Delivering Microinsurance through Insurance Companies. The Case of Uganda

Transcription

1 Delivering Microinsurance through Insurance Companies The Case of Uganda Olli-Pekka Ruuskanen Uganda Insurers Association Draft

2 1 Olli-Pekka Ruuskanen Uganda Insurers Association Plot 24, Acacia Avenue Kampala, Uganda tel: Delivering Microinsurance through Insurance Companies - The Case of Uganda Abstract This paper gives new information on formal insurance companies involvement in microinsurance in Uganda. The main data comes from the survey done to all insurance companies licensed in Uganda. Six companies out of 20 offer microinsurance products and the premium collected was 1.5 billion shs (USD ) in In most cases, companies offer similar products in both traditional and low-income market. The products cover major risks that low-income households face. A discriminant analysis reveals that it is larger, well capitalized and more profitable insurance companies within the traditional market that have entered microinsurance. The major problems encountered by insurance companies are consumer ignorance, inability to pay premiums and high distribution costs. The companies favour a level playing field and similar solvency requirements in microinsurance as in traditional insurance. Keywords: Development Studies, Financial Access, Microinsurance

3 2 1 Introduction Microinsurance is insurance for low income people. What differentiates microinsurance products from normal insurance products is that they are targeted at low-income market segment that usually has not been the main target of insurance companies. At the moment microinsurance has attracted interest from a number of development stakeholders. There is a keen interest to support microinsurance schemas as they are viewed as one way of poverty reduction. There are a variety of ways to define microinsurance. A definition based on International Association of Insurance Supervisors policy paper on microinsurance (2007) is widely used. In that paper microinsurance is defined as protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved. Examples of such practice are: risk-pooling instruments for the protection of low-income people, insurance with small benefits, insurance involving low levels of premium or insurance for persons working in the informal economy. Microinsurance can be provided formally or informally. In developing countries there exists various informal risk mitigating mechanism. Indeed, microinsurance has its historical origin in an attempt to empowering microfinance institutions, self-help groups and community based organizations. 1 Recently, regulated insurance companies have become active in the field. For example, based on the data from 100 poorest countries Roth et al. (2007) show that formal insurance companies are the latest entrants into a market previously dominated by other types of providers, like NGOs and community based groups. However, the same data shows that by now formal insurance companies have the largest microfinance outreach estimated to be 38 million insured person of worldwide total of 78 million. Loewe (2006) argues that there are two ways of offering microinsurance. He calls them downscaling and upgrading. Upgrading means the attempts of grass-root level organizations to acquire necessary proficiency in providing insurance to their members. Downscaling means the attempt of regulated 1 Most of the early literature is directed to informal groups and MFI s. Look Churchill, Even in the current opus magnum, Protecting the poor (2006), the discursion centers more on grassroot level than in formal level.

4 3 insurance companies to offer low-premium, limited-cover products to low-income population. 2 If the data in Roth et al (2007) is accurate, by looking at the pace of product introductions and attained outreach downscaling seems to have been a more successful strategy. In many countries there is scarce data on the size of microinsurance market. The regulators do not collect this kind of information and the companies are reluctant to release strategic competitor information. Coupled with lack of information on informal microinsurance this has led to a wide range of estimates of the importance of microinsurance in developing countries. There is also little information about differences between insurance companies that offer microinsurance products and those that do not. Usually only those companies that offer microinsurance are targeted in the surveys. 3 By knowing which kind of companies are active and which are not, technical assistance and funding can be more effectively targeted to increase the supply of microinsurance products. This paper provides information about the size of microinsurance market and companies that are active in formal insurance in Uganda. Uganda represents a good case study as it is often cited as one of the pioneers and success stories in microinsurance. Roth et al (2007) calculate that almost half of all the microinsurance covers in Africa (without South-Africa) are in Uganda. This study is based on the Microinsurance Survey 2008 that was collected from all licensed insurance companies operating in Uganda by the Uganda Insurers Association during the first quarter of All companies returned the questionnaire. There were two sets of questions. One set asked about the provision of microinsurance and how the companies viewed the market. The second set asked about what kind of regulation the companies would think beneficial for the development of microinsurance market. Additional data used in this study include Finscope Uganda , Uganda Household Expenditure Survey 2005/2006 and Uganda Insurance Commission s Annual Reports. First, general features of the insurance industry in Uganda are discussed. Then the premium volume and products offered in microinsurance market are introduced. After that a multivariate analysis is done to assess what features make it more likely for a company to be involved in microinsurance market. Finally, there is a discussion about regulatory aspects of microinsurance provision. 2 Loewe (2006) recommends that these two should be combined by linking grass-root organizations with formal insurers. This approach has recently been called as Parent-Agent Model. (See McCord 2006) 3 See for example Roth et al (2007). 4 Finscope is a survey on access to financial services that has been conducted in a number of African countries. See

5 4 2 Insurance industry in Uganda 2.1 Gross premiums from traditional insurance and microinsurance Insurance industry in Uganda is underdeveloped. The share of gross premium to GDP is just 0.5 percent, which is one of the lowest figures in the world. In neighbouring Kenya this figure is 2.5 percent and in South Africa it is 16 percent. For example, although the Kenyan economy is just three times bigger than in Uganda the premiums in Uganda would have to grow tenfold just to reach the Kenyan levels. Gross premiums and penetration rates are shown in Table 1 for a number of African countries. Table 1 Gross premiums and penetration rates in number of African countries in 2006 (USD million) Country Life Non - Life Life & Non - Life GDP Penetration Premium Premium Premium Rate South Africa 33,106 7,624 40, , Morocco 469 1,206 1,675 58, Nigeria , Kenya , Uganda , Source: UIC Annual Report 2008 In Uganda the gross premium written by licensed insurance companies in the year 2006 was 102 billion shs (USD 60 million). Based on the answers given to the Microinsurance Survey it is estimated that in 2007 the gross premium written was 127 billion (USD 75 million). 5 Out of this premium microinsurance products accounted for 1.5 billion shs (USD 870,000). This represented a share of 1.2 percent of the gross premiums written in Uganda. This is shown in chart 1. Chart 1 The share of microinsurance in Uganda (out of 127 billion of gross premium in 2007) 5 Based on the preliminary estimate of the premiums collected in year 2007 the real growth in premium was around 16.5 percent. The average real growth rate of the insurance industry in Uganda has been around 9 percent since The penetration of insurance measured by the premiums as a share of GDP has stayed around percent since 1997.

6 5 There were 20 licensed insurance companies operating in Uganda in the end of year The majority of those, 14, were non-life insurance companies. 6 In Uganda, like in many other African countries, composite insurance companies are allowed to operate in the market. There were five composite insurance companies offering both life and non-life insurance policies. 7 There was just one pure life insurance company, which started its operations in Six companies out of 20 said they were offering microinsurance products. Five of them were composite companies. Their combined market share was 64 percent of the gross premium collected in Uganda. Although premium in microinsurance segment is still low the companies providing microinsurance control two thirds of the whole insurance market in Uganda. 6 The distinction between life and non-life insurers is not clear in Uganda. The Insurance Act of Uganda 2000, does not have a definition for life insurance. This has led to the situation that some of the holders of non-life licence only underwrite lines that would be considered life in other jurisdictions. 7 The premium income is skewed as 95 percent of the premiums come from non-life insurance and only five percent from life insurance. The bulk of non-life premiums come from few insurance classes. The motor insurance accounts for 32 percent of the premiums, while fire accounts for 17 percent and marine and aviation is 8 percent. In life insurance the 72 percent of the premiums comes from group life policies, deposit administration plans share is 22 percent and individual life is just 6 percent. 8 The company is Liberty Life, which started its operations in Because there are no premium figures for the company, it has not been included in the quantitative analysis. However, Liberty Life s answers to survey questions have been included.

7 6 In the end of year 2007 twelve companies were majority or fully foreign owned companies, while seven of the companies had no foreign ownership. One company had a minority foreign ownership. 9 Most of the foreign companies operating in Uganda are regional companies that operate in East African countries or Sub-Saharan Africa. 10 The foreign companies underwrite over 100 billion of the premiums, which represent 85 percent of the gross premiums written. The local companies, which write the remaining 15 percent, have usually concentrated on a few insurance classes mostly motor related classes. This is shown in chart 2. Out of the six companies that offered microinsurance only one was locally owned. The others had either minority, majority of full foreign ownership. Chart 2 Insurance companies market share in 2007 and foreign ownership 2.2 The number of people insured 9 Uganda has a liberal foreign direct investment policy and foreign insurance companies have same capital requirements as local companies have. There has been an entry of foreign companies in the market by either establishing subsidiaries or purchasing local insurance companies. 10 The respondents were asked to categorize their companies. Five respondents said their companies were East-African and seven said they were either Pan-African or International. All locally owned companies viewed themselves as local companies.

8 7 It is estimated that the population of Uganda is about 27.5 million. The first comprehensive survey on the demand for financial products, Finscope Uganda 2006, showed that just 3 percent of the adult population said they had formal insurance. This would mean that there are about policyholders. In comparison 18 percent of the adult population said they use formal banking institutions, which translates to 2.3 million users. Does the survey data correspond with regulatory data collected by Uganda Insurance Commission? In their Annual Report (2008), for the first time there was information on the number of insured persons in group policies. The data was from year By combining the number of individual policies with the coverage of group policies it becomes possible to estimate the approximate number of insured people in Uganda in various classes. 11 The total number of Ugandans having nonlife insurance was about Life insurance had a larger coverage. The data provided by the companies indicate that there were 1.2 million Ugandans with life insurance. The Commission also asked the companies provide data about the number of people covered in microinsurance policies. The data indicate that out of non-life policies that individuals had were microinsurance policies. This is equivalent to 0.2 percent of the population. The number of covered persons in life insurance was 1.2 million. Looking at the premium data, about 1.1 million of these can be classified as microinsurance. Calculating the non-life and life insurance together it is estimated that there are about 1.15 million people covered under microinsurance. This amounts to an estimate of 4 percent for the whole population. These figures reveal three things: First, the number of the insured persons in life insurance is surprisingly high. The most probable reason for such a high figure is a roll over effect. Most of the policies are credit life policies tied to short term microloans. If a person renews two months microloan six times within a year, (s)he is calculated as six different persons in these statistics. Second, microinsurance policyholders account for only about 13 percent of non-life policyholders. Third, people do not know they are covered, especially under group life policies. The gap between people telling that they are covered compared with data from companies is about 1.1 million covered people. 11 There is no way of taking out commercial policies. However, the amount of them cannot be very large. For example, in Uganda there are xxx companies that pay taxes.

9 8 How does the figures available for Uganda compare with recently emerged data on the size of microinsurance market in the world? Roth et al (2007) surveyed 100 poorest countries about the supply of microinsurance. In comparison to the other countries Uganda has the highest percentage of lives covered by microinsurance. Indeed Uganda accounts for almost half of the whole microinsurance in Africa if South-Africa is not taken into account. If the data collected by Roth et al (2007) is accurate then microinsurance products in Uganda are almost totally provided by formal insurance companies. This is in clear contrast with rest of the Africa where microinsurance is provided by NGOs, informal groups, community based groups or small mutuals. 3 Potential size of microinsurance In order to assess the potential size of the microinsurance market companies were asked in the Microinsurance Survey to estimate both life and non-life microinsurance market in terms of persons and premiums. There was large variability on the estimates of the size of the potential market in low income segment. The size of life insurance in low income market was estimated to be on average 4.8 million people. The potential premium was 34.9 billion shs (USD 20.5 million). When the premiums are divided by the number of people the life premium per person would be 7300 shs or about USD In non-life the estimate was about 3.1 million people. In premium volume the average estimate was 45.3 billion shs (USD 26.6 million). The resulting non-life premium per person is shs or USD In total the potential premiums in this market segment were estimated to be 80.2 billion shs (USD 47.1 million). It shows that only 1.5 percent of the estimated low-income market is currently served by insurance companies. If the estimated premium volumes in a low-income market could be archieved, the insurance industry s gross premiums would grow by 63 percent. This would increase the penetration level of insurance to about one percent of the GDP in Uganda. As an overall indication of the size of potential market Roth et al (2007) estimate that in Africa only 0.2 percent of the poor lives are insured with microinsurance. This is the lowest figure of all the continents.

10 9 4 The factors inhibiting the growth of microinsurance market In the Microinsurance Survey companies were also asked to evaluate how important as a share of business is the low income market now and in five years. On average companies felt that low income market was not very important (score 4 out of the full score of 10) at the moment but would be in five years time ( score 7 out of full score of 10). The companies were asked to choose three most important obstacles that existed in the market for microinsurance. 12 Consumer ignorance was thought to be the greatest obstacle, followed by high administration and distribution costs of the small policies. The third biggest obstacle was a lack of suitable products to offer to low-income market. Each of these will be reviewed in turn. 4.1 Lack of suitable products The Microinsurance Survey included a list of common insurance products. The respondents were asked to indicate whether their companies were offering the product to traditional market, lowincome market or not at all. All products that the insurance companies were offering to low income market they were also offering to traditional markets. This is presented in table 2. The only real microinsurance tailored products were credit life 13 and health insurance. In credit life half of the companies that were offering the product were offering it also to traditional market. Table 2 The uniqueness of microinsurance products in product portfolio Product Original product in traditional market Credit Life Yes/No Term life Yes Endowment policies Yes Savings completion Yes insurance Pension policies Yes Educational policies Yes Disability/ Loss of limbs Yes Small Entrepreneurs Yes Property Yes Funeral Insurance Yes 12 The companies were also asked what kind of help they would need to succeed in microinsurance market. Over 90 percent of the respondents said that further market analysis was needed the most. The next most important item was lobbying the government. The third one was workshops on microinsurance. Half of the respondents needed technical assistance on product development. 13 Credit life is an insurance policy, where a sum insured is the amount of credit taken from microfinance institutions or a bank. If the policyholder dies, the loan amount is recovered from insurer.

11 10 Livestock Rural / Agricultural insurance Health Yes Yes No This indicates that in most of the cases microinsurance products are downgraded or stripped versions of the normal products. Four companies said they would be introducing microinsurance products within a year and had indicated the products they were going to introduce. Six companies said they would introduce microinsurance products in two years time. Four companies would not introduce microinsurance products at all. These were small to medium sized locally owned companies. There are a number of studies looking at the specific risks that low income households are facing and the possible demand for insurance to cover these risks. Cohen and Sebstad (2005 and 2006) review a number of such studies around the world. These studies indicate that there is a common group of risks that the poor face around the globe. The most serious ones are death, illness or disability and property loss in various forms. Uganda is no exception and major identified risks are: Illness, death, disability, property loss and risk of loan. In the Microinsurance Survey companies provided information on the type of microinsurance products offered for a low-income market. It is thus possible to look whether there are products offered that address the risks identified in demand studies. This comparison is presented in table 3. Table 3 The demand for supply of microinsurance products in Uganda Risks identified by low income groups in Uganda Corresponding microinsurance product offered in market Number of companies offering such product, February 2008 Illness Health 1 Death Term Life 1 1 Disability Loss of Limbs Personal Accident Policy Property loss Household 2 1 Livestock 2 Risk of loan Credit Life 4 3 Announced new products by new entrants to low income market in next six months We can see that there are products offered to cover these risks. However, the number of providers is not large. Especially health insurance is offered by just one company. 14 Three companies indicated that they would launch microinsurance products in the market in the next six months. All of the 14 Three companies indicated that they had exclusion clauses for people with HIV/Aids. As only seven companies offered health insurance that represented almost half of the service providers.

12 11 entrants would be offering credit life policies. Some were also entering other segments of the low income market. In their survey of microinsurance provision in 100 poorest countries Roth et al (2007) give details of the most common microinsurance products offered in these countries. The ones they mention are: life insurance, disability and loss of limb insurance, health insurance, property and agricultural insurance. If we compare this list to the products offered in Uganda, we can conclude that all these are offered. 4.2 Consumer ignorance and ability to pay The Microinsurance Survey tried to assess how respondents view the low income market in the terms of capacities. The respondents were asked to assess the sophistication of low income market in terms of literacy, numeracy, honesty, the understanding of insurance, ability to pay premiums and claim benefits. There was very little variation in the answers. The respondents felt that low income customers were not as proficient in literacy, numeracy and understanding of insurance. However, their ability to pay premiums and claim benefits was considered slightly higher. The respondents also evaluated that the customers in low income market are quite honest. The Finscope Uganda 2006 has also information from the consumers themselves. The survey included a section about insurance. Ugandans were asked why they do not buy insurance. Over half said that they could not afford it. The second biggest reason, 45 percent of respondents, indicated that that they did not know about insurance or how it works. The third largest reason was that people said they do not know how to buy insurance. The study was a representative sample so it represents views of all, not just low-income market. Roth et al (2007) asked related questions in all 100 poor countries. Consumer ignorance, lack of demand and the inability to pay premiums were the three most cited reasons for the lack of microinsurance. The reasons for not buying insurance are common in most developing countries. Besides realizing the benefit of insuring against hazards the customer must also be able to afford to buy insurance. Uganda Bureau of Statistics Household Survey 2005/2006 (2007) gives detailed information about the average incomes and expenditures of Ugandans. It shows that the average monthly income of a Ugandan household in 2006 was shs (USD 100) and the average monthly household expenditure as shs (89 USD). Out of this expenditure non-consumption expenditure was 4 percent. This is equivalent of shs (USD 3.6) per month.

13 12 Pelrine and Kabatalya (2005) conducted a study on the saving priorities in rural Uganda. It showed two things relevant to the demand of insurance. First, the reasons indicated for saving money were mostly risk related. Health related emergencies and unforeseen circumstances were the two most often mentioned reasons to save. The savings against these risks could be used to purchase insurance cover. Second, the total amount rural Ugandans said they could save on average were shs (USD 6) to shs (USD 12) a month. 15 These figures show that ordinary Ugandans can pay very little for the insurance cover. Even if 20 percent of savings and non-consumption expenditure would be used to purchase insurance cover the average amount would be less than shs (USD 2.9) per month. This would mean a yearly potential premium of shs (USD 35). 4.3 Distribution and administration of microinsurance products Given a low potential premium that is collectable from low income household, the providers must try to control the distribution and administrative costs. There are a number of attempts to create new low-cost distribution mechanism, but most of them are still under development. 16 The Insurance Act of Uganda 2000 is very restrictive on who can distribute insurance products. In Uganda only brokers and agents are allowed to do so. This means that for example, banks or retailers cannot get commission on selling the insurance products. Majority of the Ugandans live in countryside. Uganda has an urbanization level of 13 percent which is considered low. Most of low income people live outside urban areas. The capacity of the insurance industry to offer products depends on the work force employed and the number and distribution of branches within the country. In total insurance companies employed 575 full time employees by the end of The total employment in the insurance industry in 2006 was about 1100 if brokers and agents are taken into account. This translates to a ratio of Ugandans to one insurance professional. If only brokers and agents that distribute insurance products are considered there are about Ugandans for each insurance sales person. 15 In number of studies looking at the costs of banking around African countries, it has been shown that maximum amount of transaction fees people are willing to pay for banking are around 2 percent of monthly income. Unfortunately similar information is not available about the maximum amount of money that people are willing to pay for administration and distribution of insurance products. 16 See for example Chamberlain (2008) and McCord et al (2006).

14 13 The choice of distributing company s insurance products is a strategic one. A company can use branch networks or deal with brokers or agents. Therefore the outreach of a company s products cannot be ascertained only by the number of branches. However, as the road network is underdeveloped and poorly maintained the possibility to purchase insurance depends on how close one can find a branch office or whether there are brokers or agents nearby. Indeed, there is a wide disparity in the number of branches between companies. Half of the insurance companies had only main office and no branches. The total number of branches was 153. Two companies had over half of these branches. In both cases the number of branches was equal to the number of employees indicating that the each branch has only one employee. 52 of these branches were in Kampala. There were 514 licensed agents by the end of the year 2007 in Uganda, with the number of agents per company ranging from one to 94. On average companies employed 23 agents. The distribution of premiums, branches and agents by companies is presented in chart 3. Chart 3 Gross premiums, number of agents and number of branches in 2007 There has been discussion on liberalizing the distribution by allowing other entities besides agents and brokers to sell insurance products in order to cut down on distribution costs. In the questionnaire a number of alternative distribution channels were introduced. The respondents were asked if they would be interested in using these channels when they became available. The most interesting channels were Savings and Credit Cooperatives (Saccos), MFI s and Post offices as well as retailers. Of modern distribution methods Internet was among the popular

15 14 choices. However, other new technologies like mobile phones and smart cards were not popular choices. In South Africa funeral parlours have become very active in selling funeral insurance. In Uganda only 5 out of 20 respondents thought that this would be a viable delivery option. Two thirds of the respondents felt that the barefoot agents should be allowed in Uganda. Almost all felt that simpler policy wordings should be allowed for low-income market. 5 A discriminant analysis of providers versus non-providers It would be helpful to know whether those companies which offer microinsurance have different characteristics from the companies that do not offer microinsurance. Are there certain features that are common to microinsurance providers which distinguish them from other formal insurers? Because the sample size is only 19 companies, it is impossible to use regression methods to explain the decision to offer microinsurance. Therefore a linear discriminant analysis was performed. In it a linear combination of discriminating variables are found that provide maximal separation between different groups. Two groups were formed: companies that are presently offering microinsurance and those that are not. Seven variables were selected to characterize different aspects of the companies: premiums in 2007, balance sheet, combined ratio 17, number of staff (both agents and company employees), return to equity, the amount of foreign ownership and renewal ratio 18. Premiums and balance sheet are measures of size and financial capacity of the companies. Combined ratio and the amount of staff give information about the overall efficiency of the insurance operations. Return to equity tells about the profitability of the operation. The amount of foreign ownership distinguishes between local and foreign companies. Renewal ratio serves as a proxy for customer satisfaction. First the average values for these variables are compared. This is presented in table 4. There are marked differences between those companies that offer microinsurance and those that do not. Both the gross premium and the balance sheet are over two times higher in companies that are offering microinsurance. This shows that it is the bigger and more financially strong companies that have moved to this segment. This is also shown by markedly higher return on equity enjoyed by these companies of 24 percent instead of 14 percent. However, the combined ratio is 5 percent points higher in these companies showing slightly higher claims and administration expenses. Also 17 Combined ratio is the losses plus expenses incurred during a year divided by the gross premium for the same year. It describes the profitability of the underwriting business in the company. 18 Renewal ratio is the percentage of the existing policies that are renewed each year. The higher the ratio the more loyal the customers are.

16 15 the amount of staff is significantly higher in companies offering microinsurance. The renewal ratio is almost 50 percent higher in the companies that offer microinsurance implying a bigger consumer satisfaction for their products. There is no difference in foreign ownership classification as both foreign and domestic companies can be found in both groups. Table 4 The difference between microinsurance providers and non-providers Does not offer microinsurance Offers microinsurance Difference % Premiums shs 4,813,094 10,649, % Staff number % Combined ratio % % Balance Sheet shs 6,022,772,000 13,847,720, % Return to equity % % Renewal ratio % % Foreign ownership class % Number of companies 13 6 As there were only two groups, one discriminant function could be calculated. The results are shown in table 5. It was statistically significant in 10 percent significance level. Table 5 Results of the linear discriminant analysis Canonical Correlation Eigen-Value Variance prop Likelihood Ratio % F-value Degrees of Freedom (1) Degrees of Freedom (2) Probability > F Standardise d canonical Canonical Variable coefficients structure Premiums shs Staff number Combined ratio % Balance Sheet shs Return to equity % Renewal ratio % Foreign ownership class Offers microinsurance Group mean No Yes

17 16 It is in many cases difficult to give an interpretation of the canonical discriminant function. The function spans the foreign ownership in one direction and the size of the premiums and combined ratio on the other. The division separates bigger companies with foreign ownership and higher costs as microinsurance providers from smaller local companies that do not provide microinsurance. Table 6 Resubstitution classification table True Offers Classified 0 1 Total % 7.7 % 100% % 100 % 100% Total ,2% 36,8 % 100% Priors 0,5 0,5 It is common to test the success of resulting canonical function by comparing the prediction resulting from the function to actual status of the companies. This is presented in table 6. The function is successful: it classifies all microinsurance providers correctly. There is only one company in non-microinsurance providers group that are falsely classified to be offering microinsurance. The discriminant analysis was able to separate the companies offering microinsurance from those that do not. This indicates that there are measurable similarities in companies that offer microinsurance and these attributes are different from the companies that currently are not offering such products. Interestingly, it is not the small companies, but relatively large and well capitalized insurance companies that have entered low-income market. 6 Regulating microinsurance The present insurance legislation in Uganda does not acknowledge microinsurance. The Insurance Act of Uganda 2000 and the Insurance regulation 2002 give typical guidance on requirements to establish and to operate an insurance company, but there is no mention of microinsurance. 19 Recently, Uganda has been chosen as one of the survey countries in IAIS initiative to set up guidelines for regulating microinsurance. 19 In 2005 the Uganda Insurance Commission gave Ministry of Finance proposal to amend the current act but that has not happened. However, there is no mention on microinsurance on the proposed amendments either.

18 17 In order to formulate insurance industry position on microinsurance the Microinsurance Survey asked Ugandan insurance companies CEOs about their views on regulating microinsurance. Only 20 percent of the respondents to the Microinsurance Survey indicated that the restrictive legislation is a major hindrance for them. There is a clear move from policy makers to make it mandatory for financial institutions, insurance companies included, to offer their products to low income market. For example in South Africa low income households have to be a certain share of the banks lending portfolio. In India insurance companies must have a certain share of policyholders from low income people. A number of other countries have enacted similar legislation. The CEOs were asked how they saw this kind of legislation. Two thirds of the CEOs thought that such legislation should be introduced also in Uganda. 20 When asked how long it would take to comply with such legislation 12 months was the most popular answer. A transition period of one to two years was indicated. IAIS issues paper (2007) divides views about how to regulate microinsurance into two. The first view is that microinsurance is just another area of insurance. Therefore it should be regulated in a similar way like all other insurance related activities. Then microinsurance would be regulated as an activity line within organisations. This is called functional regulation. The other view is that microinsurance consists of practices and methods that are different from normal insurance practices and should be regulated separately. Therefore it would be necessary to regulate microinsurance in separate institutional framework. This would mean that a separate microinsurance act would be created and microinsurers would have a licence different from normal insurance companies. This is called institutional regulation. In the survey conducted the Ugandan insurance companies were clearly in favour of functional regulation and making microinsurance a part of common insurance regulation. Only three companies were in favour of an independent microinsurance act and agreed with institutional based supervision. All the rest thought that either present or slightly revised Insurance Act would be sufficient. 20 Respondents also felt that government should give favourable tax treatment to those companies that are active in low-income market. This especially in case if it would become mandatory to offer such services to low income market.

19 18 IAIS position paper (2007) discusses also different regulatory norms that would be applicable to microinsurance. As microinsurance deals with small risks, it has been suggested that norms concerning reserving and investing the policyholders funds should be lighter. Others think that it should be under similar solvency regulations as other companies. Most Ugandan insurance companies thought that microinsurance providers should follow the same solvency rules as rest of the market players. They also thought that assets backing up liabilities arising from microinsurance should not be treated differently. In Uganda, like in other developing countries, there exist a number of informal insurance schemes. Most common in Uganda are welfare funds, which have insurance type risk sharing arrangements. These constitute a large part of the risk management in a country. For example according to Finscope Uganda 2006, almost as many adults were using welfare funds as formal insurance. Usually, these informal schemes are used by low-income population. Another undefined area of provision of insurance in Uganda is health maintenance organizations (HMOs). They offer products that directly compete with health insurance products. However, they are not regulated. This means that they are not required to have sufficient capital and adequate reserving for their liabilities. The amount of health products sold to low income market by these companies is also unknown. 21 There is a debate what should be done with informal schemes like welfare funds. Should government interfere and impose regulation on them? There is concern that making these informal schemes illegal or forcing them under normal insurance regulations would destroy these schemas and make the part of the population using them worse off. 22 The view of formal insurance providers was that they should be regulated by the insurance supervisor and they should be legalized and possible made to cooperate with formal insurance companies. However, none of the respondents wanted to prohibit them of doing business and some view that they represented no real threat to the formal insurers. Overall, the answers by the CEO s of Ugandan insurance companies give a similar view on how the microinsurance should be regulated. Their prevalent view was that a level playing field should be created under a uniform regulation. No separate microinsurance act or different solvency rules should be created. 21 In Kenya these kinds of organizations are regulated by insurance regulator. 22 See discussion for example in Wiedmaier-Pfister and Chatterjee (2006).

20 19 7 Conclusions There is some evidence from impact studies that the most rapid way to increase the access to finance is by formal financial institutions. For example looking at MFI s Honohan (2004) argues that microfinance institutions can only play a small role and especially in the case of Africa more mainstream finance is needed. According to Honohan developing formal financial sector entails no compromise on a contrary with poverty alleviation objectives. The development of microinsurance is in such early steps that similar studies have not been made on the most effective ways of promoting microinsurance. It could be that even in this case the formal insurance companies offer the most rapid and secure way to offering microinsurance products to low-income groups. An indication of this is that although formal insurance companies have been the most recent entrants to the microinsurance, they already offer the largest number of microinsurance products and cover the largest amount of people with microinsurance. (Roth et al, 2007) The data from Uganda gives similar evidence. It shows that a number of formal insurance companies are active in the field of microinsurance and are offering more products in that category. Six companies out of 20 were offering microinsurance products and four were introducing specific products within a year. If also those six companies that said they are planning to introduce microinsurance products within two years are able to do so, by out of 20 companies operating in Uganda will be offering some kind of microinsurance products. It also shows that the companies are more aware than before of the challenges and possibilities in the low-income market. However, in line with the global findings of Roth et al (2007), the potential market is big and remains still mostly untapped. Ugandan insurance companies themselves estimated that the low-income market in Uganda would be around 80 billion shs (USD 47.1 million), implying 98.5 percent is still untapped. The lack of suitable products is not a problem in Uganda. Comparing different products offered with those found worldwide and to the demands of low-income people, it can be concluded that Ugandan companies are offering products in all categories. Bigger problems seem to be consumer ignorance and lack of funds to pay for insurance. Also restrictive distribution laws and the small workforce in insurance companies make it difficult to reach low-income population. A discriminant analysis was done in order to find those characteristics that differentiate microinsurance providers from other insurance companies. The result was that it is bigger, more

21 20 capitalized and more profitable insurance companies that are offering microinsurance products in Uganda. However, even these companies indicated that they would need technical assistance and training in the microinsurance. As to regulating microinsurance, Ugandan insurance companies had very similar views. They hoped that all providers would be treated equally under same regulator facing similar legislation and solvency requirements. Microinsurance holds a promise for reducing poverty and increasing welfare by providing risk management solutions to low-income persons. At least in Uganda formal insurance companies are trying to address this market segment with simple products. How successful they will be in the long run depends heavily on the regulatory changes and their own capacity to develop innovative products and distribution channels.

22 21 References: Doubell Chamberlain (2008) Towards new typologies for micro-insurance intermediation, A presentation, www. finmarktrust.org.za. Craig Churchill, Dominic Liber, Michael McCord and James Roth (2003) Making Insurance Work for Microfinance Institutions A Technical Guide to Developing and Delivering Microinsurance, International Labour Office, Geneva. Monique Cohen and Jennefer Sebstad (2005) Reducing Vulnerability: The Demand for Microinsurance, Journal of International Development, Vol. 17, Monique Cohen and Jennefer Sebstad (2006) The Demand for Microinsurance, in Churchill (ed.) Protecting the poor A microinsurance compendium, International Labour Office, Geneva, p Finscope Uganda (2007) - Results of a National Survey on Access to Financial Services in Uganda, Steadman Group, Kampala. Patrick Honohan (2004) Financial Sector Policy and the Poor Selected Findings and Issues, World Bank Working Paper, no.43, World Bank, Washington DC. IAIS and CGAP working group on microinsurance (2007) Issues in Regulation and supervision of microinsurance, Markus Loewe (2006) Downscaling, Upgrading or Linking? Ways to Realize Micro-Insurance, International Social Security Review, Vol. 59, p Michael McCord (2006) The Partner- Agent Model: Challanges and Opportunities, in Churchill (ed.) Protecting the poor A microinsurance compendium, International Labour Office, Geneva, p Michael McCord, Grzegortz Buczkowski and Priyanka Saksena (2006) Premium Collection: Minimizing transaction costs and maximizing customer service, in Churchill (ed.) Protecting the poor A microinsurance compendium, International Labour Office, Geneva, p Microinsurance Survey A questionnaire, Uganda Insurers Association, Kampala. Richard Pelrine and Olive Kabatalya (2005) Savings Habits, Needs and Priorities in Rural Uganda, UsAID Uganda, Kampala. Jim Roth, Michael McCord and Dominic Liber (2007) The Landscape of Microinsurance in the World s 100 Poorest Countries, Microinsurance Centre, Appleton. Uganda Insurance Commission (2008) Annual Report for year 2006, Kampala. Uganda Bureau of Statistics (2006) Uganda National Household Survey 2005/2006, Kampala.

23 Martina Wiedmaier-Pfister and Arup Chatterjee (2006) An enabling regulatory environment for microinsurance, in Churchill (ed.) Protecting the poor A microinsurance compendium, International Labour Office, Geneva, p