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Micro Insurance

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 A Draft Paper Prepared for the 11 th APRIA Conference at National Chengchi University,
                            Taipei, Taiwan (July 25-28, 2007)

                          Professor M. Ziaulhaq Mamun, PhD
                       Institute of Business Administration (IBA)
                                  University of Dhaka

                                    Contact Address
                          Dr. M. Ziaulhaq Mamun, Professor
                          Institute of Business Administration
                     University of Dhaka, Dhaka 1000, Bangladesh

                                       May 2007


This paper explores the idea of finding a suitable and sustainable model for insurers by
combining micro-insurance with micro credit. As the viability of the „credit-model‟ was
heavily constrained by contribution defaults, micro credit institutions needed to complement
credit with social security type services, like micro-insurance models, to safeguard or reduce
the likelihood of credit defaults by addressing certain high economic costs to credit groups
and their family dependants resulting from emergency health expenditures, death of a family
member, and damage to property caused by fires or natural disasters. The research finds
several avenues where government can work helping the commercial insurers and micro
finance institutions (MFIs) to go for agent partner model and design schemes for the clients
based on respective strengths. Community based models should include people form the
community as owners and vocal member of the schemes. All these will ensure the
sustainability and the financial feasibility of the programs. Micro-insurance, a market
product, along with business development service concept can help explore possibilities
beyond horizon and alternative mechanisms to give the poor access to better health services
and security to their investments.

1.0    ISSUE

Millions of people in developing countries live in a state of destitution. Their opportunities
for development are extremely restricted by economic and political conditions as well as their
financial and social situations. Through different micro finance and insurance policies the
poor could attain a better standard of life (Islam and Mamun 2006, 2005) through programs
prepared in the field of financial business services. Globally micro credit (a concept of
helping the rural poor by giving loans with minimum collaterals and other terms) is
considered as an important tool for poverty reduction. Different micro finance institutions
(MFIs) have different mechanisms and practices for micro credit. Poor people confront many
of the same risks faced by the non-poor (e.g., death, illness or injury, loss of property due to
theft/fire and natural disasters), but these risks have greater financial impact and occur with
greater frequency. Moreover, the vulnerability of poor people is exacerbated each time they
incur a loss, creating a vicious cycle that precludes lasting improvements in human and
economic welfare.

Crises are recurrent in the lives of the poor. Such crises - personal, social, or natural - often
involve high expenditures and drive poor families deeper into poverty. Most common crises
are accidents, sudden hospitalization, and death of a bread earner, and loss of crops or assets.
Expenses incurred during such crises are met either by borrowing form moneylenders, sales
or mortgaging of assets or by drawing on scarce saving resulting into a simultaneous
reduction in income and saving, and an increase in debt and expenditure. Each crisis leaves a
poor family weaker and more vulnerable. Traditional micro-finance schemes do not address
such vulnerabilities and the necessity of risk reduction for the ultra poor. The informal coping
mechanisms offer limited protection and are less available to poorer households and break
down when most needed. Formal financial services can offer greater benefits at a lower cost
than informal mechanisms but there is vulnerability to risk is reducing effectiveness and
financial performance of micro-credit.
Insurance or risk protection is one mechanism that ties both the borrower and the institution.
Mostly the MFIs only cover lenders part of risk by securing the credit whereas borrowers‟
part of risk is always overlooked. Any improvement in this area will help the MFIs not only
to bring better customer satisfaction through better risk protection of unwanted risks faced by
the borrowers but also contribute to the poverty alleviation role of micro finance.
Undoubtedly, risk coverage of borrower‟s part of micro credit is an important and interesting
area to work with. For products like micro-insurance, increased attention is given to address
clients‟ needs for risk management that in a sense helps the bottom of the pyramid to have
more savings and thus pool them from the destitution (Figure 1). This study is an initiative to
reveal the possible improvements of the existing micro-insurance mechanisms for the
borrowers and to find a way to go further.

            Figure 1: How Micro-Insurance Addresses the Risk Management of Poor

1.2      OBJECTIVE

The broad objective of the study is to suggest a flexible model to improve the exiting micro-
insurance service delivery as a poverty alleviation tool. To achieve this goal the following
specific objectives are looked into:

a)    An overview of micro insurance.
b)    Analysis of micro insurance practices in Bangladesh.
c)    Analysis of different models of micro insurance provisions.
d)    Micro finance institutions performance as micro insurance providers.
e)    Basic models of micro insurance provision augmenting micro finance


The research is confined to the ability of micro-insurance as a poverty alleviation tool. The
research analyses micro-insurance schemes offered by different MFIs/NGOs in Bangladesh.
Several focus group discussions were made for understanding the need and problems of
micro-insurance for marginal households. Some depth interviews were carried out to
understand the practical problems faced by the service providers.
For devising the sampling frame of the study, all the current micro-credit providers
(MFIs/NGOs) in Bangladesh offering micro-insurance service for borrowers are listed.
Consequently, an initial screening scheme is employed to establish the classification of the
sample. There are only a limited number of MFIs/NGOs offering micro-insurance services in
a limited scale. In order to have a representative sample, data is collect form four big, four
medium and four small NGOs/MFIs having some sort of borrowers risk coverage micro-
insurance services.

Qualitative research was mainly carried out to clarify the precise model that depicts the
dimensions of the appropriate models. Quantitative research would form a much larger and
more important section of the study since quite an extensive array of model variables
developed require measurement, analysis and testing. Data related to some of the variables
needed to test the hypotheses was available from secondary sources and was gathered
accordingly, while data pertaining to the rest of the variables is collected through survey and
processed accordingly.


3.1     Micro-Insurance and Its Connotation in Bangladesh

The term micro-insurance is gaining increasing usage in the world of micro-finance, often with
little clarity regarding the definition. In the micro-insurance donor guideline for the micro-finance
institutions the definition of micro-insurance is alienated in two parts: First, micro portion of the
definition refers to the subset of a product that is designed to be beneficial and affordable for low-
income individuals or groups. Second, insurance, which refers to a financial service that uses risk
pooling to provide compensation to individuals or groups that are adversely affected by a specified
risk or event.

ILO‟s (International Labour Organization) Social Finance Programme working group on micro-
insurance, CGAP (Consultative Group to Assist the Poor), defined micro-insurance as “the
protection of low income people against specific perils in exchange for regular premium payments
proportionate to the likelihood of and the cost of the risk provided” (MRF 2006). Low-income
people can use micro-insurance, where it is available, as one of several tools (specifically designed
for this market in terms of premiums, terms, coverage, and delivery) to manage their risks (CGAP

In Bangladesh, it is often assumed that a micro-insurance policy is simply a low-premium
insurance policy, but this is not so. For a number of important reasons, low-income clients often:
a) live in remote rural areas, requiring a different distribution channel to urban insurance products;
b) are often illiterate and unfamiliar with the concept of insurance, requiring new approaches to
both marketing and contracting; c) tend to face more risks than wealthier people do because they
cannot afford the same defenses (e.g., on average they are more prone to illness because they do
not eat as well, work under hazardous conditions and do not have regular medical check-ups); d)
have little experience of dealing with formal financial institutions; e) often have higher
policyholder transaction costs.
Thus a middle class urban-policyholder can send a completed claims form to an insurance
company with relative ease (e.g., a quick call to the insurance company, receipt of the claims form
by post, and then return of the form by post); but for a low-income policyholder, submitting a
claims form may require an expensive trip lasting a day to the nearest insurance office (thereby
losing a day of work), obtaining a form and paying a typist to type up the claim, sending in the
claim, followed by a long trip back home. Aside from the real costs of doing this, the low-income
policyholder may be uncomfortable with the process; clerks and the other officials are often
haughty with such low-income clients and can make clients feel ill at ease.

In the last decade or so, the country has seen the provision of insurance to the poor through
the rapidly growing micro finance organizations and community based insurance initiatives.
Micro-insurance is the term now commonly used for insurance services specially aimed at the
poor. Definition of these relatively new terms is still evolving, but the term certainly implies
focus on the poor (as in the case of micro credit) and involves insurance coverage with
modest premium and sums insured.

3.2    Basic Micro Insurance Principles

To serve poor people, micro-insurance must respond to their priority needs for risk
protection, be easy to understand, and affordable. Depending on the market, they may seek
health, car, or life insurance provisions. Basic principles that should be observed by micro-
insurance providers are universal to insurance and risk management. These include:

1. Similar unit’s exposition to risk: Insurers require that risks in a particular class or group
   of policies be similar. Insurers also require that the group insured (or the "risk pool")
   include a large number of these similar risks, relative to the total population. Large
   numbers of policyholders reduce the potential for adverse selection (a situation where
   claims are higher than expected because only high-risk households purchase the
   insurance) and increase the likelihood that the variance of actual claims will be closer to
   the expected mean used in calculating premiums.
2. Limited policyholder control over the insured event: Insurance protection cannot be
   offered if policyholders can control whether an insured event will occur. E.g., selling an
   insured truck and claiming it as stolen; setting fire to an old, insured home to build a new
   one with the insurance settlement; failing to properly care for an insured goat thereby
   increasing the chance it will die of disease, etc..
3. Insurable interest of policyholders: Insurance cannot be provided to policyholders who
   have a vested interest in a loss occurring. A property insurance policy, for example, on a
   home cannot be sold to anyone other than the residents of the home.
4. Losses determination and measurability: Insurance providers must have a mechanism
   for verifying the occurrence of a loss and identifying its cause and value.
5. No catastrophe: The risk-pooling mechanism of insurance breaks down against risks that
   cause large losses for a substantial portion of the risk pool at the same time.
6. Chance of loss calculation: Setting insurance premiums require estimating the size of
   expected losses and the chance of loss.
7. Economically affordable premiums: In general, for an insurance policy to be an
   attractive purchase, the cost of premiums must be substantially less than the benefit
   offered by the policy.

3.3    How do People Manage Different Risks

Most poor people manage risk with their own means. Many depend on multiple informal
mechanisms (e.g., cash savings, asset ownership, rotating savings and credit associations,
moneylenders, etc.) to prepare for and cope with such risks like death of a family
breadwinner, severe illness, or loss of livestock. Very few low-income households have
access to formal insurance for such risks. These means include (i) prevention and avoidance,
(ii) preparation and (iii) coping.

Prevention and avoidance: When possible, poor people avoid and/or actively work to
reduce risk, often through non-financial methods. Careful sanitation, for example, is a non-
financial way to reduce the risk of infectious illness. Using family networks to identify
business opportunities is another such mechanism. The imperative to avoid risk often leads to
conservative decision making by poor people, especially in business considerations.

Preparation: Poor people save, accumulate assets (such as livestock), buy insurance, and
educate their children to handle future risks. For certain risks, informal community systems
(e.g., Ghanaian burial societies) offer protection. However, such systems generally do not
adequately protect against costly and unpredictable risks, such as the debilitating illness of a
family income earner. Formal insurance products are beginning to be offered to low-income
markets, such as simple credit life insurance, which covers an outstanding loan balance in the
event of a borrower‟s death; but these insurance products sometimes appear to be designed to
protect the lending institution rather than its clients.

Coping: Ex post coping can result in desperate measures that leave poor households even
more vulnerable to future risks. In the face of severe economic stress, poor people may take
out emergency loans from moneylenders, micro-finance institutions (MFIs), and/or banks.
They may also deplete savings, sell productive assets, default on loans, and/or reduce
spending on food and schooling. In general, prevention and planning are far less costly than
coping strategies for the individual.

3.4    Different Financial Services for Different Risks

Two important parameters can be useful to identify and classify the risks households face: (1)
the degree of uncertainty caused by the risk, and (2) the relative size of the loss. The
uncertainty of a risk can be thought in terms of three elements: (i) if the risky event will
occur, (ii) when it will occur, and (iii) how often it might occur. By positioning the risks faced
by households along these two dimensions, it is possible to assess how well various risk
management options protect low-income households against each type of risk.

Credit and savings products offer low-income households a method for converting a series
of small contributions into a large sum of money. Emergency loan funds offered by
institutions (e.g., Grameen Bank, Shakti Foundation, and Action Aid in Bangladesh) are good
examples of providers reducing typical restrictions on credit products to provide more
effective risk protection. However, credit and savings products cannot provide complete
protection against risks resulting in a loss greater than what a household can save or repay.
As the size of loss increases relative to a household‟s expected future income, credit products
become increasingly ineffective risk-management tools. Similarly, savings products offer
only partial protection against risks causing large losses relative to household income. At this
point, insurance becomes a more effective method of risk management.

Insurance products aim to protect people from a low probability of catastrophic loss. By
pooling the risks of many households, insurance products can potentially offer more complete
protection against property, health, death, and disability risks at an annual cost that is within
the household‟s budget. However, insurance becomes a less effective risk management
response as the degree of uncertainty and relative cost associated with a risk reach extreme
levels (Brown & Churchill 1999). As a result, most mass, covariant risks, such as epidemics
and natural disasters, are difficult to insure. This is especially true if an insurance provider
has a relatively small customer base and operates in a contained geographic area.

Some mass, covariant risks can be insured if an insurer spreads the risk among a sufficiently
large group of policyholders. By directly offering policies to people over a large, dispersed
geographic area, insurers have successfully developed products that protect against natural
disasters, such as hurricanes and earthquakes. However, where the expected frequency of
occurrence of a mass, covariant risk cannot be reasonably predicted from historical records,
or where a risk occurs often in the same region, such as flooding in Bangladesh, insurance
will not be an economically viable solution for low-income households. Access to liquid
savings deposits and aid from the international relief community is alternative sources for
partial coverage against these risks.

3.6    Micro-Insurance Products and Their Relative Complexity

Life insurance pays benefits to designated beneficiaries upon the death of the insured. In
general there are three broad types of life insurance coverage: (i) term, (ii) whole-life, and
(iii) endowment. Term life insurance policies provide a set amount of insurance coverage
over a specified period of time, such as one, five, ten, or twenty years. This insurance is
appropriate when the policyholder‟s need for coverage is temporary. This is the most widely
used life insurance policy in low-income communities in developing countries and the least
complicated for the provider to offer.

Whole life insurance is a cash-value policy that provides lifetime protection; whereas,
endowment life insurance pays the face value of insurance if the policyholder dies within a
specified period. It has a longer time horizon than the term life insurance. These two are not
offered widely in developing countries.

Property insurance provides coverage against loss or damage of assets. Providing such
insurance is difficult because of the need to verify the extent of damage and determine
whether loss has actually occurred. It is difficult for most MFIs to guard against such moral
hazard. A few, however, do provide such coverage. SEWA in India provides insurance
against damage to home and productive assets. Grameen Bank in Bangladesh offers its
clients insurance against the death of livestock, and COLUMNA in Guatemala provides
insurance against fire damage.

Health insurance provides coverage against illness and accidents resulting in physical
injuries. MFIs have realized that expenditures related to health problems have been a
significant cause of defaults and people‟s inability to improve their economic conditions.
While coverage varies, many providers cover for limited hospitalization benefits for certain
illnesses, and for costs of physician visits and medicine. Some also make available primary
health care services. Disability insurance in most cases is tied to life insurance products. It
provides protection to the policyholder and family, should any of them suffer from a
disability. FINCA Uganda and CARD in Philippines are examples of MFIs providing clients
with disability insurance.
Complexity of different types of insurance policies is depicted in the following figure 2.

                                          Crop insurance
                                          Health and disability
                                          Annuities and endowment
                                           (retirement provision)
                                          Property insurance

                     SIMPLER              Term life insurance
                                           (payment to beneficiaries
                                         on death)
            Figure 2: Complexity of Different Types of Micro-Insurance Policies

In general drawback of MFI products are found to be as follows:

    Lack of knowledge of product design is very acute among the MFIs since they have
     never been to the risk calculation and insurance product designing.
    Lack of regulation for micro-insurance in government policy level is hindering their
     scope to be reinsured and work full fledged as commercial entity.
    Most of the MFIs don‟t use specific methods to mitigate the risk associated with each
     insurance product. (Adverse selection, moral hazard and fraud)
    Majority of the MFIs don‟t consider inflationary cost increase. Premium and cost is not
     adjusted with inflation.

Figure 3: The ability of Micro-insurance Products to Cover Risks Faced by the Policyholders

Bangladesh a country of 140 million people is very densely populated (Appendix 1). Majority
of the population is living in the rural areas and are deprived of basic social services (e.g.,
health, medicare, etc.). Micro-insurance is rapidly expanding in Bangladesh. Micro-insurance
products are becoming more competitive, and there are varieties of risk mitigation options
available to the low-income market. The very first micro-insurance scheme was introduced
1972 by Gono Shashtho Kendro. Besides regulated insurers, many MFIs have some level of
insurance provision covering disability and/or death. Recognizing the link between good
health and productivity, some MFIs are also trying to bring quality health care to people who
have not had access to these in the past (Table 1).

        Table 1: Distribution of Different Micro-Insurance Schemes in Bangladesh
      Type of scheme                  No. of schemes                  Distribution
          Health                            13                            39%
           Life                             12                            36%
       Loans/Capital                         8                            19%
        Livestock                            2                             6%
         Disaster                            1                             3%
          Total                             36                            100

The non-governmental organizations involved in micro-insurance are not registered with the
Insurance Directorate and are not regulated or supervised under the Insurance Act. The
NGOs are of the view that since the NGO regulations do not prohibit such a service, it is not
illegal to provide health micro-insurance to its members.

The Insurance Directorate is currently not taking any action for or against unregistered micro-
insurance schemes. The Chief Controller of Insurance notes regulations that guide the
provident funds, and mutual and cooperative insurers provide a mechanism to formalize these
organizations, as well as improving the potential for the consumer protection activities of the
Insurance Directorate. The Directorate generally appears ambivalent toward micro-insurance.

Most of the MFIs who provide micro-insurance schemes have rushed into the business either
to protect the money they give away as micro credit or just to make more money from
premium. It can be seen that there is still a lot of scope of introducing new products in
livestock and disaster protection.

Livestock and crop insurance

Proshika and some very few MFIs practice this. But for an agrarian country like Bangladesh
this is very important. This is helpful in insuring the farmers at source, in the field. Most
cross-country experience including Bangladesh in this field is facing high operational cost
and high loss ratios.

Health insurance

Other than BRAC, all the schemes offered by the MFIs are mandatory for the borrowers.
This increases extra load on the existing human resource that are more efficient in micro
credit. If the product is mandatory then it creates a pressure on the micro credit clients for
availing the product. One of the biggest drawbacks is that, none of the schemes‟ premium has
been calculated through actuarial analyst. The reason behind MHI schemes of the MFIs was,
lower repayment of micro credit by the clients due to exposure to health hazard. So most
MHI schemes were designed in a fashion to ensure better recovery of micro credit. Distances
and associated transport costs in traveling to and from the hospitals and clinics can be an
issue and a reason for low renewal rates. Location of health care facilities is therefore an
important issue and requires attention. It was observed that earlier reimbursements were only
paid by service form but now it covers both cash and services.

Life insurance

This is one of the easiest products to design and serve. Most MFIs are interested in this
product since the frequency of claim is very low and they can take advantage of the time
value of money. Some MFIs take premium weekly basis and after 5 years if no claim is made
then the deposited money is given back. But in terms of the policyholders death or spouse‟s
death a lump sum amount is given against the claim. Such an endowment scheme is very
good for both the insurer and the policyholder (e.g., Shakti Foundation). Some other MFIs
take premium annually in one installment keep the deposit for the time being but don‟t return
the deposit (e.g., Uddipan).

During the study it was found that most MFIs go for LI since it is easiest to serve and to
calculate the net impact of the policy on the affected family. So it can be said that LI is more
proven a product in terms of benefit. Most MFIs are more inclined to LI, as it doesn‟t require
any infrastructure to serve. A continuum of the micro-insurance products in terms of
complexity is shown in Figure 2.


World wide three models are used to deliver micro-insurance services (Figure 4). These

1. Provider Model: NGO/MFI is the provider of the health care whereas the insurers take
   charge of the funds collected.
2. Insurer Model: NGO/CBO takes the responsibility of the funds and the associated
   financial risks. They purchase care either from other providers or reimburse the patients
   who have gone to other providers.
3. Linked Model: NGO/CBO collects premium and hands it over to a formal insurance
   company. So there is a minimum financial risk with NGO/CBO and their role is mainly in
   managing the scheme.

            Type 1: Provider Model                         Type 3:Linked Model

      Premium             Health Care                                   COMPANY

                COMMUNITY                                          Group
                                                                  Premium     Reimbursement

            Type 2: Insurer Model

                                NGO                       Reimbursement
       R                                                               Premium
       O                   Premium                                               Reimbursement
       I                        Reimbursement
       E                                                 Health Care
       R     Health Care

                             Figure 4: The Three Models of Micro-insurance

The main advantage and disadvantages of these three models are provided in the table 2

       Table 2: Advantages and Disadvantages of the Three Models of Micro-insurance
 Parameters               Provider                 Insurer                    Link
                           Model                    Model                    Model
Freedom to                    -             Very free              Depends on the
suit the local                                                     insurance companies‟
market                                                             products
Premium          Set by NGO and usually based on affordability     Set by insurance
                                                                   company and usually
                                                                   based on actual
Benefit          Usually comprehensive and meets the local needs Traditional mediclaim
package                                                            policy with its
                                                                   exclusions and
Financial        With the NGO                                      With the insurance
risk                                                               company
Quality of       Better due to NGO‟s        No difference in the quality of care between
care             relationship with the      insured and non insured patients
Community        Minimal as the hospital in Varies depending on the NGO
involvement      charge and usually too


Different types of organizations are trying to offer micro-insurance to the marginal group of
the society. In their operation they perform different tasks, e.g., product sale, premium
collection, product design, pooling risk, etc. Loewe (2000) suggested a matrix (Table 3)
comparing strengths and weaknesses of MFIs as micro-insurance provider with different
other organizations. As noted due to their good relation with clients the MFIs have better
product sales and higher rates of cash collection that ensures their sustainability and growth.
But their product design and risk pooling is relatively weak due to limited R & D activities.
    Table 3: Strengths & Weaknesses in Micro-Insurance Provision by Different Types of
      Organization Mutual        Community            Mutual        Social     Commer-
         Types  Insurers           based     MFIs    Insurer     Insurance       cial
Tasks                             Groups            Networks                  Insurance
Product Sales           +             +         +        -             -            -
Premium                 +             +         +        -             -            -
collections, claim
review &
Product design          -             -          -       -            +            +
Pooling Risk            -             -          -       +            +            +
Note: (+) is advantage and (-) disadvantage

It is widely recognized that MFIs have become important innovators and practitioners in
customizing loan and other risk reducing mechanism for the poor. Given their in-depth
experience and having worked with the same customer group for two decades in an
increasingly professional manner, the MFIs know how to adapt their strategies and policies to
the particularities of this group. In this sense MFIs have shown that they can also respond to
their clients‟ needs for insurance. They have recognized that insurance protects the client as
well as the institution. MFIs have access to an additional source of income and as a result,
improve their sustainability.

Comparison of MFIs Performance and Product Features

A comparison of all the surveyed MFIs with respect to their performance features (Appendix
2) and product features (Appendix 3) is made. It is evident that although the MFIs claim that
they address borrowers part of risk, their institutional mission for introducing micro-
insurance or product design is conflicting with that statement. In most cases the product was
introduced as a tool for the credit risk management rather than ensure decrease in income
erosion of the borrowers.

As noted most of the MFIs follow the provider model. Some of them have their own
infrastructure but they are not currently using the full capacity of such facilities, which they
can. It is also found that the community-based services are not typically community based.
Where there should be more community involvement in ownership of the scheme and in fund
accumulation, the MFIs only target a group of same locality and they call the service
community based since they address and serve this group as a whole.

Since current practices incur greater risk for the MFIs, they are not willing to diversify their
product line. But if any mechanism can ensure risk management properly then many of the
MFIs can go for other type of insurance (disaster or property). Due to obstacles faced by each
organization in performing optimally all tasks on their own, insurance provisions models are
most often based on partnerships between different actors. These alliances allow them to join
resources and skills and provide better services.

Some key indicators for MFIs and insurers to successfully run micro-insurance programs are
shown in table 4. It is evident that most MFIs tie up the micro-insurance product with micro
credit and makes it a burden for the customers by making it mandatory. Their weakness lies
in product designing and strategic planning. They have the network and credit recovery
capacity but they lack integrated system that can give updates from the field and also help in
better forecasting.

                   Table 4: Key Micro-insurance Performance Indicators
                  For MFIs                                 For Insurers
     Volumes of policyholders (% of  Annual reviews of premiums written
      women)                                   Loss and expense ratios
     Premium and claim values                 Claims reserves ratio
     Loss ratios                              Other reserves
     Renewal rates                            Investment returns
     Average time for claim settlement,  Premium rate charged to the MFI
      premium rate charged to clients          Net income, capital, and surplus
     Administrative costs ratio

The high cost of operation and servicing small-scale or subsistence farmers located in a
widely dispersed area are several of the reasons why private insurance groups are hesitant to
offer crop insurance. At the same time due to the small scale or subsistence scale of
operation, farmers‟ profits are low or negative. Hence crop insurance is neither attractive nor
considered a priority to them.

7.0    Basic Models of Micro Insurance Provision in the aspect of Micro Finance

1. Full service model/Insurer model/Unit model

Under full service model, a single company undertakes all the tasks - from product design,
sales and collecting premiums to reviewing claims, handling payments and even providing
reinsurance. The insurance company undertakes all the insurance-related risk and deals
directly with the policyholders. Commercial insurers, health care service providers and
certain MFIs are examples of organizations that use the full service model. In some cases a
third-party service providers may also be involved (Insurer model). For instance, in the case
of health insurance, a third party may provide medical services. In specific where the insurer
and service provider are the same entity, the model is known as a provider model.

These models have not been very successful in reaching lower-income groups in an efficient
and effective manner. Traditionally, commercial insurers have not covered low-income
households because of the high administrative and transaction costs involved in reaching
these customers, particularly those in remote areas, and their lack of familiarity with the
demand profile. When attempting to reach these customers they must often deal with issues
of adverse selection and morel hazard, as well as a lack of actuarial information for setting
premiums. MFIs face additional hurdles to offering micro-insurance products to their clients,
including a lack of technical knowledge regarding insurance products, burdensome regulatory
requirements, highly concentrated portfolios, and lack or reinsurance vehicles.

2. Community group based model

The second model is the community group-based model, under which policyholders own the
insurance company and select a group form among them to manage the scheme. The group is
responsible for all insurance related tasks, and may subcontract external service providers to
supply specific services. Insurers in a community group-based model are typically mutual
insurers, cooperatives, community-based organizations, and credit unions. This participatory
model has the advantage of reducing moral hazard problems. Nevertheless, the absence of
reinsurance mechanisms and the geographic concentration of risk could potentially lead to the
failure of the scheme in the case of catastrophic events or large-scale claims. Finally, a
sizeable investment may be required, along with long-term training and technical assistance
to establish a sound administrative structure.

3. Partner-agent model/Linked model/Paradox model

The third type of micro-insurance provision scheme is the partner-agent model, under which
an insurer enters into a contract with an agent who markets its products. The most popular
partner-agent model used to serve low-income households is the MFI-insurer partnership. In
this type of partnership, the micro-finance institutions serve as a sales agent for a commercial
insurer. Four parties are involved: (i) the insurer, (ii) the agent (the MFI), (iii) the
policyholder, and (iv) if applicable, the external service provider. The MFI and the insurer
work together to design a product for low-income clients, and both entities negotiate the rate
offered to the customer. The MFI handles marketing, premium collection, and other customer
services. It also participates in claim reviews and issues payments on claims. In return, the
MFI reviews a commission. The insurer absorbs all the risks, sets the final rate, pays the
claims, and monitors that all legal requirements are being met.


Although most MFIs go for life insurance, it is myopic to focus on that only. It is wiser to
target such weak areas where the poor suffer most, although it takes longer time to show
impact (e.g., Health hazards). Micro credit sets an example for how a product can be altered
to cater to the bottom of the pyramid. So far the commercial insurers haven‟t yet targeted the
poor as clients due to their vulnerability. The premium for poor is supposed to be high since
they are more exposed to risk and it is not possible to track them. But according to the
concept of bottom of the pyramid (Prahlad & Hart, 2002), since targeting the poor will
increase the outreach significantly, there is significant scope for risk minimization. The
claims will be comparatively low and the scheme will be sustainable. Considering above
partner-agent model can work fine for Bangladesh.

Partner-agent model gives facilities to develop a market product, which has higher
probability of product customization. But this has to be supported by government initiative
and policy making. According to this model MFIs who lack infrastructure facilities can go for
strategic alliance with providers and insurers for synergy. The claims and premium will be
handled by the MFI but still this will be exposed to lower risk. Most MFIs use the money
collected from micro-insurance schemes as premium, to give micro credit. But this type of
activity is strictly prohibited in the micro-insurance guideline for donors (CGAP 2003). The
money collected, as premium should be invested in the welfare of the micro-insurance
program. By giving free service to the ultra poor (Embedded Services) with the contribution
from other actual insurance holders, the MFIs can ensure resource allocation for the poorest
and therefore provides equity in the community.

The MFIs who have inbuilt healthcare infrastructure are more willing to offer MHI schemes.
But they can also go for life insurance if they can achieve such expertise. Those who have
such infrastructure facilities can go for partner agent model for reinsurance. This will
increase their efficiency, decrease their part of risk and help to achieve synergistic benefits
for both the parties. The prioritizing of the social agenda over financial self-sufficiency can
lead to an adverse financial position. For financial sustainability, a MHI scheme must have a
large client base, low administrative cost and sound financial management. Cross-subsidy by
adopting a sliding scale premium and co-payments is one of the models that can be used for
meeting part of the operational shortfall (CGAP 2003b).

Donors should also question the opportunity cost of an MFI‟s focus on insurance product
development, particularly if there exist problems with the institution‟s portfolio quality or
operational efficiency. Non-MFI models for micro-insurance provision should also be
considered, including community-based insurance schemes. Payment of premiums during
periods of cash surplus is an important consideration for the success of the models.
Introducing premium payments during an inappropriate time (when there is little cash in hand
of the people) may reduce subscription and payment.
period should fit with clients‟ cash inflow.

         Horizontal cross-sector                                                           Vertical commodity-based
         generic business                                                                  sub-sector business
         services markets                                                                  services markets

        Component A                     Shoes                  Agro-
                                                            Processing                          Component B
                                                 Garments            Plastic       Insurance

                                      Management Development Services

           Generic Services
                                                IT-related Services

                                      Technology Development Services

                                                Technical Training

             Component C
              Enabling environment                                             Public Services – information, standards,
              set by government                                                advocacy, and demand creation –
              regulation and policy                                            relevant to specific markets and industries
                                                                               offered by BMOs and Government

                      Figure 5: Linking Micro-Insurance as a Market Product


In Bangladesh, micro-insurance is characterized by the strategy of catering income for poor
and vulnerable social groups who lack purchasing power for the private services, access to
quality public or private health services, and access to social security networks. This research
paper constitutes a range of information on micro-insurance schemes available to ultra-poor
and low-income earners in Bangladesh, as well as, their respective provider organizations.
The study also explored the idea of finding a suitable and sustainable model for insurers
combining micro-insurance with micro credit.

The micro-insurance concept is relatively new in Bangladesh. A small number of schemes
have been in operation for more than six years while the majority has operated for three years
or less. The evolution of the micro-insurance concept stems from the development and wide
spread implementation of micro-credit models as a development strategy. As the viability of
the credit-model was heavily constrained by contribution defaults, micro credit institutions
needed to complement credit with social security type services. Today, the micro-insurance
model has become an important development tool aiming to safeguard or reduce the
likelihood of credit defaults by addressing certain high economic costs to credit groups and
their family dependants resulting from emergency health expenditures, death of a family
member, and damage to property caused by fires or natural disasters.

Most MFIs in Bangladesh are willing to start life insurance schemes since it is easy to design
and operate and its fund generation prospect is good; but actual need in the market is for
quality health care. The research finds several avenues where government can work helping
the commercial insurers and MFIs to go for agent partner model and design schemes for the
clients based on respective strengths. The study suggests that agent partner models are more
applicable for MFIs to make the best use of the partner‟s resources and own strengths.
Community based models should include people form the community as owners and vocal
member of the schemes. All these will ensure the sustainability and the financial feasibility of
the programs.

To establish the concept of micro-insurance as a market product incorporating MFIs as the
service providers, the BDS approach suggests that government or their representative NGOs
can work as a link for such MFIs with other insurers and health service providers to make all
the parties better off. Here the horizontal cross-sector generic business services markets
(shoe, agro-processing, garments, plastic, insurance, etc.) can be supported by vertical
commodity-based sub-sector business services markets (management development, IT,
technology development, technical training, etc.) enabling environment set by government
regulation and policy for public services (information, standards, advocacy, and demand
creation) relevant to specific markets and industries offered by BMOs and Government.

To facilitate micro credit in its mission of income generation and entrepreneurial initiatives
creation for poor, micro-insurance plays a vital role in making the process sustainable and
more effective. It is the prime time for us to understand that donor funds have limited supply
and to prevent it becoming floating money, the role of micro-insurance is undeniable.
Although the study focuses on the capacity of MFIs as micro-insurance providers, other
models and alternative providers should be explored as well. Commercial insurers should see
the opportunity that lies within the bottom of the pyramid and how such poor people can be
insured as well.


CGAP: Consultative Group to Assist the Poor
ILO: International Labour Organization
MFI: Micro finance institutions
MI: Micro-insurance
MRF: Munich Re Foundation


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    Communities, Part II, Initial Lessons from Micro-Insurance Experiments for the Poor
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Brown, Warren & Churchill, Craig F. (1999). Insurance Provision in Low-Income
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MRF (2006). Munich Re Foundation. Into Action. Micro-insurance making insurance work for the
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Prahlad, C. K. and Hart, Stuart L (2002). The Fortune at the Bottom of the Pyramid. Booz Allen
    Hamilton Inc.

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