Emerging cross-country insights

1. Emerging cross-country insights • Business models and their regulatory implications • Regulatory approaches • Hennie Bester, 17 July 2013 • Drafting Group meeting: Issues paper Market Conduct, Distribution and Consumer Protection in Inclusive Insurance Markets • Manila, Philippines

2. Introduction • A2ii synthesis process: develop three thematic notes to synthesise trends and issues across countries on key microinsurance policy, regulatory and supervisory topics • Scope of notes determined by A2ii Technical Team: • First note - Evolving microinsurance business models and their regulatory implications • Second note - Different approaches taken by regulators to catalyse microinsurance markets and their impact • Third note - Input into forthcoming IAIS issues paper on market conduct, distribution and consumer protection specifically related to microinsurance 2

3. Information sources

4. Note 1 • Evolving microinsurance business models and their regulatory implications: • How do we categorise the various business models? • What are they and how do they evolve? • Risks distinctive to microinsurance business models? • What are the regulatory implications & responses? 4

5. Note 1 • Evolving microinsurance business models and their regulatory implications: • How do we categorise the various business models? • What are they and how do they evolve? • Risks distinctive to microinsurance business models? • What are the regulatory implications & responses? 5

6. Business Models: categorisation • Preferred approach: nature of intermediation process • Different forms of intermediation present different risks • Underwriting risks also relevant • Nature of the risks determine regulatory responses Risks Regulatory Responses Intermediation 6

7. Business Models: categorisation Why emphasise intermediation? • Intermediation is the method of linking a buyer and a seller • Hence intermediation is the main parameter by which we define discrete business models • And from a supervisor’s perspective intermediation is the most definitive aspect due to the increased risks as a result. • A business model (generally i.e. for any business) is fundamentally about how to link a buyer with a seller • Intermediation is particularly important in insurance because insurance is sold and not bought • The issue of intermediation is even more important in MI because of factors like difficulties in access, low premiums and values meaning high volumes needed etc.

8. Intermediation channel Rein-surer Insurer Broker/agent Clients Administration Payments Integrated Technology Platform Business Models: value chain Aggregator Clients Intermediation channel Rein-surer Insurer Payments provider Administrator Broker/agent Integrated Technology Platform Traditional insurance: • vs. Microinsurance: longer value chain

9. Note 1 • Evolving microinsurance business models and their regulatory implications: • How do we categorise the various business models? • What are they and how do they evolve? • Risks distinctive to microinsurance business models? • What are the regulatory implications & responses? 9

10. 8discrete business models • Individual sales • Proxy sales force • Compulsory sales • Group decision • Local self-help • Auto enrolment • Passive sales • Service-based sales 10

11. Insurer Agent / Broker / Call centre Model 1: Individual sales C C C C C C Description: One on one active sales through fulltime insurance agents or brokers, including outbound call centres; can be supported by in-bound call centres; no client aggregator involved. • Evolution: • Traditional sales model that insurers extend down-market for MI in parallel to or before experimenting with alternative mass distribution channels • Post-alternative distribution movement “back to the agent” where advantage of face-to-face interaction becomes apparent Examples: SINAF Seguros, Grupo Villa (Brazil), Metropolitan REI (South Africa) 11

12. Insurer Model 2: Proxy sales forces Retailer/ Utility / Bank/ Credit provider Description: Insurance sold to existing clients of non-insurance entities where the policy is marketed with the sale of another product. Active sales persons involved, but the salesperson works for the aggregator and the insurance is ancillary to the primary good that they sell. Product can be standalone (cross-selling to third party client base) or embedded in underlying service. Insurance decision is voluntary in the case of cross-selling, but often compulsory in the case of embedded credit life. S S Sales force S S S C C C C C C • Evolution, cross-selling: • Instigated by the insurer , aggregator or 3rd party. • Evolves from aggregators wishing to diversify income • For insurers, aggregator represents an easy existing contact point to the target market • Embedded credit life: • Evolves from the demand for credit and the need to protect the default risk for the credit supplier. • Often first product sold in microinsurance market. Examples: Credit life; Bancassurance; Retailer sales: Casas Bahia (Brazil); Utilities: CodensaMapfre (Colombia) 12

13. Regulation Insurer Insurer Insurer Model 3: Compulsory Agent Agent Agent C C C C C C Description:Insurance required by regulation for certain categories of citizens. • Evolution: • In response to specific public needs, eg protection of road users; health needs of employed population • Often the "beginning" of asset insurance market Examples:Third party motor vehicle insurance (most countries) Social health insurance for formally employed 13

14. Insurer Model 4: Group decision Broker / Agent Description: Members of a group become policyholders by virtue of group rather than individual decision; collective negotiation; either universal cover by virtue of membership of group or opt-in Group C C C C C C • Evolution: • Evolves where there are existing groups which reduce distribution costs • Insurers leverage the member database of the groups • Groups offer value added services to members Examples: Labour unions (Doves, South Africa), PASI (Brazil), China village model; cooperatives; Association of Tanzania bus drivers, Protecta partnership with educational institutions (Peru) 14

15. Group C C Model 5: Local self-help C C C C C C C C C C Non-members Description:Group of persons pool own risks • Evolution: • Develops in the absence of appropriate/accessible formal alternatives or where people do not trust formal options or prefer own provision on the basis of solidarity • Strong community ties Examples:Philippines MBAs; funeraria and cooperatives, burial societies 15

16. 3rd party decision & funding Model 6: Auto enrolment Insurer Insurer Insurer Description:3rd party purchases insurance on behalf of policyholders. This may be the government subsidising insurance on behalf of class of citizens or a 3rd party aggregator such as an MNO or bank purchasing insurance for its clients as a loyalty scheme. There is commercial underwriting.. C C C C C C • Evolution, public provision: • Develops from a strong state mandate & social goals • May be a response to market failures • Loyalty benefits: • Value added service to reduce client churn • 3rd party ‘market-maker’ such as innovative broker • Opportunity for extending the reach of the insurance market in undeveloped markets Examples: Health insurance in India (RSBY), state funded agricultural insurance (NAIS, India); disaster risk in rural China; Waseela BISP (Pakistan); MNO loyalty schemes: TIGO BIMA (Tanzania), TIGO (Ghana) 16

17. Insurer Model 7: Passive sales Passive channel Description: Individual purchases insurance without intervention of sales person C C C C C C • Evolution: • Particular insurance product has become "commoditised.“ • Market familiar with the concept of insurance • Atypical in undeveloped markets. Examples:Internet sales; Clientele hospital cash plan (South Africa), Pep/Hollard (South Africa); inbound call centres 17

18. Provider S S Salesforce Model 8: Service-based sales S S S Description: Securing a service to be rendered in the future through an insurance policy. Voluntary individual choice. The entity which sells the insurance is the same one that provides the service. May be underwritten by the provider or by an insurer. C C C C C C • Evolution: • Driven by strong demand for underlying service • Client cannot afford service without insurance • Does not require a well developed insurance sector to evolve Examples:Health insurance provided by health service providers; funeral assistance; funeral parlours in Colombia and Brazil 18

19. Scenarios of evolution

20. Note 1 • Evolving microinsurance business models and their regulatory implications: • How do we categorise the various business models? • What are they and how do they evolve? • Risks distinctive to microinsurance business models? • What are the regulatory implications & responses? 20

21. 6 discrete microinsurance risks • Prudential risk • Aggregator risk • Sales risk • Policy awareness risk • Payments risk • Post sales risk

22. Microinsurance risk categories 22

23. Microinsurance risk categories 23

24. Microinsurance risk categories 24

25. Microinsurance risk categories 25

26. Microinsurance risk categories 26

27. Risk matrix 27

28. Note 1 • Evolving microinsurance business models and their regulatory implications: • How do we categorise the various business models? • What are they and how do they evolve? • Risks distinctive to microinsurance business models? • What are the regulatory implications & responses? 28

29. Regulatory Implications of MI business models

30. Regulatory Implications of MI business models

31. Regulatory Implications of MI risks

32. Risk Risk trigger Impact Regulatory responses Regulatory response Impact

33. Regulatory responses: Prudential risk

34. Regulatory responses: Aggregator risk

35. Regulatory responses: Sales risk

36. Regulatory responses: Sales risk (Continued)

37. Regulatory responses: Policy awareness risk

38. Regulatory responses: Payments risk

39. Regulatory responses: Post sales risk

40. Note 2 • Regulatory approaches to the promotion of inclusive insurance markets • What is a regulatory approach? • Which approaches exist? • What triggers a particular regulatory approach? • What is the impact of different approaches? 40

41. Note 2 • Regulatory approaches to the promotion of inclusive insurance markets • What is a regulatory approach? • Which approaches exist? • What triggers a particular regulatory approach? • What is the impact of different approaches? 41

42. What is a regulatory approach? Policy objectives for access to financial services Policy objective for access to insurance Regulatory approach to facilitate access to insurance Fiscaltools Regulatorytools Political, economic & social context Market conditions Supervision / enforcement Supervisory capacity

43. Note 2 • Regulatory approaches to the promotion of inclusive insurance markets • What is a regulatory approach? • Which approaches exist? • What triggers a particular regulatory approach? • What is the impact of different approaches? 43

44. Regulatory approach continuum Regulatory approach continuum Public provision Approach State identifies risk to cover and outsources intermediation to private sector. Often substantial subsidies provided (fiscal exposure). The state makes certain elements of insurance mandatory but includes state subsidy. The state is the primary driver in increasing access to insurance through a combination of direct subsidies, regulation and public decree. Directive Approach State does not identify which risk should be covered and doesn’t make a financial contribution (no fiscal exposure). State determines which target market should be covered and sets requirements to private sector to cover these groups as a condition for being allowed to operate. Access to insurance by regulatory requirement Concessionary regime A reduction in the regulatory burden to enable lower risk products to be marketed to lower income clients at lower cost, whilst maintaining the normal regulatory burden for conventional insurance. The concessions provided to reduce the regulatory burden encourages insurers to move downmarket as this is now a potentially commercially viable. Nudge Approach Regulator does not consider it necessary to reduce the regulatory requirements for insurance provision to stimulate outreach into the low income market. It is considered sufficient to make policy declarations supporting access to insurance and to create some environmental enablers (e.g. lower cost, more accessible payment systems) Zambia Kenya Swaziland South Africa Uganda Nigeria Brazil China Nepal Mongolia India Tanzania Ghana Ethiopia Philippines Colombia Mozambique Lesotho

45. Note 2 • Regulatory approaches to the promotion of inclusive insurance markets • What is a regulatory approach? • Which approaches exist? • What triggers a particular regulatory approach? • What is the impact of different approaches? 45

46. Regulatory approaches: triggers

47. Note 2 • Regulatory approaches to the promotion of inclusive insurance markets • What is a regulatory approach? • Which approaches exist? • What triggers a particular regulatory approach? • What is the impact of different approaches? 47

48. What is the impact of regulatory approaches?

49. Questions and discussion

50. www.access-to-insurance.org bhairav@cenfri.org (presenter) hennie@cenfri.org (project director)