Dhaka, Bangladesh 29 February, 2000
Report on the Proceedings
TABLE OF CONTENTS
The International Discussion Forum on Micro-Insurance was initially planned as learning and sharing activity among CARE INCOME project partners in Bangladesh. The topic generated interest among microfinance practitioners, donors, technical assistance providers and academics, both within and outside Bangladesh. Due to an overwhelming response from various institutions and individuals, CARE Income had to plan for two batches of the forum. The first batch had about 65 participants, including more than ten international participants.
The Micro-Insurance Forum was sponsored by CARE Bangladesh and the Microenterprise Best Practices Project funded by DAI/USAID.
Mr. Mike Rewald, the acting Country Director of CARE Bangladesh welcomed the resource persons and all the participants to the Forum. In his introduction, he highlighted the relevance of hosting the Micro-insurance Forum in Bangladesh given the country's strategic importance in the microfinance sector as the home of numerous pioneering microfinance institutions.
Rewald emphasized that the primary objective of the Micro-insurance Forum was to share existing experience on the topic, advance interest in the relevant issues and increase knowledge on the subject. He observed that there was wide interest in the topic that was reflected in the diversity amongst the forum participants who included representatives of UN agencies, NGOs and microfinance practitioners. The diversity provided potential for a good exchange of ideas and practices.
Rewald remarked that microfinance was an evolving field and institutions like CARE are looking for new ways to improve services to clients. He expressed gratitude to the Microfinance Best Practices Project (MBP) of DAI/USAID for supporting the forum. Special thanks were extended to Warren Brown of Calmeadow for his contribution as a resource person. Thanks were also expressed to Carlos Ani and Harun Rashid of CARE Bangladesh for organizing the workshop.
Mr. Carlos Ani, of the CARE Income Forum, and primary coordinator of the Micro-insurance Forum, introduced Mr. Emrul Hasan Faisal, the co-facilitator for the Forum. Hasan facilitated the self-introduction of participants, following which he introduced the agenda for the forum and the specific objectives. He also outlined the process for the discussion sessions following individual presentations.
Objectives of the Micro-insurance Forum
Participants contributed the following as additional learning objectives:
There were other areas of interest that were raised by participants, but these were beyond the scope of this forum. The topics could potentially be raised in subsequent workshops or seminars.
The presentation included the findings of a study of 32 microfinance institutions that are currently offering micro-insurance products. The objective of the study was to define micro-insurance and locate the product within the delivery of other microfinance products and services offered by microfinance institutions. The presentation offers a framework for thinking about micro-insurance products in general, and for understanding and evaluating these products within the context of Bangladesh and the world. The Microfinance Best Practices Project and Calmeadow sponsored the study.
The initial motivation for the study came from requests from various institutions to USAID for information on micro-insurance, particularly the design of micro-insurance products. Other donors such as Ford Foundation and the UN Foundation were also receiving similar requests for information. These microfinance donors had the desire to reach deeper levels of poverty by providing access to financial services. Therefore, the study was designed to test two hypotheses. Firstly, to test the hypothesis regarding the need for insurance among low-income households. Secondly, to test the hypothesis that insurance can reduce risk and increase effectiveness of credit and savings activities.
MFIs experimenting with insurance are motivated by two agendas:
1. Social agenda: There is an increased recognition of poor households' need for protection against risk. Insurance reduces the vulnerability of households and increases their ability to take advantage of opportunities. Also, insurance reduces the impact of household losses that could exacerbate their poverty situation.
2. Commercial agenda: Insurance enhances the stability and profitability of poor households.
It reduces the impact of client-risks on loan and savings portfolios, generates additional revenue, and enhances services in comparison to competition.
Insurance fits into risk management, reducing clients' vulnerability to economic stresses. Insurance products can be linked with targeted savings and emergency credit.
Insurance can be defined in the following manner:
Pooling risk: Insurance protects individual households by sharing losses resulting from the occurrence of a risky event across large groups of households. With risk pooling, households exchange the uncertain prospect of experiencing nothing or a large loss for the uncertainty of making small, regular premium payments.
Reduces vulnerability:As individuals trade the uncertain prospect of a large loss in the future for the uncertainty of much smaller, regular payments (premiums).
Provides more complete compensation:Risk pooling can provide more complete compensation than individuals' capacity to save or repay.
Not for all risks:Risk pooling mechanism cannot provide coverage against all economic stresses.
When is insurance appropriate?
Insurance is not the only mechanism for reducing vulnerability. Targeted savings and consumption loans are sometimes more appropriate products.
Insurance protects households against those risks that they are unable to protect themselves through informal mechanisms, savings or credit. Insurance providers are concerned that coverage of risks can be provided on a sustainable basis. Therefore, insurance is appropriate when there is an overlap of perspectives of both the household and the provider.
There is a degree of uncertainty among the various sources of vulnerability for low-income households, such as life cycle events, death, disability, loss of property, etc. Poor households may choose to withdraw from savings or manage the risk with a loan. For most lifecycle events, the amounts are negligible, but there are occasional events such as epidemics, war, serious natural disasters that are all considerably more risky than life cycle events. Life cycle events are relatively predictable as compared to disability, illness or losses to property resulting from accidents, disasters, etc. Correspondingly, the resulting losses or costs for each of these sources of vulnerability can vary from small to very large. Rotating Savings and Credit Societies (ROSCAS) and savings clubs can help the poor to cope with day to day events, but as risks tend to get more and more uncertain, the losses increase and simple savings and loan activities may not be able to manage those losses.
Principles for providing micro-insurance:
Modern insurance provision is a concept that has been developed over centuries. There are some basic guidelines and principles.
There are other microfinance products that can respond to some areas of vulnerability for poor households. For instance, flexible credit and savings products have the potential for complete protection against life cycle events. Flexible savings and emergency loans have the potential for partial protection against mass, co-variant losses. Insurance products are best suited for death, disability and losses to property which are relatively more predictable than life cycle events and more costly, but not as predictable or as costly as co-variant losses.
Why traditional insurers have not served poor households?
Despite a large number of players, there is a gap in meeting the demand. There are two major aspects to this issue:
The risk is much higher in the case of a relatively small policyholder. At the same time, a large number of claims can overshoot the amount that was actually collected in premiums thereby creating risk to the provider.
The need for controls is to ensure that fraudulent claims are not made. Losses should not be co-variant. The ability to meet claims on a risk where a large majority of policyholders are affected at the same time is difficult.
The efficiency of insurance providers is an issue, i.e. how quickly insurance providers can respond to a crisis. Therefore in the case of life cycle events, the household is served better by emergency products, easier access to savings, rather than making a claim on insurance.
In the case of insurance providers, the potential areas for targeting are death, health and property.
Proposed framework for evaluating an insurance product
It is important to understand the three aspects of an insurance product:
Components of a policyholders benefits:
The benefits policyholders receive from insurance coverage can be thought of as a function of four variables, namely:
There are various complexities in providing the service, including:
To what extent does the product cover losses?
Issues raised in the discussion session:
Challenges are much greater. One of the real outstanding challenges is to tailor it to suit their needs. There is a need, and there is a way, it needs to be found.
Naturally, the lowest levels of poor are the most likely to suffer risk, and likely to make claims, which effects the sustainability of the provider. Therefore, it is a paradox.
There are different types of institutions providing Micro-insurance, including private commercial companies like Delta, as well as NGOs like ASA. Therefore there are different options, there is no one model.
This can be worked out, for individual scenarios, however, there is no generic model.
There is potential for providing insurance for protection in the case of natural disasters; however, MFIs should enter into this area with extreme caution. They must have the ability to appraise risk and calculate the information for actuarial services.
This is a tension between the objective of reaching outreach and sustainability versus providing a new product that is potentially expensive. It can effect the targets for sustainability. It would have to be the determination of the institution -- a hard choice.
Agricultural insurance is not common. It is an extremely challenging product, and is not recommended for the MFI sector.
Disasters and calamities risks bring about a lot of damage to property and assets, and are considered co-variant risks. Again, this is not a product that is recommended for all MFIs, given the challenge and the risk.
Mr Emrul Hasan briefly described the various insurance products that are available / existing in Bangladesh. Many of them are discussed in greater detail below.
Concept of Micro-insurance
Concept of Micro-insurance:
BRAC sees Micro-insurance as an important product as part of their micro finance services for both formal and informal markets. Micro-insurance is important for mobilizing resources for the institution's capital fund. It provides incentives and encourages clients to invest. Micro-insurance also secures client investments and ensures the repayment of loans. It minimizes losses due to disasters and protects client enterprises.
Micro-insurance is a relatively new concept in the micro finance sector despite the fact that there have been over two decades of experience and experimentation in micro credit. Financing the poor is a risk, particularly given the nature of client investments, the high level of risk in the environment within which clients operate, and the relative poor health of clients themselves. Some MFIs and NGOs have introduced Micro-insurance products for clients in case of death. Others offer insurance benefits for different crops and livestock protection. Operational aspects vary from MFI to MFI. Collection procedures are either through the collection of insurance fees or by deducting a certain percentage from the loan to the client, at the time of disbursement. The fund is given different names, including emergency fund, disaster fund and insurance fund.
BRAC operates a micro finance program that includes various activities, including group formation, savings mobilization, credit support, skill training, technical support, and insurance benefits to members. A total of 3.3 million poor people have been organized into voluntary organizations (VOs) and are depositing savings regularly with BRAC. All VO members are eligible for loans and about 2.6 million members have loans outstanding with BRAC. BRAC has been offering insurance to the members of its voluntary organizations, for death since 1990.
Eligibility: Individual must be a member of a BRAC VO. He/she does not have to be a loan recipient.
Premium: There is no premium. Individual must renew membership with the VO every year for a membership fee of Taka 15 (US$).
Purpose: The poor are particularly vulnerable in emergency situations. A sudden death in the family under poverty conditions jeopardizes the future of the entire family. The insurance policy offered by BRAC intends to minimize the level of such insecurity.
Coverage: Coverage is only in the case of death of an active VO member who has renewed his/her membership with the VO. There is no connection with the loan contract. However, members who do not have loans with BRAC are eligible for insurance coverage.
Product benefit: Upon the death of an eligible policy holder, BRAC provides a capital sum of Taka 5000 (US$ ) to the family of the deceased. If the member is also a borrower with BRAC and has an outstanding loan amount, then the loan balance is written off. The Taka 5000 is intended to help the dependents of the deceased to continue their economic activities.
The BRAC micro-insurance product offers a medical check up when the member comes to the BRAC office for a loan. Most VO members visit a BRAC office once a year to receive a loan. Members do not have to pay a fee for this check up. The cost of the medical check up is covered with the interest income from the micro credit program.
Financing for the Insurance Fund: BRAC does not collect premiums. There is no fee and no deduction from the loan amount if the VO member is also a borrower. BRAC finances the insurance program through interest income earned from the micro credit program. It is estimated that 2 percent of the total service charge charged to clients on the loans covers the total expenses of the insurance program.
Level of subsidy:
Currently, BRAC does not charge any fees or premiums. The insurance program is subsidized by the microcredit program.
Benefits of the insurance program:
The BRAC Micro-insurance program benefits NGOs as well as the clients. The insurance product deepens the relationship between the institution and the client. Members are motivated and committed to the NGO activities. They also have incentive to undertake appropriate economic activities, and participate in the loan program with regularity in repayments. BRAC has received a positive response from their members on these non-credit programs, such as insurance, health and education. It is evident that clients of micro finance institutions who receive loans are also interested in other financial services that are not currently available through the formal market. Micro-insurance can also be linked up with other financial products such as loans and long term savings products.
Offering insurance in a well-managed manner, can increase the fund mobilization potential of an institution. Therefore, in addition to providing an essential service to clients, Micro-insurance is also a way in which micro finance institutions can move from grant dependence to financial self-reliance.
Highlights from the discussion session:
BRAC needs to think about the sustainability of the insurance program. The program currently does not charge clients any membership fees or premiums to participate in the program. The program is subsidized under the micro credit program. The interest income allocated to the Micro-insurance program is done so at the expense of the credit program.
Only active members of the VOs who have paid their annual membership fees are eligible, which limits the outreach.
The age of the client base is important as the program expands. The number of members are increasing in number and the are also growing older, therefore, there will be an increase in the number and volume of claims over time.
Grameen Bank started as an experiment in Jobra village in Bangladesh, with 42 of the poorest of villagers. It has expanded to an institution of international reknown, covering 40,000 villages (out of 68,000 villages) and 2.4 million active microentrepreneurs.
Today, 494,044 groups comprise 67,691 centers under 1149 branches in 60 districts (out of 64 districts). The initial disbursement of Taka 856 (US$26) has expanded to a cumulative disbursement of Taka 124,035 million (US$3 billion). Total cumulative amount repaid is Taka 110,311 million (US$2.6 billion). The monthly average disbursement is Taka 1303 million (US$26 million).
1. Life Insurance/Emergency Fund:
Purpose: Grameen Bank members create two savings funds, namely the Group Fund and the Emergency Fund. The Emergency Fund is basically an insurance coverage in case of death of the member. The Emergency Fund offers clients a sense of social and economic security. It has been developed into a solid insurance plan for the poor.
Premium: There is no premium.
Financing the Emergency Fund:
Each borrower deposits an amount equivalent to one fourth of the total interest paid to the bank, in the Emergency Fund. This fund is used as the Life Insurance Fund. This system was continued up to 1991. Since1991, if the loan amount exceeds Taka 1000, then borrowers have to pay a fee of Taka 5 per thousand of the loan amount. This system continued through 1995. As of November 1995, Grameen Bank does not collect any contributions from members for the Emergency Fund. In December 1999, an amount of Taka 420.47 million (US$) was deposited in the Emergency Fund which is invested in a bank account. Dependents of members receive insurance benefits from the interest income.
Product benefit: Until October 1995, in the event of the death of a borrower, his/her dependents will receive the maximum amount of Taka 5000 (US$) as benefit. Recently, this amount was modified to Taka 2000 (US$) for members who joined prior to October 1995. New members, i.e. those who joined after October 1995, get Taka 5000.
2. Livestock Insurance
Purpose: Grameen Bank offers this product for those clients who have taken loans for cattle rearing. The insurance coverage is essentially to cover the loans taken for cattle rearing in case of death of the animal. There is a distinction made between the purchase of small calves for fattening and sale during festivals (Eid) and for those that are raised for milk.
Cattle rearing borrowers have to pay Taka 125 (US$) as rent to the bank. Those who have borrowed for rearing calves for fattening, pay Taka 100 (US$). Out of the total amount of rent, 75% is paid as as interest. A fee of 10% of the total rent, is paid as the contribution to the fund at the Zonal Level to cover the costs of additional extension services such as vaccination and lectures on livestock management. Another 10% is paid as a premium for the insurance.
In the case of the death of the animal, borrowers have to pay only 50% of the outstanding loan amount. The remaining 50% along with the interest is covered by the Livestock Insurance Fund.
As of December 1999, the Livestock Insurance Fund stands at Taka 10.31 million (US$) and total claims of Taka 3.64 million (US$) have been paid out.
There is no coverage for livestock that was previously owned.
3. Equipment Leasing Insurance
Grameen Bank introduced Leasing as a third product to their existing loan products, namely the General Loan and the Seasonal Loan. The duration of this loan is for a maximum of 3 years. Equipment leased include power tillers, power pumps, power looms, shallow machines, auto rickshaws (baby taxis), micro buses, tempos, trucks, computers, rice mills, saw mills, lathe machines, generators, village phones, etc.
3.1 Equipment Leasing Insurance: The purchase of equipment is a larger investment, therefore, has a greater level of risk. Grameen Bank evolved the equipment leasing insurance to cover this risk factor. !0% of the receivable interest is deposited in the insurance fund. This insurance fund is managed at the Zonal Level. If any item leased is damaged due to natural disaster or accident, then the borrower will get the benefits of a maximum of 50% of the total outstanding loan amount with the interest. The total deposit in this fund as of December 1998 is Taka 3.07 million (US$) and the total amount of Taka 146,000 has been paid out in claims.
4. Vehicle Leasing Insurance:In the case of vehicles leased, e.g. auto rickshaws, microbuses,
vans, trucks, tempos, etc. the leased items should be insured with a private insurance company. The leasee insures the vehicles with the assistance of a Grameen Bank officer. 10% of interest from leasing loans are set aside for any claims against damage or other losses. There are about 100 branches at the Zonal Level that manage this product.
As Grameen Bank is not licensed by the Motor Vehicles Association (MVA) for the provision of vehicle insurance, the insurance is provided by licensed private insurance companies. It is a special service. Only Grameen Bank members are eligible for this insurance. The advantage is lower with discounted premiums, and is more affordable for clients.
4. Health Insurance
Grameen Bank observed that about 54% of its client base crossed the poverty line in five years; however, about 20% of the client base are lagging behind in the poverty cycle even after 10 years in the program. The primary cause of their poor performance is poor health, which limits their ability to generate income. In Bangladesh, the poor have less access to basic services including education, information, and most importantly health care. Health care services in the country are vertically designed rather than at the community managed. The rural poor are therefore, vulnerable to recurring diseases such as malaria and emerging diseases such as HIV/AIDs.
Most of the Bangladeshi poor cannot afford quality health services. Most of the poor live in rural areas or in urban slums, therefore, their access to health services is limited. Their main service providers are village quacks. Diagnosis, treatment and medicines are all of poor quality.
Grameen Bank noted that poor health would be a major obstacle to borrowers in their ability to succeed in their enterprise activities, repay their loans on time and break out of the poverty cycle. In response to this, Grameen Bank set up a number of special funds, including the Group Fund, Center Welfare Fund, and the Disaster Fund, to protect members against external shocks. Nonetheless, poor health continued to plague borrowers and their families.
Grameen Bank also introduced a social development program entitled "Sixteen Decisions" which included a certain Code of Conduct. Members were encouraged to improve their standard by investing in improvements in their nutrition and housing (sanitary latrines and safe drinking water). They were also encouraged to educate their children, avoid dowry and invest in better health care. Studies revealed the following:
However, a recent Grameen Bank study showed that ill health is the single largest cause for default. Among one sample of older borrowers, ill health was the reason for 44% of the defaults.
It was noted that communicable diseases accounted for almost 70% of the health problems in Bangladesh. Despite public sector efforts, health care services do not reach the poorest due to inadequate infrastructure. Private sector services are either unaffordable or of inferior quality. The spiraling effect of ill health and catastrophic diseases play a snake and ladder game preventing families from moving beyond the poverty line, and further marginalizing families despite micro credit inputs. Therefore, the provision of basic health care at an affordable price became a primary focus for Grameen Bank.
Grameen Bank initially piloted the provision of health services the early 1990s, as well as the provision of rural social health insurance. The management of the health program was first assigned to the Grameen Trust, and later to Grameen Kalyan (Health), both sister concerns of Grameen Bank. The goal of the Grameen Health Program is to initiate the planning, implementation and evaluation of the components of primary health care to promote better health, prevent illness and premature death.
The Grameen Health Program acts both as an insurance agency as well as a provider of health services to Grameen Bank members and non-members. A Health Center (Community Hospital) is attached to a branch. Each Health Center is headed by a Director who is a professional doctor, and a staff including an Office Manager, one or two paramedics, a laboratory technician, and about four health workers. The operational area corresponds to the operational area of the Grameen Bank branch, a radius of eight kilometers approximately. The health workers provide door to door educational services on prevention of diseases and the promotion of health. The doctor examines patients on an outpatient basis, provides treatment and advice regarding pathological tests. He also provides referral services. The doctor also conducts visits to distant areas. The lab technician conducts routine pathological tests for patients referred by the doctor. The Office Manager dispenses medicines and maintains accounts.
The services were designed after consultations with eleven Grameen Bank branches. A Grameen Bank Center includes forty members. Each Grameen Bank branch covers sixty to seventy centers. Membership in the Health Plan was discussed with the borrowers. After negotiating the terms, members in all centers in all eleven branches agreed to subscribe to the Health Plan. The Health Plan aims at covering all households in its operational area, including non-members. About 1.5 non-Grameen Bank households and between 2500 to 3500 Grameen Bank member households per Health Center. Replication is anticipated.
The Grameen Bank Health Program is now operating three different pricing schemes with corresponding service packages. Access to preventive services, family planning and health education is free for all, irrespective of family subscription to the health insurance plan.
In 1994 to 1995, seven health centers operated charging a yearly premium of Taka 50 (US$1.04) per family with a maximum of 10 family members. The service package included consultations with doctor, as many as required, with a co-payment of Taka 2 (US$0.04) per visit. In addition, clients received free annual health check ups, 75% subsidy on basic pathological test, quality medicine at prices lower than the market, and domiciliary maternal and child health care. This premium structure will be discontinued in the near future.
During 1995 to 1996, five health centers were set up (including an old center) charging an annual premium of Taka 120 (US$2.5) per family with a maximum of 8 members. The service package included consultations with the doctor as required, with a co-payment of Taka 2 (US$0.04) per visit, a 50% subsidy on basic and extended pathological tests, free annual health check up for the clients, 50% of the market price on 15 essential drugs and all other medicines at prices below the retail prices. In addition, in the case of referrals, 50% of the costs of specialist and medical tests, and 10% of the hospitalization costs were provided.
In 1996, enrolled members of two health centers were provided services under the Taka 50 (US$) health plan. They could opt for additional services under the Taka 100 (US$2.08) per family per year package. The service package includes all services described above, except hospitalization benefits.
Revision in the pricing scheme and benefit packages is considered based on the comments and suggestions of members at Implementation Committee meetings. It is anticipated that the supplementary coverage will attract more subscribers from non-Grameen Bank families.
The Health Program uses a form of sliding scales in its fee structure. Non-members pay a little more than members in premiums, renewals. Poor households pay less than non-poor households. However, no distinction is made in terms of quality of service or benefits. The Grameen Bank staff who are familiar with the community are responsible for the classification of households as poor, for preferential rates. For non-insured people, walk in services are available at all local market prices.
On average, different health centers have recovered 65.23% of the operational cost with a range of 36.41% to 88.84%. In general the health centers that provide more benefits to members, with premium levels of Taka 120 and Taka 100 recover more costs than others, and recover 70% of their cost of operations.
Issues raised in discussion session:
Currently the Grameen Health Program is no financially sustainable, so this is an area for improvement. Grameen Bank plans to ensure that the Health Program can pay for itself. The plan is to expanding the service to non-Grameen Bank members, without forcing the premium on existing members. Grameen also wants to add on new facilities, such as free health check up for all family members. E.g. eye check up, blood pressure, diabetes. If 20 Health Centers are viable, then the program will be expanded.
Equipment Leasing Insurance:
In the case of a total loss then the loan balance is waived. If the equipment is repairable, then the value of equipment is ascertained. Client can sell the equipment and benefit from the insurance claim as well.
For vehicle insurance provided by private companies, there are charges, but Grameen Bank tries to negotiate the cheapest deal for the client.
The people living in the urban slums of Bangladesh have no access to insurance services, as they are unaware of these services or are unable to afford them, as currently, only commercial insurance companies provide insurance services.
GHASHFUL, a small NGO MFI based in Chittagong City created a life insurance product for the people in slum dwellers and are direct beneficiaries of GHASHFUL. The life insurance product is the cheapest form of insurance protection available in the area.
GHASHFUL is the insurer. The insured persons or policyholders are the clients of GHASHFUL.
Eligibility: Coverage is limited to members who are clients of the savings ad credit program.
Duration of contract: The contract is for 5 years.
If a policy holder dies, his/her family or the nominee will receive Taka 5000 (US$100) to Taka 10,000 (US$200) from GHASHFUL. The exact amount depends on the number of years of participation in the life insurance scheme.
If death occurs within the first three years, the nominees will receive Taka 5000 and if it is after the third year, then the nominees will receive Taka 10,000.
If the nominee is underage, and there is no guardian, then the organization will honor the policy by providing a savings certificate, which will mature at the point of the nominee's attaining majority.
If no death occurs in the five year period, then all premiums will be refunded plus 5% interest.
There is a Taka 5 charge each for the admission form for opening the policy and the purchase of an insurance passbook. There is a monthly premium of Taka 10 The NGO receives the right to increase or modify the premium rates, especially in exceptional cases, such as a large number of deaths due to disaster or epidemics.
Rules and regulations:
To be a policy holder one must meet a number of requirements and agree to certain conditions.
The applicant must fill a simple medical/health questionnaire, for the policy to be issued.
In case of any false information or misrepresentation of facts, by the applicant, in writing or orally, during the time of application or during the period of the contract, the NGO may declare the policy void, and the premium will be forfeited.
The age of the insured should be within 18 and 42 years of age when contract is signed.
For evidence of age certificates are required such as school certificate, marriage document, voter card, passport, etc. The NGO may ask for further proof of age at any time during the contract.
If a policyholder dies in the first three months before or after delivery, the insurer will not honor the policy, but will refund the premium to the nominee/beneficiary.
The organization maintains a cash reserve equivalent to 8% of the total loan outstanding for cash liquidity needs, including the payment of death claims.
Advantages of the program:
For the insured persons/policy holders:
For the insurer/NGO MFI:
Program expansion: Able to provide more benefits to members.
Currently GHASHFUL has 1955 policy holders. The amount of Taka 70,000 has been collected in premiums and Ghashful has about Taka. 500,000 in deposits in a bank, earning interest.
Issues raised in the discussion session:
There is considerable danger of small grassroots programs operating insurance schemes as they can be overwhelmed with claims in the context of a major disaster.
Ghashful is not re-insured. It operates an individual insurance policy. If Ghashful is closed down, then community has been developed to take over the management and operations. However, there is some need for clarity regarding the ownership of the fund.
Ghasful has noted that their drop out rate was high prior to introduction of the policy, but has reduced, which indicates that clients value the insurance product.
Sustainability is an issue, given that premiums, in the case of person who does not die, must be repaid in five years time. If someone dies, then the pay outs are Taka 5000 or 10,000 based on a premium of Taka 10 per month A high multiplier amount, which may cause difficulties for the institution in terms of pay outs over time. Ghashful may need to review its product and pricing, prior to an expansion of the program.
The beneficiaries are the members of the groups. They are all women. In future, Ghasful hopes to cover the whole community.
Rationale for Micro-insurance:
Rationale for Micro-insurance:
Microcredit provides working capital and disposable income to the landless poor. Micro-insurance ensures that this disposable income is not wasted and ensures the protection of assets acquired through microcredit. Micro-insurance responds to the basic insurance needs of the poor, i.e. life, health and property.
Micro-insurance is not just about making good loans, it is about making profit. Micro-insurance providers need to focus on the need to:
Recruit good actuarial services in the calculation of premium to avoid erosion of the life fund by claims
There are challenges to providing Micro-insurance to the poor, and there is a need for greater innovation and experimentation. Regulation within the industry is also critical. However, the move towards effective regulation requires a collective effort or issues will not gain attention.
Gono Bima and Grameen Bima:
The Gono Bima and Grameen Bima programs are operated by the Delta Life Insurance Company, which is fully licensed and regulated. The programs had similar motives. The rapid growth of the programs has led to the decision to merge them under one institution, separate from Delta Life Insurance Company. The new institution will be registered as a not-for-profit company.
Delta Life Insurance Company was established in November 1986. Grameen Bima was initiated in February 1988. Initially the aim was to make the service available to those who most needed insurance (low-income people) and for those who lack the financial resources or security and are unable to leave their family with financial security upon death).
The premium to be paid by the policyholder could be invested in income generating activities instead of lying idle in a bank account at low rates of return. Therefore, Delta decided to combine the insurance program with micro credit. It was also decided that the Delta directors would not take their dividend from the Grameen Bima. The project was transformed into a social welfare program.
Inspired by the experience of Grameen Bima, in October 1993, partly to create competition, and to achieve faster growth, Gono Bima was initiated. Gono Bima grew faster than Grameen Bima in terms of premium collections. However, Grameen Bima has better discipline. Recovery rates for the linked credit program of the Gono Bima program are poor. Grameen Bima charges 20% interest (service charge), and has over 90% recovery. However, recently, due to some internal tensions, the repayment had dropped to 75%. The situation is now being rectified and repayments have improved.
Delta benefited by working towards financial self-reliance. In the late 80s, Ford Foundation proposed a grant to support the experiment of life insurance, but Delta refused this grant as it was committed to self-sustainability.
Insurance is defined as "long term contractual savings". Although target groups are keen to save, they lack the ability to save for long periods. They are forced to spend this money for emergencies such as illness, food scarcity and the sudden arrival of a guest. In many cases husbands and family members take their savings by force. Money that has been saved in the house is often stolen or destroyed by termites. Long term contractual savings compels people to save. Premiums are paid because if they are not, then the paid up amounts have to be forfeited.
Failing to save makes people lose confidence in themselves. Savings leads to self-confidence. When death claims of Taka. 5000 to Taka. 50,000 are paid out to policyholders, others gain information and confidence.
Grameen Bima and Gono Bima workers are salaried and the salary is related to the income earned. The expenses are monitored continuously. Rules must be followed, given the possibility of a sudden imbalance between the ratio of income and expenses.
The projects are totally self-financed by workers and policyholders, with no external funding.
There are advantages to small, self-reliant units, including:
The only source of income is premium and service charges of micro credit activities. The premium is the savings deposited under some conditions. The institution must maintain a reserve. Salaries and other expenses must be covered. The recovery rate currently is not good enough. In 1998 the recovery rate was about 90% and dropped own to 72%. New measures are being taken to improve the situation on earnings of premiums and loan recovery. Grameen Bima is taking disciplinary measures. Financial position is tight. Rapid recovery is anticipated.
Gono Bima Product:
Vision of Gono Bima:
Activities of Gono Bima:
Issues raised in discussion:
The Gono Bima and Grameen Bima policies are for ten years and fifteen years. Shorter terms are not offered as they are not viable.
The Delta Life Fund currently stands at Taka 350 million, of which 45% is premium collected from the Gono Bima and Grameen Bima programs. The program is viable and profitable. At the end of 1998, a 5% bonus (from surplus) was announced.
Delta started with Micro-insurance and moved into microcredit as an investment strategy. The premium collection and the method of collection are similar to the MFI methodologies.
With the combination of Micro-insurance and microcredit, it is important to secure profitability of the investment side.
This program is viewed as a positive movement for socio economic security, through savings, insurance and credit.
Actuarial collection is essential for profitability. Pricing of product and the premiums does it involve an actual exercise. Delta has an in-house actuary. Actuary tables (data from Bureau of Statistics) are public information.
Decentralization of management systems and decision making is also critical for efficient and timely response to claims. An independent self-reliant unit at every thana is essential.
Crop and cattle insurance can only be done profitably with subsidies. Delta is not into going into that area risking money.
A policyholder must have a nominee. Underage policyholders have guardians. Suicides are not considered.
If a policy maker is unable to pay a premium, adjustments are made against the paid up value.
The policy is people friendly. Policyholders have come back with premiums in arrears and management has been responsive to adjust.
If the policyholder dies before the premium is paid off, then there is a one month grace period for the family to pay the balance. If it is more than one month, then they are paid the paid up value.
The depletion of life fund must be avoided to prevent collapse. A failed life insurance program earns a bad name for the industry. Easy to jump in, but one needs professional expertise. Actuaries are very expensive to recruit.
In Bangladesh it is difficult to get access to actuarial services. However, in other countries it may not be so difficult.
Transparency is essential for an insurance provider, regardless of a for profit company or an NGO intermediating financial services. Fund management is centralized. All funds are channeled to Dhaka and are ploughed into the credit program based on the demand from customers. The surplus is invested. However, there are some stipulations. 60% of the funds have to be invested in government bonds by law. Some percentage can be invested in the money market and there are limitations to the investments.
There are various costs that have to be worked out in the development of a Micro-insurance program. They include:
Background on ASA
ASA started as a development NGO in 1978 with a relatively radical action agenda. Its program focus was on consciousness raising and organizing the poor. ASA later redesigned its strategies in accordance with its philosophy of poverty alleviation and empowerment of the poor.
ASA seeks to promote social and economic development with the consequential improvement of the well being and quality of life of its clients. Its institutional mission is to support, impel and strengthen the economic status of the poor through facilitating, dispersing and expanding savings and credit to those who have limited access to such services.
The overall objectives of ASA are to alleviate poverty and improve the quality of life of the rural poor, the landless and the assetless by providing them with financial services for self-employment.
ASA's developmental strategy is to provide credit to all members, especially women and the disadvantaged, and mobilize resources through different types of savings. The credit program is supported by development education to improve the level of awareness of members.
ASA's activities include:
Credit Methodology of ASA
Credit Methodology of ASA
Major innovations of ASA:
Major innovations of ASA:
Insurance Policy of ASA:
The ASA credit program did not include an insurance policy until the institution faced problems recovering loans from borrowers who had died with the loans outstanding. The life insurance policy served the dual purpose of insuring loans as well as benefiting the families of clients after her/his death.
Coverage: ASA's life insurance policy only covers death of borrowers. Borrowers cannot claim insurance for any other purpose.
ASA has managed life insurance on its own, and has no linkage with any conventional insurance company.
The life insurance product went through four stages of development. In the first stage, the premium was 2% against the principal disbursement, i.e. Taka 20 per Tk. 1000 disbursed. The policy ensured that in the case of a borrowers death, the dependents or nominee could claim benefits equal to the principal amount borrowed.
In the second stage, the premium was 1% against principal disbursement, i.e. Taka 10 per 1000 disbursed. In case of death, the dependent or nominee could claim benefits equal to the principal amount borrowed. The premium was reduced as the number of policyholders increased by 100%.
In the third stage, the premium was 0.3% against the principal disbursed, i.e Taka 3 per 1000. For the small business loan, the premium was 0.5% against principal disbursed, i.e. Taka 5 per 1000. In case of death of the borrower, the dependents could claim benefits equal to the principal borrowed.
In the fourth and final stage, ASA eliminated premiums for the small loan. Insurance would be covered by the interest income. In case of death the outstanding amount would be written off. In the case of the Small Business Loan, the premium was 0.5% against principal disbursement, i.e. Taka 5 per 1000. In case of death, the dependents can claim benefits equal to the principal borrowed.
In case of accidents, there is a provision to disburse another loan against the insurance fund. The previous loan would be rescheduled without extra interest charge.
Issues raised in the discussion session:
What was the reason for reducing premiums?
ASA has eliminated the premiums for insurance of the small loan and reduced the premiums on the business loan from 1% to 0.5%. The rationale stated was that as smaller loans are less risky given the small amounts, the premiums were initially reduced and eventually eliminated. However, business loans being larger, the death of a business loan client is more risky for the institution, therefore, a premium is essential. There was no comment on the suggestion for ASA to increase the benefits, rather than decrease premiums.
Savings are "fully protected" vis-à-vis regulatory requirements. Although ASA is not formally supervised, it emphasizes self-regulation and accountability. If a borrower want to withdraw savings he is perfectly safe to do so. ASA has Taka 300 million in savings in reserve at the bank. Annually, their highest withdrawal is Taka 70 million and the lowest is Taka 30 million. If the government insists on prudential regulation, ASA can easily return deposits to their clients.
The ASA insurance program does not serve as a major source of funds for credit program. It serves to secure loans. It can however, depending on withdrawals provide additional sources of funds for the loan portfolio.
ASA achieved operational self-sufficiency in 1994, prior to which it had shortfalls in cash. It was only four years later that it moved into building an insurance program.
ASA is open about explaining the policy to all members and non-members. All community members are invited to learn about the policy and participate. Members of parliament, elite and borrowers are invited to learn about the policy. Death is a difficult time for a family. So the small amounts are considered useful.
There is no current study on client feedback on the insurance program.
ASA does not see an advantage in linking up with a commercial insurance company, as it is not practical for ASA. Insurance is a highly profitable venture in ASA's experience. Therefore, it does not see the value in passing on the benefits to another agent.
ASA does not have a license to offer insurance, however, currently the premium amounts are too low to raise concern among the regulators. In the case of Delta Life Insurance Company the premium amounts are higher, ranging from Taka 5000 to Taka 50,000. This range and the size of their outreach warrant a link up with an insurance agency.
There are various factors that have to be considered in designing products that benefit clients. Typically, in the examples that were studied, there are greater benefits to the client, relative to the premium charged. For instance, in the case of FINCA Uganda, the premiums are much lower on a per unit basis than in some cases where the institution charged premiums that were higher in relation to accruing benefits.
Types of products
Disability insurance. Currently no MFI studied offers insurance for disabilities. Disability is covered marginally under the programs offered by some life insurance policies.
Asset insuranceIn India, there are examples of direct providers who are able to provide property and asset coverage (livestock) profitably.
Life insurancecan benefit the institution, not only in terms of contributing to profitability, it can secure their loan program, which is their major activity. Insurance is more like securitisation of the loan, in the case of death or illness of a family member, or loss of productive assets. Life insurance is the least risky of products.
Life-Savingsis a relatively straightforward product to offer. The product is much the same as life insurance, in terms of deduction of premiums. But the benefit is related to savings, in terms of a multiple of savings balance. The advantage is that there is continuous coverage as long as the savings balance is maintained. When households do not have a loan, they are unsecured, whereas in this case they are constantly covered. There is some institutional benefit. There is a noticeable increase in the savings held, which increases the profitability of the institution.
Endowment Life Insuranceis designed on the basic idea of collecting regular premiums and not tied to any particular financial service. Clients can choose the amount of coverage. If a policy holder dies, a predetermined benefit is paid out. If a client does not die, then premium is paid out, with a bonus. Paying out requires institutions to constantly calculate the amount on maturing policies. Investment management is essential.
Why term life insurance versus life endowment?
These two products tend to meet different needs. Term life insurance has lower premiums than life endowment, which affects institutional viability. The first is more affordable, but less profitable. There is a rationale for both products.
In the case of the Chogoria Hospital, due to ambitious design without careful planning the institution could not deliver on the promised claims. The product had to be changed in terms of the services as well as an increase in premiums. The hospital is now offering a sustainable product, but offering a much more limited range of benefits than planned.
FINCA Uganda's health insurance product offers the most in terms of benefits, but has higher premium
Life insurance is less risky as people value their lives, so they will take less risk. Also unlike in other cases there is less case of fraud. In the case of health insurance, protection against fraud is essential. People are often found sneaking friends and family to benefit from the policy, which means the provider has to establish effective protection, which increases costs.
Health insurance policy providers get a lot of claims for all minor ailments when there is full coverage. There are ways in which a provider can reduce abuse of the system. Co-payments is one way. Also a time frame prior to pay out. Programs needed time to build a fund to pay out. The waiting period also helps in the prevention of abuse.
Deductibles are another way of avoiding insurance abuse. Grameen Bank's Grameen Kalyan health insurance program covers only 50% of the outstanding loan.
Actuarial calculations are particularly important when providing health insurance. A major problem with insurance is that it involves adverse selection. Insurers have a sense of high-risk candidates, for instance older people. Older people tend to buy life insurance more than young people, and have to pay higher premiums given their high risk.
Client satisfaction is critical. For instance, before changing their program from voluntary to mandatory FINCA Uganda made sure they had the assurance that their services were valued by their clients. Such a change could be damaging for an institution if it does not have a sense of client satisfaction. Uganda is able to pay claims in less than ten days, a fairly quick turnaround.
There is no one best approach in designing a good insurance product. One must take into account the following:
Options for service delivery:
Full service is more risky as it needs larger resources although it also has higher potential return. In the partner-agent model, the partner retains most of the risk, but the agent essentially can offer a service to the client without taking on risk. The return to the MFI is much less than in the first case, but the risk is greater. The preferred model for most MFIs wanting to offer insurance products is the Partner Agent model.
Recommendations for microfinance institutions
Recommendations for donors:
There are no examples of reinsurance. In some countries, donors and partner institutions provide guarantees for microcredit loans. In Guatemala, a private insurer insures the credit unions, and the World Council of Credit Unions (WOCCU) is insuring some of its members.
Savings as an alternative to insurance
In some contexts it may be more appropriate and less costly to design flexible savings instruments rather than to embark on insurance programs, that are potentially more expensive and more risky. However, in many countries, MFI NGOs are unable to take deposits directly. Microfinance institutions offer savings merely as a service to the client. Also the amounts involved in flexible savings, may not be sufficient to cover the financial needs of a family in the case of an emergency. For instance, a flexible savings instrument would be able to respond to the emergency health requirements of a poor household, however, may not be enough to cover an operation, or loss of physical assets (house, working place, storage). Therefore, it is not a case of either or, but rather the need to design an appropriate product to respond to the particular needs of clients, in particular circumstances.
Despite, the fact that property, crop and health insurance can be real challenges, and potentially highly risky for the provider, there are some examples of existing approaches that can be developed as a response. The study revealed some cases in India for crop insurance. There were some cases on insurance in the case of fire/arson, e.g. the Malik Samithi case in Bangladesh. However, these were not considered successful cases as there were problems in the management.
Not all microfinance institutions may be eligible candidates for initiating insurance programs. Small local organizations are under high risk as they may be overwhelmed with claims. Performance alone may not be enough to enable a small organization to manage a sudden deluge of claims. ASA is unusual as it has large cash reserves on hand, and has various other factors supporting its entry into Micro-insurance. It has the size, scale, high levels of efficiency and profitability to engage in a risky business. It also has a large and profitable portfolio, as well as highly competent leadership and systems. Being a national level NGO, ASA can easily manage small-scale disasters that a smaller or medium sized NGO may not be able to handle. It is also important to note that even ASA has restricted itself to life insurance, which has the least level of risk.
SHARING OF INTERNATIONAL EXPERIENCES
Micro credit is the central component of the development activities of a vast number of NGOs in Bangladesh. Many of these NGO's offering microcredit are offering life insurance schemes. The government can protect poor families against premature death, old age, illness, unemployment, accident, natural calamities, etc. by offering social insurance programs. Commercial insurers do not offer schemes that are specially designed for the poor. A Social Security Fund can be established with assistance from donors and an NGO or a group of NGOs could manage the fund.
NGOs are offering insurance services to their clients due to the:
These NGO insurance schemes have the following weaknesses. They lack
The Credit and Development Forum (CDF) proposes that NGO MFIs develop a comprehensive Micro-insurance policy (CMP). The provision of this package would call for a high level of cooperation between the NGO MFIs and the formulation of a long term strategy for meeting the security needs of the poor. The strategy would have to take into account the high level of risk and uncertainty as well as prudential aspects and the cost effectiveness of delivering the package.
A package would make the sale and renewal of insurance policies. For convenience the package could include life insurance as well as other types of insurance, offering the client options. The non-life package would be linked with credit. Every micro credit borrower would be insured by the MFI and the premium amount would be added to the loan amount.
A Mutual Association of MFI NGOs would have to be formed and the management would have to be entrusted to professionals who have competence in insurance. This would be necessary for ensuring efficiency in operational management as well as to comply with regulation regarding the provision of insurance services. The separation of microfinance and insurance is essential as the technical management of insurance services is different from the operation of microfinance services. MFIs would have to ensure coverage through a qualified institution, which could be named as the Micro-insurance Mutual Association/Club.
Commercial insurers can design the package and distribute it through MFIs, however this may not be possible due to the high costs of establishment and overheads, and the profit motive of commercial insurance providers. A mutual insurer must have the flexibility to undertake initiatives that have in mind the long term benefits of the policy holders. A natural advantage of mutual ownership is the ability to mitigate conflicts between policy holders and owners of the insuring entity. Since policyholders are the virtual owners of mutual insurance companies, conflicts among stakeholders can be eliminated. Mutual reflects the concept of cooperative ventures and a community spirit, which reflects the philosophy of NGO MFIs.
Existing Micro-insurance products such as the Gono Bima, Grameen Bima, Jana Bima and Polli Bima are not suitable for micro credit clients as the target groups for these two distinct products are not the same. The target group for Grameen Bima are lower middle class people whose yearly income exceeds Taka 60,000 (US$).
The insured amount ranges between Taka 5000 to Taka 50,000 and the annual premium for the Taka 5000 policy is Taka 468 for a ten year period. Most micro credit clients would not be able to afford this policy. Therefore, instead of endowment insurance on an individual basis, group term insurance could be offered to poorer micro credit clients.
Group insurance enables a large number of people to be covered under a single contract. In the case of group insurance, the contract is with the group/association. A single master policy is issued covering all members, as per agreed terms. The premium is paid by the respective NGO MFI, trustee, or the appropriate group representative who takes out the policy.
Group term insurance is renewable every year and is the simplest and cheapest of schemes. A fixed term is paid on the death of a member covered under the scheme. The scheme would also be appropriate to meet the outstanding loans.
Premiums are charged according to the mortality experience of the group, and can be raised or decreased depending on the group's experience. Any surplus can be passed on to members of the group by reducing the premium for the following year.
Group term insurance can be made available to poorer sections of society such as agricultural workers, rickshaw pullers, handloom workers, artisans, taxi drivers, cooperative milk producers, tailors, barbers, masons, carpenters, etc.
A Social Security Fund would have be created with the help of donors. Premiums would have to be partially covered by this fund. The schemes for different occupational groups could also be managed by the Mutual Micro-insurance Association of the NGO MFIs. The MFIs should pay out premiums for their microcredit clients, and the MFI should decide whether members/borrowers should contribute to the premium, fully or partially.
The Comprehensive Micro-insurance Package would include property and personal risk coverage under different sections. There would be two parts, the first including life insurance, and the second beings several sections comprising different risks as follows:
Section A Protection of dwelling/business premises and contents against fire, related perils such as natural and man made disasters and accidents
Section B Coverage of stocks and contents (not money) against burglary
Section C Personal accident risks for borrowers and family members within the age group of 10 to 55
Section D Business interruption risks arising out of losses under Section A.
A similar comprehensive policy for farmers is suggested where one part would cover life insurance on a group basis and a second part would consist of different sections as follows:
Section A Fire and allied perils
Section B Burglary and house break ins
Section C Personal accident for borrowers and family members
Section D Cattle and livestock
Section E Agricultural equipment and animal drawn cart
The packages would have to be flexible and easily accessible to the policyholders. The policyholders would have to take insurance against Section A and B whilst Section C, D and E would be optional. There would be discounts.
A multinational working group was formed from among the participants. The objective of this group is to prepare for an in-depth seminar workshop on micro-insurance, which may be held in late 2000. Information about the work of this group will be made available.
The foreign participants of the Micro-insurance forum were taken to the head office of Delta Life Insurance Company where they had the opportunity to meet with Director as well as the management team of Delta Life Insurance Company, including the statisticians and the accounts staff.
Participants were able to clarify outstanding issues regarding:
A smaller group of participants were taken on a full day field trip to the field offices of Gono Bima and Grameen Bima, across the Berigunga River, in Dhaka District. The participants had a chance to interact with the field staff, block office managers and clients of Delta Life Insurance Company.
Clients interviewed expressed satisfaction with Delta's services. Delta staff appeared to be professionals and competent in their jobs, with high levels of motivation. Delta had a reputation in the urban and rural areas visited. These areas did not appear to have a high degree of penetration by other MFI NGOs, and the level of competition was not high. However, it is understood that once the product has been tested and popularized, there will be other entrants into the sector. The costs of intermediating cost-effective Micro-insurance delivery limited outreach into remote areas, however, this is being addressed in Delta's strategy for decentralization.
Carlos Ani thanked Delta Life Insurance Company for their generous contributions at the forum and for hosting the field visit. He then invited participants to provide their feedback and reflections on the forum.
Participants expressed their warm gratitude and hearty congratulations to CARE Bangladesh, MBP and Delta Life Insurance Company for providing them with this opportunity to learn and share about an emerging topic in the microfinance and development sector. The forum is particularly notable given that it is the first on this particular topic, which is of critical importance to clients and microfinance institutions alike. Bangladesh was recognized as the appropriate venue, given its past success in microfinance and the current success of Delta Life Insurance Company, as well as some MFIs in their experimentation and innovation in Micro-insurance.
There was a strong sentiment to continue the process of learning and sharing through other workshops in Bangladesh as well as outside. There was strong support for hosting a more technical workshop later in 2000, which would allow a deeper exploration of the Micro-insurance product with a discussion of other case studies. Participants noted that there was scope for donor intervention, but focused on promoting knowledge and learning, rather than in the financing of Micro-insurance products. The examples of World Council of Credit Unions (WOCCU) were cited, in terms of an umbrella institution providing guarantees to partners. ILO and MBP were cited for promoting action research to inform product development. There is a need for donors to proceed with caution as this is a relatively new technology, and risk factor is high.
Carlos expressed his gratitude to all the participants, the resource persons from the MFIs who made presentations and assisted in facilitating the forum discussions, the sponsors of the forum, Warren Brown and the staff of CARE Bangladesh. He invited participants to promote the second batch of the forum to be held in May 2000, and to consider participation in the proposed workshop later in 2000.
With the permission of the participants, Carlos Ani officially closed the first forum on Micro-insurance.
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