reducing vulnerability: demand for and supply of microinsurance in east africa

Journal of International Development

J. Int. Dev. 17, 319–325 (2005)

Published online inWiley InterScience (www.interscience.wiley.com). DOI: 10.1002/jid.1192

POLICYARENA

INTRODUCTION

REDUCING VULNERABILITY:DEMAND FOR AND SUPPLY OF

MICROINSURANCE IN EAST AFRICA

MONIQUE COHEN,1* MICHAEL J. MCCORD2 and JENNEFER SEBSTAD1

1Microfinance Opportunities2MicroInsurance Centre

The slow process of increasing income and building assets marks the road out of poverty.

In the precarious world of the poor, a shock such as illness, death, fire or theft can cause

severe setbacks and make this road impassable. In the absence of significant assets and

other risk mitigation mechanisms, the poor lack the capacity to withstand the conse-

quences of many shocks. Thus a shock that would prove mild to upper and middle income

households can, in the case of a poor household, dramatically reduce assets (including

stocks of physical and human capital), reduce or eliminate income sources, lead to reduced

consumption and ultimately put present and future generations of the poor deeper into

poverty. To cope with shocks, poor households use many different risk management

strategies, including informal group based and self insurance mechanisms, such as

borrowing, saving and drawing down productive and non-productive assets.

A relatively new option for the working poor to manage risk is microinsurance. It is a

type of formal insurance mechanism that protects low-income people against specific

perils. Like all insurance, microinsurance policy holders pay regular premium payments

proportionate to the likelihood and cost of the risk involved. However, microinsurance is

more than simply downscaled formal insurance; it is formal insurance tailored to a

clientele with vastly different income and risk profiles than those of traditional insurance

schemes. Creating a viable microinsurance programme requires innovation in designing

products and services that are appropriate in terms of coverage, timeliness, accessibility

and affordability.

Copyright # 2005 John Wiley & Sons, Ltd.

*Correspondence to: Monique Cohen, Microfinance opportunities, 1730 Rhode Island Ave, Suite 609,Washington, USA. E-mail: [email protected]

Arriving at the appropriate design requires an understanding of both the demand for and

supply of microinsurance and related products, both formal and informal. These papers are

a result of a study designed to understand these themes for three East African countries:

Kenya, Tanzania and Uganda. The demand side research was conducted using adaptations

of MicroSave’s ‘Market research for microfinance toolkit’ and the AIMS/SEEP ‘Learning

from clients: assessment tools for microfinance practitioners’.1 The majority of those

interviewed were clients of microfinance institutions (MFIs), some of which offered

microinsurance products. The supply side research was restricted to organizations offering

health care financing products, or health insurance. Seven institutions in the three

countries were surveyed: Microcare, CIDR and Kitovu Patient’s Prepayment Scheme

(KPPS) in Uganda; MediPlus and the Community Health Plan (CHeaP) in Kenya; and

Poverty Africa and the Community Health Fund (CHF) in Tanzania. The assessments drew

on discussions with management, staff, health care providers, and intermediary partners in

addition to qualitative participatory rapid appraisal (PRA) sessions held with a mix of

current, past, and non-clients of each of these programs. These demand and supply reports

are complemented by a third paper ‘Health is Wealth: how low-income people finance

health care’, which provides a more detailed look at the demand for and supply of health

insurance in Kenya. The paper outlines the debilitating effects of health shocks and the

limited existing means of reducing health risks for many poor households in Kenya.

The first paper, on the demand for microinsurance, examines the major risks that face

poor households, the impact of these risks in the absence of insurance, and the

vulnerability of poor households to these risks given existing informal group based and

self-insurance mechanisms.

The results show a clear demand for microinsurance in all three countries. Many poor

households remain vulnerable to risk despite existing coping mechanisms. Among

participants in Uganda, Tanzania and Kenya the most frequent and stressful risks were,

respectively, sickness, death of an income earner or other family member and property loss

as a result of theft or fire. The impact of these shocks on poor households is a two-stage

process. The first stage is the immediate impact of the shock, which results in the loss of an

asset and/or income, and the need for lump sums of cash. For example, in the case of death

of a family member, there is an immediate need for funds to bury the individual, for a

funeral, and for transport of the body and family members. The second stage is the

medium and long term impact of the shock; the repercussions that call for strategic choices

by households as they reallocate resources to respond to curtailed cash flow from the loss

of assets and work to get back on their feet. The second stage can be particularly

debilitating if the shock is the death of a household’s major income earner, as the transitory

shock of the costs of the death is compounded by the permanent negative shock to income.

Furthermore, there are differential impacts of these shocks according to gender. With

fewer assets, less control over assets, and a lack of ways to exercise their legal rights to

assets, women often find themselves more vulnerable than men. The death of a husband,

for example, can result in the possession of household assets by the husband’s family

members, leaving the widow with nothing.

The findings showed that the most dominant mode for responding to these shocks

remains self-insurance. The person or family retains the risk of loss themselves by

1See Listening to Client Series, Microfinance Opportunities andMicroSave, 2005. This is a visual interactivemarker research training toolkit which combines both MicroSave’s ‘Market research for microfinancetoolkit’ and the AIMS/SEEP ‘Learning from clients: assessment tools for microfinance practitioners’.

320 M. Cohen et al.

Copyright # 2005 John Wiley & Sons, Ltd. J. Int. Dev. 17, 319–325 (2005)

borrowing from microfinance institutions, ROSCA’s (Rotating Savings and Credit

Associations)2, moneylenders, or depleting assets such as savings and consumer durables.

Self-insurance is frequently complemented by a wide array of informal group insurance

mechanisms, such as burial societies and Friends in Need groups. Membership to these

groups require payment of dues in return for the right to access group resources, in cash or

in kind, for a specified need such as funeral transport or burial expenses. For frequent risks

that require repeated expenditures of small sums of money, such as recurring illness,

people often draw upon other informal groups such as the extended family and friends.

Kenyans, in particular, sometimes use fundraisers or ‘harambees’ to mobilize the large

sums of money required to cover one time shocks, such as hospitalization, surgery, or

weddings.

Formal insurance options to respond to risk were often very prevalent amongst the

survey respondents. The only ones noted were life insurance, linked to credit products and

required by some microfinance institutions, and some health microinsurance. In the event

of the borrower’s death, the life insurance covers the outstanding balance of the loan and

gives a lump sum to the client’s family. The amount depends on the size of the loan

balance and/or the cause of death. Overall, however, few among the poor currently see

formal insurance as an option. Formal insurance is viewed as the province of the rich and

affordable by only the top economic levels of the population.

Nevertheless, the respondents expressed a desire for more ways to cope with risk, and

particularly formal insurance. They find their current options severely constrained. Self-

insurance and informal group-based insurance are rarely able to meet the full cost of

shocks, particularly the most expensive. Borrowing from MFI’s and ROSCA’s can be

difficult if the timing of the loan or distribution cycle does not coincide with a given shock.

Many respondents cited borrowing from moneylenders during times of crisis. Despite

much higher costs, they are usually more accessible than the cheaper options. Welfare

associations, such as burial societies or Friend in Need groups, are also limited in their

ability to help people fully cover shocks. Limited funds restrict the ability of these

groups to handle multiple crises amongst members and thus limit the amount that can

be paid out at any given time. As a result, poor people find themselves forced to have

multiple relationships with numerous informal groups, substantially increasing the cost of

managing risk. One respondent, for example, reported being a member of five different

funeral and Friends in Need societies. Only in this way will she have enough money to

cover the death of a family member. This type of hedging carries high monetary and time

costs.

Overall, many of the strategies used by the poor to manage risk are costly and

suboptimal compared to other alternatives. Self insurance strategies deplete assets and

divert income and other resources that might otherwise be invested in productive, income

generating activities. It may be the option of necessity but it is difficult to argue that it

would necessarily be the option of choice if other alternatives were available. Further-

more, informal coping mechanisms usually cover only small, predefined events. This

impels consumers to turn to other sources of funding in the case of larger shocks.

Respondents were unanimous that there is never enough money to pay for shock-related

2Rotating Savings and Credit Associations. For some work done on this type of informal insurance mechanismsee Besley TJ, Coate S. 1993. The economics of rotating savings and credit associations. American EconomicReview 83(4) and Klonner S. 2003. Rotating savings and credit associations when participants are riskaverse. International Economic Review 3(44) 2003.

Introduction 321


expenses. To manage, people patch together other sources of cash among them borrowing

from moneylenders and support from family and community. Simply, they further go into

debt, a situation that can have adverse future consequences and reduce household’s ability

to deal with subsequent shocks.

This study shows a clear demand for providing the poor with microinsurance services to

help them better manage risk both ex-ante and ex-post. Existing mechanisms, self-

insurance and informal group based insurance schemes only partially help poor house-

holds absorb the impacts of shocks. Formal insurance schemes offer the poor the

opportunity to reduce their vulnerability and avoid falling back down the poverty ladder

when faced with a shock.

Responding to these demands with appropriate microinsurance products will take time

and will be a tough challenge. Microinsurance covering loans, life and health costs, is

being tried in the region. The second study thus examines factors critical to their success. It

looks at the supply of health microinsurance, in Kenya, Tanzania and Uganda by the seven

different providers mentioned above. All of the institutions are trying innovative ways of

reaching the low income market in terms of specially designed products or delivery

channels. The study assesses the sustainability and profitability of these institutions, along

with the coverage, accessibility, timeliness and affordability of their services. This

assessment gives an idea of whether the models of these providers should be replicated,

mildly modified or completely overhauled.

All seven institutions in the survey work with poor people and their markets include

employers with low-income employees, microfinance institutions, village groups, and

others. The provider models vary significantly amongst the seven institutions. Two of the

institutions are health management organizations (HMO’s- Microcare and MediPlus), two

are provider institutions (KPPS and CHF), two are strict insurers (CheaP and PoA), and

one is a community based organization (CIDR). The intent was to visit a variety of health

insurers working in different areas so that the researchers could gain a better under-

standing of the dynamics of these institutions, the resiliency of the key lessons, and the

opportunities available for the low-income market.

Each organization studied provides services through either a single hospital or a network

of health care facilities. None of them have particularly strong governance, and most have

very little insurance business capacity. While two of the institutions had excellent

computerized systems and the benefits for the health care programme were evident, in

neither was the data used to its full potential. Manual systems were sufficient for very small

community based institutions where no real data analysis is expected or attempted. Those

that seek to grow rapidly to scale, such as Medi-Plus, need to have strong skills, strong

governance, and significant management expertise to protect capital, and in-claims manage-

ment and control. One lapse in any of these areas could bankrupt the company.

Attaining sustainability hinges on establishing appropriate pricing schemes, which has

been extremely difficult for all of the institutions studied. Most began with premiums that

were far too low to cover the costs of claims, operational costs and something for a reserve.

Only three of the seven are currently covering claims costs with premiums and only one,

MediPlus in Kenya, is covering both claims costs and administrative costs with premiums.

This ‘under-pricing’ partly derives from a desire to charge only ‘what people can afford’

without full consideration of the likely costs incurred. Doing so will likely require

outsourcing pricing decisions to professional actuaries. Unfortunately at the time of the

study only two of the institutions had made any serious attempt at proper pricing,

highlighting a major need for change.

322 M. Cohen et al.


Sustainability for a microinsurance entity also depends upon enacting control systems

to limit the problems of adverse selection, moral hazard and fraud. If control systems are

weak, the insurance institution will experience financial hemorrhaging until either the

control systems are improved or the insurer goes bankrupt. Most of the institutions have

some well-considered controls usually. However, these efforts are not comprehensive and

large gaps in the control of these risks remain.

As with traditional insurance, microinsurance is a business of numbers, and sustain-

ability also depends on growth of the client base. To manage their own risk these

companies require large numbers of premium payers to make the risk pool as hetero-

geneous as possible. The study found that, overall, the perceived impacts of the insurance

programs are positive, which should help bring in new clients. Low-income microinsur-

ance policyholders are obtaining access to better health care than those who remain

uninsured and these products are offered at premium levels that are generally more

affordable to the low-income market than traditional insurance products. Nevertheless,

many of the insurers have shown relatively low renewal rates, dampening growth

potential. Some clients leave the program after they have cured an existing ailment, not

understanding that health insurance can help reduce future health risks. As a result the

benefits of insurance to existing and potential clients are limited. Another weakness can be

working with MFI’s, particularly when all members of each group need to agree to join the

microinsurance program. Working with employers generally produces better results as,

usually, a single person makes the decision for everyone.

Overall, for all of the institutions assessed, sustainability is still distant and question-

able. Those taking on more risk will be limited by the volume of growth they can generate

and can absorb. Furthermore, they may find themselves at risk of collapse due to

substantial numbers of claims. Aside from their vulnerabilities all of the institutions

showed strengths in one or more areas. Indeed, for most, the vulnerabilities can be

mitigated, although perhaps not without outside assistance.

The overriding lesson is that to develop an insurance business, an institution needs to

have the expertise and risk management tools of an insurance company. A company should

be a formal insurer to take on health insurance risk. Insurance companies are specialists in

this complex business. They have access to reserves and reinsurance, and are overseen by

insurance supervisors. Non-insurers should identify an insurance partner, or not offer

insurance.

The study on supply also examines the effectiveness of the products offered by the

existing institutions to meet the clients’ needs of coverage, accessibility, timeliness and

affordability.

In the case of coverage, the balance between what microinsurance covers and what the

premium costs is among the most difficult faced by the industry. All microinsurers visited but

one offer a comprehensive curative package inclusive of in-and-out-patient cover, medica-

tions, and diagnostics. CIDR groups offered exclusively in-patient care. With all of these

programs, exclusions and limitations are minimal yet clients still become agitated when they

do not fully understand restrictions. Microcare, for example, excludes treatment and

medication for chronic illnesses. Low-income people are opting for the comprehensive

cover, usually without fully understanding that insurance is designed to cover acute events

and that chronic illnesses are more appropriately addressed by savings products. This

conflicts with a microrinsurer’s need to keep its overall costs contained to maximize outreach.

In the case of accessibility, several aspects must be considered, including access to

quality health care, access to microinsurance, cost of premium, and potential obstacles

Introduction 323


within a microinsurance system, such as making claims. For the consumer the choice to

access to health care is largely a function of cost and availability of enough cash flow.

However, the first hurdle is the presence, within a reasonable distance, of quality health

services. Second is access to quality health care providers with integrity. This can impede

the potential for microinsurance, especially in rural areas where the poor are further

marginalized.

Another dimension of accessibility relates to the client’s relationship with the insurer.

All too often users found that the claims process for formal life insurance required

complex paperwork, which is difficult for the illiterate. By paying claims directly to the

providers, the health insurers avoided this issue and eliminated the need for policyholders

to generate a large upfront pool of funds to cover the costs and subsequently claim

reimbursement. This not only increases access to health care but has the added benefit of

getting people cared for earlier in the disease cycle, and provides greater control over

service quality and cost to the insurer.

In the case of timeliness, timely disbursement of claims settlements is critical in terms

of health care cover. The findings showed that the period between receipt of the invoice

and payment to the health care providers was lengthening month after month for some of

the health microinsurers. This reflects negligible reserves, as well as a poor cash flow, both

of which can be attributed to pricing problems. This sets in motion a long-term downward

spiral. Health care providers cease to treat ‘covered’ patients without cash. This reduces

the credibility of the microinsurer so people stop paying premiums, and the insurer begins

to fall into an ever-deepening financial pit. One institution, Medi-Plus, closed for this

reason. Timely payment is also necessary if microinsurance is going to fill some of the

gaps left by alternative mechanisms, whose funds are not always accessible on a timely

basis.

Designing a product which the public can afford to purchase is key to its adoption.

Otherwise, design efforts are in vain. The question, however, is not simply one of whether

or not a family has the money to buy the product; but also whether there is a willingness to

pay in its broader sense. This includes the way in which clients have to pay premiums, the

total cost of coverage, and the understanding of the product and trust of those delivering it.

Since it is often difficult for the poor to generate large lump sums of cash in a short period,

microinsurance institutions have found that if they can break the premium into smaller

pieces the product becomes more affordable Consideration of this as well as the timing of

customer income flows will increase willingness to pay for an insurance product.

The study of these seven providers reveals that there are many gaps that need to be

addressed as the industry moves towards delivering appropriate microinsurance products

on any scale. Where access is limited to microcredit clients, microinsurance reaches only a

narrow band of the low-income market. Where the existence of quality health care

resources is minimal, the potential for microinsurance is limited. The effective cost of

insurance is still not well understood. There is much distrust of the insurance sector among

the poor, mostly out of ignorance. Significant client education is thus another key step in

moving forward.

The research documented in the third study ‘health is wealth: how low-income people

finance health care’, was conducted among low-income people in Nairobi slums as part of

an on-going collaboration between the K-Rep Development Agency, K-Rep Bank, and

AAR Health Services. The objective was to develop a low-cost health financing packing

for low-income people in Kenya. Researchers wanted to understand low-income people’s

health needs and the health finance/management mechanisms currently used to meet these

324 M. Cohen et al.


needs. The research relied mostly on Participatory Rapid Appraisal (PRA) and Focus

Group Discussions (FGDs) adapted from the MicroSave-Africa approach to ‘Market

Research for MicroFinance’. The results illustrate concretely the findings of the above two

papers. Furthermore they reveal the significant limits of the existing means of confronting

health shocks and highlight the need for appropriate health care financing products that

could help fill this gap and closely match the particular health needs of low income

populations.

Despite the challenges, microinsurance has a role to play in providing the poor with

enhanced risk management options. Microinsurance can help poor people better manage

risk and avoid falling back down the poverty ladder when faced with shocks. From the

interviews with current or potential microinsurance clients, health care providers, insurers,

and intermediaries like MFIs, it has become clear that microinsurance is a key in the

process of poverty alleviation. Simply offering credit or savings is not enough to help the

poor maintain the gains they have earned.

The demand, not just the need, for microinsurance is high, and responding to these

demands with appropriate microinsurance products and services will take time and will be

a tough challenge. However, these demands must be addressed by institutions that are

strong and professionally managing their own risk. A simple desire to help the poor is not

nearly sufficient to manage an insurance business. The total risk must be assessed and

whatever services are offered, by whatever method, they must reduce the overall risk to

client, intermediary, health care provider, and insurer. There is tremendous opportunity in

the low-income market, and these experiences in Kenya, Tanzania and Uganda show us

that realizing these opportunities will take much effort, but can have impressive payoffs.

ACKNOWLEDGEMENTS

We wish to acknowledge the contribution of Sarah Pearlman. This research was made

possible with support from Microsave.

Introduction 325


reducing vulnerability: demand for and supply of microinsurance in east africa

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