Creating Regulatory Frameworks for Microinsurance Presentation at Annual Microinsurance Conference Making insurance work for Africa at Cape Town, November 2006 Arup Chatterjee, International Association of Insurance Supervisors Martina Wiedmaier-Pfister, Financial Systems Development GTZ 27.11.2006 1 International Association of Insurance Supervisors IAIS is a relatively new organization 1994 Objectives of the IAIS Standards setting Setting global insurance regulatory and supervisory standards Standards implementation Aiding the standards implementation Cooperation Reinforcing the cooperation among its members and other financial sector organizations 27.11.2006 27.11.2006 2
International Association of Insurance Supervisors IAIS Framework for Insurance Supervision supervisory action supervisory assessment and intervention LEVEL 3 regulatory requirements financial governance market conduct LEVEL 2 LEVEL 1 preconditions basic conditions for the effective functioning of the insurance supervisory authority the insurance sector and insurance supervision The Insurance Core Principles (ICPs) and Methodology (2003) 27.11.2006 27.11.2006 3 German Development Cooperation (GTZ) International cooperation agency for sustainable development with worldwide operations. Capacity Development on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ). Capacity Development in Microinsurance through various angles, i.e. strengthening of Health Insurance, Social Security and Financial Systems Development = sustainable and massive provision of financial services for the poor 27.11.2006 27.11.2006 4
IAIS-CGAP (Consultative Group to Assist the Poor) Joint Working Group on Microinsurance - Established in February 2006 - Issues Paper on the regulation and supervision of microinsurance (likely adoption in February 2007) - Develops a common understanding of microinsurance - Recognizes that microinsurance activities should not be held to a lower supervisory standards - Focus on prudential, governance, market conduct and operational issues - Identifies areas where IAIS Insurance Core Principles can be customized to the supervision of microinsurance 27.11.2006 27.11.2006 5 1 Inclusive Financial Systems + Poverty Alleviation The Situation Coverage of formal insurance services in emerging markets low - Brazil: premiums 3.38 % of GDP - Nigeria and Bangladesh: lowest end with less than 1 % premiums of GDP - Compared to 15 EU countries with approx. 8 % The Goal Millennium Development Goal 1 Eradicate extreme poverty and hunger Microfinance Indicators = percentage of households with access to quality financial services, including credit, savings and insurance 27.11.2006 27.11.2006 6
2 Actors Policymakers aim at easing public budgets while seeking to provide safety-nets for low-income segments. Donors promote private sector development, microfinance and increasingly microinsurance by fostering innovations and the application of good practices Insurance providers struggle to innovate, grow, expand and formalize. Supervisors have an important role to expand the frontier of formal insurance services for low-income households and promote innovation. 27.11.2006 27.11.2006 7 3.1 Scenarios in Microinsurance A - Funeral and health insurance based on associations, mutuals or friendly societies often under a different regulatory authority or unregulated; operating outside of the insurance laws and beyond insurance supervision growth can be problematic for customer protection (weak controls by members, managing large schemes is a complex task) Oversight of insurance supervisors required! 27.11.2006 27.11.2006 8
3.2 Scenarios in Microinsurance B - Microfinance Institutions develop credit life insurance products mostly unregulated NGOs customers demand more products Unregulated growth and expansion problematic Formalization or linkage with insurer required! C - Commercial insurers develop products for poor customers and struggle with certain regulatory provisions Regulatory adaptations required! 27.11.2006 27.11.2006 9 4 Regulatory Frameworks for Microinsurance Barriers: - High capital requirements - Agent and broker requirements, e.g training requirements for agents - Composite companies - Operators outside the insurance laws - Taxation New approaches: 1) Agent regulations for microinsurance in India 2) New tier of Microinsurance Institutions = Mutual Benefit Associations in the Philippines 3) Taxation relieve for lifegroup microinsurance in Brazil 27.11.2006 27.11.2006 10 10
5 Supervisors Different Approaches A few emerging markets have specific laws/regulations to encourage microinsurance: India: agent regulations to link formal insurers with village based NGOs and Microfinance Institutions, making use of the strengths of formal insurers coupled with NGO s and MFIs village outlets Philippines: Mutual Benefit Associations as Microinsurance Institutions under the Insurance Law, supervised by the Insurance Commission Brazil: Supervisor created both a life group microinsurance product and an auto microinsurance product 27.11.2006 27.11.2006 11 11 6.1 The Brazilian Experience According to the Brazilian Government s policy objective on microfinance, the supervisor created a life group (2004) and an auto microinsurance product (2005): Supervisor initiated and maintains public dialogue with the industry on microinsurance. Microinsurance was unknown to all earlier. Positive marketing signal: commercial insurers created their own microinsurance products even before the circulars were amended. Financial transaction tax for life insurance was lowered from 7 % in 2004 to 2 %, and 0 % in 2006 (industry claim) which boosted life insurance in general. 27.11.2006 27.11.2006 12 12
6.2 The Brazilian experience Innovative distribution channels were used, such as bankassurance, internet, call centres. Consumer education program and ombudsman are other important parallel mechanisms. Supervisors products were not massively conceived, industry created its own products. Problems encountered: Salesmen lack understanding despite training (auto) Greater effort to sell compared to traditional insurance Rural insurance is still weak (wide country, subsidised programs) 27.11.2006 27.11.2006 13 13 7.1 Challenges in Regulating Microinsurance To expand the frontier of insurance services by relying on privately organised insurance services we have to (1) recognize the fact that semi- or informal schemes can do harm coupled with consumer protection concerns, especially for low-income people (2) strike the balance of extending insurance to the lowincome people while protecting their investments and confidence - without putting an undue burden on supervisors 27.11.2006 27.11.2006 14 14
7.2 Challenges in Regulating Microinsurance (3) encourage innovations (products, delivery models) and adopt new approaches (such as risk based supervision) (4) define a threshold beyond which informal schemes have to have a license (clear division between regulated and non-regulated institutions) 27.11.2006 27.11.2006 15 15 7.3 Challenges in Regulating Microinsurance (5) do away with responsibility crossings between different supervisors of microinsurance schemes in the same jurisdiction (6) develop regulatory solutions that fit the great variety of country contexts in terms of different institutional solutions (tiers) and organisational solutions (e.g. products, delivery channels) 27.11.2006 27.11.2006 16 16
8.1 Lessons Small adjustments to the mainstream regulatory framework may serve better to increase access than creating a parallel universe of specialized regulation (e.g. new tier). Relaxing licensing restrictions for insurance distribution can allow entities such as Microfinance Institutions with a community presence to become agents/brokers for mainstream insurers. Regulation does not necessarily mean an entirely separate regulatory framework. 27.11.2006 27.11.2006 17 17 8.2 Lessons Microinsurance regulation is not one topic but a range of topics depending on the type of loss that is insured and on the distribution channel that is used. The differences have ramifications for the type of regulation and supervision that will be appropriate. Regulation of microinsurance is a complex task, with many different issues and actors involved. 27.11.2006 27.11.2006 18 18
8.3 Lessons In microinsurance, it is the credibility of the market argument that motivates transformation /prudential regulation and supervision. Regulation of microinsurance aims foremost at consumer protection, rather than protecting the financial system. 27.11.2006 27.11.2006 19 19 8.4 Lessons Some lessons from microfinance: Experimentation in product offerings is one factor that allowed microcredit to grow into a sustainable industry. Don t regulate what you cannot supervise (cost aspect). Microfinance (microinsurance) is a line of business and not tied to ONE institutional type. Careful design of a regulatory framework takes time and resources. 27.11.2006 27.11.2006 20 20
9 Developmental Role of Supervisors Yes but what steps are required to adapt regulations for promoting microinsurance? 27.11.2006 27.11.2006 21 21 10.1 What can supervisors do? Supervisors 1 need the political mandate from their authorities (political AND financial support) 2 can establish dialogue with their formal and informal industry partners (open mind) 3 can strengthen their capacities in terms of microinsurance (complex task) 27.11.2006 27.11.2006 22 22
10.2 What can supervisors do? 4 can study the potentials and risks in their particular jurisdiction (no template solutions) 5 can learn from other supervisors (south-south dialogue) 6 can facilitate capacity building for operators and policymakers 27.11.2006 27.11.2006 23 23 10.3 What can supervisors do? 7 can allow for and and encourage innovation 8 can assess the risks and efforts of the process realistically 9 can seek technical assistance from donors for strengthening microinsurance systems 27.11.2006 27.11.2006 24 24
Thank you for your attention! www.iaisweb.org www.gtz.de www.microfinancegateway.org www.cgap.org 27.11.2006 27.11.2006 25 25