Creating Regulatory Frameworks for Microinsurance Mainstreaming the Margins: Social Security Annual Policy Conference on Greater Inclusion: Possibilities and Prospects New Delhi, India 17 January 2007 Arup Chatterjee Principal Administrator International Association of Insurance Supervisors Basel, Switzerland

Creating Enabling Frameworks for Microinsurance Session on Greater Inclusion: Possibilities and Prospects Annual Policy Conference on Greater Inclusion: Possibilities and Prospects 2 17 January 2007 Arup Chatterjee International Association of Insurance Supervisors 1994: IAIS was created 1998: Secretariat in Basel Objectives –Cooperate to contribute to improved supervision of the insurance industry for benefit and protection of policyholders –Promote the development of well-regulated insurance markets –Contribute to global financial stability IAIS is recognised as the international standard setter for insurance regulation

Creating Enabling Frameworks for Microinsurance Session on Greater Inclusion: Possibilities and Prospects Annual Policy Conference on Greater Inclusion: Possibilities and Prospects 3 17 January 2007 Arup Chatterjee IAIS’s strengths Depth & breadth of membership Members from more than 100 countries Members regulate more than 90% of the world’s insurance markets More than 100 Observers

17 January 2007 Arup Chatterjee Framework for Insurance Supervision the insurance sector and insurance supervision basic conditions for the effective functioning of financialgovernancemarket conduct supervisory assessment and intervention the insurance supervisory authority preconditions regulatory requirements supervisory action LEVEL 1 LEVEL 2 LEVEL 3 the insurance sector and insurance supervision basic conditions for the effective functioning of financialgovernancemarket conduct supervisory assessment and intervention the insurance supervisory authority preconditions regulatory requirements supervisory LEVEL 1 LEVEL 2 LEVEL 3 Common Solvency Structure and Standards

Creating Enabling Frameworks for Microinsurance Session on Greater Inclusion: Possibilities and Prospects Annual Policy Conference on Greater Inclusion: Possibilities and Prospects 5 17 January 2007 Arup Chatterjee Developmental Role of Supervisors “Yes … but what steps are required to adapt regulations for promoting microinsurance?“

Creating Enabling Frameworks for Microinsurance Session on Greater Inclusion: Possibilities and Prospects Annual Policy Conference on Greater Inclusion: Possibilities and Prospects 6 17 January 2007 Arup Chatterjee IAIS-CGAP Joint Working Group on Microinsurance -Established in February Issues Paper on the regulation and supervision of microinsurance (likely adoption in February 2007) - Develops a common understanding of microinsurance - Recognizes that microinsurance activities should not be held to a lower supervisory standards - Focus on prudential, governance, market conduct and operational issues - Identifies areas where IAIS Insurance Core Principles can be customized to the supervision of microinsurance - Further work on developing guidance on regulation and supervision of microinsurance

Creating Enabling Frameworks for Microinsurance Session on Greater Inclusion: Possibilities and Prospects Annual Policy Conference on Greater Inclusion: Possibilities and Prospects 7 17 January 2007 Arup Chatterjee Inclusive Financial Systems + Poverty Alleviation The Situation Coverage of formal insurance services in emerging markets low -India: premiums 3.38 % of GDP -Compared to 15 EU countries with approx. 8 % Millennium Development Goal 1 “ Eradicate extreme poverty and hunger” –Microfinance Indicators = “percentage of households with access to quality financial services, including credit, savings and insurance

Creating Enabling Frameworks for Microinsurance Session on Greater Inclusion: Possibilities and Prospects Annual Policy Conference on Greater Inclusion: Possibilities and Prospects 8 17 January 2007 Arup Chatterjee Actors  Policymakers aim at easing public budgets while seeking to provide safety-nets for low-income segments  Donors promote private sector development, microfinance and increasingly microinsurance by fostering innovations and the application of good practices  Insurance providers struggle to innovate, grow, expand and formalize  Supervisors have an important role to expand the frontier of formal insurance services for low-income households and promote innovation

Creating Enabling Frameworks for Microinsurance Session on Greater Inclusion: Possibilities and Prospects Annual Policy Conference on Greater Inclusion: Possibilities and Prospects 9 17 January 2007 Arup Chatterjee Scenarios in Microinsurance A- Funeral and health insurance based on associations, mutuals or friendly societies  often under a different regulatory authority or unregulated; operating outside of the insurance laws and beyond insurance supervision  growth can be problematic for customer protection (weak controls by members, managing large schemes is a complex task)  Oversight of insurance supervisors required! B - Microfinance institutions develop credit life insurance products  mostly unregulated NGOs  customers demand more products  Unregulated growth and expansion problematic  Formalization or linkage with insurer required! C - Commercial insurers develop products for poor customers and struggle with certain regulatory provisions  Regulatory adaptations required!

Creating Enabling Frameworks for Microinsurance Session on Greater Inclusion: Possibilities and Prospects Annual Policy Conference on Greater Inclusion: Possibilities and Prospects January 2007 Arup Chatterjee Regulatory Frameworks for Microinsurance Barriers: -High capital requirements -Agent/ broker licencing and training requirements for agents -Composite insurers/ products not encouraged -Operators outside ambit of insurance laws -Cost of regulatory compliance -Taxation New approaches: 1) Agent regulations for microinsurance in India 2) New tier of Microinsurance Institutions = Mutual Benefit Associations in the Philippines 3) Taxation relief for life- group microinsurance in Brazil

Creating Enabling Frameworks for Microinsurance Session on Greater Inclusion: Possibilities and Prospects Annual Policy Conference on Greater Inclusion: Possibilities and Prospects January 2007 Arup Chatterjee Early learning  “Regulation of microinsurance” is a complex task, with many different issues and actors involved  “Regulation” does not necessarily mean an entirely separate regulatory framework  Regulation of microinsurance aims foremost at sound development of insurance market and consumer protection Lessons from microfinance Experimentation in product offerings is one factor that allowed microcredit to grow into a sustainable industry Don’t regulate what you cannot supervise (cost aspect) Microfinance (microinsurance) is a line of business and not tied to ONE institutional type Careful design of a regulatory framework takes time and resources

Creating Enabling Frameworks for Microinsurance Session on Greater Inclusion: Possibilities and Prospects Annual Policy Conference on Greater Inclusion: Possibilities and Prospects January 2007 Arup Chatterjee Challenges in Regulating Microinsurance -Striking right balance of extending insurance to the low-income people while protecting their investments and confidence - without putting an undue burden on supervisors - Semi- or informal schemes can do harm coupled with consumer protection concerns, especially for low-income people - Doing away with responsibility crossings between different supervisors of microinsurance schemes in the same jurisdiction - Defining a threshold beyond which informal schemes have to obtain license (clear division between regulated and non-regulated institutions) - Encouraging innovations (products, delivery models) and adopt new approaches (such as risk based supervision) - Developing regulatory solutions that fit the great variety of country contexts in terms of different institutional solutions (tiers) and organisational solutions (e.g. products, delivery channels)

Creating Enabling Frameworks for Microinsurance Session on Greater Inclusion: Possibilities and Prospects Annual Policy Conference on Greater Inclusion: Possibilities and Prospects January 2007 Arup Chatterjee What can supervisors do? 1 ° …seek political mandate from their authorities (political AND financial support) 2° …establish dialogue with their formal and informal industry partners (open mind) 3°… strengthen their capacities in terms of microinsurance (complex task) 4° …can study the potentials and risks in their particular jurisdiction (no template solutions) 5° …can learn from other supervisors (south-south dialogue) 6°… can facilitate capacity building for operators and policymakers 7°… allow for and encourage innovation

Creating Enabling Frameworks for Microinsurance Session on Greater Inclusion: Possibilities and Prospects Annual Policy Conference on Greater Inclusion: Possibilities and Prospects January 2007 Arup Chatterjee International Association of Insurance Supervisors (IAIS) Questions and Answers