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Different Microfinance Models
Micro Insurance in India
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INTRODUCTION
Micro-insurance, the term used to refer to insurance to the low-income people, is different from insurance in general as it is a low value product (involving modest premium and benefit package) which requires different design and distribution strategies such as premium based on community risk rating (as opposed to individual risk rating), active involvement of an intermediate agency representing the target community and so forth. Insurance is fast emerging as an important strategy even for the low-income people engaged in wide variety of income generation activities, and who remain exposed to variety of risks mainly because of absence of cost-effective risk hedging instruments.
Although the type of risks faced by the poor such as that of death, illness, injury and accident, are no different from those faced by others, they are more vulnerable to such risks because of their economic circumstance. In the context of health contingency, for example, a World Bank study (Peters et al. 2002), reports that about one-fourth of hospitalized Indians fall below the poverty line as a result of their stay in hospitals. The same study reports that more than 40 percent of hospitalized patients take loans or sell assets to pay for hospitalization. Indeed, enhancing the ability of the poor to deal with various risks is increasingly being considered integral to any poverty reduction strategy (Holzmann and Jorgensen 2000, Siegel et al. 2001).
Of the different risk management strategies, insurance that spreads the loss of the (few) affected members among all the members who join insurance scheme and also separates time of payment of premium from time of claims, is particularly beneficial to the poor who have limited ability to mitigate risk on account of imperfect labour and credit markets.
In the past insurance as a prepaid risk managing instrument was never considered as an option for the poor. The poor were considered too poor to be able to afford insurance premiums. Often they were considered uninsurable, given the wide variety of risks they face. However, recent developments in India, as elsewhere, have shown that not only can the poor make small periodic contributions that can go towards insuring them against risks but also that the risks they face (such as those of illness, accident and injury, life, loss of property etc.) are eminently insurable as these risks are mostly independent or idiosyncratic. Moreover, there are cost-effective ways of extending insurance to them. Thus, insurance is fast emerging as a prepaid financing option for the risks facing the poor.
HISTORY & VISION
The Micro Insurance Agency has its roots within Opportunity International, a large microfinance network motivated by Jesus Christ’s call to serve the poor. With a network of 47 microfinance institutions, Opportunity International has been serving the entrepreneurial poor since 1971. In partnership with Opportunity’s microfinance institutions, we began working in 2002 on the development of a range of life, property, livestock, crop derivative, disability, unemployment and health insurance products to cover the risks faced by Opportunity’s loan clients.
Micro Insurance Agency staff observed that the risks the poor face can often set them back months and years behind where their loans and savings products offered by Opportunity had taken them. For instance, a death of a family member from HIV/AIDS –”pre-condition” most insurance companies would not cover – would often mean expensive funeral costs and the loss of a breadwinner, resulting in increased economic hardship for the family. In response, Micro Insurance Agency staff developed an affordable funeral benefit product that did not exclude any pre-conditions, including HIV/AIDS. This transformed the mindset of retail insurance providers in the country, who later developed similar non-exclusive products in light of the competing environment.
Through the experience of serving Opportunity’s microfinance institutions and their clients, Micro Insurance Agency staff observed that the products most demanded by the poor are not always the ones available. Health insurance, for example, is a critical need of the poor but the most limited in terms of supply. In addition, policies that are available are often based on first world practices and are too complex for the simple coverage demanded. Further, when offered on an individual, one-off basis, high premium requirements and a need to pay in a single lump sum preclude a huge sector of the market from access. New distribution models and channels were needed to increase access and reduce the effective price charged to clients.
In 2005, the Micro Insurance Agency was founded by Opportunity International as a fully-owned subsidiary capable of offering insurance products and services to a wide range of customers.
Our mission is to empower the materially poor to transform their lives by insuring them against financial risk and its consequences. Specifically, we seek to serve the economically active poor who live on $4 per day or less in developing countries and provide a safety net to reduce economic setbacks.
SCOPE AND FUNCTIONS
A micro-insurance agent shall be appointed by an insurer by a deed of agreement or memorandum of understanding which should clearly specify the terms and conditions, duties and responsibilities of both the micro-insurance agent and the insurer, and he shall abide by the following:-
He shall work either for one life insurer or for one general insurer or for one life insurer and one general insurer;
He shall be specifically authorized to perform one or more of the following functions:–
Maintaining a register of all members and their dependants covered under the insurance scheme along with details of name, age, address, nominees and thumb impression/ signature;
Collection of proposal forms;
Collection of self declaration from the member that he is in good health;
Collection of monies for issuance of contract or remittance of premium;
distribution of policy documents;
Assistance in the settlement of claims;
Nomination; and
Any policy administration service.
The micro-insurance agent or the insurance company shall have the option to terminate the agreement/ MOU after giving a notice of three months.
All such agreements/ MOU must have the prior approval of the Head office of the insurance company.
TYPES OF MICRO INSURANCE IN INDIA
Life Insurance
Life insurance pays benefits to designated beneficiaries upon the death of the insured. There are three broad types of life insurance coverage: term, whole-life, and endowment. Term life insurance policies provide a set amount of insurance coverage over a specified period of time, such as one, five, ten, or twenty years. This insurance is appropriate when the policyholder’s need for coverage is temporary. Compared with other life insurance policies this is not very complicated for the provider to offer. This is the most widely used life insurance policy in low-income communities in developing countries.
Whole life insurance is a cash-value policy that provides lifetime protection. This is hardly offered in low-income markets in the developing countries
Endowment life insurance pays the face value of insurance if the policyholder dies within a specified period. It thus has a longer time horizon that the term life insurance. This is also notoffered widely in developing countries.
Health Insurance
Health insurance provides coverage against illness and accidents resulting in physical injuries. MFIs have realized that expenditures related to health problems have been a significant cause of defaults and people’s inability to continue improving their economic conditions. Several MFIs have therefore, either started their own health insurance programs or have linked their clients to existing programs. While actual coverage varies, many health insurance providers cover for limited hospitalization benefits for certain illnesses, and for costs of physician visits and medicine. Some insurance providers also make available primary health care services such as immunization and contraceptives.
Property Insurance
Property insurance provides coverage against loss or damage of assets. Providing such insurance is difficult because of the need to verify the extent of damage and determine whether loss has actually occurred. It is difficult for most MFIs to guard against such moral hazard. A few, however, do provide such coverage. SEWA in India, for example, provides insurance against damage to home and productive assets. Grameen Bank in Bangladesh offers its clients insurance against the death of livestock and COLUMNA in Guatemala provides insurance against fire damage.
Disability Insurance
Disability insurance in most cases is tied to life insurance products. It provides protection to the policy holder and her family, should she or some of her family suffers from a disability. This is not very widely offered by Micro insurance providers. FINCA, Uganda and CARD in Philippines are examples of MFIs providing clients with disability insurance.
Crop Insurance
Crop insurance typically provides policy holders protection in the event their crops are destroyed by natural calamities such as floods or droughts. The experience with crop insurance in developing countries and even in the developed economies has had mixed results.
To improve the ability of rural farmers to repay loans from agricultural development banks (ADBs), many governments developed crop insurance programs in the 1970s and 1980s. These programs typically provided loan repayment and occasionally income supplements to farmers suffering crop yields below an established minimum. Similar programs were developed in countries as diverse as Brazil, India, the Philippines and the USA. In each country the results were disastrous, with expenses (administrative and claims) far outstripping revenues. Reasons for the failure of crop insurance have included: bad program design (such as failure to bring into account the incentives faced by the policy holders), covariant risks typical of rain-fed agriculture systems dependent on only one or two crops, and in some cases / unanticipated catastrophic natural calamities.
Unemployment Insurance
Unemployment insurance is typically offered by the public sector. Private insurance companies are usually not involved in it. This insurance provides cash relief to individuals who become unemployed involuntarily and who meet certain government requirements. It also helps unemployed workers find jobs. Unemployment insurance attempts to stabilize the economy by enabling people to maintain their purchasing power.
Reinsurance
Reinsurance is the shifting of part or all of the insurance originally written by one insurer to another. This is a central feature of the operations of all commercial insurers. Reinsurance reduces an insurer’s risk exposure and acts as an effective source of financing and a valuable source of actuarial expertise. Reinsurance can be used to stabilize profits, instead of having large fluctuations in financial outcomes year to year. It allows smaller insurers to share risk with other insurers in different regions or countries, effectively developing sufficient large risk pools by combining the risks of many insurers.
Despite its obvious benefits reinsurance is largely unavailable for micro-insurers. Access to reinsurance can spur both the development of new micro-insurers and the growth of existing ones. An example of an MFI using reinsurance is that of FINCA International, Uganda which has entered a partnership with American International Group (AIG) to provide its clients life and disability insurance.
MICRO-INSURANCE DELIVERY MODELS
One of the greatest challenges for micro-insurance is the actual delivery to clients. Methods and models for doing so vary depending on the organization, institution, and provider involved. In general, there are four main methods for offering micro-insurance the partner-agent model, the provider-driven model, the full-service model, and the community-based model. Each of these models has their own advantages and disadvantages.
Partner agent model: A partnership is formed between the micro-insurance scheme and an agent (insurance company, microfinance institution, donor, etc.), and in some cases a third-party healthcare provider. The micro-insurance scheme is responsible for the delivery and marketing of products to the clients, while the agent retains all responsibility for design and development. In this model, micro-insurance schemes benefit from limited risk, but are also disadvantaged in their limited control.
Full service model: The micro-insurance scheme is in charge of everything; both the design and delivery of products to the clients, working with external healthcare providers to provide the services. This model has the advantage of offering micro-insurance schemes full control, yet the disadvantage of higher risks.
Provider-driven model: The healthcare provider is the micro-insurance scheme, and similar to the full-service model, is responsible for all operations, delivery, design, and service. There is an advantage once more in the amount of control retained, yet disadvantage in the limitations on products and services.
Community-based/mutual model: The policyholders or clients are in charge, managing and owning the operations, and working with external healthcare providers to offer services. This model is advantageous for its ability to design and market products more easily and effectively, yet is disadvantaged by its small size and scope of operations.
CONCLUSION
Micro Insurance operates by connecting multiple small units with larger structures and thereby creates networks which enhance both insurance functions (through risk pooling) and support structures for improved governance (i.e. training, data banks, research facilities, access to reinsurance etc.). This insurance mechanism is independent of permanent external financial support. The principal objective of Micro Insurance is to pool both risks and resources of whole groups for the purpose of providing financial protection to all members against the financial consequences of mutually determined risks.
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