By Shabiya Ali Ahlam
Insurance starts with trust. But trust is greatly won by the wealthy segment and not the poor, who are the most vulnerable to shocks of different natures and are in need of a safety net for their livelihood to continue.
Although there many institutions that offer this basic safety net for a fee, it is not well-known or accepted by those in the bottom of the pyramid since they are yet to be aware of the importance of insurance. While this situation is common to most parts of the world, it is highly relevant to Sri Lanka where the penetration level is observed to be lowest in the region.
Although the insurance industry had recorded a phenomenal Gross Written Premium (GWP) and asset growth in the recent years, the penetration as a percentage of GDP is on declining trend, and promoting microinsurance to the rural masses is noted to be an even bigger challenge.
In 2013 the industry had penetration of 1.1% as a percentage of GDP, which is 0.05% lower than the 1.15% achieved in 2012 and 0.1% lower than the 2011 figure of 1.2%.
To share views on how the industry can be taken forward, the Insurance Board of Sri Lanka (IBSL) recently held a workshop titled ‘Promoting Microinsurance in Sri Lanka’ in Colombo.
Bringing senior officials of the all insurance companies on to one platform, the full day conference, which featured Secretary to the Cabinet Ministers Sumith Abeysinghe as Chief Guest, provided a 360 degree view on microinsurance and what should be done to further promote it.
Noting that the low penetration is more of an opportunity than a weakness, IBSL Chairperson Indrani Sugathadasa said this means there still remains a feasible portion of untapped market, thus a vast potential for insurance companies to introduce products at an affordable price that meets the needs of the general public.
While in Sri Lanka it is the mostly the urban population that is protected by insurance, she added that the industry is yet to reach out in a significant manner to the masses in rural and semi urban areas where approximately 75% the population resides.
With insurance companies citing the low disposable income of the rural populous as the prime reason for lack of penetration, Sugathadasa asserted this is incorrect since income of rural people has been on the increase as incidence of poverty has drastically reduced in the recent past.
“In order for us to enhance insurance penetration, the time has come for us to think and act differently. Doing the same thing over and over again and expecting different results is meaningless. Many insurers across the globe have found microinsurance to be profitable if operated simply and efficiently by responding to market needs and reaching out to large number of low income people. It is up to the industry to seize the opportunity and shape the environment, by creating a sustainable future their companies,” she said while delivering the welcome address.
Overview of microinsurance in SL
In 2006 the industry saw the setting up of a body that aims to have a dynamic and sustainable microfinance sector for an inclusive financial system in the country.
The Lanka Microfinance Practitioners Association (LMFPA) that has 63 member organisations was set up with the purpose of contributing to the development of sustainable and effective microfinance service by supporting all the stakeholders in the sector and creating a conducive environment through a collective action in an effective an efficient manner.
LMFPA Secretary Imran Nafeer while giving an overview of microfinance in the country noted that the 63 members consist of cooperatives, guarantee companies, limited liabilities companies, NGO-MFIs, banks, private companies and finance companies.
While having a wider coverage of member institutions that are practicing microfinance in the country, Nafeer noted that issues arises in this segment since majority of the institutions are unregulated.
To address this LMPFA has been actively advocating with the relevant authority, mostly with the Central Bank and the Ministry of Finance, to bring in a Microfinance Act.
2013 data shows that for microinsurance there over two million active borrowers and when looking at State-owned microfinance programs such as Samurdhi and Divineguma, the figure exceeds four million.
There has been steady growth observed in the last four years in this area since many institutions in the industry are doing microinsurance. The loan portfolio stands over Rs. 80 billion and if Government
sponsored programs are included it stands over Rs. 200 billion.
“Looking at the social economic changes in the country it is observed that many microfinance institutions are moving from traditional to innovative approaches. They are looking at new ways of delivery. This might be an indication for insurance practitioners to look at microinsurance as an opportunity,” said Nafeer.
He added that new products have come into the industry, where credit products are given emphasis over entrepreneurship and business development loans. Companies should also look towards catering to the ‘ultra-poor’ since it is an area that remains largely untapped.
“In the current context we can see gradual and drastic change in the poverty level where it is reducing. This is a positive indication where it is terms of repayment capacity for microcredit,” noted Nafeer.
Experience in microinsurance
The local scenario in this regard is that with penetration being 1.6% and insurance density being $ 21.3, it is low compared to the per capita income which is $ 1,400.
According to Ceylinco Insurance Senior Product Manager Indika Abeyratne, recent studies amongst the low income group have shown that 41.4% trust insurance and believe in its benefits whereas 33.3% believe that insurance is expensive and has no benefits to their income group, and 25.3% do not trust insurance and think it will not help them.
According to him low income groups want health, life insurance and funeral expense and there is very low demand for property insurance.
However, the tsunami in 2004 changed the perception of insurance to a very great extent.
Pointing out that at present microinsurance products are offered by the public, informal, and private sectors, Abeyratne said Ceylinco is looking at ways of working with the Government and other institutions in bringing down that cost to make microinsurance more affordable to the market.
“At Ceylinco we believe that microinsurance is a corporate social responsibility. We want to partner with the Government to realise and transfer the risks and mitigate them. Of our gross net premium, 4-5% is in microinsurance. There is a large market we can penetrate,” he said.
Of the many products offered, one such is for farmers where a tailor made insurance package is made available.
It is treated as a main category and business is channelled through farmers’ societies and financial institutions offering crop/livestock loans.
Product coverage include crop insurance, insurance of livestock, personal accidents, insurance for farmers and spouse, funeral expense for family members, insurance for farming equipment, excluding tractors which could be covered under motor insurance.
Increasing attention to those at the bottom of the pyramid in terms of per capita income, HNB Assurance noted that individuals of these low income groups face more risks than others simply due to factors such as their occupation, social status and surroundings they live in, making it hard to mitigate risks.
Sharing the experience of the institution, HNB Assurance General Manager Life Insurance Prasantha Fernando pointed out that for the higher income earning group, in the event of a death in a family, there are more affluent members who can support, but for the low income groups this is not so.
“There is no support from the immediate or extended family. So we feel that there is more need for insurance for this group. We observe that these groups have no access to the conventional insurance due to various reasons and for this HNB Assurance started offering microinsurance products in 2006 and we have launched several insurance policies for this segment starting with ‘Gami Pubuduwa’,” he said.
Gami Pubuduwa is a combination of level term and decreasing term assurance and was launched with HNB microfinance scheme. In addition to loan coverage the product also provides an additional life cover to the household allowing them to continue their livelihood when there is a death or disability of a member.
In 2007 HNB Assurance introduced the ‘Sathkara’ with SEEDs. The product is a combination of term assurance and endowment assurance. The benefits include funeral expenses, hospital cover, and coverage of expenses for certain disability.
Providing a snapshot of the customer profile, Fernando noted that 64% of the micro policyholders are females and 36% are males, whereas in the conventional scenario it is 60% males and 40% females. The age distribution of the policyholder shows that most are between the ages of 26-55 where approximately 13% are between the ages of 18 and 25 and very few are over the age of 55. When comparing the age distribution by gender, there is no major difference and it is the age group of 25-55 that are dominant.
Highlighting the challenges faced, Fernando stressed there are many to overcome. “The dominant challenge is that the traditional sales systems of agents and brokers do not reach the low income segment. For this it is imperative to look at alternate distribution channels such as microfinance providers, banks and other societies, to distribute and reach these segments,” he said.
He added that while specific products should be designed to suit specific micro-segments, if it does not suit the target group it will not be successful.
A challenge greatly face is the affordability factor where the policy is regarded as expensive by the target segment. “When we reduce the premium, the product becomes less feasible. It is important that we strike a balance between affordability, feasibility and the business model. If there is a sound business model it is possible to bridge the gap and strike a balance. We must also have a simple premium collection method where most are collected by the microfinance institutions and then transferred to the insurer,” added Fernando.
With Janashakthi entering the microinsurance space in 2009, much later than the other big players, it has yet to gain a higher market share.
Sharing the experience of company, Janashakthi Insurance Chief Operating Officer General Insurance Dayalanie Abeygunawardhana stated that the majority of those in the industry are inclined towards the macro portfolio and very little is interest is shown towards the low income earners. “The opportunity in microinsurance is that it not only helps to promote the business but is also similar to a social activity where poor families are protected,” said Abeygunawardhana.
With most of the poor workers being in the informal sector where they work under stress conditions, they are unable to protect themselves during crisis. This is greatly because they don’t have building or productive assets and have no steady income.
Janashakthi greatly focuses on farmers when looking at microinsurance.
However, many issues and challenges were faced when catering to them of which some include the premium being low which increased the cost of delivery. “It is perceived that there is low capacity of a poor household to pay a premium. The lack of knowledge on the need and importance of insurance and the inability to collect the premium were a few other issues that made it difficult to arrive at a correct premium.”
When exploring how best microinsurance can be offered, it was noted that it is best done through microfinance institutions.
“It was the best method we could see. We as insurers, although we have branches island-wide, find it difficult to reach the grassroots level. The partnership between the insurer, financial provider and also the community based institutions was best way to reach the low income segment,” said Abeygunawardhana.
Global trends in microinsurance
With there being high potential for insurance and microinsurance around the world and more so in developing regions, GIZ Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia Program Director Dr. Antonis Malagardis noted that the current buzz word in the industry is inclusive insurance.
Noting that inclusive insurance not only belongs to insurance promoting strategies, he said it also belongs to the strategy of promoting financial inclusion in the Government. “It is important to identify how this is linked to the development policy in terms of financial inclusion so the provision of risk protection and service which leads us to insurance is provided,” noted Malagardis.
The progress that includes risk protection is important since it is necessary to look at financial inclusion and for this not only is good regulation needed but so are good products that can be tailored to the needs of the households of rural population.
Health products having a higher demand worldwide, Malagardis noted that with it unfortunately being a complicate product, it will not work well for micro insurance. While countries that have attempted to bring health into microinsurance have failed completely, it is noted that if attempting to get into that segment strong regulatory framework is required.
Since there is a lack of insurance on local protection, in most countries people leave it to fate. It is the low income groups that are the most vulnerable since it takes them longer to recover and come out of shocks. Therefore for them it is about assistance. Cash assistance can be given to them through life insurance as it is important for this group to have a cash inflow at the time of shock. “Such assistance will help them to believe in insurance and what it can offer. People should look at this as assistance. They might not use it to recover from the situation but might use for other purposes such as education, debt repayment and others,” he said.
The strategy in the Philippines started with close collaboration between the public and the private sector. However, it took time for the government to understand that its role was to only create an enabling environment. Some parts of the public sector were of the view that they would have to be involved in subsidies, which was not expected. The private sector then looked at microinsurance not as a charity but as a real business.
“An important lesson here is that the government has to take ownership of reforms. Not just the association of insurance they are part of, but the government has to own it. It is important for the regulator to be focused and understand all proposals put forward. The regulator should look back to the market every three or six months and listen to what the industry is saying, because insurance is based on what the market says,” pointed out Malagardis.
She added that when designing the product it was felt it was best left simple. “It has to be in the language that they understand so mostly the covers and the benefits should be specified either in Sinhala or in Tamil where the people in the rural areas could understand. There is lot of potential in microinsurance and for this we need to look beyond the short term gains that we sometime focus on, and reap the profits patiently,” expressed Abeygunawardhana.
Sanasa Insurance serves low income households of 805,000 persons (with families totalling up to three million) using the network of its member societies.
Using its 46 branches located island-wide for delivery, it has 13 products in total to offer to the rural population and its performance is observed to be on an increasing trend.
Number of claims paid by Sanasa increased from 148 in 2011 to 248 in 2013, where the total life claims paid increased from Rs. 4.5 million in 2011 to 13.4 million in 2013. In terms of general insurance it increased from Rs. 64.9 million in 2011 to Rs. 76.4 million in 2013.
Despite the progress a number of challenges were faced when promoting the products mainly due to the fact that microinsurance is not considered in the current insurance legislation, according to Seemasahita Sanasa Rakshana Samagama Consultant International Relations L. B. Abeyratne.
“This situation is not conducive to the future development and promotion of the microinsurance sector. In many countries registered microinsurance organisations are enjoying relaxed provisions under the insurance law pertaining to microinsurance. Consequently Sanasa is deprived of such relaxations due to absence of legislations to regulate microinsurance activities,” shared Abeyratne.
He added that instead of making efforts to achieve the objective of developing microinsurance, Sanasa has been forced to change its pathway to a different direction of developing insurance products for higher income groups.
Absence of clear cut definitions of microinsurance is one other challenge encountered by the company which intends to operate microinsurance business needs to demarcate boundaries of its microinsurance department.
“Absence of a national policy for development of microinsurance as a tool of risk management has resulted in unhealthy situation between the policy maker and the microinsurance practitioners in the industry. Negative attitude towards microinsurance is observed not only from the potential clients but also from front line staff and officers of the Governmental departments who are in charge of community development program. This has been a great hindrance for the development of microinsurance,” asserted Abeyratne.
Way forward for microinsurance in SL
To discuss the way forward, the workshop featured a panel discussion under the title ‘Future of Microinsurance in Sri Lanka and the way forward’. Moderated by IBSL Chairperson Indrani Sugathadasa, the panel members for the session were IBSL Acting Director General Damayanthi Fernando, GIZ Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia Program Director Dr. Antonis Malagardis, Insurance Association of Sri Lanka President Prakash Schaffter and Lanka Micro Finance Practitioners Association President S. W. Kiriarachchi. Following are the excerpts of the session:
Q: We understand that there are institutions collecting premium from those not registered with IBSL. Will the IBSL allow them to continue to operate in that manner?
Sugathadasa: We should not allow them to continue. However, it is noted that there should be clear definition and some relaxation should be given along with legislation. There also should be a microinsurance centre. There are lots of suggestions on this and we will consider it.
Q: What are the barriers or the bottlenecks for other companies to develop and sell microinsurance products?
Schaffter: The reason why others do not sell microinsurance is that it goes back to the definition of microinsurance. If that is defined we will have a clear list of persons who are not doing microinsurance at the moment. But assuming that you define micro insurance products that are targeted at the low end of the society, the reason for some insurance companies not doing it is because it does not fit within their business model.
For example, a company has taken a policy decision of being city-based and not having an extensive branch network and focusing on the corporate segment, then the business model determines that it will not provide products for microinsurance segment. If the business model is not limited to that and is focused on providing other products, that it means that micro insurance is an area where they are simply not thought about and focused upon. Alternatively it would mean that the cost structure involved in microinsurance is such that it does not make it economical considering the volume for that particular business.
Q: Sanasa Insurance is not under the regulator. How do you view your organisation being in partnership with other registered organisations in promoting microinsurance products?
Kiriarachchi: I don’t see any problems in doing that. It is up to the insurer to contact such originations and come to some amicable understanding. I think there is a necessity, but there are so many organisations having informal insurance. The models are different. All institutions have some sort of risk mitigation so the insurers can talk to the microfinance institutions. However the premium needs to be discussed.
Q: When we discuss about standardising and formalising the microinsurance sector and bringing the organisations under the regulator, or to have a separate insurance for them, it is said that the capital cannot be different. Why is it so?
Malagardis: Looking at the experience in the Philippines where in the beginning of the success was not commercial insurance. It was not MFIs, it was the Mutual Benefit Associations (MBAs). The capital structure is different as they sell only life insurance for the moment, and they were exempted from taxes. They started with five time’s lower capitalisation compared to the insurance companies.
Now it is going to change. The cooperatives are also in a similar status. The commercial insurance companies have 8% tax and non-life insurance has 27.5% and they are still selling profitably.
While now commercial insurance is thinking of starting microinsurance, it would need the same capital amount as it has for traditional insurance. The regulator will not permit relaxation.
Sharing the lessons learnt, he said that business relationships between insurance companies and organisations of potential customer groups is impacted due to the unsatisfactory state of affairs experienced from insurance agents. “If insurance broker firms are encouraged to provide services to customer groups of microinsurance, it will be beneficial to both the insurer and the potential customer groups,” noted Abeyratne.
Solutions to promote microinsurance in SL
Noting that Sri Lanka is just in the initial stages of its dialogue, GIZ Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia Program Director Dr. Antonis Malagardis, while suggesting solutions to promote microinsurance in the country, said that the regulatory issues would have to be addressed.
While commending the use of microfinance institutions and general societies as a distribution channel as well as general societies, which is common in many countries, he stressed that the current traditional methods used would not give future success.
“It is not that traditional arrangements don’t work. It will not meet the purpose. This is because they are going to be more expenses due commissions and the message will not be transferred as clear as we want to. Linked to awareness, most traditional people have a different mindset and it is for this reason that other countries have been looking at an alternative solution and Sri Lanka should look at doing the same,” advised Malagardis.
Promoting the use of microfinance institutions to deliver microinsurance products, he said it is one of the most-favoured distribution channels, in addition to cooperatives and mutual associations.
Taking the example of the Philippines that has similar issues to Sri Lanka, it has managed to find a way forward since it looked at alternative distribution channels and emphasised the importance of microfinance institutions and the basis of reaching the rural target audience. According to Malagardis this worked well since such institutions know clients a lot better, provide more services and are spread widely across the country.
Touching on few issues in Sri Lanka and suggesting suitable solutions, he said that while microfinance institutions are much better prepared for this, the issue in taking it forward is greatly around formalisation.
“It is imperative to strike a balance between affordability and feasibility. High premium many not be affordable since we are talking about low income. But again, low premium is not feasible for insurance company. So it is about making profits and meeting the CSR and still making a business. It is necessary for institutions to understand the affordability when designing products,” he said.
Speaking on the role of the IBSL, Malagardis noted it was surprising that the IBSL has yet to conduct a demand study on microinsurance since doing so would provide fine insights on the need of such a service.
He recommended that while the study does not have to be conducted on a large scale, it can be carried out based on sampling and empirical information from the industry.
“It doesn’t have to be a six-month study. It can be around probability analysis and may be based on focus group discussion. This means you provide quality and figures and will help strike the balance of feasibility from both sides.”
With there being a clear lack of awareness on microinsurance, Malagardis stated that a collective effort from the Government and the industry could help. “I am surprised to note that companies are willing to work together with the Government since in most of the countries it is the opposite. There is no joint effort. I think Sri Lanka’s willingness to do so is something other countries can learn from,” he added.