Pricing of Term Insurance for Low Income / Microfinance groups

Sagar Deshmukh

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2

Agenda

Introduction to Microfinance Groups

Micro-Insurance

Micro-Finance process

Pricing

Communication

Questions / Observations

Introduction -Microfinance groups(Low Income)

Microfinance (MF) is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services

– Wikipedia

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Microcredit, or microfinance, is banking the unbankables, bringing credit, savings and other essential financial services within the reach of millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral.

www.microfinanceinfo.com

Ultimately, the goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money, borrowing money and insurance.

– www.investopedia.com

Micro-Insurance

Analogous to the terms microfinance and microcredit, Micro-insurance refers to insurance products specifically targeting low income markets

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International Association of Insurance Supervisors (IAIS): Micro-insurance is insurance that is accessed by low-income population, provided by a variety of different entities, but run in accordance with generally accepted insurance practices (which should include the Insurance Core Principles). Importantly this means that selection and management of the risk insured under a micro-insurance policy is based on insurance principles and funded by premiums. The micro-insurance activity itself should therefore fall within the purview of the relevant domestic insurance regulator/supervisor or any other competent body under the national laws of any jurisdiction. Excludes government social welfare scheme since these are not funded by

premiums commensurate to risk Micro-insurance is contributory (premium fully paid) and hence differentiated

from social insurance (subsidized)

Process of Microfinance

Village Surveys

Village meetings

Group formation

Group training

Group recognition test

Documentation

Disbursement

Loan utilization check

Weekly/fortnightly collections

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Objective of Pricing

• Derive rates that will sufficiently cover all costs and generate a fair return for all partners involved

• Premium rates should be set so that the actuarial present value of all premium collected over the duration of coverage will be sufficient to fund the expected present value of future claims and expenses incurred on the same block of business and still generate a “modest” surplus

i.e. (very simplistically)

PV(Premium) = PV(Claims + Expenses) + Surplus

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Term Insurance – Indicative rates

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Full U/w Partial U/w Microfinance

Rate per mille*

7 *Indicative Gross premium rates for 35 year old male

Why pricing micro-Insurance is different?

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Scarce Data

Need for an Affordable Premium

Evolving Pricing Model

Importance of Processes

Innovative Distribution Model

Pricing of insurance for MF groups

Rating Factors

Area of Operation

Past experience, if any

Process of MF institution

Age distribution

Gender mix

Target profile

Duration of covers

Average cover

Claims process

Use of technology

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Geographical distribution of Mortality

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BOUNDARY, INTERNATIONAL BOUNDARY, STATE / U.T.

KILOMETRES

0 100 200 300 400100

0 24 6KILOMETRES

A

A

P

A

K

I

ST

AN

AFGHANISTAN

C

H

I N

AT

I

B

ET

B H U T A N

BANGLADESH

ARABIAN SEA

LA

KS

HA

DW

EE

P

SE

A

N

E

PA

L

SRILANKA

I N D I A N O C E A N

BAY OF BENGAL

LA

KS

HA

DW

EE

P

AN

DA

MA

N

AN

D

NI

CO

BA

R

I

SL

AN

DS

ANDAMAN SEA

(I

ND

IA

)

(I

ND

IA

)

New Moore I.

Coco Is.

(INDIA)

(INDIA)

INDIRA POINT

RANN OF KACHCHH

MYANMAR

D E L H I

J A M M U & K A S H M I R

H I M A C H A L P R A D E S H

P U N J A B

U T T A R P R A D E S H

H A R Y A N A

R A J A S T H A N

P

P

M A D H Y A P R A D E S HG U J A R A T

M A H A R A S H T R A

A N D H R A P R A D E S H

O D I S H A

B I H A R

W E S T B E N G A L

SIKKIM

M E G H A L A Y A

A S S A M

TRIPURA

MIZORAM

MANIPUR

NAGALAND

A R U N A C H A L P R A D E S H

D A M A N & D I U

K A R N A T A K AGOA

T A M I L N A D U

PUDUCHERRY

D A D R A & N A G A R H A V E L I

U T T A R A K H A N D

J H A R K H A N D

C H H A T T I S G A R H

___<

P

(MYANMAR)

Narcondam I.

Barren I.

(INDIA)

680

720

760

800

840

880

920 96

0

80

120

160

200

240

280

320

360

720 76 0 80 0 84 0 88 0 92 0East of Greenwich

360

320

280

240

200

160

120

80

COASTAL

INLAND SOUTHERN

SOUTH

WESTERN

INLAND NORTHERN

PLAINS WESTERN

PLAINS

EASTERN

NORTHERN

CENTRAL

DRY AREA

SOUTH

EASTERN

PLAIN

NORTHERN

SOURASHTRA

EASTERN

WESTERN

COASTAL

&

GHATS

INLAND

EASTERN

INLAND

NORTHERN

INLAND

SOUTHERN

NORTHERN

SOUTHERN

INLAND

SOUTHERN

COASTAL

NORTHERN

COASTAL

CENTRALMALWA

NORTHERN

SOUTHSOUTH WESTERN

VINDHYA

COASTAL

EASTERN

INLAND NORTHERNINLAND EASTERN

INLAND WESTERN

INLAND CENTRAL

COASTAL

NORTHERN

SOUTHERN

NORTHERN

SOUTHERN

NORTH EASTERN

SOUTH

EASTERN

SOUTHERN

WESTERN

CENTRAL

WESTERN

EASTERN

SOUTHERN

WESTERN

PLAINS

HIMALAYAN

EASTERN

PLAINS

CENTRAL

PLAINS

JHELAM VALLEY

OUTER

HILLS

MOUNTAINOUS

BOUNDARY, NATURAL DIVISIONS

CH

P - PUDUCHERRYCH - CHANDIGARH

KERALA

DATA NOT AVAILABLE

CENSUS OF INDIA 2011

INDIA

DEATH RATE BY NSSNATURAL DIVISIONS 2013

DEATH RATE AT NATURAL

DIVISION LEVEL

7.0 AND BELOW

7.1 - 8.0

8.1 - 9.0

9.1 AND ABOVE

Area of Operations

The mortality statistic varies very widely by the region in which the microfinance institution (MFI) is operating in Some examples

Lower mortality in southern states of Kerala and Tamilnadu

Higher mortality in West Bengal, Bihar, interiors of Maharashtra

There are a few exceptions bucking the trend by having better processes

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Past Experience

Past data not always available

If available, not always reliable

Since the data is large (more than 100 claims), the experience is generally

statistically credible

Exposure and claims to be considered carefully

# of members enrolled for finance & covers may be different

# of claims – By claim reporting dates or claim event dates (?)

Claim intimation delays to be considered for Incurred But Not Reported (IBNR) claims

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Process of MF Institution

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Adherence to the Processes

Process Improvements

Sharing of Best Practices among regions

Age Distribution & Gender Mix

Age specific / Various Age-bands / Unit Rate (Single Age Band)

Mortality varies drastically by gender for this socio-economic class

Proportions may vary & need to be priced for

Experience rating should be done gender-wise, if data is available

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Target profile

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Already involved in income generating activities

First Time Loan Borrowers

Roll over Customers

Duration of Covers

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Generally – One year Weekly cycle

Can be longer – 2 years to 3 years Fortnightly or longer cycles Appropriate margins for longer guarantees

Recent RBI circular limits the loan amount to Rs.30,000 for tenures less than 24 months

Average Cover

Bands – First time borrowers

• 5,000

• 10,000

– Second / third cycle

• 18,000

• 35,000

• 50,000

– Second business - 1,00,000 (rare)

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In general - Higher the cover, better the mortality

Claims

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Intimation Delay

Documentation

Exclusions and Waiting periods

Investigate Sudden spike in number of claims from a region Causes (snake bites?)

Cost benefit analysis for claims investigation (?)

Use of technology

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Technology can help reduce Transaction costs Errors Claim frauds

Smart Cards – Loan passbook

Biometrics – For uniqueness

Mobile Devices – Collection of data / premium (?)

Claims paid directly to bank accounts (?) Cash Cards

Other considerations

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Reinsurance (?)

Explicit profit loading, if any

Stamp duty = 0.02% of Sum Assured

Expenses

Constrained by the product filing

Cost of issuing Certificate of Insurance

Claim settlement/investigation costs

Transaction/data handling costs

Cost of Capital

Feedback loop

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Pricing is a cyclical process

Continuous review is the Key

Communication of the feedback

• Premium

Less

• Claims (Paid + Pending)

• IBNR adjustment

• Expenses

• Change in Reserves

Add

• Investment Income (not significant)

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Non-negative residue (?)

Communication…Level 2

• Earned Premium

– Less

• Claims (Paid + Pending)

• IBNR adjustment

• Expenses

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Non-negative residue (?)

Communication…Level 3

• Earned Premium - Period ending 6 months prior

– Less

• Claims (Paid + Pending)

• Expenses

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Non-negative residue (?)

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Summary

Introduction to Microfinance Groups

Micro-Insurance

Micro-Finance process

Pricing

Communication

Questions? / Observations

Sources

Pricing for microinsurance a technical guide by Peter Wrede and Caroline Phily

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An Overview for Incorporating Client Protection Practices into Group Lending by Microfinance Institutions in India by smartcampaign.org

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