Tricky challenges

Microinsurance is a sensible approach to tackling serious risks poor people face. Unless policies are well conceived and administered, however, they are likely to do harm. The trust of clients, however, must not be shattered.

[ Dubby Mahalanobis ]

Microfinance institutions are increasingly taking interest in microinsurance. The reasons are obvious. On the one hand, MFIs that are serious about fighting poverty must tackle risks that concern the health and life of breadwinners. Otherwise, diseases, accidents and deaths are likely to throw entire families back into economic misery. On the other hand, many MFIs want to grow by diversifying their services. These goals make sense, and they are certainly not mutually exclusive.

Things, however, are not as easy as they may look at first glance. Microinsurance is something very different from microsavings or microcredit. The basic mathematics of insurance is based on probabilities. It is more complex than that of basic mathematics of banking, which is the calculation of interest rates.

The psychology of selling insurance policies is also quite different from convincing clients of the benefits of savings accounts or credit. Bank clients have an idea of what they might do with the money. But if you want to get someone to invest in an insurance policy, you will have to focus their minds on something they do not want to happen. Moreover, poor people will often shy from paying for something that does not show immediate rewards.

Insurances cover a great number of persons and spread the financial consequences of specific individual risks, which are unlikely to happen, but devastating if they do occur. Unlike bank customers, insurance clients do not know whether or not they will actually benefit from their insurance; but if the worst does happen, they really depend on their insurance policy.

MFIs are normally too small to run their own insurance schemes. They cannot cover an adequately large number of people. Most often, therefore, MFIs cooperate with an established formal-sector insurance company.

Clashing cultures

One must not underestimate the cultural frictions between these actors. MFI staff operate in remote rural areas or rural slums, whereas insurance offices are likely to be based not only in cities, but in well-run commercial centres. In many developing countries, MFI clients are illiterate and will struggle to come up with official documents such as birth certificates, marriage certificates, land titles, death certificates and so on. Insurances, on the other hand, normally cover well-to-do customers. MFI clients can only afford rather small premiums and are unlikely to understand exclusions written in small print in the policy. Insurances, on the other hand, tend to reduce their risk (and, accordingly, wealthy clients’ premiums) by defining such exclusions.

The cultural differences matter, and the MFI will have to manage them. As recent data from Ghana, Uganda and the Philippines shows, typical problems occur again and again. Insurances, for instance, tend to deny payments because
– there is no death certificate,
– they point out some kind of “pre-existing” condition,
– they argue that premiums were not paid regularly, or
– the names of relatives, who should benefit from the policy, were not properly entered into the policy form.

Bear in mind that people make insurance claims in times of personal crisis. They are, for instance, coping with the death of a loved one, and they need money. They have to organise the funeral and they are certainly not in a position to fight a major institution. If insurance matters go wrong, they will hold the grudge against the MFI that sold them the policy. This kind of news, moreover, spreads fast, so the credibility of the MFI itself is suddenly at stake. Should such worst-case scenarios reoccur, further expansion of microinsurance in that particular community will become impossible.

MFIs must keep in mind that insurance companies operate according to the principle “guilty until proven innocent”. To protect themselves from fraud, they normally run rather tough claim-adjudication. If microinsurance is to work out well, things have to be handled accordingly. MFIs must address all difficult issues from the start.

If it is very difficult or even impossible to come up with official documents, the design of life-insurance policies must not be based on them. Of course there are alternatives to officially registered death certificates. A witness statement by a mullah, a pastor or some other faith-based leader can serve the purpose, and so can testimonials by local-government officials. This alternative needs to be accepted by the insurance company. There should, moreover, be no exclusions for pre-existing conditions, and at very least, such issues should be explained clearly to all involved in the local vernacular. Premium instalments have to be documented diligently.

The administration of health-insurance policies is even more complex. Issues are likely to arise about whether someone is really sick and needs treatment, and if so, what kind of treatment is adequate. These matters are harder to determine than whether someone is dead or alive.

Even if the insurance pays, there may still be problems. Disbursement itself is a source of potential trouble. The money cannot simply be transferred to the insured family’s bank account because the family does not have one. MFI staff has to handle the money – and may attempt to sideline some of it. Just as likely, the insured relatives may accuse them of doing so. MFI staff are therefore well advised to pay out insurance money in front of the local community.

These few examples show that the administration of microinsurances is tricky for MFIs. Field staff members are normally capable of tracking loans and collecting savings, but collecting premiums requires additional documentation – documentation the insurance partner, not the MFI itself requires. On top of documenting payments, field staff must keep track of other issues as well. For instance, they must inform the insurance company of clients’ new-born children. As the children are potential beneficiaries, the insurance company must be informed. These issues need be handled with care on a continuous basis, no matter how often the field staff may change.

Experience shows that, once an MFI starts to work with microinsurance, field staff need constant monitoring and coaching on these issues, which, in turn, requires management attention. The snag, however, is that low premiums imply that administration costs must also be kept low. The lesson, of course, is to keep things simple. But that is easier said than done.

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