Dear Hugh,
Indeed, we can and should look for intermediate-scale models for incrementally offering value-added financial products. The coop union models in Canada and places like Germany and Netherlands are roughly based on this very principle. Such models have not evolved yet around VSLAs in any significant way, perhaps because of slower evolution and greater degree of emphasis on making sure that VSLA roots are strong first. Your idea of starting with life and home insurance sounds good!
Taking cue from you, I found this paper Burial Societies in Rural Ethiopia to be a very useful reference. Indeed, it is possible to have members owned insurance system. Interestingly, one third of Iddirs also provide health insurance. The authors, though, caution readers about their limitations.
There have been cooperatives of SHGs (federations) in India (what Hans Dieter Seibel calls a village level banks) that have successfully adopted strategy of offering additional products; but not without their challenges. SHG Federation Structures in India publication at DGRV site provides a good account. APMAS has been one of the pioneers for federation capacity building, self-regulation/ self- governance. Policy environment in India is very different, which is a critical factor in allowing informal SHGs to organize themselves into formal coops.
But back to your point, institutional architecture beyond the primary VSLAs will still need to be developed carefully to offer additional products including insurance; it is unlikely to happen on its own. With cost efficiency as primary driver in many VSLA programs so far, maybe next set of programmes will need to pay attention to additional design options that would include products beyond basic saving and short term loans. From some of the VSLA program implementers we had here in Coady courses, there seems to be innovations happening already on the ground in an organic fashion, suggesting larger appetite for additional financial products and services. Maybe, insurance can become one of the next frontiers! Especially where scale has been achieved.
In the new design frame, I would urge that we need not be completely averse to linkages with private sector institutions, though I agree that relationship will need to be carefully designed and facilitated. I too organize the certificate course on community based microfinance at Coady and have a bias towards promoting community based institutions, but we all know from experience that developing higher tier coop structures are not always easy or cheap, one has to carefully decide how many tiers can one build to achieve required scale, and sometimes private sector institutions may be better options as engaged partners. There are equal number of failed cooperatives as there are failed corporate partnership ideas. As Arman points out, the promise of hybrid versions are perhaps yet to fully realized.
Great conversation! Apologies for writing this frequently, and hope that others will jump in as well.
Regards,
Anuj
From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com] On Behalf Of Hugh Allen
Sent: Tuesday, February 25, 2014 1:20 PM
To: MicrofinancePractice@yahoogroups.com
Subject: RE: [MFP] Introducing Case Briefs: Highlighting successful innovation
Dear Anuj,
I must start by saying that what I know about insurance is roughly equal to my grasp of quantum theory, so maybe I’m off the mark, but here’s my reaction.
I agree with you that if you want a broad palette of insurance products, informal systems won’t be good enough, but my argument is that if you wants widespread access to basic, simplified products there are solid examples. I am not talking about group-level social funds, which work very well but are very small scale, and I am not talking about linkages to international insurance systems where reinsurance is possible. I refer to a practical intermediate step where apexes of groups come together in numbers that are anything from a couple of hundred to 7-800 and provide limited insurance for some pretty extreme (but important) contingencies and use simplified financial systems and actuarial calculations that are based on local rather than national research. Iddirs in Ethiopia started after world war 2 and cover the entire country. There is hardly an adult anywhere who is not a member and they have proven to be sound, simple and sustainable throughout the entire country and offer very substantial benefits. So my argument is based on the idea that we should start with community-based systems that offer very basic services that are in high demand and offer substantial benefits – with limited co-variant risk. Life (or funeral) insurance is an obvious candidate as is ma jor medical with a fixed payout, or having your house catch fire. No-one troubles to die or burn down their house to get an insurance payout. The inconvenience is considerable. Thus, costs are virtually zero because claims are uncommon and meetings periodic, while surpluses can be generated through a premium pool that allows for capital accumulation and safe investments. Aiming for an intermediate level product that is simple enough to be self-managed is where I think we should set our sights.
Savings groups were successful because the inventors had no way of financing a loan fund and had the wisdom to look at what the informal system was already offering and tweaked it. They realized that bringing in external entities (even local MFIs) would be complicated, expensive and ha ve limited success, so they used the tontine as the basic building block. Now with some 10 million people in savings groups no-one really questions any more the practicability and value of this system.
What I find surprising is that when we start to look at other financial products (i.e. insurance) we go back to a failed paradigm and start by assuming that linkages to the informal sector are a pre-requisite and under-value the potential of an intermediate-scale model that is member-managed and can offer a service that is a whole lot better than what savings groups can provide at this time. So, what I am suggesting is that we should invest some of the creative energy into experimenting with community-managed insurance that we invested in savings groups and see where it takes us, without , at the start, external dependency.
Hugh
From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com] On Behalf Of Anuj Jain
Sent: 25 February 2014 03:52
To: MicrofinancePractice@yahoogroups.com
Subject: RE: [MFP] Introducing Case Briefs: Highlighting successful innovation
Hi Hugh,
Good question. Though I am not qualified to answer it fully, I have following to offer.
I had a Diploma course participant in 2012, who did her independent research on community based health insurance subject, and I had the chance to study that subject with her in some detail. Gist of her findings was that community based insurance can indeed help a lot, especially those who are not otherwise covered or cared for in the macro system. And yet, the examples of large scale CBHIs were few and far between, and also fraught with big challenges.
As we know, at the micro-level, in VSLAS, or in Iddirs, or in SHGs, self-insurance does play a critical though limited role. But given the complexity of insurance (need for diversity of risks, scale, actuarial management, need for taking long-term view and capital management, fraud and conflict of interest), designing it under self-management system is perhaps a big challenge. From my personal experience, my home insurance is by Farmers’ Mutual here in Antigonish, a cooperative and a very well-run enterprise with long reputation. And there are other coop insurance enterprises here competing with large corporates. So indeed, it is possible. And yet, I as a member of the coop do not feel any more empowered per say; and still had to agree my coop’s unilateral increase in premiums three years in a row. I still like them, perhaps because of my personal bias towards coops, and good customer service I get; but don’t feel any more ownership in the coop.
Self-financed and managed insurance works, in theory, but I am not sure if it can be done with sufficient scope and scale (home, health, cattle, crops, life) without broader Institutionalization and aggregation/ diversification of risks. Perhaps a hybrid version (consolidated professionals management along with community administration/ process) is a more viable option? But as I said, I have very limited experience, so, let the experts chime in. And may be, we need to experiment with VSLAs, now that they are in sufficient numbers, to see if micro-insurance products can be introduced gradually. Please do share if you know of any pilots. < o>
Regards,
Anuj
From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com] On Be half Of Hugh Allen
Sent: Monday, February 24, 2014 7:54 PM
To: MicrofinancePractice@yahoogroups.com
Subject: RE: [MFP] Introducing Case Briefs: Highlighting successful innovation
Anuj. I am curious as to why, with all our success with community managed savings groups we repeat the approaches with microinsurance that have so signally failed in microfinance: bring in the outsiders. When we do this we quickly find that admin costs eat a large percentage of premium value and get hit quite hard by covariant risk (drought, floods etc.) I am fairly sure that with capped benefits for a limited range of risks, communities can do as good a job. Imperfect and inadequate for sure, but a great improvement on nothing at all. Such institutions (think Iddirs in Ethiopia) can be stable a nd sustainable and can form the basic building blocks of a more integrated system, over time. I am certain that starting with the community is a much sounder way to proceed - although I acknowledge that what savings groups have achieved may not be easily replicated in other areas.
On 24 Feb 2014 23:32, "Anuj Jain" <ajain@stfx.ca> wrote:
Well-argued Peter!
Micro-insurance, in many ways, is a conundrum of sorts. At a system level, as you have indicated, the gross risk of the affected population is often much higher than what they can realistically pay through premiums. And that is very often just a simple fact of life; be it health, asset, small holder farming, or even life insurance. While we can wish and hope that private sector should and will bear the residual risk; that seems more and more a wishful thinking.
As this case-study also suggests, there is some room to maneuver the costs of administration and to avoid fraudulent claimants; by letting the community based and managed decision making; but there is a limit in that. And Hence, at the system level, there is almost a compulsion either have cross-subsidy (in the market sphere) or subsidy (by the State).
My own personal experience with micro-insurance, post Tsunami in Tamil Nadu/ India was no different, where the project had managed to sell over 175,000 policies (home, assets, life) within a short span after the launch, but the first year itself experienced another cyclone and meant larger pay-out than the premiums collected by the insurance company; forcing them to rethink and red esign the products.
This issue is not isolated in developing world; it even dogs a nation like USA where affordable health care (Obama Care) is forcing everyone to enroll so that cross-subsidy of more vulnerable can become more financially feasible; but it is a tough political (and economic) battle to fight.
Here is a source that estimates economic losses for Haiti to highlight the scale of challenge we face:
“Haiti, which was hit by a 7.0 magnitude earthquake in January 2010, suffered an estimated 222,570 fatalities and close to $8 billion worth of economic damage, according to its government. However, Haiti is also highly vulnerable to hydro-meteorological disasters and Maplecroft's research reveals that even without the damage from the 2010 earthquake, which was equivalent to 73% of annual GDP, the Caribbean country would still have had the 12th highest economic loss in the index (loss to GDP).” Natural Disasters Economic Losses Global Index 2010
I just can’t see how any micro-insurance can realistically succeed at scale without systemic cross-subsidy or State or donor subsidy; even if re-insurance players were to brought into the picture. But must admit, my experience is rather limited. Micro-Insurance Innovations Facility at ILO has done a lot of work; it will be useful to hear their views on this subject. Here is a paper by ILO that throws some light on this subject.
Regards,
Anuj
From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com] On Behalf Of Peter Burgess
Sent: Monday, February 24, 2014 3:36 PM
To: Micro financePractice@yahoogroups.com
Subject: Re: [MFP] Introducing Case Briefs: Highlighting successful innovation
Dear Colleagues
A quick read of the Fonkoze Case Study suggests that there are a whole set of issues that are misunderstood about the purpose and practice of microcredit and microinsurance ... and the role of conventional 'for-profit' financial organizations being engaged with the social microfinance sector.
Certainly there is no reason for capital markets to be excluded from support for the microfinance sector, but the reason the capital markets are supporting this sector should be that they see the value of 'creating good' rathe r than merely making goods that someone with money can buy and produce a profit!
People who are typically the clients of a microcredit institution like Fonkoze are going to need help from time to time because of natural disaster. The big question is who should 'fund' the recovery that these people need.
And then there is a second question. How should the high cost of administration in an emergency recovery situation be funded?
In this case study, it seems that the big entities in the financial ecosystem backed out as soon as the need for their help was real and substantial. It seems to me that a rather modest hit to the profits of these institutions took precedence over what Fonkoze and its clients really needed.
Remember these names ... big Swiss Re and MiCRO (MIcroinsurance Catastrophe Risk Organization) limited their exposure essentially leaving Fonkoze and its clients stuck with the disaster. This is essentially what the financial sector does all the time, and it is high time they get called on their practices.
A long time ago I was the 'risk' manager and CFO of an international company operating in 26 different jurisdictions ... we managed our risk and self insured for most of the hazards that were likely to come up most of the time. However we did carry 're-insurance' for the very big event that we hoped would never happen. This was a win win for my company and for the insurance industry.
< p class="MsoNormal">You cannot use quite the same model with very poor communities that are the typical clients of the social microfinance institutions. Big finance organizations that have a for-profit business model cannot deliver in the poor community world and at the bottom of the pyramid. Extracting profit from the BoP is almost always going to be at an unacceptable cost to the community ... yet these communities need investment in order to progress. Muhammad Yunus is on the right track with the idea of Social Business just as he was with social microcredit.
Peter Burgess
____________
Peter Burgess
TrueValueMetrics ... Meaningful Metrics for a Smart Society
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On Mon, Feb 24, 2014 at 11:47 AM, <mifacility@yahoo.com> wrote:
The ILO’s Microinsurance Innovation Facility has launched a new series.
The Case Brief series highlights successful innovation stories from the Facility’s grantees. Each brief describes a grantee's experience and lessons learned. The latest case brief features the experience of Fonkoze.
Increasingly insurance is being seen as a way to protect low-income people against the worst effects of catastrophes, such as the storms, floods and earthquakes which are regular and devastating for poor Haitians. Yet a chasm exists between the world of multinational reinsurers and the daily life of Haiti’s most vulnerable. Find out how Haiti’s largest microfinance institution was able to bridge this gap in the Case Brief: Fonkoze.
Read the full case brief at: www.microinsurancefacility.org/publications/cb5
Check out the other case briefs in the series at: http://www.microinsurancefacility.org/news/2014/february/introducing-case-briefs
Please feel free to share the case briefs with others.
Best regards,
ILO’s Microinsurance Innovation Facility
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