4 Partial Report IV Identifying the Major Parameters for Microinsurance Products

Transcription

1 4 Partial Report IV Identifying the Major Parameters for Microinsurance Products Preliminary Insights Regina Lidia Giordano Simões João Luis Nascimento Vieira Christine de Faria Zettel Wagner Clemenceau Rodrigues Ramos Rossano Orsini Junior Francisco de Assis Vasconcellos English version: Sandra Machado According to the approved schedule, the SUSEP Working Group on Microinsurance (SUSEP WG) established by the Ordinance SUSEP 2.960, dated June 12 nd, 2008 should submit to the Superintendent, in its fourth and last Partial Report, a study in which the major parameters for Microinsurance products are indentified, as well the eventual products themselves. As a starting point for such studies, SUSEP WG considered it expedient to adopt the following strategies: i) To take into account the discussions that occurred within the scope of the Products and Target Audience Subgroup of the CNSP (CCM-CNSP) Microinsurance Consultative Committee. ii) To consider the result of the studies performed within the scope of the Escola Nacional de Seguros Funenseg Survey Program, approved by CCM-CNSP in November

2 120 Microinsurance in Brazil: Research Series iii) Considering the active participation of this Authority at the IAIS-CGAP Joint Working Group on Microinsurance (JWG-MI) and at the IAIS Subgroup on Microinsurance, both chaired by the Superintendent of SUSEP to adopt as main references, the paper Issues in Regulation and Supervision of Microinsurance and works performed by members of these working groups; renowned experts in the financial and insurance sectors. The Conclusions within the Scope of the CCM-CNSP Products and Target Audience Subgroup The creation of a Products and Target Audience Subgroup had been proposed during the CCM-CNSP meeting of May 26 th, 2009 and its primary objectives were the following: i) to define the Microinsurance consumer audience in Brazil, that is, to establish a more appropriate concept for low-income population with the specific purposes of Microinsurance, since the limit specified previously by CCM-CNSP (three minimum wages) was revealed as being too high considering the results of the studies performed within the scope of the Survey Program carried out by FUNENSEG, which could distort the Microinsurance purposes; and ii) to identify a range of the major Microinsurance products and their minimum parameters. This Subgroup has been formed by representatives from the Brazilian Central Bank, Escola Nacional de Seguros, CNSeg, FENACOR, and also specialized advisors, actuaries and the totality of the SUSEP WG members. Regarding the Low-income Population Concept Regarding the definition of the Microinsurance consumer audience, that is, the low-income population concept, the members of the Subgroup arrived at important conclusions, of which we may highlight the following: Brazilian contrasts and regional differences influence significantly the minimum wage purchasing power, which would make difficult its use as parameter to define the Microinsurance target audience. Furthermore, it was noted that in recent years, the minimum wage has been increasing above the variation of inflation. This is a trend for the policies adopted for the Country, and which would make even more difficult

3 Partial Report IV 121 its adoption as reference for a definition without having noted the relevant distortions during the time. Establishing a definition of the target audience for consumers of Microinsurance had the main objective of measuring and estimating market potential, and was achieved by research carried out by the SUSEP WG and the CCM-CNSP, with both finding it unnecessary to establish a cut-off for the upper limit. In addition, the Sub Group felt that one could not place limits of Microinsurance consumers by favoring some over others. The probable eventual tax benefits obtained shall be applied to Microinsurance products and not to the Microinsurance consumers, ultimately benefiting the target audience, but in a general and more indirect way. Products designed that are specifically intended to meet the needs and the profile of the low-income population which may vary greatly from region to region shall be defined by the target audience. For this reason, Microinsurance products should be designed to provide appropriate protection and services for their target audience, using the appropriate logistics and delivery channels for each specific sector. Within this context, although there are product design aspects that need to be rethought, the main focus of the legislation should be the definition of the parameters for the Microinsurance products, which should protect the Microinsurance consumer, but without preventing innovation. The Subgroup recommended that CCM-CNSP pre-approve the Microinsurance products of SUSEP, at least for a pre-determined period (e.g. 5 years), and considered it appropriate the establishment of Microinsurance branches and sub-groups, similar to the branches and groups already provided for in the currently law, which would allow the separation of the statistical data sent to SUSEP and the creation of a Microinsurance database. To carry-out further studies and research regarding the potential of the target audience, the Subgroup considered that it would be more appropriate to consider groups by types of family (e.g. couple with two children, mother with two children, family with only one member, etc.), achieving results by product range and not by income level. Based on the studies carried out within the scope of the FUNENSEG Research Program 1, the Subgroup also evaluated the inter-connectivity of the social programs and insurance already in existence in Brazil, considering criteria such as: i) risk transfer 1 Galiza, Francisco. Social Programs and Insurance in Brazil: Major Features the work describes about 20 programs, seven of them complementary to the Bolsa-Família program social and financial inclusion, population more vulnerable to the risks arising from the poverty (which is understood as a more comprehensive concept that unites factors such as income, literacy and living conditions), etc.

4 122 Microinsurance in Brazil: Research Series and the possibility to manage this; ii) the existence of a limited target audience within a pre-defined scope; and iii) programs financed by premiums or specific taxes. The result reinforced what had previously been concluded, cautioning the use of the minimum wage as an index for definitions, due to its annual variation above the inflation rate. In general, excluding some exceptions (e.g. the workers compensation insurance, to be regulated, and microcredit programs, as the PRONAF), the target audience of Government social programs, not counting eventual programs that will include governmental subsidies, is different from that of Microinsurance, since the target audience of the Government social programs is intended for sectors of the population on the threshold of the indigence. For all these reasons, the Subgroup concluded that an eventual definition of target audience or of low-income population should not use objective indexes, given that the minimum wage that may change over time, but, instead, it should be conceptual, rather like the Microinsurance definition adopted by CCM-CNSP 2. In this case, the Subgroup recommendation would be for the adoption of concepts and expressions such as: social and financial inclusion, population more vulnerable to the risks arising from the poverty (which is understood as a more comprehensive concept that unites factors such as income, literacy and living conditions), etc. Regarding Microinsurance Products and their Parameters Regarding Products Having its basis in the partial results 3 carried out within the context of the FUNENSEG Research Program, the Subgroup identified three potential Microinsurance products, from existing programs: i) the credit life insurance (microcredit programs 4 ); ii) Group Life + PA (PASI 5 ); and iii) Funeral Care (existence of informal programs). 2 Microinsurance is the insurance protection provided by entities authorized to work in the country, whose major purpose is to preserve the socioeconomic, personal or family status of the low-income population, against specific risks in exchange for premium payments proportionate to probabilities and costs of risks involved, in accordance with the generally accepted laws and principles of insurance. 3 Galiza, Francisco. Products of the private initiative interconnected with the Microinsurance. 4 An important data to be recorded is related to the value of microcredit average lending, about R$1, Plano de Amparo Social Imediato PASI (Immediate Plan of Social Support), intended mainly for the low-income population sectors, established in 1989 by a request of the Employees Union from the UMG. Since its beginning, the program already counts on 17 conventions and assureds, and works in partnership with Vera Cruz Seguradora, currently Mapfre Seguros.

5 Partial Report IV 123 But the identification of these products should not be considered the limit, since the objective of the existence of a legal framework for Microinsurance is to regulate programs already existing; on the contrary, it should stimulate the creation of a new market, with new products adjusted to the needs and the reality of the low-income population. Within this context, the Subgroup initially concluded that more than merely define products, Microinsurance legislation should carefully establish objective parameters, including, but not limited to: period; maximum amount insured; maximum term to settle the claims, including procedures; contracting method (tickets and/or policies); documents limits required by branch in the event of loss. These objective parameters for Microinsurance products should be defined and specified by the branch. The legislation should also establish marketing conditions and necessary requirements, such as: maximum cost of policy; need for prior approval for products; permitted delivery channels; control, transparency and compliance criteria; solvency and capital requirements, and market conduct (with special attention to the Microinsurance consumer protection and clarification), preventing regulatory arbitrage. It is worth also highlighting other conclusions of the inter-connectivity Subgroup: Upon the establishment of criteria, as much for the minimum parameters of the products as for other necessary requirements, caution is recommended in order to prevent future constraints, either in a product s design and/or in its operation, in order to allow innovation, and at the same time that appropriate conditions are created for protecting the low-income consumer, who is, by nature, less than sufficient. On account of the established laws in the Civil Code, special attention should be given to the form of the policyholder, with determination of specific conditions for Microinsurance, mainly in the case of open policies. The establishment of appropriate finance education programs that allow the development of a well-informed consumer market is essential for the process. With respect to the delivery channels, the Subgroup recommends that the legislation, when defining it, should also make explicit the possibility of linear combinations amongst different channels (for a same product), which would prevent further questions.

6 124 Microinsurance in Brazil: Research Series Regarding Parameters As described in item Regarding the Low-income Population Concept of the SUSEP WG Partial Report II, that considers the IAIS paper Issues in Regulation and Supervision of Microinsurance 6, Product Regulation aims at ensuring consumer stability and protection through the regulation of the type and the structure of insurance products and may include, but is not limited to, for example: the products record and prior approval; fulfillment of the guidelines with respect to simplification, standardization, documentation, coverage period, exclusions, etc.; the establishment of maximum and minimum premiums by product category; the provision of services from providers using specific legal methods, and the obligation to offer specific mandatory products. On the other hand, purposely establishing parameters that may be applicable to Microinsurance products is to differentiate them from traditional insurance products. Within this context, though the Subgroup members have disagreed a lot with respect to the limits to be determined for the various parameters for Microinsurance products, there has been an agreed consensus on the need to establish them. The summary of opinion on every parameter discussed is presented below: Maximum Amount Insured for Personal Insurance The majority of the Subgroup members consider that the determined value of the maximum insurance amount for Microinsurance can be based on a monthly income of 2 minimum wages received in periods from 12 to 24 months, considering the double payment for Accidental Death. Maximum Amount Insured for Damages Insurance There has been a consensus that in the case of damage insurance the maximum insurance amount shall be analyzed individually, since the values may vary a lot according to the branch. Maximum Period The suggestion to establish a minimum period took into account the fact that a Microinsurance product would have an educative feature, when informing and educating the low-income consumer about the importance of the protection provided by the insurance. But, it is necessary to consider that there may be frequent irregularities in 6 temp/questões de Regulação e Supervisão do Microsseguro Junho de 2007.pdf

7 Partial Report IV 125 the income flow of the poorest populations. Thus, the Subgroup members proposals were separated into two: i) monthly minimum period, by facility of operational management and easy understanding of the product by the consumer (when failing to pay the premium the consumer loses the coverage), at the same time the rehabilitation flexibility is permitted; and ii) annual minimum period, with rehabilitation flexibility due to failure to pay, which would permit, in addition to the flexibility, the creation of an insurance culture. Maximum Term for Indemnity Payment The consensus among the Subgroup members is that the maximum term for Microinsurance indemnity payment should be lower than that of traditional products, due to the expected economic insufficiency of the consumers and the dependence they have on the protection against poverty that is provided by the insurance. Almost all of the members agreed that three working days after delivering the documents would be a reasonable term for indemnity payment. Furthermore, the list of papers required by the insurers should also be concisely and objectively defined by the branch. Marketing Methods The majority of the Subgroup members consider it appropriate that the marketing of Microinsurance products should be by ticket and other possible ways (policy and proposal) with the definition of the essential information to be contained in the tickets. Waiting Period The waiting period matter was discussed with the explanation that, if used improperly, it may cause severe reputational risks for the market. On the other hand, however, the risk of fraud is created with the consequent increase of the risks and premiums. An eventual term for maximum waiting period was not discussed and there has not been any consensus regarding the theme that could be evaluated carefully soon. Previous Approval Although it is not a parameter, there is consensus on the requirement for the products to have prior-approval before being marketed, at least for a pre-determined period (e.g. 5 years). Therefore, the importance of appropriate qualifications was highlighted, by both SUSEP servants and by the industry, to prevent the occurrence of product distortion.

8 126 Microinsurance in Brazil: Research Series Conclusions and Comments from SUSEP WG Although the SUSEP WG members have organized the CCM-CNSP Products and Target Audience Subgroup, there are some questions that should be commented on and emphasized under the specific view of those that represent the Supervisory/ Regulatory Agency, mainly in respect of the care taken when determining the parameters for Microinsurance products. The Subgroup decision, having as its background an eventual definition of lowincome population, has been a certain one, since the focus should be on products adjusted to the specific needs of the sector. The defining of the objective parameters that will regulate in a way that is appropriate to Microinsurance products, in the first instance, shall work as protection for the poorer consumer and to the new market being formed. Regarding Parameters Regarding parameters discussed, it is necessary to highlight some issues raised by the WG representative at the Subgroup meetings: Minimum periods should be determined for products that bind Microinsurance to capitalization. Capitalization bonds, due to their capacity to give tangibility to a product like insurance, may be used to encourage the marketing of Microinsurance, but it is essential that conditions are established in order to prevent the loss of focus on the main product which, in this case, is the protection provided for the insurance. Thus, the issues surrounding of the insurance period is essential and of special relevance, since the products of monthly period would stimulate more the chance component of capitalization bonds than the permanence at an insurance plan. The Maximum Amount Insured for Damage Insurance should be evaluated in greater detail individually. Thus, other studies could be performed to become the basis for the eventual determination of values. A good example for fire insurance could be the use of average values of real estate financing for the low-income population by region. In the case of maximum term for indemnity payment, specific criteria should be specified for insurance such as funeral, because of the great reliance on this kind of service, mainly by the less fortunate classes.

9 Partial Report IV 127 Although all the stakeholders were granted access, the regulatory agency of private insurance is liable for determining the parameters and criteria for Microinsurance products. In addition to the previously mentioned parameters, the Regulatory/ Supervisory Agency of private insurance should establish simplified methods of marketing and contracting, through policies, tickets, individual certificates and, if authorized, by electronic means. Regarding the Operation Criteria In addition to establishing parameters for Microinsurance products, the Regulatory/ Supervisory Agency should determine the operating criteria of Microinsurance and also the specific conditions for the authorization and operation of the providers that work solely with Microinsurance, and also the property and accounting segregation of the Microinsurance operation for the providers that do not work solely with Microinsurance. Regarding Tax Issues Subsequent to the conclusions of the CCM-CNSP Products and Target Audience Subgroup sphere and the results of the studies carried out in the scope of the FUNENSEG Research Program, SUSEP WG considers it expedient to comment on the possibility of tax benefits for Microinsurance operations that could influence: The Microinsurance products themselves; The Microinsurance providers, as specialized insurance companies (Microinsurance companies) or, proportionally, as unspecialized insurance companies, but with accounting and property segregated for this purpose; and The employers, individual and legal entities, that contract Microinsurance for their employees. The main reason for the tax possibilities suggested is in the fact that the Microinsurance market does not yet exist, nor implying any reduction or waiver of public income. On the contrary, there would be an indirect increase of income. Obviously, everything shall depend on the favorable opinion of the authoritative sector from the Federal Internal Revenue.

10 128 Microinsurance in Brazil: Research Series As for the possibility of tax benefits for the employers also, a first evaluation seems to conclude that the measures would serve as a stimulus to the formalization of employees, promoting also a large collection of social security contributions, since the benefit would be conditioned to the regularity of the employee before the general regimen of social security. In general, it is certain that a lower tax impact will provide the reduction of the final cost of Microinsurance products for the assureds. Furthermore, it is indisputable that this benefit shall operate as a stimulus for the entry of new insurance companies in the market, attracting new investments for the Country. Bibliography BELTRÃO, K., SUGAHARA, S. e RITO F., Estimate of the Microinsurance Market Potential in Brazil. Research Report. Microinsurance Research Program. Escola Nacional de Seguros FUNENSEG. CNSP Consultative Committee on Microinsurance. GALIZA, F., May Products of the Private Initiative interconnected with the Microinsurance. Microinsurance Research Program. Research Report. Escola Nacional de Seguros FUNENSEG. CNSP Consultative Committee on Microinsurance. GALIZA, F., May Social Programs and Insurance in Brazil: Major Features. Microinsurance Researches Program. Research Report. Escola Nacional de Seguros FUNENSEG. CNSP Consultative Committee on Microinsurance. IAIS, Issues in Regulation and Supervision of Microinsurance: Available at: temp/questões_de _Regulação_e_Supervisão_do Microsseguro Junho de2007.pdf IAIS, Basic Principles of Insurance and its Methodology. Available at: element href.cfm?src=1/136.pdf National Treasury of South Africa, The Future of Micro-Insurance Regulation in South Africa. Discussion Paper. Available at: %20 Micro-insurance%20Regulation%20in%20South%$20Africa.pdf SUSEP Working Group on Microinsurance, August Microinsurance Partial Report I: Defi nition of Concept and Identifi cation of Target Audience. Microinsurance Research Program. Research Report. Escola Nacional de Seguros FUNENSEG. CNSP Consultative Committee on Microinsurance. SUSEP Working Group on Microinsurance, October Microinsurance Partial Report II: Identification of the Regulatory Barriers in Brazil. Microinsurance Research Program. Research Report. Escola Nacional de Seguros FUNENSEG. CNSP Consultative Committee on Microinsurance.