Thanks, Daniel, for keeping the discussion going and Ragini and Srinivasan for your comments!
My two cents:
Regardless of what the "mainstream" financial industry does, I would absolutely agree that MFIs should not be collecting debts for deceased clients. It's unethical, a major burden for families/groups, and even a reputational risk for the MFI. However, those portfolio losses due to death (or other major risks) carry a cost, which needs to be covered either 1. through additional loan loss provisioning, which factors into the interest rate, or 2. through insurance.
In my personal opinion, MFIs are not equipped to do the necessary actuarial calculations to effectively provision for mortality losses (much less health or natural disasters!), so taking on this risk themselves is not prudent. Insurers have the databases and the technical expertise while MFIs have the client knowledge, so together they can face the risk more efficiently. Regulators would seem to agree. As recent as 5-10 years ago it was still common practice for MFIs to "self insure," but now this is frowned upon, if not outright prohibited by regulation. (As a side note, it's worth mentioning that the same sometimes, but not always, applies to service providers, such as health network administrators, who sometimes sell "health care packages" with unlimited use and low costs--a huge risk for an entity that isn't a regulated risk carrier!)
I encountered an MFI a while back that was still "self insuring" its clients. The problem was they didn't have fixed policies for this. So in good months they'd forgive all the debt, in bad month's they'd forgive some of it, for good clients they'd pay an extra sum for funeral costs, etc. There was no consistency and benefits were tied directly to fluctuating financial outcomes. Not good. This is an extreme case but highlights one value of insurance which is certainty.
On your final point, all of the MFI credit-life policies I have seen were group life policies. So the MFI is the contracting party on behalf of a constantly changing collectivity of clients. And yes, it is (or at least can and should be) quite cost effective. There is no reason why credit-life microinsurance should be expensive. In cases when it does look expensive, I suspect it's because 1. The insurer is overestimating the risk in the target market due to beliefs about the poor and lack of specific data, 2. The insurer is in fact gouging a bit because otherwise they don't make much profit on tiny premiums, or 3. The MFI is trying to turn a big profit on something that should really be more of an "added benefit." If clients figure it out, this MFI will not last long.
Finally, credit-life insurance is a cost-effective springboard for other, more client-oriented benefits. Like funeral coverage, health coverage, or property coverage. For example here in Mexico, VAT does not apply to life insurance but does apply to other kinds of insurance. So often insurers will register a "life policy" that includes other types of "secondary" coverage, and thus clients avoid having to pay VAT on their cover.
Cheers,
Derek
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Posted by: Derek Poulton <dpoulton@gmail.com>
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