Microinsurance Within Reach

... for the price of a beer

Regulated insurance companies and microfinance institutions are teaming up to generate major cost savings for health care that allow poor urban and rural workers in Africa, Asia and Latin America to gain access to medical and accidental death insurance plans. At first glance, these alliances might seem like mismatches, but they have proven to be the secret to providing microinsurance suitable for the poor, specialists say.

International and domestic insurance companies and locally based microfinance institutions (MFIs) play into each other's strengths to serve a large group of previously underserved clients. "The companies have significantly different comparative advantages: the insurers know risk management, MFIs know marketing access to the masses," says Michael J. McCord, President of The MicroInsurance Center, a non-governmental organization that develops such partnerships to expand access to microinsurance products.

On one hand, a commercial insurance company is expert at managing and reducing risk, has the know-how for creating insurance products and the financing needed to launch group insurance plans. On the other hand, microfinance institutions are familiar with the needs of poor people and their capacity to pay for insurance, plus they have the outreach capability to contact the large potential client base among low income and poor people. The synergies created by pooling these different skills make it possible to deliver good quality health care and other insurance products to needy people who previously could never hope to get such a service. Typically, microinsurance products can serve a large group of low-income clients, says McCord. The destitute, however, are beyond the reach of these financial services.

An Enormous Help

Group life insurance policies are a highly popular product in the nascent field of microinsurance. In Colombia, the foremost product of micro-insurer La Equidad is a group life policy known as "Amparar," which in Spanish means to protect. Amparar is a combination policy that covers death of the head of household from any cause, total and permanent incapacitation, payment of public utilities and help with funeral costs. The insurance pays between US$1,300 and US$4,200.

"It doesn't solve the life problems of anyone, but is an enormous help when the breadwinner dies," says Martha Cecilia Bohorquez, vice president of Insurance and Marketing at La Equidad, "and the cost of the group policy is the equivalent of one beer per month." La Equidad currently has 16,000 people insured which offers protection for a total of about 48,000 people.

La Equidad is unusual among microinsurers because it is a non-profit insurer made up of 1,200 non-profit organizations, predominantly cooperatives but also including employees' funds, says, Bohorquez. The insurer has offices in 22 cities nationwide and works through alliances with microfinance institutions (MFIs) and cooperatives to market its policies and reach a wider clientele. In Bogotá and in the provincial capitals of Popayán and Bucaramanga, MFIs affiliated with Women's World Banking are offering some La Equidad insurance policies to their clients, who are predominately low-income women microentrepreneurs.

These policies are not new, as COLUMNA, the industry leader in Guatemala in serving low-income clients, can testify. It launched its services with a group life insurance policy as far back as 1994. The group life insurance requires an annual payment and pays out between US$1,200 and US$6,200. Most of the clients live in rural areas, and the standard life insurance covers their savings and loan balances in cooperatives that belong to the National Federation of Credit Unions (known by its Spanish acronym of FENACOAC). COLUMNA is the creation of FENACOAC and nine member credit unions. Fully 90 percent of the insured are people connected to the 35 member credit unions of the Federation that boasts about 500,000 members. More than 50,000 people have contracted an enhanced type of coverage, the "special life plan," which covers funeral costs and accidents.

The experience of COLUMNA offers some useful lessons for microinsurance providers. Once again: the importance of channeling, or marketing, microinsurance policies through organizations that bring together large numbers of low-income people, such as members of credit unions or clients of MFIs, is underscored by COLUMNA, which has sold tens of thousands of policies through its member institutions. The product sold must be simple so that it can be understood by potential clients, according to the findings of a case study by Carlos Herrera and Bernardo Miranda.

In a similar arrangement, the international insurance giant, AIG, offers group accident insurance through FINCA Uganda and other MFIs that pays a benefit to the family of the insured MFI client in case of accidental death. For MFI clients, a group plan is offered that also pays any outstanding loan balance to FINCA Uganda, the affiliate of FINCA, an international MFI. The premium covers the client (usually a woman), her husband and up to four dependents named in the policy. The coverage varies slightly depending on the cause of death, but death by AIDS is excluded from coverage. AIG lends FINCA the funds for paying for the group insurance; clients borrow funds from FINCA to pay for the insurance.

By working with FINCA, AIG coverage reached 40,000 clients, plus five dependents per client, for a total of 200,000 lives covered. AIG then expanded its partnering—and its outreach—by offering the insurance through the 14 other substantial MFIs in Uganda, says McCord. Some of these MFIs are larger than FINCA and some work in urban areas, so AIG has gained experience serving both rural and urban clients. Today, some 300,000 Ugandan MFI clients and their family members have the insurance, making for a total of 1.6 million covered lives and $1.4 million in premiums. The coverage was also changed from voluntary to mandatory for the MFI clients.

AIG was so successful that it not only expanded to neighboring countries, but it has even triggered industry competition. One of Uganda's top five insurance companies now offers full life insurance which covers both accidental death and death by illness.

Protection Against Risk

Colombia's La Equidad offers another important type of insurance: coverage for micro, small and medium entrepreneurs. Called Equi-empresa, the product is a multi-risk policy to cover risks that affect businesses. Depending on the coverage chosen by the client, the policy covers everything from fire and other damages to the business premises, machinery and equipment breakage or replacement, liability, transportation of valuables and other potential risks.

La Equidad markets its policies with its own sales force and with salespeople who work on commissions for their sales. "We are working hard to win the confidence of MFIs to market Equi-empresa" which would provide good coverage for the microentrepreneurs who borrow from MFIs to buy machinery for their businesses, says Bohorquez. "The great value of this insurer is that it thinks about the weak," she says.

Bold Microinsurance Initiative

Some of the bolder and more complex microinsurance schemes are working in the critical area of health care. In Peru, ServiPeru focuses on two services: funeral services and preventive health care for low-income clients who are insured through a separate firm, the ServiPeru insurance brokerage. ServiPeru is a cooperative and its target clients are people who work in the informal economy and insure themselves through the alliance with the ServiPeru insurance brokerage. The basic insurance policy is called "Previsión Familiar" [Spanish for Family Foresight]. Clients make monthly payments on their policies and they or their family members may access funerary services or basic health care at facilities operated by ServiPeru. "The fact that the benefits of the insurance are offered as services rather than as cash payments or reimbursable expenses has been a factor that has encouraged low-income sectors to buy into the plan," write B. Miranda and M. Rodríguez in their case study of ServiPeru. However, setting up a medical center is ambitious and costly, which has limited the number and variety of medical services the program offers and restricts the client base to people who live within a reasonable distance of the medical facility, the authors say.

Comprehensive Healthcare in Uganda

|sidebar| Holding Costs Down Microcare of Uganda has seemingly thought of every angle for cutting health care costs...

A different approach has achieved an offering of quite comprehensive health care services for slum dwellers and rural poor in Uganda. A domestic insurer, Microcare, working with local MFIs, launched a pilot program that provided 14,500 poor people with health insurance that includes home care for AIDS patients and treatment for malaria. The policy provides full in-patient and outpatient coverage at the best hospitals in the country in shared rooms, HIV counseling and home care, eye examinations but not glasses and basic dental care, says Francis Somerwell, technical director of Microcare Health Ltd. in Kampala, Uganda. Malaria is the biggest health problem among clients and the costliest to treat. "We don't discriminate against AIDS because it does not cost that much," he says. The insurance pays for prescription drugs for non-chronic illnesses lasting less than three weeks, but would not cover AIDS treatment with costly retroviral drugs.

Local MFIs make the first contacts with farmers, artisans and market sellers, and then Microcare follows with a health plan. "It's difficult to convince clients who sit under a tree about insurance and convince them about it for the long term," says Somerwell. A gradual approach has been adopted: clients enroll for four months and then renew. This allows the rural poor to test the product before making a long-term commitment and makes the policy more affordable.

In four years of operating, Microcare has created a host of techniques for streamlining administration and monitoring health services which trim costs of services to $1.33 per month per person and the insurance premium to $60 per year for four people [see page 29]. In its function as a health maintenance organization, Microcare identifies and screens the health care providers that will serve its clients. Microcare negotiates contracts with hospitals and clinics to ensure quality care for the poor at private facilities and offers the policy to multiple MFIs. "Clients should have a choice of service provider," says Somerwell. Microcare is also brokering a large client base to hospitals and clinics. "We can negotiate health service prices saying

'I have 10,000 clients.'" To avoid adverse selection—whereby individuals who already have health problems would predominate in the group—at least 50 percent of clients of the participating MFIs must sign up for the plan.

Mutual Partnership for Mutual Benefit

The benefits of partnerships like these are multiple. Health care made possible by the insurance makes poor entrepreneurs healthier, which helps them develop their businesses, protect their savings and overcome catastrophes that can cause them to slip into deeper poverty. Market research of the poor shows the top three demands in health care financing are the so-called three Ds: disease, death of the breadwinner and decapitalization from burial costs. Any of these situations can easily wipe out the savings of a poor family. "What I see is health and poverty are linked—if we can improve health, we can help alleviate poverty," says McCord.

The MFIs expand financial services for their clients, which can improve client loyalty and retention and improves the solvency of their loan portfolios because sickness so often drives microentrepreneurs into default and destitution. Expanding their services to a new client base creates new business and profits for commercial insurers.

Above all, the microfinance borrowers stand to reap enormous benefits from insurance that is scaled to their needs and delivered directly to them through their local microfinance institution. "Microfinance—savings and credit services—can help people move out of deep poverty and it covers some risks. Microinsurance can help people protect the gains they have made," says Somerwell.

Microinsurance also helps strengthen the solvency of microfinance institutions. "Sooner or later, you have to offer microinsurance because it breaks a pattern where most loan default cases (in MFIs) are due to incapacitation or health issues owing to the vulnerability of the people who make up the client base of microlenders," says Nidia Hidalgo, a microfinance and microinsurance specialist in Mexico. There the most common type of microinsurance is a life insurance policy that includes repayment of loan balances in a microfinance institution.

Partnerships between commercial insurers and MFIs or professional, non-profit insurers like La Equidad work best when the MFI can offer a client base large enough to be of interest to a commercial insurer. "Twenty thousand clients is a desirable number," says McCord. Because few MFIs have that many clients, the MicroInsurance Centre helps bring together several MFIs to create a pool of 20,000 clients or more. In Nepal, several MFIs have been grouped together for insurance products through the country's MFI association, and the association was used as the link with the insurer.

Even when a large potential market can be demonstrated, getting insurance companies to engage in partnerships with unfamiliar associates like MFIs and to launch innovative products is not easy. "You need a champion at the senior management level, someone to push the idea forward because it doesn't happen without that," says McCord. By presenting information about microinsurance to conventional insurers, McCord has identified some interested executives and is working with them to create partnerships for service delivery on the ground.

A basic initial step in the partnership is for the commercial insurer and the MFI to agree on their roles and responsibilities and get the cooperation of all departments, including claims officers and sales agents, he says. There are powerful incentives for establishing guidelines that will make the partnership work. "This is a great market for formal sector insurers; this can be done profitably and do a huge amount of good, and it doesn't get better than that," says McCord.