CONTRIBUTION OF MICRO-INSURANCE AUGMENTING THE POVERTY ALLEVIATION ROLE OF MICRO-FINANCE: A CASE STUDY OF BANGLADESH

A Draft Paper Prepared for the 11th 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 Email: mzmamun@bangla.net

May 2007

CONTRIBUTION OF MICRO-INSURANCE AUGMENTING THE POVERTY ALLEVIATION ROLE OF MICRO-FINANCE: A CASE STUDY OF BANGLADESH ABSTRACT 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 borrowers 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 microinsurance service delivery as a poverty alleviation tool. To achieve this goal the following specific objectives are looked into: a) b) c) d) e) 2.0 An overview of micro insurance. Analysis of micro insurance practices in Bangladesh. Analysis of different models of micro insurance provisions. Micro finance institutions performance as micro insurance providers. Basic models of micro insurance provision augmenting micro finance METHODOLOGY

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 microinsurance 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. 3.0 3.1 OVERVIEW OF MICRO INSURANCE 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 lowincome 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. ILOs (International Labour Organization) Social Finance Programme working group on microinsurance, 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 2003a). 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 microinsurance providers are universal to insurance and risk management. These include: 1. Similar units 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. 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 nonfinancial 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 borrowers 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 households 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 households 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 policyholders 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 peoples 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.

HIGHLY COMPLEX Crop insurance Health and disability insurance Annuities and endowment (retirement provision) Property insurance Term life insurance (payment to beneficiaries on death)

SIMPLER

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 dont use specific methods to mitigate the risk associated with each insurance product. (Adverse selection, moral hazard and fraud) Majority of the MFIs dont 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 4.0 OVERVIEW OF MICRO-INSURANCE PRACTICES IN BANGLADESH

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 microinsurance 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 spouses 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 dont 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 doesnt require any infrastructure to serve. A continuum of the micro-insurance products in terms of complexity is shown in Figure 2. 5.0 MODELS OF MICRO INSURANCE PROVISIONS

World wide three models are used to deliver micro-insurance services (Figure 4). These include: 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 NGO
Premium Health Care

Type 3:Linked Model INSURANCE COMPANY

Group Premium

COMMUNITY

Reimbursement

NGO P R O V I D E R

COMMUNITY

Type 2: Insurer Model NGO P R O V I D E R

Reimbursement Premium Reimbursement Health Care Reimbursement Premium Reimbursement

Health Care

COMMUNITY

Figure 4: The Three Models of Micro-insurance The main advantage and disadvantages of these three models are provided in the table 2 below: 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 calculations Benefit Usually comprehensive and meets the local needs Traditional mediclaim package policy with its exclusions and limitations Financial With the NGO With the insurance risk company Quality of Better due to NGOs No difference in the quality of care between care relationship with the insured and non insured patients provider Community Minimal as the hospital in Varies depending on the NGO involvement charge and usually too technocratic 6.0 MFIS PERFORMANCE AS MICRO-INSURANCE PROVIDERS

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 Organization Mutual Community Mutual Social CommerTypes Insurers based MFIs Insurer Insurance cial Groups Networks Insurance Tasks Product Sales + + + Premium + + + collections, claim review & payment 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 microinsurance 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 women) written Premium and claim values Loss and expense ratios Loss ratios Claims reserves ratio Renewal rates Other reserves Average time for claim settlement, Investment returns premium rate charged to clients Premium rate charged to the MFI Administrative costs ratio Net income, capital, and surplus

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. 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. 8.0 PROBABLE MODELS FOR BANGLADESH

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 havent 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 MFIs focus on insurance product development, particularly if there exist problems with the institutions 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. The timing of the premium acceptance period should fit with clients cash inflow.

Horizontal crosssector generic business services markets

Vertical commoditybased sub-sector business services markets

Shoes AgroProcessin g
Garments

Component A

Component B
Insurance

Plastic

Management Development Services

Generic Services

IT-related Services Technology Development Services Technical Training

Component C
Enabling environment set by government regulation and policy

Consumers Public Services information, standards, advocacy, and demand creation relevant to specific markets and industries offered by BMOs and Government

Figure 5: Linking Micro-Insurance as a Market Product 9.0 SUMMARY, CONCLUSION AND RECOMMENDATION

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 partners 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. ACRONYMS CGAP: Consultative Group to Assist the Poor ILO: International Labour Organization

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