Publisher: Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH

Transcription

1

2 Publisher: Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH Promotion Small Financial Institution (ProFI) Bank Indonesia Menara Radius Prawiro, 2 nd Floor Jl. MH. Thamrin No.2 Jakarta / Indonesia T: +62 (0) F: +62 (0) E: gtzprofi@cbn.net.id I: Author: Daniel Weiss 1.edition Jakarta, May 2007

3 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 1 Table of Content: TABLE OF FIGURES: 2 ACRONYMS AND ABBREVIATIONS 3 US DOLLAR/ INDONESIAN RUPIAH EXCHANGE RATE 3 1. BACKGROUND AND OBJECTIVE OF THE PAPER 4 2. PUBLIC-PRIVATE-PARTNERSHIP ON MICROINSURANCE BACKGROUND, SET-UP, AND ROLES OF GTZ GMBH AND ALLIANZ SE STUDY ON DEMAND AND PROSPECTS CREDIT LIFE PLUS ADDITIONAL BENEFIT 8 3. FEATURES OF THE MICROINSURANCE PRODUCT THE PARTNER-AGENT MODEL AS A DELIVERY CHANNEL INSURANCE COVERAGE PROTECTING AGAINST ADVERSE SELECTION, MORAL HAZARD AND FRAUD PREMIUM PAYMENTS CLAIMS MANAGEMENT MARKET EDUCATION AND MARKETING EFFECTIVENESS OF PAYUNG KELUARGA NEXT STEPS INCREASE OUTREACH ESTABLISH A DISTRIBUTION NETWORK BPR AND LPD REQUIREMENTS FOR FUTURE DISTRIBUTION PARTNERS DIVERSIFICATION OF PRODUCT RANGE ADAPTATIONS TO PAYUNG KELUARGA EDUCATION ENDOWMENT INSURANCE LESSONS LEARNED ANNEXES 29 ANNEX 1: INSURANCE DENSITY AND PENETRATION FOR SELECTED ASIAN 29 COUNTRIES ANNEX 2: THE MINIMUM REQUIREMENTS FOR MFIS WITH 30 INSURANCE OPERATIONS 30

4 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 2 8. BIBLIOGRAPHY 32 Table of Figures: Figure 1: The five most perilous risks in Indonesia... 7 Figure 2: GTZ ProFI s goal in microinsurance... 9 Figure 3: The Partner-Agent-Model... 10

5 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 3 Acronyms and Abbreviations ASCA English Accumulating Savings and Credit Club Indonesian BPR People s Credit Bank Bank Perkreditan Rakyat CGAP CU DIMAN Consultative Group for Assisting the Poor Credit Union Dian Mandiri foundation GTZ supported microfinance program. The program aims to address the unmet GTZ ProFI demand for microfinance services in Indonesia using a financial systems development approach. LPD Village Credit Institution Lembaga Perkreditan Desa NGO PPP ROSCA Non-governmental Organization Public-Private-Partnership Rotating Savings and Credit Club US Dollar/ Indonesian Rupiah Exchange Rate 1 US Dollar (USD) = 9, Indonesian Rupiah (IDR) Source: Oanda - the currency site (Internet),

6 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 4 1. Background and objective of the paper Since 2004, GTZ GmbH and Allianz SE are cooperating in order to develop and provide safety net mechanisms to the poor through microinsurance. The project described in this paper is a Public-Private-Partnership which has been appraised by the German Federal Ministry of Economic Cooperation and Development 1. This cooperation is based on and is part of the joint initiative Measuring Microinsurance Demand and Prospects: Providing Safety Net Mechanisms to Poor People which is a strategic cooperation between UNDP, Allianz SE and GTZ GmbH. Within that framework microinsurance products are being developed and pilot tested in Indonesia and India. In Indonesia the project is being implemented by Allianz Life Indonesia and the GTZ-supported program ProFI. Allianz Life Indonesia provides its expertise in private insurance markets and GTZ ProFI supports the project through its experience in development assistance and microfinance. Both partners have introduced a Credit life plus additional benefit microinsurance product to the low-income market in Indonesia recently. At the time of writing the microinsurance product is being pilot tested for four months and sold through a single distribution partner. This publication covers the product design and the pilot testing phase in Indonesia. The two main objectives of this publication are to highlight the technical lessons learned of the Public-Private-Partnership on Microinsurance and to scrutinize the suitability of the microinsurance product for poor clients. As the target group of microinsurance are vulnerable low-income households it is necessary to maintain a clear focus on whether microinsurance can effectively reduce their vulnerability. The study provides practical experiences of the Public-Private-Partnership on microinsurance in Indonesia. The following chapters two and three illustrate the set-up of the Public-Private-Partnership, the responsibilities of each partner and the product features of the Credit life plus additional benefit product itself. It highlights the experience gained during the product design phase and the first months of implementation. These sections elaborate the specific insurance needs of low-income households. By means of practical experience it highlights how insurance processes have to be designed to make a credit life insurance product (with additional benefit) work. It is necessary to understand why microinsurance has to be implemented with a special focus on client needs. Chapter four then systematically scrutinizes the effectiveness and suitability of the microinsurance product developed by GTZ GmbH and Allianz SE in reducing economic risks associated with death for poor clients. It provides an insight into the appropriateness of microinsurance as an additional risk management strategy to existing informal strategies. Chapter five then looks into the future of the Public-Private-Partnership and lays out the next steps necessary to extend protection for low-income households. Finally, chapter six provides practical lessons learned which are drawn from experiences during the product design and the pilot testing phase. 1 Public-Private-Partnerships is an initiative of above mentioned German Federal Ministry to promote a project-based cooperation of the private and the public sector in order to combine economic with developmental objectives.

7 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 5 2. Public-Private-Partnership on microinsurance 2.1 Background, set-up, and roles of GTZ GmbH and Allianz SE The framework for the cooperation on microinsurance between Allianz SE and GTZ GmbH is a Public-Private-Partnership. The objective of the partnership is to develop and provide a safety net mechanism (microinsurance) for the poor. The objective of GTZ is to provide low-income households with an additional risk management strategy. Microinsurance, as the provision of insurance to low-income households, has the potential to complement the existing strategies of poor and vulnerable households. Micro-credit and micro-savings have played an active role in reducing the inability to deal with losses or costs which result from the occurrence of natural calamities but also more regular events such as illness and accidents. Still these events translate into crisis for many poor households and erode the economic gains they have made. Credit and savings services are inadequate when households are exposed to risks which cause losses that are beyond their means. Insurance can serve as a promising response to such client needs. In order to attain the objective of providing low-income households with a safety net mechanism both partners have to combine their respective strengths and professional experience. Each partner would not achieve this objective alone as GTZ GmbH is lacking the required insurance experience and Allianz SE is lacking the link to the lowincome market. The first joint activity within the PPP was the facilitation of studies on microinsurance demand and prospects in India, Laos and Indonesia. The studies combined an in-depth analysis of the framework conditions (e.g. insurance regulation, structure of the insurance industry), the existing microinsurance market with a client needs assessment (based on focus group discussions). The studies also provided a first appraisal of possible marketing strategies and recommendations for product development. After reviewing the findings the partners agreed upon developing a microinsurance product in Indonesia and India. In Indonesia the project is being implemented by Allianz Life Indonesia and the GTZ supported project ProFI. Both parties carry out the project jointly while focusing on their respective expertise. GTZ ProFI contributes its experience in development assistance in general as well as technical expertise in microfinance and a profound knowledge of and links to the microfinance sector in Indonesia. Concrete contributions in this respect are: to contribute its microfinance experience by o providing, processing and analysing financial as well as organizational data o pre-selecting potential distribution partners to act as a matchmaker o between Allianz and its distribution partners, associations, second-tier institutions (training institutes)

8 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 6 o towards central and provincial government authorities e.g. promoting Bank Indonesia regulation for an enabling environment o towards associations o to an international microinsurance network to assist in product design through o emphasizing the development and social aspect of microinsurance o incepting initiatives for innovative and more comprehensive products o facilitating UNDP-GTZ-Allianz microinsurance market study The role of Allianz Life Indonesia is to contribute its insurance expertise. Concisely, its contributions to the project are: to develop a microinsurance product including activities such as o actuarial calculation o establishment of administrative procedures o official registration with Ministry of Finance o producing marketing materials to establish partnership with distribution partners by o negotiating partnership agreements with distribution partners o conducting focus group discussions with clients o contracting distribution partners o training and educating the sales staff of distribution partners on insurance principles product features administrative procedures e.g. premium collection, claim handling and claim payment to conduct administrative insurance activities such as o claim verifying o financial monitoring and supervision This categorization intends to highlight the respective competencies of both partners and is not exhaustive. Chapter three describes the features of the product as well as the contributions of GTZ ProFI and Allianz Life Indonesia in further detail. Prior to that it is important to understand how GTZ ProFI and Allianz Life Indonesia arrived at the decision to develop a Credit Life plus additional benefit product. 2.2 Study on demand and prospects As a first joint project activity GTZ GmbH, Allianz SE and UNDP conducted a study on the demand and prospect of microinsurance in Indonesia in The study was conducted by internationally experienced microinsurance experts and revealed that the potential microinsurance market in Indonesia comprises the poor and the informal sector. This market segment consists of approximately 114 million people in Indonesia. The insurable population between 20 and 59 years are about 62 million people. The authors estimate that approximately 20% or 12 million people could become future microinsurance clients by Suggestions from other sources estimate 25 to 35 million insurable persons. At the beginning growth will be slow and will depend largely on the availability of microinsurance products, marketing mechanisms and distribution 2 McCord/Ramm/McGuinness, Microinsurance Demand and Prospect Indonesia, 2005

9 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 7 partners. But once clients and distribution partners recognize the value of microinsurance growth will be faster. Today, insurers are still reluctant to move into the low-income market due to low profitability, high risk of fraud, high transaction costs, uneducated sales personnel, lack of appropriate MIS systems etc. On the other hand there is an unmet demand for insurance services among Indonesia s poor. Conventional insurance services in Indonesia are available only for the middle and upper market segments. Individual insurance policies like health, education endowment, life, or motorcycle policies are accessible only to those who are able to pay the premiums. 3 Group insurance products, for example health insurance which is provided by the employer is accessible only to people who work in a formal sector job. Striking evidence is the very low insurance penetration 4 in Indonesia (1.49% of GDP). The level is by far lower than in Malaysia (3.45%) or Thailand (5.35%) and similar to countries like Vietnam and the Philippines. In addition, the insurance density 5 is low as well with a yearly per capita insurance premium of around 15$. Malaysia and Thailand have higher densities of 227$ and 80$ respectively. The Indonesian level is similar to the levels of India or the Philippines. The main objective of the study though was to find out which insurance product lowincome households need most. Therefore, it was crucial to understand what risks poor households regard as most pressing and endangering. Several focus group discussions were conducted in order to assess which risks cause the greatest loss to low-income households. Participants of the focus group discussions identified 22 different risks. The following five risks were perceived as most perilous. Figure 1: The five most perilous risks in Indonesia Identified Risk 1. Serious Illness 2. Education of Children 3. Poor Harvest 4. Death of a Relative 5. Accidents Source: Own elaboration adapted from McCord/Ramm/McGuinness, Microinsurance Demand and Prospects Indonesia, 2005, p. 24 Thus, microinsurance products should primarily provide protection against serious illnesses and mechanisms to lower the irregularity of educational expenses. The reasons 3 Allianz usual premium rates of at least IDR 100,000 (USD 10.50) per month are beyond these customers reach. 4 Insurance penetration measures the amount of insurance premiums as a percentage of GDP 5 Insurance density measures the value of insurance premiums per capita. Figures are derived from McCord/Ramm/McGuinness, Microinsurance Demand and Prospect Indonesia, 2005, p. 3 For further information please see the graphic Annex 1

10 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 8 why GTZ ProFI and Allianz Life Indonesia decided to develop a product against the risk death of a relative will be given in the following chapter. 2.3 Credit Life Plus Additional Benefit The study on demand and prospects of microinsurance in Indonesia in 2005 also revealed that the risks that need to be addressed most urgently are serious illness, educational expenses and poor harvest. The focus group participants perceived the risk of death only as the 4 th most perilous risk. Nevertheless, Allianz Life Indonesia and GTZ ProFI decided to develop a simple credit life product with additional benefits first, due to the following reasons: it is one of the most affordable products the insurance administration is extremely cost-efficient and simple it acts as an entry point for increasing coverage through product adaptations and more complex products. The resulting product is a compulsory group credit life insurance with additional benefits for loan clients called Payung Keluarga which literally means Family Umbrella. The product benefits both the creditor and the debtor. Upon death of the insured person (the loan taker) the insurance benefits the creditor and the dependants of the insured as it immediately repays the outstanding loan. Thus, MFIs do not have to write off the loan and the family does not have to repay the loan the dependants of the debtor with an additional benefit (twice the original loan amount) Thus, the product enlarges the effectiveness of a single credit life insurance product. It now benefits both the loan taker and the creditor. The product benefits both MFI clients as well MFIs themselves. In implementing the microinsurance product, GTZ GmbH as well as the GTZ-supported project ProFI focus on two main goals both with the ultimate objective of achieving sustainable poverty reduction; to contribute to sustainable poverty reduction through the benefits derived directly from the product by individuals and through strengthening of the MFI-sector. The impact chain of Payung Keluarga for individual clients (left chain) and MFIs (right chain) can be seen in figure 2.

11 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 9 Figure 2: GTZ ProFI s goal in microinsurance 1. Sustainable Poverty reduction Sustainable poverty reduction is achieved 2. Strengthening the MFI-sector Greater outreach to reduce poverty Better planning for the future is made possible Improved access to funds and more loans Individual vulnerability is reduced Improved loan portfolio and soundness Risk distribution over a large pool +additional funds after risk event Loan repayment if loan taker dies Source: Own Elaboration, based on a presentation of M. Hamp, Microinsurance Press Trip, 2007 As the insurance product is closely linked to credit services, the insurance duration matches exactly the loan term. The premium is deducted from the loan pay-out at the beginning of the loan term. The maximum insurable loan size is IDR 10,000,000 with a maximum duration of two years. Average loan size of the microfinance clients ranges from IDR 1,000,000 to IDR 4,000,000. The person covered is the loan taker. Every cause of death is being covered even death due to catastrophic risks like bird flu and earthquakes. Since the PPP is in its pilot testing phase and the credit life plus additional benefit microinsurance product Payung Keluarga is available to debtors of one MFI in the South Jakarta District and Badung District, Bali. To date more than 7,000 debtors are life insured and the first preliminary financial assessment indicates that the product may become financially sustainable in the future. The future commitment towards microinsurance of Allianz Life Indonesia depends on the sustainability of this pilot product. The objective of Allianz Life Indonesia is not to create a highly profitable product, rather the focus is on creating a financially sustainable product which can be offered to sections of the population that were previously without access to insurance. As already mentioned the crucial point in product design was to design a financially sustainable (or non-loss ) credit life product which is suitable towards the insurance needs of low-income households. The following section on product features provides a rationale for the product design. Beyond, it highlights advantages and limitations of the product features including first experiences of the pilot testing phase.

12 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia Features of the microinsurance product 3.1 The partner-agent model as a delivery channel During product design the question arose how to bring a future microinsurance product to the market. As mentioned above neither Allianz Life Indonesia nor GTZ ProFI have direct access to the low-income market. Allianz Life Indonesia s usual premium rates of at least IRD 100,000 are far beyond these customers reach. GTZ ProFI cooperates with and supports micro-, meso- and macrolevel institutions but has only limited direct access to potential microinsurance clients. Therefore, a third party had to be involved and both decided to rely on the partner-agent-model as an efficient retailing channel. Within that model the partner (insurer) and the agent (MFIs, Cooperatives, NGOs) split responsibilities and provide the services they have the most experience with. Within the Public-Private-Partnership Allianz Life Indonesia (partner) is mainly responsible for product manufacturing whereas the distribution partner (agent) is responsible for product sales and servicing and acts as the direct intermediary towards the low-income market. The partner-agent-model is shown graphically in the figure below. Figure 3: The Partner-Agent-Model Source: Brown/Churchill, Insurance Provision in Low-income Communities, 2000, p. 24 Currently, the microinsurance product is being distributed via a savings and credit cooperative. Its name is Dian Mandiri Foundation (DIMAN) and its head office is located in Tangerang south of Jakarta. DIMAN offers credit services to its customers and conducts social projects. DIMAN has 13 branches mostly located on the outskirts of Jakarta and in Banten Province. DIMAN s target beneficiaries are low-income, unemployed and poorly educated urban people (e.g. street vendors) as well as rural women. DIMAN serves approximately 17,000 loan clients but being a foundation is not allowed to take deposits from its clients. DIMAN's credit strategy is a group lending program called Trust Bank. DIMAN provides small business loans of up to IDR 1,000,000 to groups of 15 to 30 poor entrepreneurs. The Trust Bank program provides a graduation mechanism. Upon successful loan repayment clients can apply for larger credits in ever smaller groups. Finally, they are allowed to take individual credits. About 86% of DIMAN s clients are women. The members of the group co-guarantee each

13 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 11 other's loan repayment. 6 In the text box below you can find the responsibilities of DIMAN and Allianz Life Indonesia. Roles of DIMAN and Allianz Life Indonesia The role of DIMAN as an agent is to sell and provide service for the insurance products. Within that course DIMAN handles insurance subscription, collecting client data conducts client education upfront loan disbursement is responsible for premium collection (deduction at loan disbursement) as well as claim processing and even claim payment forwards premium surpluses monthly is to regularly forward premiums and report to Allianz Life Indonesia. The role of Allianz Life Indonesia as the partner is to: develop, calculate and provide the microinsurance product train DIMAN field staff extensively on general insurance principles as well as specific products features to initially assist DIMAN in technical matters (reporting) provide financial assistance if claims exceed premium payments and/or reserves. GTZ ProFI and Allianz Life Indonesia decided to rely on the partner-agent-model because it is a cost- and resource-efficient way to approach customers and it enables many MFIs to introduce insurance products complementing their product range. Under current regulation People s Credit Banks (BPRs) as well as many other MFIs are not allowed to develop and run insurance services on their own. Allianz Life Indonesia takes over the financial risk and even provides (indirect) access to reinsurance. Besides, the administration of the products within the partner-agent model is very costeffective. The small premiums of Payung Keluarga (in average around IDR 6,000) do not allow any space for unnecessary administrative complexity. With the partner-agent model the transaction costs for customers, MFIs and Allianz Life Indonesia can be kept to a minimum and this provides a real value for the policyholder. GTZ ProFI and Allianz Life Indonesia agreed to rely on the existing distribution channels of MFIs because MFIs are in a unique position to reach the low-income market. They have extensive networks, work efficiently and additionally their proximity to and experience in serving the poor are advantageous. In the future the project will focus on the cooperation with savings and credit cooperatives, People s Credit Banks (BPRs) and Village Credit Institutions (LPD). Via their networks Allianz Life Indonesia can reach out 6 DIMAN also offers a graduation program for the clients who need more capital. Then the credit groups consist of only 3-5 debtors with more developed businesses and a reliable credit history (max. loan size IDR 5,000,000) Beyond that DIMAN also offers collateralized individual loans (max. loan size IDR 10,000,000). The average loan size is around IDR 1,150,000 (as of March 2006).

14 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 12 to a large number of reliable customers as these MFIs already have an established credit history with their clients. The advantage for the current distribution partner DIMAN on the other hand is that it widens its product range and is insured against loan default due to death. Due to field experience many MFIs in Indonesia simply write off loans after the death of the debtor. Admittedly, this advantage is not decisive for MFIs as the debtor s family usually continues to repay the loan. 7 Thus, the MFIs that have been contacted yet support the additional benefit for their clients. But on the other hand there are also limitations of the partner-agent-model. One is for example that MFIs may not be able to negotiate favorable partnership conditions with insurance companies. This assumption may be true for less well established MFIs but the experience in partner selection to date reveals the opposite. BPRs and LPDs are aware of their own risk situation and their clients needs. Thus, GTZ ProFI and Allianz Life Indonesia are rather in a sales position and have to make a valuable offer for MFIs. A sensitive issue that arose during product design was the suitability of the distribution partner. As insurance is an intangible service it relies heavily on its distribution to market its benefits. For Allianz SE in general and Allianz Life Indonesia specifically it is important that their image as a successful and reputable insurance company is not distorted. Thus, professionalism of the management and financial sustainability have to be ensured when selecting distribution partners. The issue will become even more important in the future in case the PPP partners develop and provide more complex microinsurance products. In contrast to direct sales through insurance companies the partner-agent-model increases the risk of fraud and abuse as there is a second source of potential manipulation. But as fraud in life insurance with a fixed duration is difficult it seemed appropriate for Allianz Life Indonesia and GTZ ProFI to start with the partneragent-model. Another limitation of this model arises in case administrative arrangements are complex. In consequence, claim processing and payment may be long-winded. It is most crucial to ensure that pay-outs can be managed very timely. Besides, also insurance application and data exchange has to be implemented in a simple and cost-efficient way. Finally, one question is unanswered. What is the advantage for the debtor? DIMAN s clients for example do benefit from the model as they are offered well calculated products at affordable premiums. Secondly, the product improves the financial situation of DIMAN s clients. They may be willing to take larger credits in the future as the product reduces the risk loan repayment upon death. Besides, the debtor s transaction costs of purchasing and handling the microinsurance product are minimal as they can purchase the microinsurance product at a well-known and nearby MFI. As we have seen the partner-agent-model has some vital advantages. Both parties can split responsibilities and use their comparative advantages through concentrating on their core businesses. Thus, the partner-agent model minimizes transaction costs for them as well as for the customer. Still, there are limitations that have to be addressed to make the partnership effective. The administrative procedures (especially claim payment) have to be cost-effective and insurers as well as MFIs must be able to verify that they deal with reliable partners. 7 There is a religious belief in Java and Bali that the soul can not enter heaven while being indebted.

15 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia Insurance coverage The critical issue with insurance coverage is to find a balance between the interest of the insurers and the effectiveness of the product for the policyholder. With the microinsurance product of GTZ ProFI and Allianz Life Indonesia another issue was to ensure affordability of the product. GTZ ProFI and Allianz Life Indonesia decided on a simple but rigid product design in order to make the premium affordable and to keep administration simple. The product Payung Keluarga provides coverage for the event of death due to any circumstances. Thus, death due to accidents, HIV/AIDS and even suicide is covered. The reason is that any investigation on the cause of death would be more expensive than covering the additional risk. Besides, covering death due to any cause avoids the risk of claim rejection which can entail dissatisfaction among customers. In addition, the insurance has no exclusions (e.g. medical tests) for application in order to reduce transaction costs. Rather, mandatory group insurance is used, providing a mechanism to reduce the insurer s risk that many high-risk individuals join the scheme. Clients benefit from group insurance products in the form of lower premiums and less strict application processes. Payung Keluarga is provided to members of group loan schemes on a mandatory basis. The insured groups are (mostly female) credit customers of MFIs. The insurance product is based on the group-lending approach of the distributing MFIs. Thus, with one credit disbursement immediately 15 to 30 persons are life insured for the length of the loan term. In the first place mandatory group insurance benefits the insurer and the client as operational costs of group contracts are considerably less complex, less costly than individual insurance contracts. Group insurance contracts for example, reduce distribution and administrative costs (e.g. claim management) as there is only one contract for many policyholders. A limitation of the group insurance design of Payung Keluarga is that only clients who currently are members of a lending group can obtain insurance protection. Customers who currently do not have a credit can not obtain insurance coverage. Besides, only active members of lending groups can be insured. During interviews with credit groups in Java Tengah it became clear that not all group members take loans at the same time. In consequence, only those members who apply for loans can be insured. Members who pause go uninsured until they apply for another loan. Besides, long-term protection can not be provided yet as the covered term is consistent with the loan term. Thus, clients have insurance coverage only in times when they are indebted. This is a clear limitation as coverage is not available for clients who currently have no loan, savers or persons without a financial relation with a MFI. Another limitation is that until now the insured person is only the debtor but none of his/her family members. Thus, the insurance product can not provide comprehensive coverage yet. Beyond, the insurance term is always congruent with the loan term. Thus, coverage after loan repayment is not possible and Payung Keluarga can not provide any long-term protection.

16 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 14 As we have seen the product can not provide comprehensive coverage yet as it provides only short-term coverage and is restricted to small target group. The gender aspect of microinsurance is critical here as most of DIMAN s clients are women. Thus, their families are protected but the women are left alone in case their husband dies as most men go uninsured. But the credit life product is only a first step on the road toward comprehensive insurance for the low-income market. In order to gain the first experiences it is important to start with a small and simple step. Here, mandatory coverage facilitates a large customer number with an average risk portfolio. 3.3 Protecting against adverse selection, moral hazard and fraud Microinsurance providers have to find a balance between the affordability of their products for poor clients and the financial risk of excessive claims. Two main sources of excessive claims are adverse selection and moral hazard. Adverse selection describes the risk for an insurer that a disproportional part of high-risk individuals become members of an insurance scheme. Moral hazard describes the situation when a person engages in risky behavior especially because the person knows insurance coverage exists. The primary financial risk for insurers is excessive claims. These can distort its financial viability and in consequence can endanger customer protection. Both adverse selection and moral hazard can entail excessive claims. The crucial point for Allianz Life Indonesia and GTZ ProFI was to find the balance between the financial risk and the costs of measures to avoid this risk. The primary measure to prevent both is underwriting. Ultimately, underwriting measures would make the product unaffordable for clients. The necessary underwriting measures that are applied by Allianz Life Indonesia can be summarized as follows: The measures to avoid adverse selection are o mandatory insurance (all high- and low-risk individuals will join the insurance) and o age limitation (people over 60 can not apply for insurance any more) There are no medical check-ups, surcharges, premium loadings etc. There are no instruments in place to prevent moral hazard as their implementation would be too expensive (and the risk of moral hazard with life insurance products is generally very low) Thus, the product covers co-variant risks such as death due to epidemics e.g. avian flue or natural disasters. Just imagine the costs to verify the cause of death either through an on-site visit or a medical report - especially with regard to the small premiums. Another measure to reduce transaction costs is to not apply any upfront medical check-ups. As mentioned above, it is cheaper to add a risk margin to the product than to undergo expensive upfront examinations. The need for measures against fraud is minimal as the covered event death is hard to pretend. Allianz Life Indonesia requires the death certificate with signatures of local authorities (village or sub-district head). Additionally, the beneficiaries have to hand in the claim form. The claim form has to be signed by several authorities (e.g. head of the credit group, loan officer and others). Thus, it is hard to fake. Besides, there is no fraud on the pay-out side as benefits are determined through the loan size (determined at credit disbursement).

17 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 15 The limitations of the product can be seen clearly. No person older than 60 years can join the insurance and people are obliged to purchase the insurance even if they do not want to receive it. These limitations weigh heavily on the microinsurance product. But these two instruments are the absolute minimum of measures to ensure financial viability of the product. Without applying these two measures the premium would increase dramatically or Allianz Life Indonesia would not be willing to provide the product. Thus, it is a compromise between risk limitation for the insurer and client orientation. In general it is important that measures of underwriting and against fraud are used with prudence as not to deliberately exclude the ones who are in need of insurance and not to limit insurance benefits. It is very crucial to ensure that the product is of value for the client and at the same time reduces transaction costs. Thus, it is more suitable to clearly restrict coverage than to apply exclusions or check-ups as these finally make premiums more expensive. The measures taken by Allianz Life Indonesia represent the absolute minimum procedures. 3.4 Premium payments There is a clear correlation between the socioeconomic level and the ability to purchase insurance. Setting premiums is therefore one of the most crucial issues in providing microinsurance successfully. On the one hand premiums have to be set high enough to secure sufficient coverage, cover operational costs and ensure a profit for the insurer. But most importantly premiums have to be affordable for the targeted low-income clients. The insurance premium of Payung Keluarga is based mainly on assumed claim ratio, the administrative expenses and a certain profit margin for Allianz Life Indonesia and the distribution partners. The premium was discussed with existing group credit clients of DIMAN through focus group discussions during the design phase. Asked how much the premium for the product should be most clients stated higher premiums. Additionally, the customer satisfaction with premium levels will be re-evaluated at the end of the pilot phase. The insurance premium of Payung Keluarga is being paid as a one-time deduction at the beginning of the loan term. DIMAN deducts a certain percentage of the loan size at loan disbursement. This premium payment mechanism is the most cost-effective for Allianz Life Indonesia. The advantage for clients is that they do not have to use their own funds and do not have to make continuous payments. Regardless, of their income situation at loan disbursement clients are covered by life insurance for the loan term. Still, clients are burdened as the loan amount he or she receives is smaller than without the insurance premium. Allianz Life Indonesia designed the handling of the premium in a way that minimizes administrative costs and builds upon mutual trust with the distribution partner. DIMAN is entitled to keep the premium of new insurance customers for one month. At the end of the month DIMAN transfer the total premium less the amount of pay-outs towards Allianz Life Indonesia. In case the pay-outs exceed premiums Allianz Life Indonesia will transfer additional funds to DIMAN. As the product is mandatory Allianz Life Indonesia does not pay any commissions for DIMAN but engages in profit-sharing in order to cover DIMAN s expenses.

18 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 16 The credit life product has also some limitations. Our experience shows that, some MFIs are not interested in insuring their credit portfolio as this can be done more effectively by adding a risk margin on interest rates. Secondly, some MFIs are willing to accept credit life insurance but are not interested in the additional benefit. The argumentation is that the premium for the additional benefit is too expensive for debtors and besides, does not bring any value for the MFI. A critical aspect of premium payment in general is that premium payment schedules should be designed in accordance with the volatile income flows of a MFI s clients. Fixed annual premium schedules may be most economical and manageable for insurers 8 but are not always appropriate for the low-income market - especially for the urban poor. But for farmers on the other hand, an annual premium payment after harvest may be perfectly suitable. For credit life insurance the premium payment can be easily designed as a single deduction at loan disbursement without burdening the debtor too much. In addition, administration of premiums for credit life should be in the hands of the distribution partner when relying on a partner-agent model. For other types of insurance e.g. endowment insurance or health plans insurers have to find a way to ensure payment schedules that are economical and manageable for the insurer but most important - suitable for clients. 3.5 Claims management Two aspects have to be considered with claims management. At first claims are the biggest single bulk of costs for the insurer and their amount is uncertain. This imposes a threat to the financial performance of the insurer. Secondly, claim processing is a key factor regarding usefulness of and client satisfaction with microinsurance products. Microinsurance providers have to ensure a claim verification process that reduces the risk of fraudulent claims while guaranteeing that pay-outs are delivered quickly. Allianz Life Indonesia and GTZ ProFI decided to design the claim handling process in a way that gives most responsibilities to the distribution partners. Currently, DIMAN is responsible for claim verification as well as for claim payment. DIMAN front office staff is to compile the necessary claim documents (death certificate of the village or sub-district head, claim form) and to verify the identity of its clients. This may be a tricky task in Indonesia since many people have two or three identification cards. So far there are no experiences that client identification imposes a problem for microinsurance operations. Besides, its primary function as a watchdog DIMAN s role is also to ensure that clients actually do claim and to assist them in making valid claims for example in gathering all necessary signatures of local authorities. After claim verification DIMAN is entitled to pay-out the benefits to their clients directly. Concerning the timing of benefit payment literature usually stresses the need of poor clients for timely pay-outs. GTZ ProFI and Allianz Life implemented this idea. DIMAN is entitled to make instant payouts once the claim has been verified. To date DIMAN may keep all premiums paid in their own account. Only at the end of each month DIMAN 8 Annual premium schedules reduce complexity for pricing and allows maximum time for investments as one-time payments are usually paid at the beginning of the insurance term.

19 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 17 transfers the balance between paid premiums and paid claims towards Allianz Life Indonesia. Allianz Life Indonesia will only get a monthly report including copies (or scans if sent via ) of the claim documents. Allianz Life Indonesia will not reject any claims unless there is educated guess for fraud for example if the death certificate is missing. But although instant claim pay-out is possible GTZ ProFI and Allianz Life Indonesia decided to not pay-out the additional benefit directly towards the client. During focus group discussions with DIMAN clients prior to product inception it became clear that about 50% of the insurance pay-out would be used to enlarge and upgrade burial and commemoration ceremonies. But the developmental objective of the PPP emphasizes the productive use of pay-outs. Benefits should be used as starting capital for a new livelihood or to cover educational costs for children. Therefore, the claim payout is done at earliest eight days after the death becomes known to DIMAN. Then, the most important burial ceremony (called selamatan ) has already taken place. A limitation of this approach is that Allianz Life Indonesia lacks control mechanisms but rather has to trust its distribution partners. For example, claims may be paid out earlier than after the 8 th day. But Allianz Life Indonesia can check this only ex-post. One counter-measure is that the pay-out form has to be signed by several persons including local authorities. It is rather unlikely that DIMAN s loan officers may manipulate the form. Besides, it takes some days to issue the death certificate. With microinsurance it is crucial to simplify administrative procedures so that transaction costs can be minimized. Furthermore, existing perceptions on client needs should be reviewed. One way of promoting the productive use of insurance benefits is to introduce a specific waiting period after death reducing the probability of consumptive use of benefits for example to finance lavish funeral ceremonies. 3.6 Market education and marketing In Indonesia there is a gap between the high demand and insufficient supply for insurance services among the poor. The situation is aggravated by the fact that insurance services face an uneducated market, with many uneducated poor lacking the understanding of and acceptance for insurance schemes. Due to the intangibility of insurance services there is a dire need to educate clients on the basic principles of (micro-) insurance. The crucial point is to create willingness to pay for uncertain benefits. To date the microinsurance product developed within the PPP insures DIMAN s group loan clients on a mandatory basis. Every member of a loan group has to pay the insurance premium when taking a loan. This product feature was crucial for Allianz Life Indonesia to set foot into the microinsurance market. This top-down approach, however, benefits in the first place the insurer. As the mandatory insurance product does not allow demand articulation by the market it is most important to monitor customer satisfaction and to obtain feedback. That is why GTZ ProFI and Allianz Life Indonesia estimated client satisfaction during focus group discussion with DIMAN clients prior to the product launch. At the end of the pilot phase focus group discussions will be conducted a second time. These surveys are of utmost importance as DIMAN clients have no other way to express satisfaction or dissatisfaction

20 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 18 because they can not opt out of the insurance scheme. Unsatisfied clients could only opt to not renew their credits and to apply with other financial institutions instead. An important focus for GTZ ProFI and Allianz Life Indonesia during the pilot phase is to ensure that clients do understand and accept the insurance product. The objective of the PPP here is that all group clients receive sufficient and correct product explanation through the sales staff. The most vital measure in the context of a partner-agent-model is to properly educate the sales staff of DIMAN and future distribution partners. Both PPP partners developed training materials for loan officers and administrative staff at DIMAN s head office. The training conducted by staff of Allianz Life Indonesia - takes about three to four hours. It explains insurance principles as well as product specifications. Beyond that, the staff training explains the processes of insurance application as well as claim handling. GTZ ProFI and Allianz Life Indonesia require DIMAN sales staff to be able to: inform clients about the insurance benefits, premiums; to answer clients questions (also about insurance principles) and; to guide them through the application and claim process. Through irregular on-site visits Allianz Life Indonesia monitors (ex-post) that field staff explains the product properly and that every customer receives the product brochure. But the insurance education measures to date are limited to DIMAN s group loan clients. There have been no activities to educate the public yet although Allianz Life Indonesia and GTZ ProFI raised awareness at provider level and at meso-level organizations e.g. the association of People s Credit Banks (BPR). Mandatory insurance may be a valuable tool to ensure the sustainability of a microinsurance scheme. But this top-down approach does not give a voice to the customer. Thus, it is of utmost importance to have a look at client satisfaction and client demand. In addition, there is a strongly felt need for educating clients on insurance basics. But it remains to be explored how knowledge can be provided on the large scale, also to non-customers. 4. Effectiveness of Payung Keluarga Until now we got to know the objectives of Allianz SE and GTZ GmbH concerning microinsurance, the product details, the distribution approach and the advantages and limitations of Payung Keluarga. But one final question remains. How do low-income households in Indonesia benefit from this product? As we have seen before, low-income households protect themselves against risks and cope with shocks mostly by drawing upon informal strategies. What is then the advantage of microinsurance over saving, lending money or selling livestock? Based on the concept developed by Sebstad/Cohen 9 this section compares the effectiveness of informal individual (saving, buying assets, diversifying income etc.) and 9 See ILO and MunichRe Foundation, Protecting the poor: A microinsurance compendium, 2006, pp. 25

21 Lessons Learned from a Public-Private-Partnership on Microinsurance in Indonesia 19 group-based mitigation strategies (reciprocal relationships, ROSCAs) with microinsurance. Informal individual strategies can be to save money or livestock to anticipate losses after risk events. Besides, diversifying income sources is a strategy to limit risks. Group-based strategies comprise reciprocal relationships (lending money, assets) and ROSCAs (Rotating Savings and Credit Association). In Indonesia ROSCAs - called Arisan - is a very popular strategy of mitigating risks. These strategies are compared to microinsurance in terms of: Coverage What amount of funds can they access after a loss? Accessibility Can they apply a certain strategy or not? Timeliness How can they build up reserves (does it suit their income pattern) How fast can they access finances after a loss? Secondary impacts What is the consequence of a certain mitigation strategy? In contrast to informal mechanisms Payung Keluarga is advantageous for low-income households in terms of coverage. Relatively small installments of a large number of policyholders cover the losses of the minority. A premium of IDR 6,000 or 12,000 provides DIMAN s group clients with the security to receive a pay-out of at least IDR 1,000,000 or 2,000,000 during a loan term of one year, in case the risk occurs. Thus, the insurance clients are provided with the possibility of a greater pay-out than their premium. Informal individual strategies instead cannot provide protection against risks resulting in a loss greater than what a household can save 10, lend or repay (when taking credits or pawning assets). Group-based strategies like Arisans can provide enlarged coverage as the savings of several members are pooled. One drawback of the currently available Payung Keluarga product is that it provides benefits only against one specific risk. The credit life insurance premium can not be used as a security against accidents, disability or severe illnesses. Thus, the premiums are a negative investment in case the risk does not occur and can not provide multi-coverage against several risks. But nevertheless, and although the risk of death is not the most perilous risk for poor Indonesians, the risk and fund pooling mechanisms of Payung Keluarga permit low-income households to insure themselves against specific risks the consequences of which would otherwise exceed their financial capacity. In contrast to informal strategies Payung Keluarga is less advantageous for low-income households in terms of accessibility. Premiums, although low and conveniently deducted from the loan at loan disbursement may be too expensive for low-income households. To date several MFIs suggested lowering the premium by restricting benefits. Price sensitive clients would apply for credits at MFIs without insurance if premiums are too expensive. 11 Furthermore, Payung Keluarga can only provide protection in areas with available distribution partners. To date this is only the case in Tangerang. Informal mechanisms e.g. saving and even ROSCAs are available everywhere in Indonesia, also in hard-toserve rural areas. 10 Brown/Churchill, Providing Insurance to Low-Income Households, 1999, p Please note that the MFIs suggested lowering the additional benefit. The premium for covering the outstanding loan is not perceived as too expensive.