Published by CGAP, based on key chapters of Protecting the Poor: A Microinsurance Compendium, 4 pages, October 2007, available for viewing here.
The second microfinance focus note of the series, entitled “Product Design and Insurance Risk Management”, focuses on ensuring the viability and sustainability of the insurance product. In order to design a product that strikes a balance between broad inclusion, value, affordability, and sustainability, microinsurance providers must start with four basic steps: define the target group, assess insurable risks, determine key product features, and establish payment capabilities among the target population.
The paper compares types of insurance products: group and individual, mandatory and voluntary. Group insurance targets those who are members of existing groups, and tends to cheaper to administer. On the other hand, individual insurance may be better suited for a scattered market or products that cannot be offered through a group approach. Mandatory insurance with voluntary options for individual coverage level is highlighted as a successful combination that can provide the affordability and sustainability of mandatory insurance while presenting the flexibility in choice of voluntary insurance.
In terms of payment options, the paper highlights short-term insurance policies with renewable terms as the best compromise in which policyholders can have continued coverage and insurers can adjust pricing as needed. Because the low-income market tends to have unpredictable cash flows, payments deadlines should be timed to correspond with periods, such as harvest seasons, when households have some surplus income.
Product benefits should be kept as simple as possible, such that they can be easily explained in a few minutes. Clients should also have ready access to these benefits through an easy claims submissions process. Distribution of benefits, whether in cash or in kind, should depend on the type of insurance. On the other hand, long-term clients who have not claimed any benefits should also be offered extra benefits, such as savings features and premium refunds.
The paper recommends that insurers avoid elective participation, diverse target population, and numerous product choices, all of which increase adverse selection and necessitate more controls. However, some claims controls are crucial in maintaining the viability of microinsurance schemes. Effective ones, especially when used in combination, include: deductibles, which reduce administrative cost; coinsurance, in which the insured assumes partial liability; benefit ceilings, which curb insurer cost; and waiting periods, which help insurers better assess high-risk clients while providing immediate benefits.
By Mary Fu
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