Partnership With Insurance Companies

POWERING INNOVATIONS IN MICROFINANCE conference on microfinance July 24 - 25, 2008 * Asian Development Bank, Manila, Philippines

Edited by Foxit PDF Editor Copyright (c) by Foxit Software Company, 2004 - 2007 For Evaluation Only.

CONCURRENT WORKSHOP SESSIONS Friday, July 25, 2008

9:00 a.m. - 10:30 a.m.

MFI Partnership with Insurance Companies in Providing Microinsurance

Auditorium Zone C

Microfinance institutions have developed different methods to deliver microinsurance in order to minimize poor household’s losses due to catastrophic events. These unforeseen events may be due to severe illness, injury, death of a family member, and natural or manmade disasters. Some MFIs have developed informal insurance schemes while others have established licensed mutual benefit associations (MBAs). Other MFIs have partnered with commercial insurers to provide insurance to member-clients. This workshop will explore the mechanics of adopting one delivery model, the partnership with insurance companies, in providing microinsurance to clients. In addition, the advantages of partnering with insurance companies will be presented. Resource speaker: William H. Martirez, Country Manager Micro Insurance Agency Philippines

Facilitator: Joseph Alaban RIMANSI Organization for Asia and the Pacific, Inc.

Documenter: Laila Garcia RIMANSI Organization for Asia and the Pacific, Inc.

MFI Partnership with Insurance Companies in Providing Micro insurance

William H. Martirez Country Manager, Micro Insurance Agency Philippines

MICRO FINANCE TRIPOD

TI O

Enterprise development

TR AN SF OR

Micro credit

AN TRANSFORMATION SF OR MA TI ON

MA

TR

N

MICRO FINANCE

Micro insurance

TRANSFORMATION

Micro credit z

the extension of microloans to the unemployed, to poor entrepreneurs and to others living in poverty who are not considered bankable.

Fundamental Principles: - emphasizes building capacity of a micro entrepreneur - employment generation - trust building - help to the micro entrepreneur on initiation and during difficult times

Enterprise Development z

globally regarded as a key driver for sustainable economic growth.

Purposes: - Promote entrepreneurship - Reduce barriers to entry - Provide support for micro and medium enterprises - Develope individual skills, or create more “Enterprising People” - Sustainable Enterprise

Microfinance Institutions (MFIs) z

work directly with the low-income market, conduct financial transactions, manage financial controls, and market specialized financial products

z

perfect intermediaries for insurers to reach the low-income market

What is Micro insurance? z

The insurance business activity of providing specific insurance products that meet the needs of the disadvantaged for risk protection and relief against distress or misfortune (IC CL 9-2006)

z

Providing the poor access to a basket of insurance, support and services in pursuit of poverty reduction.

Critical Components z

Real Value - product should meet real risks of low-income households - premium payment schedules should strive to match policyholders’ cash flows - coverage should be easily understood/non-deceptive - procedures for claiming benefits should be simple - portion of premiums being used to pay claims should be high (at least 60%) - expenses must be kept as low as possible, rarely exceeding 25-30% of premiums - net income to the insurer should be modest (at most 5-10% of premium) - sustainable

z

efficiency in transactions and operations.

Claims Processing z

The most important aspect of insurance

z

Involves - occurrence of an insured event - collection of required documents - presentation of the claims applications to an intermediary or the insurer - claims adjustment and settlement

z

For microinsurance to be successful, operational and fraud cost must be minimized Fraud mitigation – claims validation, client visits

Essentials in Packaging a product z

Willing risk carrier / insurance market - high risk - refuse to offer terms

z

Qualified Actuarial Input - products pricing to be sustainable

z

Historical Data Set - reliable historical data on the index to be used is essential for any index to be established

z

Distribution Network

z

Local Project Management

Reinsurance Value proposition is enhancement of primary insurers’ ability to conduct business by reducing long-term cost of the underwritten risk. 4 MAIN FINANCIAL EXPOSURE CAPACITY

CATASTROPHES

SURPLUS RELIEF

STABILIZATION

Services relevant for microinsurers

Self Insurance z MFI

Establishment: - product features - pricing - collects premiums - pool the funds - pay claims from internal funds

Limitations to Self Insurance 1. Lack of expertise - no insurance expertise - calculate premiums - determine reserves - require actuaries - lack of access to reinsurance - adverse attritional - natural catastrophe

Limitations to Self Insurance 2.

Leads to poorly designed product - poorly priced product - poor value for money to clients - loses money for seller - temptation to raid the fund - no reserve build up For incurred but not reported losses - no cover for future losses - catastrophes - natural disasters - disease epidemics - worsening trend of losses

Limitations to Self Insurance 3. Regulation - Current trend of Government to regulate - Ever increasing levels of institutional risk

Traditional MFI partnership in Micro Insurance

Insurance Risk Carrier

Reinsurance

Insurer

Delivery and Service

MFI

Individual or groups

Insured

Partner – Agent / Mutual Model Risk Carrier •Insurance Company •Mutual •Self-insurance •Protected Cell Company

Micro-insurance

Distributor •Direct to clients by MFI through loan or savings

Administrator

•Tied agent

•MFI by itself

•Independent intermediary

•Insurance Company

•Linked to another good or service (e.g. furniture sale)

•Amended agency agreement •Outsource to third party

MFI - MIA Partnership Model Insurance Risk Carrier

Reinsurance

Development of product Services

Insurer

Intermediary

Delivery and Service

MFI

MICRO INSURANCE AGENCY

Individual or groups

Insured

Functions: MICRO FINANCE INSTITUTION

INSURANCE INTERMEDIARY

Claims Processing Claims Management Data Encoding and Processing Product Management and Administration Product Marketing Underwriting Reinsurance

Training Claims Processing Product Development Data Encoding and Processing

Independent Micro Insurance intermediaries z z z z z

corporate or individual partnership independent of a single insurance company working locally or globally partnership with a risk carrier or multiple insurers seek to serve large groups of clients

Advantages 1. Product development: An intermediary that can understand: the needs of the clients. - operational realty of the MFI - needs of the insurance company - should be able to design a product that is more suitable for all parties. 2. Transaction cost - It is not cost efficient for an individual MFI to develop its own MIS for transacting insurance business. - an intermediary that benefits from a wider client bases and global reach can fund such an overhead. - investment in system reduces transaction cost - operating efficiencies

Advantages 3. Administration - best equip to handle administration relating to - claims processing - responsible to insurance company (Who are covered and premiums due) 4. Additional channel of sale Without system, MFI’s are often unable to offer insurance products to their clients outside of loan 5. Staff training and client Education 6. Range of Sustainable Product 7. Distribution network/linkages 8. Enhancement/technological

WHAT WE DO MICRO INSURANCE AGENCY

PRODUCT DEVELOPMENT

DISTRIBUTION

PROCESSING

We source data from other stakeholders and local agencies for the design/study of new products Products are then presented to our partners locally and globally for approval Once required products are identified, we develop quantitative and qualitative market research tools to identify client needs

WHAT WE DO MICRO INSURANCE AGENCY

PRODUCT DEVELOPMENT

DISTRIBUTION

PROCESSING

Products designed are pilot tested and followed up by market research to find out how the product has worked for the clients.

WHAT WE DO MICRO INSURANCE AGENCY

PRODUCT DEVELOPMENT

DISTRIBUTION

PROCESSING

BPO – Business Process Outsourcing A cost-saving measure for tasks that MIA and its partners require that is divided in 2 categories: Back Office Outsourcing Internal business functions – i.e. data processing & billing Front Office Outsourcing Client related services – i.e. marketing & technical support

Services AIMS – Automated Insurance Management System

-

a critical component in the timely and cost effective provision of micro insurance services to MFIs. A state-of-the-art technology that specializes in the following: z z z z z z

Data encoding Large volume data processing Data Management Insurance Claims Processing Data Synchronization Automated Reports

Core Strengths z Flexibility

- allows collection for a minimal set of data, customised for a given MFI or product

Core Strengths z Transparency

- regular reporting - provide detailed list of insured - summary level report

Core Strengths z Reliability

- Data processed is secure and backed up - Communications are sent with high levels of encryption

Education & Training

MIA provides full training to the staff of its partner organization. z

Currently working on deploying a micro insurance curriculum for client education. z

Research z

MIAPH conducts actual surveys and evaluate the information about its clients and their needs, and make recommendations to MIA.

z

Conducts research for development of new products

Malawi Weather Index Insurance z

Joint World Bank / MIA project

z

Zero credit available in 2004 to farmers

z

Developed ground nut, maize, tobacco etc

z

Loans for as little as $100 per acre increase yields by more than 100%

z

Today over $7m in credit available

Traditional vs weather index z

Multi-peril Crop Insurance z High Administrative Costs z Moral Hazard z Adverse Selection

z

Index-Based Weather Insurance z Use weather parameter as a proxy for damage z Objective triggers and structured rules for payouts z Improved correlation between need and provision

Risks faced by farmers z

Weather Related: z z z z z

Drought Typhoon Flood Frost Hail

z

Non Weather Related: z z z z z

Displacement Civil Strife Economic Decline Price Collapse Pests

Insurance only covers causes captured by index

FACTS for Crop Insurance z

Natural and man made disasters are the highest cause for MFI’s loan defaults

z

Agri-Agra Law requires that all banks set aside 20% of its loan portfolio that shall be devoted to agriculture and agrarian (agri-agra) loans z Agricultural loans are risky, Banks instead invest in government bonds

z

Philippine Banks Loan Portfolio (2006) P1.9T (USD47.5M) 20% is Php380B ($8.44B), 25% of this is Php 95 B

If agri-agra law is implemented, Php 1.17B will be allotted on each of the Philippines’ 81 provinces

PROGRAM WITH MFIs WILL: z

encourage banks to open their lending windows to agriculture

z

banks can be agricultural loans wholesalers

z

MFIs can be agricultural loans retailers

z

open the floodgates for the development of agriculture

z

provide a mechanism for the formation of the commodities market

WHAT IS WEATHER RISK PROTECTION z

Financial protection based on the performance of a specified index in relation to a specified trigger

z

Offers protection against uncertain costs that result from weather related volume volatility z

z

Farmers are compensated against unfavorable weather fluctuations that impact physical volumes produced Objective & Timely

Drought Index Products z

Use historic rainfall at a weather station to develop index

z

All farmers growing rice within 20km radius can be included

z

Each weather station and crop has a different price based on history & crop water requirement

Typhoon product design z

The amount of insurance payout is based on the: z z

Wind speed of the typhoon The distance from the farmer’s field to the typhoon eye

z

Wind speed and location of typhoon provided by the Japanese Meteorological Authority (JMA)

z

The location of the farmer is calculated by using GPS technology and is added to the insurance policy document

Benefits: z

Policy pays when farmers are in most need of money, such as when there is drought or typhoon during the growing season.

z

There is no need to file a claim. MIA checks Rainfall and typhoon figures from the meteorological station and determine whether a payout is due.

z

100% Reinsurance cover for agricultural risk Reinsurer - Swiss Reinsurance, a leading and highly diversified global reinsurer located in Zurich, Switzerland

Season 1 - First phase of selling - September 2008 growing season

Season 2 - Second phase of selling - April 2009 growing season

Season 3 - Third and long term phase of selling - From September 2009 onwards

Weather insurance is not a panacea z

It can enhance existing agricultural supply chains and businesses, not create them

z

It can help support expansion in rural finance

z

There are issues with basis risk

z

Regulatory issues currently exist

MICROINSURANCE FOR AGRICULTURE • • • •

TRAINING & INSTITUTIONAL DEV’T

MARK E TI N G DEVEL OPME NT

MFI

AL FINANCI NCE ASSISTA

T ES RV T HA R S S T PP O T IE PO SU CILI FA

P PR RO DE O D V E CE U C LO SS T PM ING EN T

• Property insurance • Stocks of merchandise bonds

Life Accident Funeral Health

Equipment floater • Mortgage redemption insurance

Crop Insurance

Micro Insurance Associates Agency Philippines 3F RCBC Savings Bank Bldg. Luna St., Lapaz Iloilo City Country Manager: William H. Martirez Email: [email protected] Website: www.microinsuranceagency.com (033)320-0387 (033)300-1472

(033)508-4655 (033)329-0729

We provide the poor with opportunities to protect themselves against risks by being the global leader in innovative insurance products and services

Acknowledgement: Richard Leftley President, Micro Insurance Agency Holdings, LLC Opportunity International

Shadreck Mapfumo Vice President for Crop Insurance, Micro Insurance Agency Holdings, LLC World Bank Commodity Risk Management Group

James Sharpe Micro Insurance Agency Holdings, LLC

Mae Joy Armada Micro Insurance Agency Philippines

THANK

YOU

Edited by Foxit PDF Editor Copyright (c) by Foxit Software Company, 2004 - 2007 For Evaluation Only.