MFIs can use insurance to manage their risks more effectively – as well as protecting their clients. Yet many MFIs are not using insurance tools to reduce their exposure to credit and liquidity risks. This will not only expose the institution to such risks, but also its clients. The session explored how MFIs can use insurance to strengthen their business model and deliver this product to clients, illustrated with concrete examples from Grupo Fusai in El Salvador, MiCrédito in Nicaragua and Kashf Foundation in Pakistan.
Katharine PULVERMACHER kicked off this session by explaining that MFIs are faced with different kinds of risks, to which they are not equally exposed. These risks can be direct (non-performing loans, liquidity and credit risks) or indirect (such as clients defaulting, unexpected expenses). The size of the MFI, whether it takes deposits, and the regulatory framework it is operating in, may also affect the kind of risks the MFI can run into.
Pulvermacher subsequently explained how such risks can be managed effectively through insurances, and pictured the various scenarios with or without insurance coverage. Loans may be secured through collateral, yet this has a clear negative effect on the surviving family. If the loan is not secured, the MFI has to resort to the non-performing loan reserve. For such cases, the MFI can apply credit-life insurance, whether or not also covering surviving family protection (cash benefit). Pulvermacher referred in this context to the paperwork required by the family, such as a death certificate, and more creative solutions for poor rural areas, to protect both the MFI and the borrower.
Asier ACHUTEGUI then highlighted the three case examples mentioned above, which were selected randomly, yet different in size for purpose of comparison. Microinsurance Network compared the different insurance product options (credit-life insurance, health microinsurance) to the respective benefits for the MFIs (reducing risks and defaulting, client loyalty) and for their clients (reducing income risks, health risks and family exposure). Whereas the insurance scheme in El Salvador covered mentioned two insurance options, the scheme in Nicaragua with 20,000 clients is a bit bigger, and includes a Parametric insurance that was launched in 2018. This latter insurance covers climate risks (floods and droughts) and earthquake risks. Its Microhealth insurance includes telemedicine, i.e. medical service at a distance. The scheme in Pakistan is much bigger again, covering some 500,000 client families. This scheme includes a livestock insurance instead of the parametric insurance they have in the case of Nicaragua.
Gilles RENOUIL, from Women’s World Banking, referred to their recent programmes in Africa, and the study they did with Kashf on the effects of COVID-19. In that respect he distinguished between the various risks that clients are perceiving, compared to the realities of their business and the ability to be resilient. For some of these risks, reference was made to peer group information solutions. He gave an example from Egypt, concerning family relations and the bundling of products, and provided a link to a YouTube video with parametric examples by Acre and Pula in East Africa. In this respect, Dominik SCHWEIZER, from Crédit Suisse, asked a question to Renouil if they perceived any maternity risks, but according to Renouil that was not a big issue to cover.
There were some questions from the audience which would be answered through email, such as on the working of the Parametric insurance and on the costs of the health insurances. Sukhwinder ARORA, from Savings at the Frontier, asked what worked best: insurance costs embedded in loans, or a separate payment for insurance products. Pulvermacher said this would depend on the situation, but that it is absolutely important to communicate to the client that they do have this insurance and how to claim benefits, so as to safeguard full transparency with customers, and educate them in this respect to build trust.
Philippe GUICHANDUT, from Grameen Crédit Agricole Foundation, asked if insurance was compulsory in the examples given, and what challenges MFIs were facing. Pulvermacher and Achutegui responded that for large part this was important for the outreach and business model, and not only for cases involving death, but also for disability cases. As for the challenges, it was explained that crucial issues such as educating clients and agents need to be taken into account when developing insurance products. Another challenge was to keep the premium low enough, yet not affecting the capacity of the fund to pay.
Pulvermacher concluded the session by thanking the audience, and referring to the various case examples of Parametric and Microhealth insurances available, whether through their website or by requesting further information through their contact details.