Protecting the working Poor

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1 New Channels to Get Insurance to the Poor By Abby Gray & Sarah Bel Microinsurance Innovation Facility Microinsurance needs scale and efficiency in order to be sustainable. Insurers may be efficient, but they often lack a clear understanding of low-income clients and ways to access poor markets. Thus, involving a distribution partner can help create a successful business model. Given the multitude of options available, what should insurers consider when selecting a distribution channel? In The Fortune at the Bottom of the Pyramid, C.K. Prahalad argues that recognizing the poor as value-conscious consumers instead of victims would open up a new world of business opportunities in developing countries. The insurance industry is starting to notice those opportunities. Microinsurance, or insurance for the poor, is growing 30-50% every year. Despite this rapid growth, there is still a huge untapped market: only 5% of low-income people in developing countries are using microinsurance products to better manage risks and smooth their way out of poverty. In Africa alone, the low-income population constitutes a microinsurance market of approximately 700 million people, with an annual income of approximately 500 billion USD. 1 Assuming a potential for insurance expenditure levels of 5% of GDP 2, the value of the market for microinsurance in Africa is approximately 25 billion USD. However, quoting statistics about the huge potential of the low-income market is easy; tapping into this potential is not. It can be a real challenge for insurers to access poor communities, educate them on the value of insurance, and gain their trust. In traditional insurance, agents and brokers receive commissions for selling individual policies. With microinsurance, profit margins are small enough that this approach is often too expensive. Furthermore, reaching economies of scale quickly is essential to making microinsurance sustainable. So, finding distribution channels that can help insurers access clients, sell products, and administer policies is truly critical to making microinsurance work. Though microfinance institutions (MFIs) have been the most commonly used distribution channel so far, many exciting projects are experimenting with new, 1 World Bank, Sigma 3, 2009 figure for South Africa.

2 unconventional options as well, ranging from churches to retailers. So, what makes a distribution channel effective, and what should insurers look for in a partner? Reaching large numbers of poor clients Obviously, one of the most important qualities of a distribution partner is its capacity to help an insurer attain scale and reach a large number of poor clients. What may not be obvious, however, is the wide variety of potential channels that meet this criterion. Aside from MFIs, options include informal financial institutions, governments, utility companies, community organizations, churches, employers, and retailers, among others. It should also be kept in mind that distribution channels even if they reach great numbers - can actually limit an insurer s potential market. Working through the traditional agent model, insurers could target just about any potential new client. With distribution channels, the market for new clients is usually limited to the group of people the channel has access to. Churches have access to their congregations, retailers to their customers, MFIs to their borrowers and savers, and employers to their employees. Some channels are less restrictive than others for example, governments have access to virtually all citizens in a region. The potential market provided by a distribution partner should be well understood. Engaging in regular financial transactions Reaching large numbers is essential, but it s not enough. An ideal partner should also have regular financial interaction with clients. Clients who purchase microinsurance usually need to make regular premium payments, so the collection method needs to be convenient for the client and administratively inexpensive for the insurer. A distribution channel that already engages in regular financial transactions loans and savings, for example with the target market will make premium collections much more efficient. Box 1: Tea Plantations in India ICICI Prudential, an Indian insurance company, is partnering with the world s largest tea producer to provide a life insurance product for its employees. The pilot launch in January 2010 was successful, with over 2,500 workers authorizing payroll deductions, and ICICI is currently in discussions with two other tea companies to expand the project. Combining premium payments with other financial transactions often requires creative administrative solutions. For example, the tea employees premiums are paid on credit at the beginning of each month to accommodate ICICI s collections schedule, and the credit is repaid through weekly wage deductions to accommodate workers pay schedules. Also, in case of absenteeism and non-payment of wages, premiums can be deducted from the spouse or children s wages with due authorization. Adjustments like these are critical to accommodating the financial transaction arrangements of varying distribution channels and their clients.

3 One alternative distribution channel that meets the regular financial transaction criterion is employers. Though this channel only targets poor people working in the formal sector, it still has potential to reach large numbers efficiently by deducting premiums from paychecks. Many other distribution channels have the same potential for creative and cost-effective collection arrangements, such as combining payments with utility bills and taxes. Leveraging a trusted relationship Insurance is not an intuitive concept, and the distribution channel plays a critical role in educating clients and establishing trust. Thus, channels that already invest in creating meaningful relationships with clients have an advantage over those who simply engage in financial transactions with them. This is an area where MFIs can be at a disadvantage the world of microcredit is moving away from community-based models and more toward a business mentality. Less formal financial institutions, such as Savings and Credit Cooperative Organizations (SACCOs) in East Africa, often have a closer, more personal connection to members (or are even owned by them). Other community-based organizations also enjoy the trust of their members, such as churches, Self-Help Groups in India, and Mutual Health Organizations in West Africa, all of which are being tested as distribution channels. Box 2: Churches in the Philippines In 2009, Pioneer Life in the Philippines launched a project that combines financial and risk management education with a product that bundles savings with life and accident microinsurance. The project targets 250,000 families of migrant workers children and adult dependents who are part of a migrants association at churches and schools. Through wellness clubs based in the dioceses, the insurer creates awareness about savings and insurance benefits, leveraging the trust the religious association has gained in its relationships with members over the years. Supporting the sales strategy Despite their advantages, community-based organizations often lack the expertise and administrative capacity needed to support the sale and delivery of insurance. This capacity is especially important when distributing more complex products in markets where demand is less developed, because these environments require an active sales strategy. This trade-off between active and passive sales strategies is important for microinsurers to consider when choosing appropriate channels for their products. The following graphic illustrates the spectrum from passive to active, giving examples of both products and distribution channels.

4 Figure 1. The product/channel complexity spectrum Thus, an ideal distribution channel has the appropriate capacity to sell actively or passively, depending on the product and environment. See Box 3 on Hollard for an illustration of this principle in action. Box 3: Retailers in South Africa Hollard, a South African Insurer, has been offering funeral microinsurance for years, using retailers as distribution channels. Funeral insurance is a very simple product, and South Africans are already aware of its existence and its value, so this passive distribution channel works well. However, Hollard has recently introduced a property microinsurance product that is more complex and less familiar to the target market. Thus, the passive retailer strategy is proving to be less effective, and Hollard may be forced to invest in training for the retailers to become more active sales channels, or to redesign their strategy altogether. Incentivizing your partner This fifth and final consideration is easily overlooked, but has the potential to undermine an entire project. Even if a distribution channel is perfect in every other way, if its interests cannot be aligned with those of the insurer, the partnership will fail. Benefits to the channel can either be created by the insurer for example, commissions or can be intrinsic. Intrinsic benefits to offering microinsurance can come in a variety of forms. As in CODENSA s case (see Box 4), microinsurance can offer utility companies a competitive advantage and help with customer retention. This benefit applies to MFIs as well, but it s not their only motivation to offer microinsurance. For example, Zurich Bolivia has enjoyed a successful distribution partnership with Bancosol, a commercial bank targeting the lowincome market. According to Jorge Alvarez-Pol, a Vice President at Zurich, Bancosol s management believed that better risk management tools for clients would improve their clients financial stability and the institution s bottom line. Microinsurance products can also offer diversified income streams and contribute to the delivery partner s social mission. Choosing distribution channels that can recognize intrinsic benefits from selling insurance is not enough management of the channel must believe that the benefits are realizable and important. If intrinsic benefits aren t enough to motivate active sales, commission structures need to be carefully calibrated to drive the desired behavior. For example, retailers engaged as distribution channels by Max Vijay, a life insurance company in India, earn 10% on initial sales and a 3% commission on top-ups. Max Vijay has learned that this structure isn t working well: until a critical mass

5 MicroInsurance Innovation Facility Box 4: Utilities in Colombia In response to increased competition, CODENSA, the largest electricity distribution company in Colombia, has been developing a customer loyalty program to strengthen its customer base since A core component of the strategy is to offer alternative, non-electricity products that can be paid through the electricity bill, including the option to buy insurance products. Thus, CODENSA entered into a partnership with Mapfre Insurance in 2003, and currently offers five types of insurance products: life, personal accident, funeral, home, and vehicle. As an equal partner with a significant investment in the project s success, CODENSA is committed to maximizing profitability and developing an effective microinsurance business model. Thanks to aligned interests and good project management, the project has been successful, and more than 300,000 families made monthly insurance premium payments with their electricity bill between 2001 and of policyholders is attained in a given area, these commissions don t add up to a meaningful level to make selling worth the retailers time and effort. If the commission structure cannot be designed in a way that motivates retailers while remaining profitable for the insurer, Max Vijay may have to seek another distribution channel whose incentives are more aligned with their own. The future of distribution Arrangements between insurers and distribution channels are not simple, and project planners should carefully consider each of the five criteria presented here when establishing partnerships. Insurers should keep in mind that every situation has a unique cultural, regulatory, and environmental context, with different options and challenges for distribution. The ideal distribution model will take into account all of these factors, including the complexity of the product and the level of demand stimulation required to achieve scale. Insurers would also do well to remember that building successful partnerships can require creative, innovative and participatory solutions, and flexibility and open-mindedness will smooth the process. Like any value-conscious consumers, the poor work hard for their money and want to use it effectively for the benefit of themselves and their families. For insurers, using innovative distribution channels to get well-designed products into their hands is certainly a challenge but one that s worth tackling.

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