November 2008 · Number 138 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region. MICROINSURANCE MATTERS 47528 IN LATIN AMERICA Mike Goldberg and C.S. Ramanathan This note discusses the rapidly evolving issue of micro- Helping the Poor Manage Risk insurance in Latin America and how MFIs, insurance Over the past two decades, Latin America has witnessed companies and donors can respond to its challenges. This rapid growth in microcredit (largely short term working note is part of a series summarizing the DFID-LAMIT capital loans). Despite the incredible progress in creat- eight-part distance learning program with South Ameri- ing assets owned by the poor, MFIs have not addressed can microfinance networks and government officials. the risks faced by microbusinesses and low income households ­ whether from hurricanes, fires, accidents This note addresses three critical questions about micro- or other causes. The insurance penetration rate in Latin insurance in Latin America. America is only 2.5 percent, compared to 4.3 percent in 1. What is microinsurance? Africa and 3.1 percent in Asia. Only seven percent of the 2. Is microinsurance a very useful way for low income region's 113 million people with annual earnings below households to manage their risks? US$3,000 have any form of insurance coverage. 3. What are the challenges for expanded coverage of Because they only have a small amount of savings and commercial microinsurance in Latin America, and what other reserves, poor households are left with few risk can governments, donors and investors do to help? management options. They are more vulnerable to unex- pected events or disasters than middle-income or wealthy What is Microinsurance? households. In the absence of insurance, they adopt Microinsurance is defined as the protection of low-income expensive risk management options. For instance, data people against specific risks in exchange for regular pre- mium payments. Microinsurance can be provided by a Box 1 - The Elements of a Microinsurance Contract: variety of entities, and should be run in accordance with · Policies are for small amounts and are provided as a group generally accepted insurance practices (see www.iaisweb. policy, not individual. org). Like any pro-poor financial product, microinsurance · Documentation is simple and easy to understand. can only be effective and attractive if delivery and col- · The client pays the premium in installments usually through lection mechanisms are innovative, products are demand an existing payment source like a microcredit or a con- driven and affordable, and the risk management system sumer loan repayment. protects the portfolio from adverse selection and moral · The underwriter may be a private insurance company, a hazard. MFIs can play a central role in microinsurance de- cooperative, a mutual-based association or a community livery, given their intimate knowledge of their clients and based organization like an NGO or a funeral parlor. the similarities in the products and processes. In partner- · A variety of intermediaries (MFIs, public utility companies, ship with MFIs, traditional insurance companies typically retail stores, and telecom companies) distribute the policies. underwrite the insurance contracts.(see Box 1). The work described in this note was supported by the UK Government's Department of International Development (DFID) through the Markets and Governance for Poverty Reduction Fund (MGPR) Trust Fund. The views expressed in this document are not necessarily those of the UK Department for International Development' from the Living Standards and Measurement Study In traditional insurance, a product's price is based on the Survey demonstrate that, in response to an unexpected individual's risk exposure. Insurance companies maintain and devastating event, half of the poor households re- complex databases to estimate the risks faced by specific duce their spending on food and clothing; 10 percent individuals. Though this individual client analysis results send another household member to work; and another in higher costs, the client's risk priorities are generally 25 percent meet expenses with more debt. Microinsur- met. Microinsurance providers have to operate with far ance can address the need that these strategies repre- less information because clients are often not served by sent by providing coverage when it is most needed. formal financial institutions, have little disposable in- There are several types of insurance that are likely to come, and are left out of market research studies. Few be popular among low income households and micro- countries have databases with statistical information on businesses (see table below). the rates of mortality, illness, accidents, and asset losses of poor households and microbusinesses to calculate the Type Examples risks as the basis of the premium, the level of benefits Life Credit , Education, Pension, Funeral, Endow- and the potential profits for the insurer. ments To overcome such barriers, microinsurance requires an Disability Permanent, Temporary, Total, Partial, Dis- institutional provider with experience in risk management, memberment. Debt coverage due to disability product development, and efficient information manage- Health Hospitalization, Out-patient, Optical, Surgi- ment systems. As such, the institutional options are similar cal, Dental, and specific diseases to microcredit--ranging from cooperatives to non-gov- Property Fire, Theft, Agriculture, Flood, Drought, ernmental financial institutions, and banks. Given the Prices distribution networks required to reach large numbers of Source: Michael McCord, Microinsurance Centre, presentation clients, experience shows that the most efficient and effec- Feb, 27, 2007 tive way to achieve large scale microinsurance coverage is the partner-agent model. This model pairs commercial in- From the supply side, the most common products in- surance companies with MFIs, public utility companies, or clude funeral, credit life (to pay off a debt upon the telecom companies. The insurance company provides the borrower's death), accident and life insurance are more coverage and the partners provide local knowledge, local common, while property and health insurance products networks, and services that can lower costs. are rare (Microinsurance Centre Landscape study of May 2007). Evidence from demand studies in 11 coun- To launch a microinsurance product, insurance compa- tries shows that there are preferences for health and nies must be aware of the rules of the game established funeral/death insurance in most cases. (see Chart 1). by the government through legal and regulatory frame- works and supervision arrangements. They should be Launching a Microinsurance Program able to deploy the extensive delivery networks of their The cost of underwriting coverage is directly related partners to develop an efficient and large scale program. to the quality of information available about the client. Insurance companies can enter the microinsurance mar- Chart 1 - Risk management needs prioritized by the poor in 11 countries seirtnuocforebmuN10 8 6 1st Priority 2nd Priority 3rd Priority 4 2 0 Health Death Property Job loss Livestock Other Source: Cohen and Sebstad, 2006 2 · December 2008 · Number 138 ket niche based on strategic decisions, competitive pres- Box 2 - Codensa, the largest electric power distribution sures, or new market opportunities. company in Colombia, has used its base of two million clients to develop appealing microinsurance products with By providing policy leadership and using incentives, insurance companies. The Spanish firm Seguros Mapfre is governments can encourage the growth of a strong micro- the underwriter. Codensa provides the promotion, sale and insurance sector. In Colombia, for example, the program servicing. Between 2001 and 2008, Seguros Mapfre, has in- for financial inclusion--Banca de las Oportunidades-- sured 300,000 Codensa clients and settled more than 30,000 strives to provide access to microinsurance among other claims. The policies for low income households include funer- financial services. The government has also recognized al, life, extended warranties (on consumer goods), home in- the importance of offering microinsurance to protect the surance and personal accident insurance. Codensa's strength gains made by poor people through improved access to is in its well-structured client information system, which financial services like savings and credit. Competitors captures information on the demographic characteristics of in the traditional insurance business can also influence a the client, premium payment records and claims data. Such company's decision to enter the microinsurance market. a robust information system enables Codensa to demand in- The Colombian competitive insurance market drives novative product benefits from Seguros Mapfre. For example, microinsurance growth and is largely responsible for the the life insurance product pays a lump sum and compensates sale of 3.1 million policies, according to the national in- the loss in income of the insured for 12 months to meet the surance association FASECOLDA. education and food expenses of the household. Source: See: www.munichre-foundation.org. Colombian microinsurance has also benefited from a sup- portive regulatory environment. The regulator does not company (SOFOL) in Mexico. FINSOL began opera- set any price controls on premiums or commissions. In tions in August 2003, and by mid-2007 was serving more addition, the regulator supports the distribution of mi- than 200,000 clients through 105 branches in 28 states. croinsurance products through innovative channels like As the institution evolved, FINSOL's management no- utility companies. Technology like smart cards, electronic ticed another gap in the market--a lack of insurance cov- debit cards are allowed by the regulator for collection of erage for borrowers. premium payments. The supportive norms help reduce the cost of distribution and products become easily acces- The high costs of promotion and operations as well as sible and affordable to low income clients. the geographic isolation of many potential clients had made these clients unattractive to traditional providers. Finally an innovative delivery channel partner like Coden- The microfinance institutions did not have the specific sa (see Box 2) drives the Colombian insurance companies insurance design and delivery skills. Yet, in combina- to offer better quality microinsurance products at a reason- tion, they could come up with a product that would be able price. The Colombian case highlights an important attractive to FINSOL clients and marginally profitable feature--the integration of all four actors (government, for the institutions. Within one year of start-up, FINSOL regulator, intermediary and competitors) is a pre-requisite life insurance had reached more than 180,000 of borrow- for a successful microinsurance market development. ers. The terms of the insurance include: i) no medical examination required for coverage; ii) policy costs kept Successful Partner-Agent Models in Latin America low; iii) US$3,000 coverage iv) immediate pay-out of In Latin America, several MFIs have taken the lead in 30 percent for funeral expenses; v) remaining pay-out is creating a microinsurance sector. For example, in Mexico, made within three days vi) coverage of people ages 16 to the leading MFI Compartamos calls for microinsurance 65; vii) use of a collective policy format; and viii) double bids each year. The insurance companies compete to offer coverage for accidental death. voluntary insurance schemes to more than 600,000 clients of Compartamos. The bidding process has led to increased Successful Cooperative Models in Latin America competition among insurance companies and resulted in Two cooperative insurance providers demonstrate an- more demand-driven products at an affordable price. other model that has proven effective in Latin America: La Equidad in Colombia and La Columna in Guatemala. In 2002, a group of financial sector investors created Fi- Both programs have achieved significant levels of cover- nanciera FINSOL, a regulated limited objective financial December 2008 · Number 138 · 3 age. To offer microinsurance products, these institutions The Future of Microinsurance in Latin America had to overcome several disadvantages inherent in their While microinsurance shows enormous potential, it is institutional structures. First, because insurance authorities not just a scaled down version of commercial insur- do not supervise cooperatives, the institutions' solvency is ance. It has special characteristics in design, delivery, not monitored by an impartial government body. Second, claims processing and premium structuring that make it the design and pricing of microinsurance products might not an important alternative risk pooling mechanism for the be appropriate because cooperatives may not have experi- poor. Although co-operative models have shown success enced staff with risk management expertise. Finally, these in some cases, in many countries the path cooperatives rarely have information systems that to large scale microinsurance coverage will can handle the amount and type of information be through traditional insurance companies. required for sustainable insurance operations. These companies already have the skills, information and risk management systems La Equidad is a regulated insurance com- required for microinsurance. Governments pany founded in 1970 by 41 cooperatives. should develop an enabling environment As of 2008, it is owned by 1,273 coop- for insurance companies to offer and for clients to eratives and non-profit institutions with purchase appropriate policies. Finally, donors and a combined membership of two million investors can help by financing training, technical as- people. The company is ranked 13th out sistance, market research, actuarial tables, and other of the 21 life insurance companies in Colombia in terms of support efforts. premium income. Its success is based on its demand-driven products that reflect its clients' risk priorities, its reinsurance Bibliography program to help with risk management, and its high quality CGAP (Consultative Group to Assist the Poorest). 2004-2006. services and efficient operations meeting international stan- Good and Bad Microinsurance Practice Case Studies. Working dards (ISO 9000 certification). Group on Microinsurance, Washington DC, USA La Columna was created by the National Federation of CGAP (Consultative Group to Assist the Poorest). Website on Credit Unions (Federación Nacional de Cooperativas de resource centers. www.microfinancegateway.org/resource_cen- Ahorro y Crédito; FENACOAC) and nine leading coop- ters/insurance. eratives in 1994. With 25 affiliated cooperatives and sev- Cohen, Monique and Jennifer Sebstad. "The demand for micro- eral large independent NGOs selling its policies, La Co- insurance." Protecting the Poor: A microinsurance compendium. lumna provides coverage to 54,000 members. Its success 2006 stems from its reinsurance of the insurance portfolio, an effective point-of-membership sales strategy (involving McCord Michael. 2007. Presentation on Microinsurance Prod- member testimonials and lotteries), special incentives for ucts and Delivery Channels. Access to Insurance for the poor, policy renewal, and leveraging an efficient and profitable Rio de Janeiro, Brazil distribution channel (thereby providing economies of scope and scale). McCord Michael, Jim Roth and Dominic Liber. 2007. The Landscape of Microinsurance in the World's 100 Poorest Coun- There is a role for donors, governments and investors to tries. Microinsurance Centre, Wisconsin, USA play in strengthening the cooperative service providers, Rivas, H. F. Seguro de Vida ­ FINSOL. Presentation for Dis- starting with investing in training to improve management tance Learning Series, World Bank, February 17, 2007, Mexico. skills. They might also provide the seed capital to build a reserve fund for future claims, or fund technical assistance for product design, streamlined policy issuance, claims About the Authors settlement, management information systems and client education. Finally, they might fund programs to develop Mike Goldberg is a Senior Private Sector Development Special- ist and C.S. Ramanathan is a Consultant, both with the Poverty actuarial tables and market research to understand risk pri- Reduction and Economic Management Department of the Latin orities in the low income market segment. America and the Caribbean Region of the World Bank. "en breve" is produced by the Knowledge and Learning Team of the Operations Services Department of the Latin America and the Caribbean Region of the World Bank - http://www.worldbank.org/lac · December 2008 · Number 138