Managing Risk in Financing Agriculture 1-3 April 2009, Johannesburg, South Africa Working Group A: Microinsurance as a Risk Management tool in Rural Areas Dr. Brigitte Klein, Financial Systems Development, German Development Cooperation (GTZ) and Federal Ministry for Economic Cooperation and Development (BMZ)

2 What is Microinsurance? Microinsurance is  insurance accessed by low-income people  provided by a variety of institutions  run in accordance with generally accepted insurance core principle  funded by premiums

3 Microinsurance is  a financial services, besides savings, credit and cashless payments which the poor use to manage their risks  closely linked with other financial services via clients, products, insurers, intermediaries, policy decision makers, regulation and national strategies  a strategic tool for different development agendas (pro-poor financing, agricultural and rural development, social security development, mitigation of climate change) What is Microinsurance? (2)

4 Major Risks in Rural Areas Major Risks that are insurable: 1. Illness and injury: HIV/AIDS, Malaria and Tuberculosis, accidents 2. Death: loss of life (accidental and other reasons) 3. Loss of assets and production due to harsh weather effects (droughts, flooding, storm), and other risks such as theft and fire

5 Microinsurance can  help to reduce vulnerability of rural households and mitigate the perils threatening their lives, productivity and assets  assist in promoting investment and productivity by securing the lending risk for agricultural, investment  support asset building by securing housing loans and helping to avoid that savings and other assets are depleted in case of an emergency …contribute to spurring rural development!. Potential Impact of Microinsurance in Rural Areas

6 Access – Facts & Figures Access to insurance remains a huge challenge:  Brazil: insurance premiums account for 3.38% of GDP  China: 2.70 % of GDP  Compared to 15 EU countries with approx. 8% of GDP  Bangladesh: premiums are less than 1% of GDP In African countries like Nigeria, Ethiopia or Algeria insurance coverage is less than 1 % of GDP  South Africa and Namibia are outstanding: 15.3 and 8.11 %  Average of Africa: 4.35 % Source: SIGMA Report (2008) Only 0.3 % of the poor population in Africa has access to microinsurance. Landscaping Study Microinsurance Centre (2007)

7 The Business Environment in Rural Areas (1) Compared to urban areas, microinsurance provision in rural areas faces a number of serious challenges: (1) Infrastructure is less developed (roads, hospitals, telecommunication, water and sanitation, schools) (2) Banking network is weaker (3) Weather and health risks are more widespread and severe (4) Population density is often low and distances are far

8 The Business Environment in Rural Areas (2)  Underwriting is more sensitive and costly as risk exposure related to health, property loss and business failure is higher.  Covariant risks strike hard.  Reaching scale is more difficult.  Distribution (sales, premium collection, flow of funds) is more difficult and costly

9 When buying insurance, low-income households often suffer from  weak financial capability and literacy  misinformation, abuses, and low-value products and services.  They lack trust and good experiences.  Educational levels are lower.  Clients are more vulnerable. Microinsurance Clients in Rural Areas (1)

10 Microinsurance Clients in Rural Areas (2)  Higher investments for financial literacy work are required.  Combination of financial services (insurance as an add-on) has proven more effective.

11 The mostly urban-based insurers are not ready to serve rural low- income markets.  Demand is not known or understood  Products are weakly designed and range is narrow  Systems are not adapted  Premium collection  Back-office administration  Claims management  Marketing strategies and distribution are weak  Costs do not cover high transaction cost  Risks assessment is difficult (no mortality and morbidity tables ) Challenges for Insurers

12 Many rural-based intermediaries are reluctant to sell microinsurance, and have no know-how on microinsurance.  Management and staff of banks is often not convinced about relevance, business potential and techniques of microinsurance  Sales force is not sensitized and trained  Systems are not adapted (premium collection, claims management)  Competition about scarce funds of households with other financial services  Marketing strategies and distribution are weak  High transaction cost Challenges for Intermediaries

13 Most networks, associations, training providers, reinsures, researchers and IT supporters are ill-equipped in terms of offering microinsurance support services.  Public goods (data, transparency, code of conduct, awareness campaigns)  Curricula and TOT for training and coaching is not existent (product development, marketing, administration)  Technology solutions are not developed  Demand studies are lacking, including the know-how to implement them Challenges for the Support Infrastructure

14 The policy framework including regulation and supervision is not conducive to rural microinsurance development.  Awareness and know-how of authorities is weak  The different policy and regulatory frameworks lack coherence (finance, agriculture, health, social protection, consumer protection)  In a landscape of diverse authorities mandates are disperse for regulation and supervision for the various types of providers (Insurers, Banks, Credit Unions, MFIs)  There are mandate crossings between various government agencies (e.g. mutuals)  Subsidies can impede market based solutions. Challenges in the Policy Framework (1)

15 Challenges in the Policy Framework (2)  Supervisory capacity is limited - and particularly low in rural areas - which impedes the supervisor from being proactive (Rural Banks in Ghana, Ethiopian MFIs).  Policy and regulatory barriers are not understood.  High fiscal burden on premiums and intermediation weakens demand.  General customer protection frameworks and financial literacy work often do not include insurance or low-income customers

1617. Mai 2015 In most countries, regulations are not adapted to the specific features of microinsurance. Insurance Regulations Entry requirements Agent rules Demarcation between life and non-life lines Product regulation Capping of commissions Definition of insurance Customer protection Other Regulations Cooperative laws Payment systems rules Foreign investment rules Know-your client rules Health regulations Banking or microfinance rules Tax rules Challenges in Policy Framework (3)

17 Challenges in a Systemic View Consumer protection is a policy task, but also a cross- cutting challenge involving all actors at the three levels of the financial system.

18 1.The quality of value-for-money products is measured in terms of financial viability, demand-orientation and broad outreach. 2.Microinsurance is an integral part of the financial system and should be promoted as such; e g. via an “Access to Finance Strategy” 3.Coherence with other sector policies (Agricultural Development Policy, Consumer protection policy of Ministry of Trade) results in more effective approaches 4.Actors follow a market-based approach. 5.Customer protection and financial education are of utmost importance and requires crosscutting the involvement of all actors. Source: Draft BMZ Position Paper Microinsurance (2009) Principles for Microinsurance Development

19 The poverty oriented financial services industry is a very important player to promote microinsurance. They can decide to add microinsurance.  Sensitization of board, management and staff of relevance and potential of microinsurance as complementary financial service for risk management  Board and management need to choose a strategic option: A - Linkage with insurer and acting as an intermediary B - Creating a new insurer/microinsurer  Training of staff, development of incentive system, adapt procedures and systems  Sensitization and information of clients and marketing of new business line  Pushing a national agenda (consumer protection and financial education) What can Banks and Microfinance Institutions do?

20 What can insurers do? Insurers can …  Learn and sensitize their board and management and train their staff  Research demand and develop new products  Implement pilots and study the impact of products and sales strategies  Motivate their networks to support them  Contribute in a national dialogue among the various stakeholders  Proactively seek and participate in the policy dialogue. Help the authorities to understand microinsurance better.  Cooperate with networks and the government in financial literacy and consumer protection work.  Be transparent and truly customer oriented. Honour claims commitments fast.

21 What can networks and other supporters do? Networks, research bodies, reinsurers can …  integrate microinsurance in their own agenda  support the learning process about relevance and successful models  push the implementation of pilot projects  motivate a national dialogue among the various stakeholders  participate in the policy dialogue  develop public goods (data, research)  include microinsurance into stakeholders’ agendas including donors

22 What can policymakers do? Policy makers and regulators/supervisors are the drivers for a national financial access policy to mainstream microinsurance. They can…  develop their understanding, assume ownership for the process, give the insurance supervisor a development mandate and provide resources  identify the key drivers in the policy framework to abolish policy and regulatory barriers  combine several policy tools to make them more effective and achieve greater impact more rapidly  speed-up regulatory innovations and other policy solutions by exchanging with other supervisors and  initiate a national dialogue among all stakeholders  develop a national agenda for financial consumer education including microinsurance

23 Thank you for your attention!  Thank you