Chuck, thanks again for starting this conversation, I think it's important to analyze these issues critically.
Many thanks to Thierry for sharing the data here so we can contextualize the discussion.
Just to add my two cents to a few of the general issues raised:
What else is covered besides loan balance?
-The most common would be a cash indemnity for funeral costs or income replacement. It's also common to see hospital cash (a fixed indemnity for each day hospitalized), serious illness and/or cancer indemnities (insured receives a lump sum if diagnosed with one of these diseases), as well as a variety of additional services, from pharmacy discounts to telemedicine hotlines to locksmiths if you lose your house keys. (Caveat: these are observations from my admittedly Latin American-skewed viewpoint).
Were payouts significant relative to the loan balance coverage?
This varies widely, but I would argue the answer is usually yes. Though the relevant metric isn't really the loan balance but rather the "thing" that the coverage aims to pay. Funeral indemnities are usually calculated to cover the cost of an average, modest funeral. Cancer indemnities are usually calculated to cover a few months' average client income, or the secondary costs of cancer treatment (direct costs are usually provided by the public sector).
How strongly can you really argue that these are products designed as something clients demand, rather than what helps the MFI generate more revenue?
Ideally, the choice of which additional coverage to add is based on market research and direct client feedback. The thoroughness of that feedback varies widely. It is true that by expanding coverage, MFIs benefit financially through increased commissions over premiums. But I would argue that in most cases, the marginal financial benefit isn't sufficient to justify the added complexity of managing multiple types of coverage based on a pure profit motive. Instead, adding more coverage, especially in-life services or benefits like property or health, makes the insurance more tangible, so clients can actually see the value of insurance at work, (which isn't the case when they die and beneficiaries collect the benefits). This tangibilization is an important part of building demand for insurance.
You questioned the value of covering offering FORCED policies that only/mostly cover the LOAN balance, since this would seem to benefit the MFI more than the client. I will admit that for a long time, I held this same view.
However, the clients I work with are changing my mind.
I recently did a market study for a Mexican MFI, which yielded some interesting insights:
In a quantitative survey, when asked "what worries you most about each risk?" clients responded:
--Hospitalization
74% mainly concerned with how to pay back their loan if they are hospitalized and unable to work.
59% mainly concerned with paying medical bills
35% mainly concerned with how to pay household expenses
29% mainly concerned with reactivating their business
--Serious/Terminal Illness
74% mainly concerned with paying medical bills
56% mainly concerned with paying household expenses
38% mainly concerned with leaving their family a cushion (assumes terminal illness)
29% mainly concerned with repaying the loan
--Natural Disaster
65% mainly concerned with repairing the home
53% mainly concerned with repaying the loan
24% mainly concerned with repaying the businesses
So we can see that paying off the loan IS a priority for clients, depending on the risk. In some cases like hospitalization, it is the main priority.
After the survey, we drilled down into focus groups. There clients had a lot of interesting feedback. Some of the main comments summarized:
--"We know we need insurance, but would never buy it on our own. There are too many competing demands on our cashflow."
--"If the premium is less than 10 pesos (about US $0.75) a month, make it obligatory for all of us. We won't feel the added cost, and we'll be grateful for the support when we need it."
--"If the premium is greater than 10 pesos a month, it should be voluntary."
--When given the choice between a check and applying the indemnity to their loan balance, clients were divided about half and half.
--"When a client dies/falls ills/has an accident, the entire village bank suffers because we have to make unexpected solidarity payments. So insurance benefits everyone, not just the person who made a claim."
For a more detailed review of the value of different products and comparisons by type, country, channel, etc. I really encourage anyone interested to check out the Microinsurance Learning and Knowledge reports at
In several of those studies (esp Natural Disaster insurance in Colombia, Haiti, etc.) loan balance coverage was highly valued by clients. They didn't want to fall into arrears and lose access to credit, because they knew they would need loans to reactivate their businesses, and thereby generate money to recover their household.
The reality is that for any type of risk (but especially so for high-cost risks like disasters or health), the needs are great, but the cost of insuring everything is prohibitive, so MFIs must pick and choose to arrive at a premium clients are willing to pay (even if forced to do so). MFIs know that excessive insurance fees would drive clients away and to the competition, so there is a limit on price gouging. Insurance isn't the cash cow that some believe it to be. And when forced to choose between cover types, the loan balance is an obvious choice, not only because it helps both client and MFI, but because in many cases it aligns with clients' own priorities.
Why don't MFIs publicize their insurance?
I can't speak to every case, but I have noticed this trend and have a few theories:
--Microcredit is basically a commodity in most markets these days. Insurance is a clever way to distinguish oneself from the competition, so MFIs try to keep that information secret. This is understandable but unfortunate, since in the end clients lose when all MFIs aren't afforded the benefit of learning from one another to improve coverage offered.
--MFIs, despite their best intentions to become multi-product entities, are very much focused on their core business, and microinsurance loses the fierce battle for internal resources/competition. Also unfortunate, but understandable.
Chuck, in your analysis of forced insurance and pricing, I would encourage you to consider the potential added cost (hard to define, but we know it's there) of loss provisioning added to the interest rate in the absence of insurance. Between the two, I think insurance is a more transparent and safe option. Yes the pricing of insurance can be messy, mostly because reliable actuarial data is still scarce. This problem will be alleviated by offering more insurance and observing the actual claims ratios. Regarding how clients are charged for insurance, I would repudiate schemes that tack on an extra percentage to the interest rate, which is not transparent or fair. I suspect, however, that not all MIS have the ability to handle insurance as a non-interest / non-penalty fee in the repayment plan.
Finally, I think it is really important to emphasize that none of the above matters unless clients are fully aware of their coverage and how to use it. Awareness building and customer education are vital. Unfortunately this doesn't always happen, whether due to a purposeful strategy to reduce claims ratios (and boost profits for insurers) or a lack of MFI time/resources to really explain a complex product well. This is where I see the biggest problem with microinsurance today. There is a lot of excitement at conferences about microinsurance outreach and scale, less concrete discussion about how to increase customer awareness and boost claims ratios. Neither of the latter two are easy. Creating true customer awareness is a high touch, high cost activity that most commercial insurers and MFIs have little patience for, and boosting claims ratios is of course anathema to most insurers, which already make relatively little money on microinsurance, and aren't anxious to further squeeze those margins. We also see a lot of blurring between "microinsurance" (i.e. pro-poor insurance) and "mass market insurance" (cheap low-value products tacked onto other products), especially in Latin America.
To clarify my previous statements, I do believe there is tremendous value in microinsurance, and there are good examples out there. But commonly heard blanket statements like "clients need a variety of financial services, so MFIs should offer them" are not helpful unless one first considers the potential pitfalls of these products, which are the same, if not even thornier, than those related to microcredit by itself. As we can see from the discussion, offering insurance and saving does not automatically make an MFI socially responsible, and doing so "the right way" is an onerous process.
Cheers,
Derek
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Posted by: Derek Poulton <dpoulton@gmail.com>
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