MFI's Foray into Microinsurance. By Dr. V Rengarajan.

Transcription

1 MFI's Foray into Microinsurance. By Dr. V Rengarajan. Keywords: MFIs, NGOs, micro-insurance, financial services, financial management. Note: This paper examines the appropriateness and practicalities of MFIs providing insurance. The article cites examples of established schemes highlighting the fact that when insurance is provided by microfinance institutions, it does not often reach those who really need it. It suggests that as MFIs and NGOs may not be ready to enter fully into insurance schemes, a system allowing established insurance institutions to cover all aspects of rural development could be an alternative. Countries: India, Indonesia, Malaysia, Sri Lanka MFI's Foray into Microinsurance Dr.V.Rengarajan (March 2001) International consultant Micro finance India In the Microfinance industry, the identification of insurance as one of the financial needs and demands of the target market, is gradually gaining momentum in developing countries. In the past the subject has not received the attention it deserves in the development process of the poor through micro finance. Of late MFIs are expressing interest in entering into the Insurance sector along with MF. The players already existing in the formal sector provide insurance services however not adequately enough to cover the poor clients in rural areas. In the context above this paper critically examines the appropriateness of MFIs exploring Insurance and the ways and means of delivering input to the poor in rural areas. With this objective in mind, the following issues will be addressed: 1) What does the present scenario of micro-insurance teach us? 2) Are MFI's capable of running the Insurance business in the given set up? 3) Are there any substitutes to Micro-insurance? 4) How to link formal insurance institutions with MFIs to deliver insurance benefits to target clients? 5) What is the demand side of micro-insurance? 1

2 1. MICROINSURANCE PRESENT SCENARIO A perusal over the Rural Micro Financial (RMF) products and services in Asian countries reveals that insurance coverage has become an integral part of the RMF system in the rural area. For instance, in Indonesia, the borrowers under KUPEDES (a credit product tailored exclusively for rural folk by Bank Rakayat Indonesia) are covered under life insurance which encompasses the principle that outstanding interest up to the loan maturity and premium is paid for by the bank. In Malaysia, even the saving scheme PATRIOT MUDA (a plan for school children by Bank Pertanian Malaysia) provides insurance coverage for injuries that accounts up to US$ 4000 for those savers with balances exceeding US$200. Another savings project, PATRIOT RHEMEJA (for young people) gives automatic insurance coverage up to US$ 4000 for those with balances exceeding US$ 400. Another kind of insurance is provided to farmers who take a paddy loan from Bank Pertanian Malaysia, where savers are encouraged to pay US$ 4 each towards a fund. This fund could later be used to write off debt, for example, in the event of untimely death from whatever cause. Funeral expenses would also be covered by the scheme. In Sri Lanka, saving plans also provide insurance cover, however only MFI borrowers are covered. In India, there are leading Insurance corporations/companies (e.g. the Life Insurance Corporation Ltd and the General Insurance Corporation) in the formal sector. A plethora of insurance schemes is available to the general public, though very limited products are available exclusively for women and the rural poor. Bank credit products like livestock loans (dairy animals, sheep and goats, poultry, transport operators, electric pumpsets, etc) are linked with compulsory insurance. Furthermore, products like Rajarajeswari Mahila Kalyan Yojana (for women), the Bhagya Shree Child Welfare Policy (for girls), free insurance policies for the rural people, Rural Hut Fire Insurance and a package scheme called Kamadhenu Insurance scheme (covering animals, cattle owners and their spouses with hospitalisation expenses) are all implemented by United India Insurance Company Ltd (a subsidiary of GIC). These are useful products, however the majority of micro-credit schemes designed for poor households are not linked to microfinancial projects and have yet to reach the poor effectively. Even the well-organised 'Self-Help Group' members are not really aware of the availability of micro-insurance products. There is much grass to water across major parts of the country. All the cited micro-insurance scenarios in Asian rural areas point out that microfinance and insurance have only come together in a few limited schemes. Furthermore, these insurance products are designed more for the purpose of attracting clients, as a gift for getting them into the bank's fold for security reasons (e.g. in event of loan defaults), and not for meeting the needs of the poor. The benefits are, if at all realised, purely incidental and not intentional. It is ironic that even the incidental distribution of insurance benefits are not even equally shared amongst the target clients. For instance, under Government sponsored schemes like IRDP India, it is made compulsory for there to be an equal entitlement of benefits, however it is confined to limited schemes like Animal husbandry (AH) and Transport. The moot point here is that whilst the status of the poor remains the same with equal entitlement for the benefits under IRDP, only the lucky schemes like AH benefit from the access to insurance. 2

3 The above situation indicates a lack of innovative products to match the needs of all categories of poor households by the prominent players in the insurance field. The available products are designed more for safeguarding the interest of the suppliers than that of the receivers (the poor clients). The overall picture on micro-insurance indicates that Insurance remains the 'Cinderella of Microfinancial activities'. 2) THE MFIs ABILITY TO FORAY INTO THE INSURANCE SECTOR Are MFIs capable of delivering the insurance input to the target group? Institutions are important in any development activity. The following problems are already being faced by MFIs in general and the NGOs involved in financial services, thus the decision of MFIs to enter into the Insurance sector should be carefully looked into. 1) Ability to obtain legal status and authorisation to mobilise savings from the public (members as well as non-members). 2) Viability and sustainability. 3) Participation is more governed by the donor's expectation than the demands of the market. 4) Lack of co-ordination among MFIs/NGOs for comprehensive coverage of all regions. 5) Financial Management capability is still lacking in the weak MFIs and capacity building programs are already being conducted. 6) Sustainable good recovery performance. 7) Competition from the grassroots level field agents/workers functioning for the formal players. In addition to the background two questions a) Why should MFIs enter into Insurance? Will they be able to last? b) If entry into insurance is considered a necessary evil, then why not allow MFIs to act as Marketing Agents to sell the insurance products instead of directly underwriting the risks? 3) INSURANCE SUBSTITUTES If MFIs are not the providers in the insurance sector, what substitutes or alternatives to microinsurance could they consider? When the purpose of Micro-insurance mainly concerns safeguarding the bank loan against loss, using the following innovative financial schemes could attain the same goals: 3

4 1) Credit Guarantee Corporation - INDIA 2) G.G.F - Rajshahi Krishi Unnayan Bank, BANGLADESH 3) DISASTER FUND RESERVES - BRAC, ASA, GRAMEEN BANK - BANGLADESH 4) Grain Bank - Risk against loss or failure of crops. Can we treat these products as Insurance Substitutes? As long the insurance goals are met by these substitutes, why shouldn't MFIs develop to include new schemes such as these? 4) WAYS & MEANS OF DELIVERY - LlNKING WITH FORMAL PLAYERS How can we involve formal insurance players effectively into Micro-finance activities and take advantage of insurance benefits whilst continuing to pursue policies of poverty alleviation? When the formal players are unable to reach certain important groups, notably the poorest and women, MFIs could be used as a means of reaching these target clients. For example, in India, The Tamilnadu Women's Development Project (IFAD Assisted - State Government undertaking) is implementing Mahalir Thitam for the Economic Empowerment of rural women following the Self- Help Group Approach. By implementing at field level, project offices are established at district levels run by a project officer supported by Assistant Project Officers (APO) each one representing a sector like Training & Communication, Monitoring & Evaluation, Administration and Accounts, Marketing and Bank Credit. These APOs are in co-ordination with NGOs and the Commercial Banks look after the formation of SHGs among the poor and the other requirements for the effective functioning of the Groups. Here the important point to be noted is that while many APOs look after the needs of the Group members, there is no representation from the Insurance Companies to act as APO. With the posting of officials from formal Insurance Companies, the client coverage would be better and would also make it mandatory for the group members. Presently the coverage is only incidental and confined to those financed under the animal husbandry scheme. The benefits of insurance are not equally spread to all the members. While the target members are identified on an equal footing for economic empowerment, why do only a few enjoy the insurance benefits while the majority is denied? It is probable that a representative from the formal Insurance Institutions is posted to the MFIs/MFProject to not only cover all the clients but also to innovate new products that match the demands of the poor who live and work in unprotected environments. What is therefore needed is a comprehensive scheme that covers a) the life of the poor b) the huts they live in c) assets created out of loans (group/bank loan) instead of piecemeal coverage by different agencies. Linking with a Formal Insurance player would be the best way for the MFI/P to effectively deliver the insurance benefits to the deprived class without taking any direct risk. 5) DEMAND SIDE PICTURE 4

5 Rural folk, particularly women and the very poor, are not insurance conscious and are more concerned with saving rather than securities as they feel that destiny will decide their fate. As reported by the MFI/NGO (LEAD - INDIA) the poor ignorantly ask why they should ensure. In some cases if insurance schemes are made mandatory they may yield a counter productive result. In others, the poor may not know that they are covered under insurance packages as in the case of IRDP- INDIA. By forcing Insurance onto the poor without their conscious demand (which requires awakening) and MFIs foraying into Insurance with neither capability nor competency is like putting the "cart before the horse" or the "last before the first". Alternative Development approaches should eschew the above anomalies. Among the various needs for protecting the livelihood of the poor, health assumes priority since the target clients are very much exposed to environmental predicaments. Women and children are also highly susceptible to health hazards due to unhygienic environs, unprotected water and poor medical facilities. There is therefore a demand for health based insurance products designed exclusively for the rural poor. In the organised sector, labourers are protected by the provision of different insurance schemes like: a) Employees State Insurance Scheme (ESIS) providing both cash and the medical benefits for illness, maternity, temporary or permanent disablement and funeral rights. b) The Standard Mediclaims Policy of the General Insurance Corporation Ltd. (GIC) is a reimbursement Insurance plan covering only hospital care and domiciliary hospitalisation benefits. c) Specialised Insurance from the Life Insurance Corporation Ltd. covering the medical expenses for four dreaded diseases. d) Arogya Bima Policy of GIC providing medical reimbursement on an individual basis and charging higher premiums for older people or those with dependants. Similar products should be designed for the welfare of the poor in the unorganised sector. In conclusion, taking note of the above observations, I would like to close with a few words: 1. It is too early for NGOs/MFIs to enter insurance activities and at best they could market the products as an agent without directly underwriting the risk. 2) NGOs could concentrate on the capabilities of the poor through social empowerment and entitlement rather than struggling with financial services. 3) Possibilities could be explored to promote insurance schemes based on demand or insurance substitutes (like collateral substitutes) with a priority to health. 4. Existing formal players in the Insurance sector should be drawn through a linking programme 5

6 for effective participation in MF programmes. 5) Legal support and regulatory system are inescapable necessities for safe financial activities including Insurance. Comments are welcome Dr.V.Rengarajan 6