Addressing the challenges of micro-insurance

Kazi Md Mortuza Ali concluding a two-part articleLimited overall understanding of insurance, on the part of the poor people, is one of the biggest challenges to selling micro insurance to lower income strata of the society. The poor people need to be activated to understand comparative advantages of saving, protection, credit and insurance. Awareness arising programmes need to be undertaken by the governments, regulators and the insurers in both formal and informal sector. Once there is general awareness about insurance, there needs to be an effort to increase understanding of the specific products. Insurance education to understand product features must be customised to different target groups, taking into account of their religious faith, culture and taboos. Communication methods such as street theaters, folk theaters, music, musical soiree, video programmes can be rightly used. Literatures in simple languages with pictures, cartoons may also be useful. Claims documentations and procedures should be made simple. After-ssales service needs to be ensured. Therefore, agents should be motivated to work as social worker for the welfare of the community. Operators can motivate them by focusing on their ultimate success as human being in this and the world hereafter. Micro-insurance products should be as simple as possible. Both the premium and administrative costs be kept as low as possible. It is also important to ensure that customers can make a claim easily; otherwise, the proposed benefits will not be beneficial. Micro-insurers can avoid excluding high-risk clients by instituting waiting periods for benefits and or increased death benefits after some time after he or she purchases a policy. Flat premium, irrespective of age of members, and inclusion of all members of a family can help put all under the benefit umbrella. Premium back features may help to launch positive marketing for the insurer. Affordability of customers and product features must match together to provide real value to the customers. Prospective customers may initially overestimate their capacity to pay. This can lead to subsequent dropouts. The object of product design and marketing strategy of micro-insurers should be to strike a balance among factors like wider inclusion, affordable premium, reasonable benefits, low dropouts and sustainability of the scheme. In order to reduce administrative costs mandatory group insurance is preferable to individual voluntary coverage as it lowers the adverse selection risk, improves claims ratios, reduces vulnerability to fraud and makes the product affordable. A unique challenge of micro-insurers is premium collection process and frequency. When cover is linked with credit and or group insurance coverage is provided to cooperatives, it becomes easier to collect premium at source. However, to expand the outreach of micro insurance, the insurers should strive to assist individual policyholders to finance their premiums. In this respect, micro-insurers can work with savings associations to encourage clients to deposit slightly higher amounts into their savings. This can be utilised for premium payment. The micro insurers can also help to boost the income of the insured's by helping them access to micro finance with easiest terms and rates. While monthly payment mode is used, the insured may be allowed to pay arrear premiums, if any within next two months without any penalty. If and when arrear premium is collected without additional charges, it may help to halt higher lapse ratio. One of the great imperatives for the micro-insurance operators is to significantly reduce operating expenses relative to premiums. More efficient operations should result in lower premiums and or additional benefits for policyholders. Among other things, micro-insurers must have appropriately skilled employees, realistic product pricing, a sound business plan and reliable management information system. Managers of micro-insurance need a business plan that helps them stay focused on delivering high value protection at the lowest possible cost. To be managed effectively, micro-insurance programme should be undertaken as an independent activity so that management can asses its viability and potential. Good management means using available opportunities and confronting imminent threats effectively. Operators should know how to learn from other's mistakes and perform above the market standards. Policy Issues of micro insurance: In order to address challenges of micro-insurance, policy issues be made clear by the governments and the regulators. It is no denying of the fact that there is a need to respond to the growing micro insurance market in order to safeguard provisions of insurance products for the poor. In this connection, several possible areas of policy tools can be considered. The role of government and its intervention do have a bearing on efforts for developing micro insurance as a social and economic measure for the poor. A regulatory framework can be set up for facilitating expansion of micro-insurance both for formal and informal providers. Technical and financial aids are relevant to micro insurance operators and or subsidy to premium merits consideration. Training and research centers can be established, along with creating data base of prospective customers in different segments. Generally, the governments are more interested to focus on market-led insurance provision. Therefore, a combination of various policy tools can be integrated into a policy of "access to financial services by the poor". This will help to set the framework conditions for the development of a micro insurance market. Regulation and supervision of micro insurance is one of the most powerful policy tools. Regulation can facilitate the introduction and recognition of non-traditional delivery channels, the inclusion of players form outside the formal insurance system, the establishment of new licensed micro insurer, framing market code of conduct for operators, agents, donors and protection of customers. It is interesting to note that India has already introduced regulations for facilitating distribution of micro-insurance as supplementary to its regulation on rural and social sector obligations of licensed insurers. Recently, development organisations and donors have developed some training materials and advisory services. There are not sufficient opportunities for training, as are needed by micro-insurance operators. Trainers need to be developed first. Major challenge is the professional operation of the schemes. Therefore, it is necessary to decide whether the amateurs or the professionals be allowed to operate micro-insurance. It is felt that micro finance institutes and non-government organisations (NGOs) can operate micro-insurance only in collaboration with regulated insurance providers. In that case product development, underwriting principles, pricing of products, claims management be left with the conventional insurers, while the micro-finance institutions (MFIs) and NGOs should deliver the service of insurance to their members. This would help to reduce administrative costs. The governments vis-à-vis the regulators need to frame a policy guideline for micro-insurance operators in order that MFIs and NGOs play their vital role in marketing micro insurance products to their members on voluntary or on mandatory basis. The promotion of micro-insurance requires social marketing techniques, along with financial education to change the negative attitude of the prospective customers. Therefore, the micro insurance operators need to use a combination of several vital messages to the target market. The massages are: a) financial protection in times of dire needs of the insured, b) the risk pooling system through creating common fund with the spirit of helping each other and c) necessity of insurance be portrayed by setting examples of distressed people due to uncertain events of life. Micro-insurance have to earn the trust of the target market. The best way to earn trust is to pay claims as quickly as possible and transparency in pricing, operations and customer service. One unique feature of Takaful system is that the transactions have to be transparent. This is important for micro insurers. To earn the trust of the poor people, micro-insurers need to be transparent in pricing, operations and customer services. It is also important to ensure that the products are as simple as possible. Exclusions and restrictions should be minimised. Need for Cooperation: Micro-insurance needs to be used to provide protection of the poor people organist risk and to ensure an integrated strategy of social protection. This needs collaboration of private and public institutions and civil society organisations to create an equitable system. The schemes should be sustainable and affordable to all stakeholders. The demand for micro insurance is there. But the challenge is to find out the right product design, delivery mechanism and institutional arrangement to address that demand in a cost effective way that provides value to the customers. Insurers, credit providers, donors and development agencies can play a significant role in improving the design of products for the poor. It is observed that saving- and credit-linked insurance products can make an important contribution to protect the poor. Therefore, the savings and credit organisations should utilise their capacity to introduce mandatory insurance by involving their clients in the decision to do so. This would reduce the transaction and other costs substantially. Group coverage and short-term insurance are more appropriate because they help minimise cost and can offer lower premium. For marketing purpose, it makes sense to charge the same price for each client. In life insurance, the applicable rate can be derived from the weighted average mortality rate. The future success of micro-insurance depends on achieving prudent, profitable and continuous growth and development. The goal of micro-insurance is to make appropriate, affordable insurance products to the poor to help support their economic development. There are many challenges that inhibit the development and expansion of micro-insurance. Therefore, it is necessary to tackle these challenges by effective insurance awareness and providing client education, cultivating an insurance culture in the low income market and reaching the most vulnerable. It is also necessary to strengthen management, enhance efficiency and find an appropriate model and delivery channel. To insure the poor, customers, regulators, policymakers, insurers, micro-credit providers, non-government organisations must work together with a common purpose. Concluding Remarks: Time is not ripe to make concluding remarks about micro insurance. The industry is learning through trials and errors. Fair judgment can not be made without having sufficient experiences. Experiences that have so far been gathered in Asia, Africa and South America, are mixed and varied. All concerned need to learn more and more from historical perspectives and current developments. What are needed most today are transparency and efficiency in the mechanism of micro insurance. This critically important for optimistically looking forward to brighter days in future not only in the field of micro-insurance but also in the broader horizon of risk management, conventional insurance and the emerging Takaful system. This can then bring real good to the poor people throughout the developing Third World countries. Sincerity of purpose is the key point from where all concerned do need to strive their efforts. Best results can only be derived when such efforts are made in the best possible manner. The writer is Managing Director, Prime Islami Life Insurance Ltd. He can be reached at email: mahabub_prime@yahoo.com