Access to finance: the role of microinsurance

1
Access to finance the role of micro-insurance

• WSBI-World Bank Conference
• Brussels, 28 to 29 October 2004
• Bernd Balkenhol and Craig Churchill
• Social Finance Programme
• ILO

2
Access matters

• Gives people the ability to expand options
• Allows consumption smoothing
• Protects people against external shocks
• The right to have access?

3
Barriers to access

• Infrastructure
• Subsistence economy
• Low population density
• Illiteracy
• Poverty
• Gender
• Financial repression
• Inefficient suppliers
• Collateral

4
Access to what sort of finance?

• To manage a micro-enterprise?
• Or
• To manage risk?
• Or
• To do both?

5
When is what financial service appropriate?

• Magnitude of the possible loss?
• Scope for risk spreading?
• Probability of risk occurring

6
Degree of Uncertainty (if, when, how often)
Highly Uncertain
Certain
Flexible Savings and Credit
Life Cycle Events
Small
Property
Health
Death
Insurance
Relative Loss / Cost
Disability
Mass, Co-variant
Flexible Savings / Partial protection
Very Large
7
Insurance???

• risk pooling mechanism combines the resources of
  the many to compensate for the losses of the few
• premiums for the average loss suffered by the
  group rather than the actual cost incurred
• risk pooling benefits the few who suffered the
  loss, while the many basically receive peace of
  mind in exchange for their premium payments

8
What are the differences between insurance and
microinsurance?

• Relevant to the risks of the low-income market
• Affordable premiums in small amounts
• Small benefit amounts
• Simple rules, minimum exclusions and conditions
• Fast payment of benefits
• Strategies to overcome the wariness of customers
  (e.g., client education, minimise claim
  rejections)
• Build on existing informal coping mechanism and
  social capital
• Different attitude help people to manage risks

9
Contingencies

• Credit life insurance
• Life insurance
• Health insurance
• Fire and other property related insurance

10
Why makes micro-insurance special in the context
of access?

• Opens up access to other financial services
  (credit life)
• Corresponds to financial needs of all working
  poor in the informal economy, entrepreneurs or
  not
• Substitute for social protection

11
Determinants of demand

• Education and information
• Incidence of risk
• Incidence of fraud in the past
• Socio-cultural taboos
• Income levels and the affordability of premiums

12
Supply determinantstransaction costs

• Selling policies
• collecting premiums
• preventing premium lapses
• verifying claims
• making payouts

13
Controlling TC by linking insuranceto credit
Example AIG in East Africa

• Pays 800 for the accidental death
• of the borrower
• Pays 400 for the accidental death of spouse
• Pays 200 for the accidental death
• of dependents
• Premium 0.5 of loan amount
• Term 4 months

14
Controlling TC by twinning savings to insurance
COLUMNA in Guatemala

• Pays clients family 1-2 times the balance in
  their savings account at the time of death
• Size of benefit varies based on clients age
• Premiums paid by reducing the interest rate on
  savings
• COLUMNA, a cooperative insurer manages product
  manufacturing, local cooperatives handle
  distribution
• Advantages simple to manage, low transaction
  costs, stimulates savings

15
Facilitating access some models

• Partnership model MFI as agent of commercial
  insurance company
• partnership with a local utility company
• life insurance through affiliated grocery stores

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Contextual factors affecting access entry points

• Regulation
• - Minimum capital requirements
• - Documentation requirements
• Re-insurance
• - Broadens the risk pool and enables insurers
  to withstand catastrophic losses caused by
  covariant shocks
• - Allows technical assistance to MI

17
Current ILO research

• Adverse selection, moral hazard, fraud and
  over-usage
• Appropriate regulation
• Understanding insurance vs. savings
• Re-insurance options
• Reducing transactions costs

18
Thank you

• Social Finance Programme
• ILO
• www.ilo.org/socialfinance