners conform to the IRDA definition of MI agent. Another case of partnership of an NGO (AIDMI) with public sector insurance companies to provide life and asset insurance is described in Appendix 2. Most insurance companies have partnerships with MFIs that are registered as companies to access the large client bases of such
organisations. Some insurers partner with Cooperative Banks (see Box 6) and individuals (like local grain traders (arhathis), shopkeepers, school teachers) to sell micro-insurance. It is perhaps not surprising that the IRDA treats such facilitation with benign neglect, ignoring the
collaborations as long as client protection is not compromised. However, these are grey areas that the MI regulations do not cover and have allowed intermediation by unauthorised agencies to flourish. A large number of such partnerships still try to follow the insurance norms through quasi-agents/brokers to ensure a modicum of legal protection. Such regulatory uncertainty adds to the cost of the product on account of the elaborate payment systems and arrangements that must be made to fulfil the regulatory
requirements. These costs clearly could be avoided if more facilitative regulation was put into place.
Such partnerships have also allowed the aggregators to collaborate with multiple life and non-life companies to offer products best suited to their members while MI agents are limited to just one life and one non-life company. Yet, it is widely believed that for MI agents, microinsurance cannot be a fulltime engagement due the small earnings that would result. Therefore, this regulation is seen as a restrictive step that limits the viability of micro-insurance as a business opportunity, compounding the limitation resulting from the small size of these products. Box 6. Selling insurance through Cooperative and Rural Banks: The Aviva experience
Aviva was the first insurer to experiment with the distribution of insurance products through District
Cooperative Banks (DCB). This model is commonly referred to as bancassurance in which the aggregator shares the existing client data with the insurer who are then approaches the clients directly for selling insurance policies. The banks are paid a fixed percentage of the premium collected. The proportion varies from bank to bank, on the basis of numbers, type of policy, term and frequency of the premium payment. In addition to Cooperative Banks, Aviva has also tied-up with Regional Rural Banks (RRB). Across India, Aviva has such arrangements with 27-30 RRBs and DCBs for using their client base to sell its
insurance products. Other companies have also started using this model now. In 2006-07, 60-70 % of the total business of Aviva came from this channel. This model has worked well for Aviva because the credibility of the products increased when sold through the DCB/RRB channel. Trust is a big issue while purchasing financial products and insurance
is no different. Customers inquire with the DCB/RRB about the insurance company and their staff assures them about the authenticity and reliability of Aviva. Though the conversion rate (number of people who are actually contacted and who finally buy the products) differs across branches, the overall rate of 35-40% achieved by AVIVA through this channel is regarded as good. A more detailed case study of this channel is contained in Appendix 2.
45
The restriction to only one company of each type is based on the assumption that the complexity of insurance products is high and that too much information would be a burden both for the MI agent and the client. This restriction makes it impossible to combine the best products from different companies into a bouquet that will suit the needs of particular types of clients. BASIX a leading NBFC MFI that facilitates micro-insurance linkages has been able to provide such a bouquet of insurance products to its clients as it is not an MI agent (see Box 7 below). The fears about confusion in the selling of products appear to be misplaced since it is unlikely to become a full-time occupation and, therefore,
highly unlikely that any MI agent would engage in de facto brokering which is really what concerns the regulator. Box 7. Collaboration of Basix with various insurance companies
Basix is a leading MFI and has collaborated with Aviva Life Insurance Company for credit-life, ICICI Lombard for weather insurance and Royal Sundaram for enterprise and livestock insurance. Since its core business is providing financial services to its clients, Basix a micro-finance group with around 250,000 clients would like to offer other services and products that are appropriate and complementary with its microfinance products. The micro-insurance experience of Basix started with the credit-life (compulsory) product of AVIVA.
This insures the life of the client and also Basixs loan in case of the death of the client. With
experience, the premium per client on this product has gone down and the cover has been extended to the spouse of the borrower as well.30 However, just life cover was not sufficient for the borrowers of Basix as a large proportion had taken loans for agriculture, livestock and micro/small enterprises. Since AVIVA does not provide non-life insurance, Basix scanned the market for the most suitable products and identified ICICI Lombard and Royal Sundaram for weather and enterprise insurance respectively. The general observation is that not only Basix but other leading MFIs in India have multiple collaborations with life as well as non-life companies in order to make the best possible
insurance options available to their clients.
5.3. Products and Outreach not only low insurance penetration but also very limited distribution amongst the low income segments of the market While the rapid increase in insurance penetration in India, apparent from the discussion earlier in this section and in Section 3, is a good augury for the future of insurance coverage and economic security in India, indications for the present coverage of the low-income micro-insurance market are not good. No direct information on micro-insurance cover is available but information from the 59th round of the National Sample Survey conducted in 2002-03 (as of end-June 2002) shows a highly skewed distribution of household assets.31 Since the overwhelming majority of the insurance products sold in the Indian
market and, indeed, the thrust of the marketing undertaken by the insurance companies is on the selling of endowment products, it is apparent that the average policy holder sees insurance as a form of
saving. In this context the use of the available information on the distribution of financial deposits as a proxy for the current distribution of insurance penetration seems appropriate. The distribution of deposits by the distribution of household wealth levels is presented in Figure 7. 30 Gunaranjan, 2007. The challenges of micro-insurance IRDA Journal Nov 2007 31 NSSO, 2005. 46 47 Figure 7. Distribution of deposits by households across wealth classes As the figure shows, the bottom 56% of households own just 9% of total financial deposits while the
wealthiest 9% of households own over 50% of financial deposits. This yields a Gini coefficient of deposit distribution of 0.627, a highly unequal situation though better than the 0.74 coefficient of land distribution in India (measured in 2003).32 This indicates the likely levels of investment and in insurance by the low income sections of the population. It suggests that insurance cover of the bottom 56% of the population is not likely to be any more than 9-10% of the total insurance cover taken by households in India. On this argument, the bottom 30% of the population the main target of the microinsurance effort would account for an even lower 2.3% of total insurance. The impression of the study team, based on an informal assessment, is that even this low estimate of overall insurance premium
emanating from the bottom 30% of the population is optimistic. 5.3.1. Micro-insurance cover by insurance companies
Systematic information on micro-insurance cover provided by the insurance companies is not available. However, data obtained on rural and social sector obligations (discussed in Section 4.3.1) show that most insurance companies have been able to meet their obligations Table 6 (detailed table in Appendix 6). It is clear from the numbers and emerging from interviews of insurance company managements with this study team that most of the insurance companies have made an effort to fulfil the statutory obligations. 2002-3 2003-4 2004-5 Life insurers Achv./Trgt. Ratio
No. of Policies Achv./Trgt. Ratio No. of Policies Achv./Trgt. Ratio No. of policies Private 1.54 109,326 1.31 258,599 1.38 414,909
32 Coefficient of land distribution cited in Bardhan, 2007. 0% 10% 20% 30%

40% 50% 60% 70% 80% 90% 100%
0% 10% 18% 31% 44% 56% 64% 74% 83% 91% 100% proportion of households proportion of total deposits 48 2002-3 2003-4 2004-5 Public 1.16 4,545,841 1.42 6,146,023 1.43 5,488,592 Overall life 1.49 4,655,167 1.32 6,404,621 1.38 5,903,502 Non-life insurers Achv./Trgt.
Ratio Gross premium u/w (Rs lakh) Achv./Trgt. Ratio Gross premium u/w (Rs lakh) Achv./Trgt. Ratio Gross premium u/w (Rs lakh) Private 1.03 5,339 1.07 11,803 1.30 25,110 Public 1.43 91,115 1.53 100,924 1.64 111,902
Overall non-life 1.21 96,455 1.23 112,726 1.41 137,011 Source: Analysis of data collected from Rajya Sabha Unstarred Question No.4016, dated 23.05.2006 and IRDA Journals for May 2003, 2004, 2005 and
2006
Table 6. Compliance with rural sector obligations by insurance companies In terms of growth the number of policies underwritten by private life insurance companies under the rural sector have almost trebled (~140% p.a) from 2002-3 to 2004-5 while that of LIC has just increased by 10% p.a. The growth status of the non-life insurance companies is similar gross premium underwritten by private companies in the rural sector grew at 185% p.a while the public sector companies grew by 11% p.a from 2002-3 to 2004-5. As Table 7 shows, all insurance companies (life and non-life) were also able to meet their social sector targets. While most have tried just to achieve their targets some life insurers like SBI Life, Aviva & LIC
and non-life insurers like IFFCO Tokyo, ICICI Lombard, HDFC Chubb, Cholamandalam and the four public
sector non-life companies were able to exceed their targets significantly in 2004-5. However, the number of lives covered by non-life insurance companies have shown a decline during these years mainly due to huge drop lives covered by New India Insurance Company and National Insurance Company ( 45% p.a each). 2002-3 2003-4 2004-5 Life insurers Achv./Trgt. Ratio No. of lives covered (mio) Achv./Trgt. Ratio
No. of lives covered (mio) Achv./Trgt. Ratio No. of lives covered (mio) Private 1.74 0.17 2.53 0.32 8.63 1.70 Public 1.01 0.76 2.30 1.74 5.58 4.21 Overall life 1.09 0.93 2.34 2.06 6.21 5.91 Non-life insurers Private 29.14 0.89 21.23 1.11 15.23 1.22 Public 33.16 19.97 9.08 Overall non-life 34.04 21.09 10.30
Table 7. Compliance of social sector obligations by insurance companies12 Source: As for Table 6.
In terms of rural market share, the share of public sector insurance companies (both life and non-life)
remains substantial but it declined from around 98% for life companies and 95% for non-life companies in 2002-3 to 82% for both in 2004-5, confirming that the private sector is also making some inroads in this market. 49 Though the numbers on coverage of rural and social sector obligations appear encouraging, there is limited information on the coverage of low income families by the insurance companies through microinsurance. Interactions of the study team with the insurance companies reveal that the focus is mainly on the rural rich and surplus categories of rural families in a presumed continuum that divides the rural
population into four economic classes rich, surplus, poor and very poor. While some insurers have
started to target the poor as well, the opinion of the companies is that the lowest level, the bottom of the pyramid in international parlance (or the bottom of the truncated diamond as explained in Section 3), should be supported by the government with social security schemes and development programmes to improve their economic status, and not be turned into a millstone for the insurance sector. The regulatory obligations for a proportion of underwriting being for the rural and social sectors have nevertheless forced the new (private) insurance companies to assess the needs of these less immediately attractive markets and to experiment with products, distribution channels and delivery
systems appropriate to these markets. With more or less enthusiasm, these companies see the rural
and social sectors as well as the micro-insurance market as one that has income generating potential in the distant (if not the immediate) future. 5.3.2. Market trends In 2003-4, the insurance sector filed 12 micro-insurance products from six insurers. These products were approved in 2003-433 but became operational only after the introduction of MI regulations in 2005. Table 8 shows that the small number of micro-insurance products initially filed with the IRDA, apparent from the table, suggests that most insurers did not immediately invest much thought into treating micro-insurance as a business opportunity, considering it more as a Government obligation to be
satisfied with the minimum of effort.34
Products Life products Non-life products Total products Public Private Public Private Public Private All insurance products 6 49 20 45 26 94 Micro-insurance products 1 1 1 1 Total (during 2005-6) 6 49 21 46 27 95 MI products initially filed (2003-4) 3 6 3 6 6 Overall MI products registered (Nov-07) 35 1 11 8 12 8 Source: IRDA Annual Report 2003-4 and 2005-6; IRDA website Table 8. New products approved by IRDA The number of MI products now approved by the IRDA is 12 life products from 6 life insurers and 8 nonlife products from 4 non-life insurers. The life products are mostly endowment (single & regular premium policies) and term assurance (with risk and return of premiums) while the non-life are mostly
health insurance, package cover and crop insurance products. The insurance companies have launched
several products for targeting the rural markets as well though some of these cannot be categorized 33 UNDP 2007. Building security for the poor potential & prospects for microinsurance in India 34 Ibid. 35 Prabhakara G, IRDA 2007. MI Conference 2007, Mumbai 50 under the micro-insurance. Appendix 6 provides the main features of the products offered in rural areas. A consideration of the products offered in the micro-insurance market reveals the trends in product design, distribution and up-take. Micro-insurance market dominated by credit-life and loan linked asset insurance
The domination of credit-life and loan linked asset insurance business by the insurance companies is
directly correlated to the rapid growth of the micro-finance sector in India over the past few years. The micro-finance sector in India is broadly characterized by mainly credit and (limited, usually compulsory) deposit services provided to low income families by (i) government programmes (including the linkage of self help groups (SHGs) to commercial banks) and (ii) by private for-profit or not-for-profit microfinance institutions (MFIs). The SHG-Bank linkage programme (SBLP) covered an additional 9.6 million persons in 2006-7, over 90% of them women and perhaps half classified as having incomes below the government-defined poverty
line. The total number of SHG members who ever received credit through the programme has grown,
therefore, to 41 million persons. MFIs, grew even more strongly and added an estimated 3 million new borrowers to reach a total coverage of about 10.5 million borrowers. Both programmes taken together have, therefore, reached about 50 million households though perhaps around 30- 35 million of these are currently being served.36 The growth of micro-insurance products in bundled form has been mainly due to the micro-financiers (the MFIs) need to protect their loans in the event of the untimely death or loss of assets of their borrowers. The MFIs as well as rural (RRB and Cooperative) banking system have provided the insurers
with ready access to their huge rural client base enabling the latter to comply with the rural and social sector obligations while enabling them to experiment with and learn about the microfinance and rural finance industry as a distribution channel. The role of the microfinance rating agencies in encouraging the MFIs to engage with the insurance companies rather than try to undertake in house underwriting has also been important in the growth of micro-insurance in India through the partner-agent model see Box 8. That micro-insurance has started mainly as a loan protection tool for MFIs rather than as a financial cushion for their clients is perhaps an inevitable consequence of the presently undeveloped nature of the market. However, as indicated above, it has initiated a process of growing experience with
product development, servicing of policies and client awareness that could facilitate the development of
the MI market in the future, presumably with credit-life policies covering more than just the credit taken by the client and providing some real benefit to the family in case of the unfortunate demise of the insured person. Box 8. Role of microfinance raters in promoting micro-insurance37 Agencies rating microfinance institutions in India have played an important role in shaping the insurance practices undertaken by MFIs. When the microfinance sector was at its nascent stage in the 36 Ghate Prabhu 2007. Microfinance in India A state of the sector report 2007 37 This study of micro-insurance is undertaken by a team led by M-CRIL the main microfinance rater in India and the most active specialized microfinance rating agency in the world.
51
late 1990s, a large number of MFIs were providing insurance cover (mainly life) to their current borrowers. This was done usually through an insurance fund created by collecting a small proportion (1-2%) of the loan amount from their borrowers. M-CRIL, the leading microfinance rater, viewed this as imposing a substantial contingent risk on the MFI on account (of the covariance of) their operations in limited areas. This affected the overall rating of the MFI and discouraged them from the practice of independent insurance under-writing. This resulted in MFIs seeking distribution arrangements with insurance companies so as to pass the risk on to them. In addition, to reducing their own risk the
MFIs were, thereby, able to earn commissions/service fees for this business from the insurance companies. Table 9 provides an indication of the insurance cover available to the clients of some selected MFIs. ~March 2007 MFI Customers covered Life Health Accident Livestock Micro-enterprises Weather BISWA 58,743 153,223 47,386 237 3,862 KAS Foundation 2,794 190,357 1,934 5,505 KDS 25,000 5,000 CASHPOR 27,879 ASA 49,623 BASIX 372,344 356,545 10,098 1,263 10,711 ESAF 287 13,510 68,521 KBSLAB 17,892 17,892 953 1,005
Mahasemam Trust 221,613 30,498 Saadhana Society 101,901 SWAWS 48,154 48,154 SKDRDP 721,203 SKS Microfinance 603,933 990 Spandana 1,020,000 Table 9. Insurance coverage by selected MFIs38 Preference for endowment over term products
Traditionally, insurance in India has been promoted mainly as a savings product which provides some returns at the end of the tenure so that risk coverage is just an additional benefit. The rural population, which anyway does not have much knowledge of insurance, is unable to comprehend the benefits of pure risk policies on which the premium is written off (for the client) if there is no claim before the end
of the term. The field research corroborates this observation. The discussion in Appendix 3 shows that
clients are more inclined to buy products which provide them returns than pure risk policies that are seen as forced upon them along with loans obtained from MFIs. However, the preference for composite 38 Ghate, 2007. 52 products (which are mainly pure risk based) like those provided by SEWA and its partner NGOs was found to be high particularly if it was bundled with a health product. Term policies are also not favoured by insurance companies since their earnings on such policies are much lower than those on endowment policies. On micro-insurance they are even more reluctant to do
so. The reason cited by insurers is that micro-insurance is equivalent to medically underwritten39 policies in terms of the risk of booking such policies. This is mainly on account of the poor health of the population and limited health facilities in rural areas where the micro-insurance clients are based. Therefore the health risk is naturally high and ideally requires high premiums particularly for individual products. This is why, even for rural markets, the insurance companies prefer to market endowment products underwritten on a group basis, carrying a smaller proportion of risk for the insurer. It is clear
that this apparent win-win of the endowment product is a bad value proposition for the client but continues in the absence of appropriate consumer education. There is no incentive for the insurance
companies to disillusion their clients in this matter. Health insurance has a naturally high demand
Health insurance has a naturally high demand in rural as well as urban markets. This is evident from the number of health insurance policies (see Appendix 5) offered by various types of organization across the country. According to a World Bank study40, the economic status of about one- fourth of Indians who are hospitalized falls below the poverty line41 on account of their hospital stays and similarly, more than 40% of hospitalized patients take loans or sell assets to pay for their hospitalization. The FGDs conducted by the study team also show the high preference for health insurance among existing insurance buyers. In the context of insurance, health was found to be the top priority for 61.6%
of respondents as they associate illness with unplanned expenses as well as the loss of income causing a
huge impact on their cash-flows. The more aware groups (in the South and West of the country) were even able to break this preference down further. For them, cover for common illnesses (as out-patients) was the most important risk that requires insurance (Appendix 3). Health insurance is usually offered through group products offered to the members/clients of MFIs and NGOs and to specific sections of the population (such as all the BPL families in a state) by the state government. Research42 shows that MFIs/NGOs offer health insurance to the poor in two different ways: (i) through collaborations with a formal insurance provider, where the MFI/NGO acts as an
intermediary; and (ii) where the MFI/NGO manages the health-insurance scheme in-house, by arrangement with a health-care provider. 39 Insurance works on the assumption that the insured is a healthy person. Also, even in case of ill health the insured has access to medical facilities.
In rural areas this scenario is lacking due to lack of medical infrastructure and the probability of dying without getting proper treatment is high. Therefore MI by default makes adverse selection and leads to booking of sub- standard lives. 40 Peters, et al. 2002. Better Health Systems for Indias Poor: Findings, Analysis and Options. The World Bank, Washington DC 41 The poverty line referred to here is as defined by the World Bank, where a person is considered poor if his/her average income is less than US$1.0 per day. 42 Ahuja, Rajeev. 2005, op cit, pg 28.
53
In the case of collaborations with a formal insurance provider, typically, health insurance cover is provided as a fixed sum in case of the hospitalisation of the client. These products are offered as group insurance products and may be bundled with accident benefits. Table 10 illustrates the health insurance products offered by three MFIs/NGOs in partnership with mainstream insurance companies. 5.3.3. Product feature SHEPHERD SKDRDP SEWA Delivery model Group product Partner-agent with United India Insurance Corporation Group product Partner-agent with ICICI Lombard Insurance (for hospitalisation cover
only) Group product Partner-agent with ICICI Lombard, LIC, Om Kotak and Bajaj Allianz Term One year One year One year
Eligibility Age: 18-60 years Age: 18-55 years Age: 18-55 years Compulsion Voluntary Voluntary Voluntary Product benefits Rs15,000 for accidental death Rs15,000 for permanent disability Rs250 per month for a maximum of three months (to compensate for lost wages in case of hospitalisation or disability) Rs5,000 for hospitalisation expenses
Rs5,000 in case of house getting destroyed by fire and allied perils 30-days of pre-hospitalisation expenses and 60-days of post-hospitalisation expenses included Rs20,000 for accidental death of head of family Rs5,000 for normal/accidental death of head of family Rs12,500 for partial disability and Rs25,000 for permanent disability Rs50 per day for 30 days to compensate for loss of pay Rs5,000-50,000 for hospitalisation expenses (cashless in network of hospitals) floater policy
Reimbursement of maternity expenses Rs2,000-4,000 Rs1,000 in case of house being destroyed by natural calamity Rs40,000-Rs65,000 for accidental death of member or spouse Rs7,500-Rs20,000 for natural death of member or spouse Rs2,000-Rs6,000 for hospitalisation of member or spouse Rs2,500 for hospitalisation of one or more children Rs10,000-Rs20,000 for loss of assets Maternity benefits of Rs300, Support for dentures: Rs600 and for hearing aids: Rs1,000 to members
paying premium as fixed deposit Pricing Member pays Rs100; Rs84 goes to the insurance company (an additional Rs20 is charged for thatched roof houses) Annual premium from Rs190-Rs1,225 per person depending on number of family members Annual premium of Rs650 for a family of 5 Rs325-Rs550 per annum or Rs3,600-Rs9,000 as one time deposit
Source: SHEPHERD: Roth, et al. 2005. SEWA: www.sewainsurance.org; SKDRDP: information provided by orgn. Table 10. Partnership micro-insurance products
Note: SHEPHERD is an NGO-MFI in Tamil Nadu with a client-base of 5,300 on 31 March 2006. SEWA (Self- Employed Womens Association) is a trade union of working women mainly in Gujarat. SEWA is the largest cooperative of working women in India, with nearly 960,000 members (31 March 2006). SKDRDP is an NGO run by a
Temple Trust in Karnataka. SKDRDPs microfinance programme covered ~400,000 clients (30 September 2006). As discussed earlier, the second approach of MFIs/NGOs in offering micro-health insurance products to low-income families is where the NGO/MFI offers the product in-house (also called mutual insurance). Though not very common, this arrangement is worth considering. Several NGOs and MFIs including SEWA, Gujarat had been providing insurance in-house before they started collaborating up with the
insurance companies.43 Case studies on Healing Fields and Vimo SEWA insurance programmes respectively are presented in Appendix 2. 43 SEWA abandoned its in-house insurance product when it faced high losses resulting from the Gujarat 54
The prominent health insurance schemes offered by the Government (both Central and state governments) in India for low-income families include44 - Central Government Health Scheme (CGHS), Employee State Insurance Scheme (ESIS), Universal Health Insurance Scheme and other schemes funded by State governments and central Ministries. Public schemes, only reach a small proportion of the population. Experts in the industry estimate that only 10 to 20 million persons have health insurance.45
As indicated in Box 9, these low outreach parameters are confirmed by a recent study by the National Insurance Academy. A write-up on the government schemes is provided in Appendix 2. Box 9. A study by National Insurance Academy, Pune
Though the health insurance sector recorded a healthy 38% growth during 2006-7, only 1.08% of the over one billion Indians have secured medical insurance cover since 1986 when health insurance was first introduced in the country. A shortage of hospitals as well as insurance providers, poverty and lack of coordination between hospitals and insurance companies as well as peoples belief in destiny have been cited as some of the reasons for the poor response. The potential market for health insurance is about Rs30,000 crore ($120 billion), but, at
present, it is limited to just Rs1,400 crore ($5.6 billion). And moneywise, the health insurance sector stands at just 3% of the insurance sector. These are the findings of the latest study conducted by National Insurance Academy, one of the premium institutes in the insurance sector. The data for the study was collected from 16 insurance companies providing medical insurance. The findings also suggest that a majority of the insurance schemes have remained restricted to the five metropolitan cities Mumbai, Delhi, Kolkata, Bangalore & Chennai. K N Mishra, NIA Director also mentioned in his recent discussion with a leading daily newspaper Times of India that there were restrictive players and not enough hospitals to enable people to take the benefit of
health insurance. Very few people can afford to buy insurance policies due to poverty and very few insurance
firms have branches in semi-urban and rural areas. The majority of the semi-urban and rural population remains neglected. Source: Gitesh Shelka and Rupa Chapalgaonkar, Correspondent Report, Times of India 25 Nov 2007 Among the health-insurance initiatives of the central/state governments the prominent ones are: The Ministry of Textiles health insurance scheme46 for 300,000 weavers in 2005, providing cover to the weaver, his wife and two children for all pre-existing diseases. Out of the total annual premium of Rs1,000, the Central government contributes Rs800 and the weaver has to pay the remaining Rs200.
The health insurance scheme for the poor launched by the Government of Kerala around July 2006, but revoked by the new Left Democratic Front Government in November 200647. The scheme was envisaged to cover 2.5 million BPL families and provide a package of benefits that included Rs30,000 a year as the total medical expenses for a family of five; up to Rs60,000 a year for treatment at earthquake of 2002. 44 Chakraborty, Manab. 2005. Study on Linkages between Statutory Social Security Schemes and Community Based Social Protection Mechanisms to Extend Coverage: India Case Study. ILO/SSA/AIM
45 Garand, Denis, 2005. CGAP Working Group on Microinsurance - Good and Bad Practices Case Study No. 16 46 Chakraborty, Manab. 2005. Op cit, pg 4
47 Source: www.hinduonnet.com/fline/fl2322/stories/20061117001305000.htm 55 home, if required; up to Rs15,000 a year for maternity needs; a subsistence allowance of Rs50 a day (if the bread-winner was hospitalised); a bystander allowance of Rs50 a day; coverage of all "existing" illnesses, and cashless medical treatment on production of the photo identity cards
supplied by the insurer. The scheme also included an accident insurance benefit of Rs1.0 lakh ($2,500) for death or full disability and Rs50,000 for partial disability. The insurance cover was provided by ICICI Lombard General Insurance Company Ltd. The total premium for a "typical" fivemember BPL family was Rs399 a year. The beneficiary's contribution was Rs33. A Central
government subsidy of Rs300 under the Universal Health Insurance Scheme (UHIS) and an additional subsidy of Rs33 each from the State government and the local body concerned accounted for the balance. The scheme was to be implemented through neighbourhood groups (similar to Self-Help Groups) under the State government sponsored Kudumbasree programme. The rural and social sector obligations are of prime importance The rural and social sector obligations have generated considerable pressure on insurers to sell microinsurance. Without selling micro-insurance, the regulator will not let them sell their more profitable products. To date the IRDA has fined a number of insurers for failing to meet their targets. Continued non-compliance with the rural and social obligations could result in suspension of the license to operate.
Insurers prefer to meet the rural targets rather than focus on the social ones since large farmers can be covered resulting in more viable operations. During 2003-4, all 12 private life insurers and LIC met their
rural sector targets. However, under the social sector two private companies, Tata AIG and Om Kotak, did not meet their targets, with a shortfall in the number of lives covered under the social sector. Among the private non-life insurers the exception was HDFC Chubb which failed to meet both rural and social targets, while two public sector companies did not achieve the social sector obligations (UNDP 2007). It is to fulfill these requirements that insurers even started on the process of looking at developing products that suit MFI requirements so that they could target the large client bases of those
institutions. The concern is that the resulting focus may have been too much on credit-life products
rather than those customized for the comprehensive needs of low income families. This is further articulated in Box 10. Box 10. The impact of quotas may not be all positive There have been unverified reports that some insurers are dumping poorly serviced products on clients solely to meet their targets. As soon as they have met their targets, such companies immediately stop selling micro-insurance during that year. This practice is difficult to regulate, as it is harder to police the quality of insurance sold and serviced than its quantity. It would certainly be unfortunate if the regulation resulted in a mass of poorly serviced products sold at a loss, to enable
insurers to concentrate on their more profitable markets. This situation would not result in meaningful sustainable financial deepening, since it is more akin to charity forced on insurers as a condition for doing business in India. (James & Vijay, 2005). The information in Table 7 (above) shows that target-achievement ratios of the insurers have not
improved much over the years, being more or less constant around 1.3 to 1.4. This is an indication that the insurance companies have actually not made a significant effort to go beyond a certain limit in meeting their rural and social obligations. However, the quotas have contributed to the creation of awareness among insurers of the potential 56
of the low-income population as insurance clients and forced them to look at the opportunities
available. This has led them to devise several innovative products and schemes for the low-income population resulting in the insurers starting to look at this segment more positively. No composite products yet The micro-insurance regulations allow insurers to offer composite life + non-life products provided there is an agreement between the life and non-life insurance companies for this purpose. However, the underwriting of risk for life/non-life has to be done by the respective specialised companies. The agreement would provide a composite product for consumers enabling better marketing and easier
claims processing. However, composite products have not been offered so far on account of nonregulatory dynamics. The insurance companies are reluctant to get into any contract with each other for
offering micro-insurance products as this could restrict them in collaborating with other life/non-life agencies in the future if a more remunerative commercial opportunity arises. It is for this reason that even sister concerns like ICICI (Prulife & Lombard) or HDFC (CHUBB & Standard Life) or TATA AIG (Life & General) have not collaborated with each other to offer composite products. Another reason cited by the insurers is that each company (life or non-life) specialises in covering a certain type of risk and there are regional leaderships as well. Therefore, collaborations with one company will restrict them in
collaborations with other companies that are market leaders in certain regions or products. Further, the amount of effort required for negotiating and concluding such agreements is widely thought to be out of proportion with the small amount of benefit that would accrue from the microinsurance market. High concentration in the southern region of India A high proportion of micro-insurance business (for both life as well as non-life companies) comes from the southern region of India in the states of Andhra Pradesh, Karnataka, Tamil Nadu, and Kerala. The
reasons are similar to the growth of the microfinance sector in the southern region a large number of good quality NGOs, more vibrant local economies in the southern states as compared to the less
developed states in the north and east and higher literacy and participation rates of women in the local economy make them suitable clients for MFIs. The MFIs in the southern region account for more than 50% of MFIs in India and the clients served by these MFIs are more than 80% of the total MFI outreach in India.48 This has provided easy access for the insurance companies to the rural client base. Of LICs rural business, 67% comes from the southern region and the businesses of other companies are similar. The very poor areas of the states of several East and North-East region remain uncovered by the insurance companies. Use of technology in micro-insurance The use of technology in micro-insurance is at a very nascent stage in India and most of the initiatives
are at the pilot stage. TATA AIG Life is one of the insurance companies which have been proactive in 48 M-CRIL, 2007. 57 attempting to use technology. It has introduced a cash collection and receipting system using a hand held machine to address the front-end concerns in remote rural areas. With the present system of equipping NGO partners with handheld devices that can issue receipts seamlessly, TATA AIG has empowered the NGOs to issue receipts on collection of money and also get real time information, every 24 hrs, on collection details. This has helped in reducing the time lag between the collection of premium from customers and the payment to TATA AIG while the cash receipt system has enhanced the
credibility of the NGO staff. This has helped to overcome the customers earlier reluctance to pay money to the staff of the NGO.49 SKS a leading MFI in India has also been experimenting with the use of technology and has develop
an integrated module for an insurance management system, financial accounting, management information and customer information system. The software generates receipts in the vernacular and branch wise reports on insurance products purchased by clients. SKS is now exploring the possibility of mobile banking for premium collection, reminder services, product information/marketing, claims registration, processing and settlement.50 5.3.4. Micro-insurance product features
The key features of micro-insurance products in India that distinguish these from other insurance products are Simplicity: The micro-insurance regulations specify that contracts for products demarcated as microinsurance have to be issued in vernacular language that is simple and easily understood by
policyholders. Even for group policies separate certificates have to be provided to each member of the group providing proof of insurance and details of the terms. Further, these products may also be distributed through micro-insurance agents (in addition to insurance agents, corporate agent and/or broker licensed under the Act). The micro-insurance agents are supposed to perform several additional functions like collection of proposal forms, collection of remittances of premium, distribution of policy
documents, assistance in the settlement of claims and other policy administration services. All this warrants the products to be simple for better understanding by the client (who in most cases would have lower levels of education and awareness) and better servicing by the microinsurance agent.
Range of prices: The regulation has set limits for micro-insurance products and the maximum cover cannot increase more than Rs50,000 ($1,250) under any circumstances. The policy term also cannot exceed 15 years for non-life and for life the term is annual. Pricing depends on the types of risk covered, savings based or pure risk products and group based underwriting. There is a range of products available for the low income segment ranging from relatively costly health insurance to low priced
group-based credit-life/asset insurance for members of MFIs.
49 Athreye Vijay 2007. A presentation on TATA AIG experience on use of technology for improving efficiency and enhancing benefits Source: Presented at Munich Re Micro-insurance Conference at Mumbai 50 Divya Vishwanath 2007. A presentation on SKS experience on use of technology for improving efficiency and enhancing benefits 58 Group-based underwriting: At present, the micro-insurance sector mainly caters to the enormous client base of MFIs and members of SHGs formed under various government programmes. Since most of the clients/members are in groups, group-based underwriting provides very cheap cover to them, though in most cases this does not exceed the loan amount.
Limited benefit values: Since the products are for low income households the size of benefits is kept as limited as possible to limit the premium. Group-based underwriting also propagates limited benefits. The regulations limit the size of benefits by restricting the cover to Rs50,000 ($1,250). Some additional non-financial benefits offered by insurance companies include various payment options (annual, halfyearly, quarterly, monthly), a free-look period of 15 or 30 days and surrender value for policies that have been in force for even a limited period. The ILO/STEP, 2005 working paper on insurance products provided by insurance companies (through partnership or in-house models) to the disadvantaged in India listed 83 microinsurance products of
which 55% covered a single risk. Most products covered life, which is a relatively simple entry point for micro-insurers. Standardized government products with a large subsidy component: Most government programmes on
insurance offer standardized products for the low income population irrespective of their geographical location and inherent risk profiles. An example is the Universal Health Insurance policy announced by the government and implemented by the four public sector insurance companies. Similarly the Janashree Bima Yojana succeeded by (the recently announced) Aam Admi Bima Yojana are also standard products implemented by the LIC. Another characteristic of government insurance programmes is the subsidized premium.
5.4. Conclusion: Key Market Features
The discussions above have highlighted the characteristics of the micro-insurance market in India in terms of the players, distribution models and challenges, products and outreach. The following salient features emerge. Product characteristics. Micro-insurance products in the market have short policy contract terms and are overwhelmingly (but no longer exclusively) underwritten on a group basis. A number of the new products offered by formal insurers may be individually under-written but the numbers of such policies is still minuscule even relative to the already low overall outreach of micro-insurance. The size of benefits of micro-insurance products is also limited by micro-insurance regulations.
Demarcation. Formal insurers are required either to provide life or non-life insurance exclusively though health insurance may be provided by either category of insurer. Community-based insurance systems are largely limited to health cover. However, the microinsurance regulation
allows the offering of life/non-life composite products provided there is a formal agreement between one life and one non-life company with each underwriting the respective risks and providing a unified service to clients. Health prominence. Health insurance is prominent in community-based systems because the health risk is generally seen as potentially the most devastating type of systemic risk likely to upset the lives 59
and economic livelihoods of the low-income population. Formal micro-insurance schemes are yet to cover health in any significant way on account of the difficulties of ensuring service delivery and the dangers of moral hazard in a highly informal health service network. Low outreach of community-based insurance. Community-based health insurance systems managed
by NGOs is available but, except in a couple of cases, has minuscule outreach. The limited prudential risk vis--vis payments made by the covered population means that the regulator has not yet taken a significant interest in these. Dominance of loan linked products. It is probably the largest market driven by the compulsion of borrowers to purchase insurance schemes mainly to provide protective cover to the MFIs. The
domination of credit-life and loan linked asset insurance business by the insurance companies is directly correlated to the rapid growth of the microfinance sector in India. This is also beneficial for the insurers who gain access to the huge rural client base of MFIs thereby enabling them to comply more easily with the rural and social sector obligations. Micro-insurance category. The advent of separate micro-insurance guidelines provided by the insurance regulator has seen the launch of new micro-insurance products in the formal market. At present there are 12 life micro-insurance products by 6 life insurers and 8 non-life products by 4 non-life insurers approved by registered with the regulator. New distribution models. Rural and social sector obligations imposed on formal insurers by the
market regulator have compelled insurance companies to experiment with new distribution models through NGOs, MFIs and the rural banking network. However, very few formal relationships for the distribution of micro-insurance products have been seen so far, mainly because for-profit MFIs,
which cover a very large proportion of microfinance outreach in India, have been left out of the ambit of the regulation. Adviceless selling. Micro-insurance is sold overwhelmingly without advice while the higher end of the insurance market is served by brokers providing advice. Micro-insurance agents are specifically restricted to working with a single life and single non-life insurer. However, microinsurance agents
have been entrusted with a much larger scope of service functions to be carried out by them. Overall, while there is much in the Indian micro-insurance regulation that is designed to promote such products through its liberal and developmental approach, there are crucial omissions and design glitches
that limit its efficacy. Specifically, the exclusion of corporate MFIs, the restriction of collaborations to one life and one non-life insurer and the limitations placed on pricing have a dampening effect on the micro-insurance market. These are issues that need to be examined in more detail and are the key factors addressed in the following section on the drivers of the micro-insurance market in India. 6. Drivers of the microinsurance market
The improved performance of the Indian economy, with GDP growth in excess of 8% since 2003, is
reflected in the insurance industry. The premium underwritten in India and abroad by life insurers in 2005-06 increased by 27.8%, higher than the 24.3% growth in 2004-05. In the case of non-life insurers the corresponding growth was 15.6% compared to the 11.6% growth of the previous year. At the primary level, therefore, there is a macro-economic driver for the insurance market in India. Given concerns about the relatively exclusive nature of this economic growth, however, the extent to which it 60 has a direct impact on the micro-insurance market is open to question. This is a question that cannot be
resolved in the short term since adequate data on regional development is not immediately available.
Other non-regulatory as well as regulatory drivers of the micro-insurance market identified in the course of this study are discussed in this section. 6.1. Non-regulatory drivers of market characteristics There are a number of non-regulatory drivers that are enabling (or limiting) the growth and development of the micro-insurance market in India. While some are related to the lack of certain basic facilities for the rural/semi-urban low income population the target client segment for micro-insurance in India others are stimulated by the growth of the microfinance sector in the country. The discussion that follows, though not exhaustive, examines the nature and magnitude of the effect of these drivers
(and limitations).
6.1.1. Growth of microfinance has facilitated outreach and the resulting limitation on product design is starting to change The growth of microfinance has led to the creation of a rural/low income client base for micro- financial services and has become a ready market for insurers. From the MFI perspective, more than 95% of the lending they do is unsecured and repayments are highly dependent on peer pressure and the client-MFI relationship. However, in case of the death of the client or loss of assets on account of natural or manmade disasters, the loan becomes bad and the chances of getting it back (from the group or family of the deceased) are low. Therefore, the MFIs welcome a loan protection mechanism to safeguard their
portfolio from such unfortunate events. This has led to a symbiotic relationship between the insurers
and MFIs and the insurance companies have started designing products that are suitable for them. The MFIs act as client aggregators for insurance companies resulting in effective and relatively economical distribution of micro-insurance products. It is for this reason that the micro-insurance market is dominated by credit-life policies; compulsory products for the clients of most of the MFI aggregators. This means that any client borrowing money from an aggregator MFI has to purchase a life or asset insurance policy or rather receives a life or asset insurance policy bundled with it. In most cases life cover is provided for the term of the loan and the
sum assured is equivalent to the loan amount. Some of the larger MFIs that provide financial products
to their clients for asset building and enterprise creation (for example purchase of livestock, agricultural tools and equipment, establishment of grocery shops, readymade garments shops, cycle repairs and servicing) have also introduced (or are in the process of introducing) loan linked asset insurance. There are also a few instances of composite products at the level of the MFI (for example the Vimo SEWAs integrated insurance product 51 for further details see Appendix 2), which has not happened at the level of insurance companies. 51 Vimo SEWA offers integrated insurance products covering multiple risks. Once a member has bought her coverage, she can also insure her husband
and children. Risks covered under Scheme 1 includes natural death, health, asset loss, accidental death and spouse accidental death while Scheme 2 61 Overall, on account of the sheer size of their client base currently aggregating around 10 million MFIs are able to bargain with insurance companies for offering products suitable for their clients. In the case of Basix (Box 11) with experience the coverage offered by the insurer has even been increased for the same (or lower) value of premium. To this extent the major limitation of working with MFIs as aggregators overwhelming interest in credit-linked products may be starting to erode as the experience of working together grows and each type of institution learns more about the other as a partner in micro-insurance market development.
Box 11. Providing sustainable and competitive insurance products to rural customers52
Basix, a livelihood promotion institution set up in 1996, provides both financial and technical assistance services to about half a million households spread over 8 states in India. In October 2002, it began its initiative to provide life insurance cover to customers who took microcredit. Basix took a group policy from AVIVA which covered its borrower for 1.5 times the loan amount taken by him/her during the loan tenor. In the absence of any past experience of mortality of the customer profile served by Basix, AVIVA priced the product conservatively at Rs8.61 per thousand sum insured. By October 2004, the experience of covering more than 50,000 persons was completed. The positive
performance of the product by this stage allowed the insurance company to lower the premium rate to Rs6.89 per thousand of sum insured. A year later in 2005, over 100,000 person years were covered cumulatively. The claims experience gained till then allowed the insurance company to reduce the premium rate to Rs3.98 per thousand sum insured. Based on the actual performance of the product, Basix and AVIVA were able to reduce the premium rate by more than 50% in a three year period. This further allowed Basix to extend cover to the spouses of their borrowers, as the premium became more affordable. This experience proves that a sustainable approach to pricing of micro-insurance combined with proper administration of the products, allows the partners to add value to the small
premiums paid by their customers.
6.1.2. Group based risk management and distribution has played a positive role Since microfinance is delivered mainly on a group basis, it is perhaps not surprising that most of the micro-insurance policies in India are underwritten on a group basis. This is mainly due to a combination of factors the SHG movement in India is the backbone of the current microfinance industry, low awareness about insurance is more easily overcome if clients are organized into groups, and group underwriting limits premiums and improves affordability of insurance products. The SHG movement has been the major factor in group-based risk management and distribution as a vast majority of low income/rural microfinance clients are mobilized in groups for various kinds of
activities. At present, the microfinance sector outreach is estimated by some at around 50 million53
covers the same risks but with a higher sum assured. (Source: Garand Denis 2005. CGAP Working Group on Micro-insurance Good and Bad Practices Case Study No. 16) 52 Gunaranjan Sai, 2007. Chapter 7 in Microfinance in India A State of Sector Report 2007 53 Ghate Prabhu 2007. 62 households but is more likely to be around 30 million of which some 30-40% are estimated to be poor (BPL). Assuming that each family has an average of 4 members, the current microfinance outreach of poor clients is about 20% of the IRDA estimated micro-life insurance market of 240 million BPL
individuals. In a country the size of India, these constitute large numbers, resulting in the microinsurance company getting easy access to this client base through the organizations promoting such groups. Since these low income families have similar types of risk and they are able to use their membership of the group to access risk coping mechanisms such as insurance. Since awareness of insurance is low amongst the low income families (as well as the more affluent in India) marketing individual products is, in any case, a difficult proposition the field survey supports this observation (refer Appendix 3) refer to Box below on the main observations from the FGDs on client awareness levels. The insurance companies, themselves testify to the relative benefit of distribution
and servicing of policies through these groups. However, there is also the feeling that, over time and with growing awareness and buying capacity of micro-insurance clients the demand for small (but not micro-) insurance policies will increase as their economic status improves. In this situation, insurers will
have to start designing appropriate individual products for them if the overall size of the market is to realize its enormous long term potential. It is only in this way that the diverse needs of individual families can be met. The natural efficiencies of working with (readymade) groups has, of course, reduced the cost of underwriting relative to that of individual products that must be sold as retail products and are,
therefore, relatively less affordable. Premium size inevitably increases for low income clients as the administrative as well as marketing cost of selling individual products is proportionately higher. Box 12. Client awareness level
The FGD findings show that clients awareness level on insurance as a financial product is low but varies widely across regions. The level of awareness depends on access to financial services, geographical proximity and exposure to insurance companies but not as much on the economic status of low income respondents. Though respondents were able to understand the risks faced by them and the need for risk cover insurance is regarded as a sunk expense which is unlikely to yield returns.
However, respondents who had purchased insurance products and benefitted from these were able
to appreciate the utility of the service much better than the non-clients. Further, the awareness level of insurance products available and of insurers themselves is low. Clearly the awareness level of clients is comparatively better than that of non- clients. At the regional level clients in South India were found to be more aware than in other parts of the country. The high concentration of microfinance operations in the South, which has provided a good market and scale for the insurance companies has contributed to this. Further details in Appendix 3. 6.1.3. But the lack of access to health services is a major limitation The guidelines for national health planning in India were provided by a number of committees dating
back to the Bhore Committee in 1946, which laid the foundations of a comprehensive primary health 63
care delivery system in the country, not too different from the National Health Service of the UK and other tax-funded health provision models in other countries. Over the past six decades, India has attempted to build up a large public health infrastructure at primary, secondary and tertiary level. However, the public health sector continues to be plagued by problems like poorly motivated manpower, inadequacy of funding, skewed geographical distribution and other access issues. In rural and remote areas, even qualified providers from the private sector are conspicuous by their absence. In
addition to this, despite a multitude of legislation on the subject, the providers of health care in India
continue to be poorly regulated, with no checks on pricing and often no checks on service quality. The absence of influence from large organized purchasers of healthcare (like insurance companies) has also contributed to this situation.54 It is clear that for micro-health insurance to be successful and sustainable there have to be adequate health care facilities in rural areas. In the absence of this, micro-health insurance is not a viable product at levels of premium that would be affordable for the majority of the low-income population. Yet, low income families perceive health as the most important risk that needs to be covered (as is apparent
from the discussion in Appendix 3 see Box 13 for a summary of field observations). In fact the lack of
proper health care facilities has had an adverse impact on the premium for life- cover as well since, as a result, insurers are covering what might be termed sub-standard lives. Box 13. Priority of health and other risks among consumers FGD respondents prioritise the risks (to be covered) mainly on the basis of the frequency of occurrence and perception of the immediate impact it could have on their livelihoods. Thus health insurance was the top priority for most of the respondents while life was relatively unimportant. Health is the top priority for 61.6% of respondents as they associate illness with unplanned expenses as well as loss of income that causes a huge impact on their cash-flows. The more aware groups (in
the South and West) were able to break this preference down further and for them cover for common illnesses (as out-patients) is the most important service. This is in contrast to the tendency for most insurance companies to offer cover only for in-patient care of selected health service providers. Overall, life insurance is the second priority (14.2%) but this is very low compared to the priority accorded to health as a large number of respondents felt that the benefit of their death goes to their family and not to them; their concern is more with what happens if they live than with what happens if they die. The risks which could be clubbed together as the third priority include livestock (6.3%), household assets (6.8%) and business/enterprise assets (4.7%). The other risks identified by the
groups were crop loss and loss on account of accidents/natural calamities. Further details in Appendix 3. 6.1.4. As is lack of awareness of insurance as a financial product
Until now, insurance in India has been driven primarily by either tax incentives or as a requirement mandated by financiers to protect their own interests. Insurance as a measure of protection against 54 Dr Devadasan N & Dr Nagpal Somil 2007. Perspective and prospects in micro- health insurance in IRDA Journal November 2007 adversity is relatively low. It is only now that people are slowly realizing the value of insurance as a means of protecting the familys income in the event of the unfortunate death or incapacitation of the
breadwinner. While this is the state of affairs in the high and middle income groups, the poor lacking
knowledge and awareness of insurance are almost totally outside its realm of coverage.55 The above opinion of the Chairman of IRDA indicates the lack of awareness of insurance amongst the more affluent population and, relatively, the level of awareness about insurance among low-income families is virtually negligible (refer Appendix 3 & Box 12 above). One of the reasons for this lack of awareness is that in the past insurance was promoted as a savings mechanism with insurance as an addon facility rather than as a means of financial/risk coverage. This has become ingrained in the psyche of Indian consumers (at all levels upper, middle and lower income) and it is difficult for consumers now
to appreciate the benefits of a pure risk policy which does not provide any returns except upon the occurrence of the event for which the risk cover has been bought. It is for this reason that even low-income families prefer savings-based insurance over risk based
products (refer Appendix 3 & Box 14 on field observations). For the insurers this is a win-win situation as it gives them a higher premium while the corresponding coverage is lower in comparison with risk based policies of the same value. In some cases the insurers also gain when savings based policies lapse and low income consumers (not being aware of their rights) do not claim the savings portion of the premium which then becomes part of the insurers revenue stream. Box 14. Product priorities
The FGDs show that low income clients are more inclined to buy products which provide them returns. It is for this reason that the preference for savings linked life insurance products is high. Pure
risk policies are seen mainly as a forced option for respondents who have obtained loans from MFIs. This is mainly the case in South India. However, the understanding of the respondents of the benefits and drawbacks of pure risk and savings-linked policies is low. For them, the only differentiating factor is that pure risk is a sunk cost while savings-linked policies provide returns in addition to cover. The preference for composite products is particularly high if there is a health component attached. The affordability of premium was also found to be an important factor for the respondents to make
decisions and the average acceptable level of premium was reported to be around Rs350-400 (~$10). The occupational profile of the respondents also defines their priorities; farmers prefer crop insurance, dairy entrepreneurs want cattle insurance. 6.1.5. And lack of access to formal financial services Lack of formal financial services in rural areas has been well documented and is one of the prime reasons for the success of microfinance in India. Access to financial services is essential for the delivery and servicing of micro-insurance products as well. There are a number of issues related to remittances 55 Rao C S 2007. IRDA Journal Nov 2007 Focus on Micro-insurance
for payment of premium and claims servicing which ultimately have an impact on the pricing of the product. The micro-insurance regulations have given extra responsibilities to microinsurance agents. These responsibilities include collection and remittance of premium and other policy administration services. In the absence of a formal financial infrastructure the agent is handicapped in delivering the services effectively. Insurers consider the policy as active only when they receive the premium payments and there is often a substantial time lag between the collection of payment from the client and receipt of premium by the insurer. There are now other ways in which this issue could be addressed. These
include the use of mobile payment systems (paying through airtime) as mobiles now have very good outreach in rural areas. Some insurance companies like TATA AIG and ICICI Lombard are even
experimenting with payments through hand held devices but, at the present level of technology, there are still cost and sustainability issues for micro-insurance agents. There are also regulatory issues in the use of mobile phone technology in relation to the financial (rather than the insurance) system that are being actively considered by the financial services regulator (the Reserve Bank of India) but are yet to be formally resolved. Aggregators, particularly for the private insurers, are for-profit companies and do not fit into the
definition of micro-insurance agents. Though MFIs have the capacity to collect premium and remit these to the insurance companies, something they have already partly proved through their microfinance operations, they are hampered by both insurance and financial services regulation.
Regulation does not permit them to (i) become micro-insurance agents and (ii) collect or remit premium through their books of account (as the funds, however temporarily held, are considered to be client deposits). This is discussed further in Section 6.2.2. 6.1.6. As well as lack of actuarial data While the public sector insurance companies have more than 50 years56 of experience, the private insurance sector is just 5-7 years old. The rural and social sector obligations were introduced only in
October 2002 when the IRDA made it mandatory for insurance companies to fulfill certain obligations. Though public as well as private companies were selling insurance in rural areas before this as well, 2002 is considered as the watershed year when the insurance companies started to work out strategies for targeting the rural population. Therefore, formal experience in the underwriting of rural insurance policies is just 5 years old. The private insurance companies initially used LIC and public non-life company data for pricing their products. Despite this, it is widely accepted that rural policies are overpriced due to the absence of information on the occurrence of events that trigger payments. Lack of information hampers the
56 Insurance business was nationalised in 1956, when Life Insurance Corporation Act was passed, giving birth to the Life Insurance Corporation of India (LIC). 154 Indian-owned insurance companies, 16 non-Indian companies and 75 provident funds were taken over by the state. rational pricing of insurance and results in over-pricing to ensure that the insurer covers its own risk. The example of the Basix-AVIVA experience (Box 4.1) is a testimony to this observation; premium on an over-priced policy was reduced based on field experience. Thus, it is only in situations where the aggregator is alert to the possibilities of improved terms from insurers that accumulating experience can result in lower premiums or in improvement in other conditions (such as simpler claims procedures) for
micro-insurance clients. 6.2. Regulatory drivers of market characteristics
6.2.1. Inclusion of micro-insurance within the rural & social obligation norms It is apparent from the discussion in this and the previous section that the rural obligation norm has encouraged the development of products for low income clients resulting in some de facto microinsurance outreach. The inclusion of micro-insurance in the rural obligation norms has, however, not encouraged the insurance companies to view it as a separate market segment. The first aim of all insurers is to achieve the rural and social obligations and there is the tendency to do this either by targeting upper and middle income families in rural areas or by entering into agreements with rural
finance institutions. This means that some insurance companies have limited outreach to the lowincome
families which are the target clients for micro-insurance or serve them mainly through credit-life type products that provide very limited coverage and mitigate risk more for the financial institutions than for low income policy holders. Most insurance companies admit that the micro-insurance sector offers limited business potential and they are still trying to ascertain how this could be converted into a commercially viable opportunity. The micro-insurance regulation has not so far stimulated much of a response, as most insurers have worked out how to achieve their rural and social obligations without any need to focus specifically on microinsurance.
The recent relaxation in the definition of a rural area (earlier defined in terms of population size) has now allowed the insurers to qualify any products sold in any non- municipal area. This has reduced the regulatory burden for insurance companies but has, in some ways, been detrimental to the degree of interest taken by them in the provision of micro-insurance services. 6.2.2. Limiting the definition of a micro-insurance agent The micro-insurance regulation allows only organizations registered as not-for profit NGOs (Societies or Trusts) and cooperatives or SHGs consisting of 20 or more members to become micro-insurance agents. This has omitted that section of MFIs that have the highest outreach to low income families. These
organizations are Non Bank Finance Companies (NBFCs), not-for profit Companies (registered under
Section 25 of the Companies Act and known as Section 25 companies), Cooperative Banks and Regional
Rural Banks which specialize in providing micro-or small value credit to their members. This has meant that insurers cannot appoint these MFIs as micro-insurance agents and therefore could potentially forgo relatively easy outreach to a large number of potential micro-insurance clients. This approach of the regulator is consistent with that of the Reserve Bank of India, the financial services regulator, which forbids NBFCs from collecting deposits except under very stringent conditions. This cautious approach 67 follows from several dramatic cases of imprudent and irresponsible management of depositor funds by NBFCs in the 1990s.
A number of companies have approached the IRDA to broaden the definition of micro-insurance agent. However, it appears that even if IRDA were to allow company MFIs to become micro-insurance agents
nothing much would change since Reserve Bank of India (RBI) regulations classify funds collected from clients as deposits and most NBFCs and all Section 25 companies are specifically prohibited from undertaking this activity. This would severely limit the ability and flexibility of such institutions to collect and remit premiums to insurance companies. In practice, despite this limitation imposed by the micro-insurance regulation, the insurers and MFIs together have found a way around it by becoming partners, with the latter being paid for services rendered to the insurers rather than through commissions on the premium.
Based on the concerns expressed by MFIs and the recommendations of a government committee, the
IRDA has now liberalized this provision. The latest development on the definition of MI agents is presented in Box 15: Box 15. Changes in the definition of MI agent The latest development in the definition of an MI agent emanates from the Financial Inclusion Committee (FIC)s recent recommendations.57 The committee says that there is a need to recognize a separate category of microfinance Non Banking Finance Companies (MF NBFCs), without any relaxation on start-up capital and subject to the regulatory prescriptions applicable for NBFCs. Such MF-NBFCs could provide thrift, credit, micro-insurance, remittances and other financial services up to
a specified amount to the poor in rural, semi-urban and urban areas. Such MF- NBFCs may also be
recognized as Business Correspondents of banks for providing only savings and remittance services and also act as micro-insurance agents. IRDA has been prompt in implementing the recommendation of the FIC by announcing in its circular58 that Section-25 companies will be allowed to become micro-insurance agents. However, the restrictions from the RBI on allowing such entities to collect premiums (which are considered deposits) continue and it will be a major bottleneck for Sec 25 companies to function as registered MI agents. It is also yet to be seen whether the change in regulations actually encourages and enables
Sec25 companies to become formal MI agents or whether they prefer to remain partners of insurance companies. This depends, to a large extent, on whether such companies forego the extra income
they earning as partners than the income that the caps on agents premium would allow. 6.2.3. combined with commission caps imposed for social reasons does not help The aim of the commission cap is to control pricing on the assumption that there is a socially acceptable limit to the premium that should be charged to low income clients. In terms of proportion, the 57 Press release by Ministry of Finance, GoI. Press Information Bureau, 5 February 2008. (www.pib.nic) 58 Circular No. IRDA/F&A/062/Mar-08. www.irdaindia.org 68
commissions permitted to micro-insurance agents are higher than those permitted to mainstream insurance agents. The following (Box 16) provides the commission structure for micro-insurance agents. Box 16. Commission structure for micro-insurance agents Life insurance business Single premium policies Non-single premium policies 10% of the single premium 20% of the premium for all the years of the premium paying term this compares with 65% over the first five years of a non-micro policy General insurance business 15% of the premium However, the general opinion of the insurers is that this commission is not commensurate with the responsibilities to be carried out by micro-insurance agents. Since the overall size of micro-insurance
products is small, even a 20% commission does not constitute a significant sum of money unless the agent is able to expand to a large scale. Again, the regulation has, in any case been by-passed as NGOs/MFIs engaged in working with the insurance companies are paid by way of a service fee rather than through commissions on premium.
Through this method independent pricing models for facilitation services are being evolved. The service fee earned by one well known health insurance facilitator (which ironically is registered as a Society and could, theoretically, become a micro-insurance agent) amounts to around 30% of the premium; an amount well in excess of the 15% commission cap decreed by regulation. Another well known MFI
receives a service fee of the order of 25% of the premium. As this suggests, the regulation itself provides
an insufficient incentive to any type of institution to become a micro-insurance agent. 6.2.4. Taxation on premium and commissions reduces returns All micro-insurance policies are subject to service tax and so are the commissions earned by the microinsurance agents. A service tax of 12.36% is levied on all commissions earned by the microinsurance agents and also impacts the pricing as the insurance company has to pay the service tax on the premium collected. This has been seen as a detriment to the sustainable functioning of micro-insurance agents whose earnings are already limited by commission caps. Representations have been made to the Ministry of Finance requesting the removal of service tax on
qualified micro-insurance plans but the Government has yet to take action on this matter. 6.2.5. and the limitation to one life and one non-life partner could also be a constraint The regulation also limits the relationship of a micro-insurance agent to one life insurance company and one non-life insurance company. The model was conceived to promote the partner-agent model in which the insurer appoints an NGO-MFI as micro-insurance agent. It is based on the assumption that it is best for micro-insurance clients if micro-insurance agents do not get into multiple arrangements. Too 69 many arrangements, it is presumed, would confuse the not-so-well educated employees of microinsurance
agencies and too much information would cause further confusion for the average microinsurance client who has limited literacy skills. However, MFIs argue that their core activity is providing financial services to their clients, they understand their clients needs and they would like to provide the products best suited to those clients in the best possible combination. Therefore, the MFIs do not want to be restricted to the choice of just one life and one non-life insurer to partner with. They would rather scan the environment and bargain with various insurers for the best product for each type of risk cover needed by their clients. There are numerous examples of the partner-agent model (though mostly outside the regulatory definition) in
which the MFI has a partnership with one life and multiple non-life companies; Basix, SKS and SEWA are some of the leading examples. 6.2.6. but is mitigated by supervisory forbearance As the discussion above shows, a number of activities in the micro-insurance sector could lead to
supervisory intervention as these may be prima facie contrary to the regulation. Such activities include for-profit MFIs acting as aggregators or facilitators for insurance companies, the collaboration of facilitators with multiple life and non-life companies though as aggregators rather than microinsurance agents they are not actually prohibited from doing this. In addition, there are several community based in-house insurance programmes in operation in which the organization provides
insurance cover through risk pooling mechanisms, some even supported by the central and state governments.
The regulator has ignored these developments and this supervisory forbearance has helped in the growth of micro-insurance, also creating awareness among rural and low-income households (though participation in this market segment has been mainly from members of MFIs). Given the large numbers contributed by both MFIs and the rural banking system perhaps over 90% of all micro-insurance clients such forbearance can be deemed to be a significant factor in the growth of micro-insurance in India. 6.2.7. Greater responsibility to micro-insurance agents could facilitate growth The delivery of micro-insurance products to low income families has similar operational bottlenecks that
the microfinance sector has faced in delivering credit to borrowers. In both cases the key is to attain
scale as quickly as possible and to keep a check on operational costs. Therefore, if the insurance companies were to set up branches in rural areas for delivery and servicing of policies, micro-insurance would become unaffordable. The regulation has been facilitative on this front as it has allowed for micro-insurance agents to take-up a number of responsibilities which has not been given to mainstream insurance agents. There are a number of functions which, if carried out effectively and professionally at a large enough scale by micro-insurance agents would help in minimizing cost and would allow the insurance companies to offer lower premiums to their clients. However, the other aspects of regulation,
discussed above, have limited the appointment of micro-insurance agents and constrained the activities of aggregators/facilitators, thereby restraining the entire activity. 70 6.2.8. Though uniform capital requirements and other restrictions also limit participation Finally, any institution that wants to underwrite risk in India must invest a minimum of Rs100 crore ($25
million) in capital. The maximum amount of foreign equity investment allowed in an insurance company is 26%. This condition is uniform for all insurance companies irrespective of the type of their products or the area of their operations. While the larger companies have the resources to make this level of investment, there are smaller specialized insurers in South Africa and developed countries that would
neither like to start with capital investments of this size, nor do they have large enough counterparts in India capable of investing more than three times as much. In India, the smaller organizations already underwriting risk are mutual insurers (mainly cooperative organizations) and these are neither recognized by IRDA nor do they have sufficient capital to partner with the specialized foreign insurers
who could provide the experience and expertise to develop and grow the microinsurance market. The limitations of a one size fits all prudential policy vis--vis the micro-insurance market are apparent. 7. Summary and conclusions This document provided an overview of the microinsurance market, its evolution and regulatory
framework in India in order to identify the core market and regulatory drivers of the development and current state of the microinsurance market. Section 1 introduced the study Section 2 set out the methodology and approach Section 3 provided an introduction to the microinsurance landscape in India
Section 4 described the regulatory framework for insurance in India and set the microinsurance regulations within that framework Section 5 went on to outline the nature and scale of the micro-insurance market in India, and Section 6 identified the key factors (drivers) influencing that micro-insurance market. The appendices to the report fill out some of the detail on the nature and utility of the microinsurance
products offered in the Indian market, on the one hand, and client knowledge and perceptions of both insurance as a service and of the microinsurance products on offer in the Indian market, on the other. The following key insights emerge from the analysis: Market context. Over the past 30 years and more, insurance in India has been monopolised by government-owned companies as a result of nationalisations in 1956 of life insurance companies and in
1972 of general insurance companies. It was only in 2000 that the entry of private companies into insurance was allowed again. The one public sector life insurance company until 2000 has now grown to 14 life insurance providers and the four general insurance companies have increased to 18 by March
2008. Since the re-entry of private companies into insurance, the sector has registered very high growth
rates with life insurance premium increasing at a rate of 25% per annum between 2001-02 and 2006-07 and general insurance premium increasing at 17.6% per annum. Nevertheless, despite the very fast growth of the private sector, public sector insurers continue to account for more than 75% of all life insurance business and around two-thirds of general insurance business in India. The policy, regulation and supervision context. For regulatory purposes, the insurance sector in India is categorised into life and general insurers with companies being allowed to offer one or the other but not both. Health insurance may be provided by holders of either type of licence. The provision of
insurance services is governed by the Insurance Regulatory and Development Authority (IRDA) established as the statutory regulator in year 2000. Since then, IRDA has attempted to put in place a
framework of globally compatible comprehensive regulations. The Authority has also been providing support systems for the insurance sector in relation to the training of agents and the issue and renewal of licences. In addition, it has laid down a roadmap for a smooth transition of the insurance market in India from regulated to non-regulated. The approach is for the regulator to concentrate increasingly on solvency issues while allowing insurance councils to act as self-regulatory bodies in addressing matters of market conduct.
In order to ensure that relatively poor and financially excluded people also get the benefit of insurance the regulator has imposed certain obligations on insurance companies since 2002 as well as introducing micro-insurance regulations in 2005. The rural and social obligations impose quotas on companies to procure insurance business from pre-defined rural areas and social sectors. The subsequent introduction of microinsurance regulations was aimed at liberalising the regulation for the specific provision of insurance services to the financially excluded. This regulation supplements the overall policy approach of the Government of India to increase social security coverage by incentivising and paying (mainly) the public insurance companies to offer life, accident and health insurance to low income agricultural
workers and artisans.
Salient features of the microinsurance market. The microinsurance market in India is characterised by products that have short policy terms and group-based underwriting. These are largely loan-linked products driven by the compulsion of borrowers to purchase insurance schemes bundled with credit, mainly providing protective cover to microlenders (MFIs or rural banks). The rural and social sector obligations have been the key driver in forcing insurance companies to seek alliances with the rural finance network. Community based, not-for-profit, insurance systems are not covered by regulation and are largely restricted to health cover because health risk is generally seen as potentially the most
devastating type of systemic risk likely to upset the lives and livelihoods of the low income population.
Formal microinsurance is yet to cover health risk in any significant way on account of the difficulties of ensuring service delivery and the dangers of moral hazard in a highly informal health service provision network. Yet community-based health insurance networks have relatively minuscule outreach. The overall outreach of life micro-insurance is currently of the order of 14 million clients, less than 2% of the total adult population of the country. Over 80% of this cover is channelled by formal insurance companies via the micro- and rural finance network. Some 90% of this formal cover is provided via compulsory credit-life insurance products. The 10% of micro-insurance taken up voluntarily also often through the rural finance network consists mainly of endowment products with very limited pure risk cover.
Drivers of market development. Perhaps the key non-regulatory driver of micro-
insurance in India is the growth of the micro- and rural finance network. This has facilitated the outreach of microinsurance products albeit mainly as compulsory credit-life insurance. Since microfinance delivery is mainly on a group basis, it is not surprising that most of the microinsurance policies in India are underwritten on a group basis. Such an approach reduces administrative expenses and limits premiums, improving the affordability of insurance products. However, both the lack of experience of insurance companies at working with low income populations and the lack of availability of reliable actuarial data for such people has meant that the insurance companies have tended to over-price microinsurance products to ensure that they cover every conceivable risk. With increasing experience, rural finance providers are able to negotiate with insurers to obtain a more rational pricing regime. It is apparent from the discussion above that the key regulatory
driver of microinsurance in India is the rural and social sector obligation. As indicated above, it is this that has compelled the insurance
companies to engage with the micro- and rural finance network. In addition, the microinsurance agent definition has relaxed the distribution requirements for microinsurance. However, since most rural finance providers are for profit institutions, they are not allowed to be classified as micro-insurance agents. Therefore there is some waste built into the system as a means have to be found by which insurers can compensate aggregators without the payment being defined as commissions (i.e. without them strictly speaking acting as insurance intermediaries). It is mainly the high degree of supervisory forbearance exercised by IRDA that has allowed this arrangement to proceed to the extent that it has. Finally, any for profit institution that wants to underwrite risk in India must invest a minimum of Rs100 crore ($25 million) in capital. The maximum amount of foreign equity investment allowed in an
insurance company is 26%. This condition is uniform for all insurance companies irrespective of the type of their products or their areas of operation. This effectively excludes smaller specialised Indian insurers from being established and foreign insurers from finding appropriate Indian partners; companies for whom the microinsurance market would be a more attractive proposition. The limitations of a one size fits all prudential policy vis-a-vis microinsurance are apparent.
Key issues for the regulation of microinsurance in India going forward. The uptake of microinsurance has seen some increase but is mainly linked to the growth of the microfinance sector rather than microinsurance per se. Uptake of non-credit linked insurance is still very limited. This begs the question: is the Indian experience of a proactive/direct regulatory mandate for low-income portfolio expansion a good example for others to follow? Regulatory reform is still
at a nascent stage and time will tell its true impact. This research has flagged
various challenges as listed above. The regulations have however to some extent created supply side interest. This needs to be reinforced by designing prudential requirements to enable the entry of specialised insurers for the special needs of low income populations, on the one hand, and to enable for profit rural finance companies to act as microinsurance agents on the other. Combining this with efforts to create demand-side interest is also important. This requires a substantial effort to generate knowledge and understanding of microinsurance through financial literacy programmes and advertising campaigns in the public media. Greater knowledge and understanding of the benefits of insurance, on the one hand, and the key features of microinsurance products, on the other, would greatly increase interest in and demand for microinsurance. An increased outreach of microinsurance services would go a long way in furthering the interests of economic inclusion and reducing vulnerability amongst large segments of the low income population of India.
Conclusion
The implementation of Microinsurance is dependent on its financial viability both in encouraging commercial interest and from a sustainability point of view. This entails both viable gross written premium written and acceptable loss ratios. Distributors of the product have to be incentivied to not only write business but to write profitable business . This may entail them sharing in the the profitability of the scheme, which in turn presents regulatory challenges. A further issue is the involvement of the broker in the distribution of the products. Normally the low margins provided by Microinsurance products are not attractive to the broker channel. Again innovative solutions need to be thought through , more often than not involving flexibility on the part of Regulators where the interests of providing accesss to needed financial services should override those of pedantic, unimaginative and impractical regulatory intervention.
Acknowledgements :
1. Making insurance markets work for the poor: A synthesis of five country case studies on the role of regulation in the development of microinsurance markets. Authors: Hennie Bester, Doubell Chamberlain and Christine Hougaard, An IAIS study overseen by Finmark Trust www.cenfirq.org 2. Brokering change in the low-income market : The threats and opportunities to the intermediation of microinsurance in South Africa Prepared for FinMark Trust and the Ford Foundation 12 October 2006 Authors: Hennie Bester Doubell Chamberlain Ryan Short Anja Smith Richard Walker 3. An Indian Case Microinsurance Study, Making insurance markets work for the poor: A synthesis of five country case studies on the role of
regulation in the development of microinsurance markets. Authors: Hennie Bester, Doubell Chamberlain and Christine Hougaard, 4. Micronensure Business Case prepared by The Hollard Insurance Company New Business Team

MICROINSURANCE Role of Policy, Regulation and Supervision in The Development of Microinsurance Markets in Colombia, India, The Philippines, South Africa and Uganda

Încărcat de

Informații document

Descriere originală:

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

MICROINSURANCE Role of Policy, Regulation and Supervision in The Development of Microinsurance Markets in Colombia, India, The Philippines, South Africa and Uganda

Încărcat de

Drepturi de autor:

Formate disponibile

EASAAviAdence

from Five Country Case Studies

Final Submission: May 2009

South Africa Rwanda Nigeria

agricultural insurance.) Philippines India 350,000 150,000

1,000,000 (unlikely that health insurance would be ceded)

demanding support on micro- insurance (esp Botswana ,

However, despite the growing importance and rapid expansion of insurance

sold via client aggregators such as cooperatives/mutual associations,

Where regulators follow an exclusionary approach they may limit underwriting

this can either be done through exemptions from certain requirements, or by

Guideline 6: Provide a path for formalisation.

through careful market monitoring. For this purpose, it is important that

people are still without adequate protection.

Accessible to: Microinsurance products need to be accessible and appropriate to

2.6. The distinction between formal and informal

2.8. Policy, regulation and supervision

issuing the legislation pertaining to insurance or a statutory body issuing

Financial inclusion policy/regulation refers to policy or regulation promulgated

product-based approach to microinsurance where a regulatory space is created

specific statutes for individual insurance firms, especially mutuals.

Understanding the insurance regulatory framework. Each study gives an

overview of the insurance regulatory framework, in general and as pertaining to microinsurance.

Traditional demand and supply mapping;

Qualitative focus group research;

Regulatory and policy analysis; and

Population <$1/day 8% 40% rural; 20% urban 14% 23% 82%

Products: Voluntary microinsurance plays an important role in Colombia

Distribution: Traditional broker and agent distribution channels do not feature

capital requirements per class of product provided. In 2006, the standard

insurance and the establishment of proper complaints procedures.

Flexible market conduct regime. The Colombian regulatory framework facilitates

microinsurance intermediation in a number of ways. It accommodates new

3.1.5. Conclusion: insights and lessons from Colombia

India is unique in that the government plays a proactive role in providing

groups (SHGs) promoted under the Governments/NABARD SHG-Bank Linkages

comprehensive and covers only certain listed diseases which require

A high regulatory burden undermines dedicated microinsurance provision. The

Despite the relaxation in the demarcation requirement for microinsurance, and

own set of Insurance Commission-licensed Note that the largest commercial

mechanism is used to grant loans and collect repayments. This group-based

It is the only category for which such graduation is allowed.

understand, and must have simple documentation requirements. Premium

their clients, unless they obtain underwriting by large commercial insurers.

South Africa is a middle-income country with a population of around 47-million, of

innovations for more appropriate products. This is partly due to industry

be served via the traditional broker/agent model. Low-income market products

benefits covering medical expenses) is regulated separately under the Medical

Cooperatives Act, registered financial cooperatives may provide insurance but

special regulatory treatment in a number of instances: it is the only class of

Intermediary services are defined as actions requiring the person to exercise

Since democratisation in 1994, South Africa has been characterised by a drive

However, the passing of an insurance law and the establishment of a supervisor

Ugandan adult population use any type of formal or semi-formal56 financial

Ugandan market is, however, triggering product innovation and a more

institutional framework for respectively cooperatives and companies. The

assets over liabilities, or such other percentage to be determined by the commission.

development of the microinsurance market. Although the ultimate focus is on understanding

A large proportion of the

Secondly, low income

purposes of providing insurance. In South Africa informal insurance is provided by funeral

requires availability of the insurance policy documents in the vernacular language.