Ralf Radermacher of the New Delhi-based Micro Insurance Academy explains why community-based institutions are so important to expanding insurance, and how big insurance companies fit into the picture.
 | Ralf Radermacher, Micro Insurance Academy"Insurance is different from buying chapati: you pay upfront, but your benefit is in the future. This requires a considerable amount of trust." |
How important is microinsurance in India?
India is one of the hot spots for microinsurance and there are plenty activities going on. A number of them are state-led activities, related to social protection. Many are partnerships between formal insurance companies and NGOs or microfinance institutions (MFIs).
In such a partnership the NGO/MFI assumes the role of an agent and distributes the insurance product of an insurance company to its clientele. This helps the insurance company reach markets, which it has difficulty reaching otherwise - both in physical but psychological terms.
What is the difficulty here?
Trust of the prospective clients towards insurers is one of the main obstacles, as insurance is different from buying chapati: you pay upfront but your benefit is in the future. This requires a considerable amount of trust. The insurance company benefits from the trust relationship the local NGO or MFI have established with the target population.
But this is also often the breaking point: insurers often do not deliver what the local agent thought they would - either in terms of claim settlement, duration of the process, heavy price adjustments or high refusal rates. And the local NGO or MFI certainly does not want to risk its trust relationship with its target group for the insurer. Thus, relationships are often fragile due to this inherent conflict of interest.
What are the alternatives to these partnerships?
Many local institutions have launched their own, community-based microinsurance schemes. They either provide the insurance in-house, or promote mutual insurance schemes, where members manage risks and butgoverning. This seems to be working out very nicely, especially in those heads of damage, where the need for information is very high.
Health insurance is the most prominent example here. As members are insurees and insurers at the same time, the incentives are streamlined and the adverse effect of hidden information is reduced - at least as long as the scheme is localized.
Insurers play no role in such a model?
Insurance needs numbers and small schemes are prone to financial collapse, which means their strength can also become a weakness. Insurers can come in here and provide some kind of re-insurance coverage.
The Micro Insurance Academy, where I am working, provides structured support to such community-based schemes, and assists in establishing structured links to providers of reinsurance.
What is the logic of such an arrangement, and how does it differ from the partner agent model?
Local schemes, offered by NGOs or MFIs, but especially when on a mutual basis, have the advantage of better access to local information and can bank on streamlined incentives. They can handle frequent transactions much better and at lower costs. Most of the health insurance arrangements in Europe and America started like this, and many still follow such a mutual structure.
But, as already mentioned, their main strength is also their main weakness: while information flows best in small groups, which have strong ties of solidarity, the limited size of the group threatens the financial viability. Therefore, a financial back-up mechanism is needed, which keeps the local ownership and at the same time protects the group from financial collapse. A reinsurance arrangement can bring such a back-up.
Formal insurers on the other side have less difficulties with the financial stability aspect, but more with the information flow. They would be well advised to take the role as re-insurer and develop a deeper understanding here: local ownership, localized product. The re-insurer could be a provider of some technical input and partner in the risk, allowing local ownership, instead of viewing the community partner as mere distribution channel of products designed far off from the community.
Where can such a hybrid model be particularly effective?
The advantage of the model is reducing control costs and having cheaper access to information. It can thus be particularly effective where the danger of hidden information is particularly high or frequent transactions are needed. Health insurance is the classic example.
editor: Thilo Kunzemann
publishing date: April 30, 2008
