Pricing of Term Insurance for Low Income / Microfinance groupsX(1)S(lrgu0i45ifrffl55a50y1w45))/GI/5GI/... · Pricing of Term Insurance for Low Income / Microfinance groups ... or
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Pricing of Term Insurance for Low Income / Microfinance groups
Sagar Deshmukh
1
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
3
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
10
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)
22
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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