> Posted by Richard Koven, Consultant, MicroInsurance Centre

The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. This blog series spotlights financial inclusion efforts around the globe, shares insights from the FI2020 consultative process and highlights findings from “Mapping the Invisible Market.

Both client value and a business case are needed for microinsurance to be sustainable. In an ideal world, the two ultimately reinforce one another. Value is recognized by clients, leading to greater satisfaction with and demand for insurance, while demand leads to reasonable profits for insurers, enhancing their ability to provide value to clients in the medium and long-term.

In an effort to better understand how profitability and client value complement one another and how they conflict, the MicroInsurance Centre’s Microinsurance Learning and Knowledge (MILK) project conducted extensive research on health microinsurance in Kenya.

Understanding client value and the business case

To understand client value, MILK conducted two “Client Math” studies. These quantitative assessments seek to understand the value of insurance compared to other risk management tools by exploring the differences in how insured and uninsured households cope with financial shocks. We looked at hospitalization insurance products offered by two private insurers: the Afya Yetu Initiative, an NGO that oversees and implements 30 Community-Based Health Insurance schemes, and the commercial insurer British-American Insurance Company Kenya (Britam). We surveyed low-income people (insured and uninsured), asking them about the direct, indirect, and opportunity costs they incurred in connection with a high-cost hospitalization as well as the strategies they used to finance those costs.

Overview of products studied

We found that while both products provided value for clients, the Afya Yetu product offered more generous coverage. Post-claim, Afya Yetu policyholders paid only a quarter of the total costs of hospitalization of their uninsured counterparts. By contrast, Britam’s clients paid 80 percent as much as their uninsured counterparts. In both cases, insured respondents were able to finance their costs more independently than uninsured respondents by reducing spending in the short-term rather than taking out loans. The Afya Yetu product is simpler and was thus better understood by respondents than Britam’s more complex product, which offers eight different levels of coverage. Afya Yetu uses a relatively “high touch” enrollment process that leverages existing relationships with agents from within the communities of the target populations, thereby educating clients and building trust. Britam’s clients, by contrast, struggled to understand their coverage; of the insured respondents in our study, 60 percent reported paying more than they expected to pay for their hospitalization.

To understand the business case, MILK analyzed financial outcome data for Afya Yetu and Britam over the 5-year period 2008-2012 and held detailed interviews with management of these insurers and other key stakeholders. Neither has achieved sustained profits on its microinsurance activity, but both programs have taken steps toward sustainability. Britam’s business case is the most promising, at least in the short-term, as its claims ratios have trended down in the last two years and it reached profitability in 2012. While not a major player in the health space in Kenya, Britam does have significant traditional health insurance business to support its HMI schemes. MILK found in other studies that insurers with mixed books of business can support a micro segment more readily than standalone microinsurance schemes, at least from an expense structure point of view. While Afya Yetu does not have that advantage, it does have a resource-sharing model that allows smaller community based groups to achieve some economies of scale.

Tensions and trade-offs between client value and business case

Combining our findings, we see clear tensions between client value and business case, but a balance remains possible. Afya Yetu provides high financial value for those who make claims, and understanding and familiarity with the product seem to lead to frequent use by clients. Afya Yetu may be something of a victim of its own success: as members become better educated about the product and more accustomed to accessing coverage, claims have increased, calling the program’s financial sustainability into question. Afya Yetu had apparently been forgiving in premium collection and generous in benefit payments and was forced to raise premiums to catch up with costs of providing value. In contrast Britam started with modest medical benefits and then increased them to stimulate demand, but has struggled to communicate the relatively complex product details effectively to its low-income clients.

We are optimistic that client value and business case can be balanced. As Britam, Afya Yetu, and other insurers work to do so, they may benefit from considering some of the critical features of the programs we studied that contribute to and/or undermine the client value proposition and the business case:

  • Level of coverage. Increasing the level of coverage may not always be the best way to improve value, especially in a market such as microinsurance in Kenya, where insurers struggle with high claims ratios. Other product features, such as simplicity and ease of use, are also critical determinants of the value clients receive.
  • Simplicity and flexibility. Simplicity can serve both clients’ and insurers’ interests, even if this means sacrificing some flexibility or choice. Britam’s product offers clients more flexibility in terms of both coverage and service providers, but the simplicity of Afya Yetu’s product might be more valuable, as clients better understand and can effectively use the product.
  • Perceptions of value. Clients’ perceptions are related to product coverage, but also to features such as simplicity and ease of use. These perceptions are important to understand, particularly for voluntary programs, as they drive demand, enrollment, and renewals. Small changes can often be made to increase value with little cost implication.

To clients, a business case matters, as it influences long-term program viability. To insurers, client perceptions and experiences matter, as they ultimately drive the demand for their products. If we are to provide clients with valuable products over the long-term, this strong interconnectedness and the tensions that often arise between value and business case will warrant careful consideration and further investigation.

The full study was written by Richard Koven, Barbara Magnoni, Emily Zimmerman, Danielle Sobol, and Laura Budzyna, and can be found on the MILK Project website.

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Richard Koven is Business Case Manager for the MILK Project and a MicroInsurance Centre Consultant. He has 30 years of experience managing and consulting with insurance companies, health plans and self-funded programs, including ten years with emerging microinsurance programs.

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