Summary of Last Lecture

1. Summary of Last Lecture • THREE PRODUCTS: INSURANCE, HOUSINGFINANCE, AND REMITTANCES

2. THREE PRODUCTS: INSURANCE, HOUSINGFINANCE, AND REMITTANCES

3. Where we left last time • Let’s examine some of these successful cases that exemplify the principles of good product design.

4. Health Insurance • Around the world, an estimated 1.3 billion people lack access to health care. Poverty makes it difficult for millions more to afford good quality treatment.

5. Health Insurance • The cost of treatment, together with lost income during an illness, can send a working poor family back into severe poverty.

6. Health Insurance • The World Heath Organization estimates that every year another 100 million individuals are pushed into poverty by medical costs. Health insurance has great potential to transform lives and economies, if it can be scaled up commercially.

7. Zurich FSG and BancoSol. • Zurich Financial Services Group has found a way to provide health insurance to low-income Bolivians for only $4 per month. The antecedents to this product lie in the relationship between Zurich and BancoSol, a commercial bank specialized in microfinance.

8. Zurich FSG and BancoSol. • Zurich provides BancoSol’s savers with life insurance policies for less than $1 per month. Once developed, Zurich began offering this life insurance product through multiple financial institutions—mutual housing finance companies, microfinance companies, and mainstream banks.

9. Zurich FSG and BancoSol. • By 2007, these policies reached 83,000 clients. This experience provided a base of market and operational knowledge that served as starting points for creating a health insurance program with BancoSol.

10. Zurich FSG and BancoSol. • The program covers all doctor visits and most hospitalization costs. With 10,000 families participating, the program remains small, but plans are under way to scale it up and offer it through additional institutions

11. ICICI Lombard, SKDRDP, and GrameenKoota • A real challenge in health insurance at the grassroots is to structure and maintain a good relationship with the hospitals and clinics that treat patients.

12. ICICI Lombard, SKDRDP, and GrameenKoota • ICICI Lombard underwrote health insurance for the clients of GrameenKoota, an award-winning microfinance nongovernmental organization (NGO) in Karnataka, India.

13. ICICI Lombard, SKDRDP, and GrameenKoota • The initial pilot made everyone unhappy. The GrameenKoota staff did not know how to guide clients on the proper use of the scheme. Clients could not understand how the scheme worked and filed grievances when they were denied benefits they (erroneously) expected.

14. ICICI Lombard, SKDRDP, and GrameenKoota • Hospitals were unable to handle the flood of clients that suddenly appeared seeking treatment. And ICICI Lombard did not see any prospects for turning this scheme into a scalable and profitable operation. It was ended after a year.

15. ICICI Lombard, SKDRDP, and GrameenKoota • An alternative solution presented itself with the help of an NGO, the Shree KshethraDharmasthala Rural Development Project (SKDRDP), which developed answers to the very list of problems the initial project encountered.

16. ICICI Lombard, SKDRDP, and GrameenKoota • SKDRDP carefully negotiated network relationships with a large number of hospitals, increasing convenient options for clients and making it easier to accommodate large numbers of new clients, who would overwhelm a single institution.

17. ICICI Lombard, SKDRDP, and GrameenKoota • It set up a department responsible for training all the program participants and managing the interface with clients. This project was made possible by SKDRDP’s existing knowledge of and relationship to clients.

18. ICICI Lombard, SKDRDP, and GrameenKoota • Particularly in the early stages, this program was profitable for ICICI Lombard only because these training and administrative activities were carried out inexpensively (and with some start-up subsidy) by the nonprofit SKDRDP.

19. ICICI Lombard, SKDRDP, and GrameenKoota • While this model may not sound fully commercial, given its use of a subsidy and the role of regulation in driving the insurance company to work in this market, the sponsors do expect it to be sustainable over time.

20. Housing Finance • At the bottom of the economic pyramid, millions of families across the world live in conditions whose squalor would shame middle-class residents of rich countries.

21. Housing Finance • Dirt floors, leaky roofs, outdoor plumbing, and overcrowding are only a few of the facts of life for a huge proportion of the next billion people. It’s no wonder that dreams of a better house hold such emotional power.

22. Housing Finance • We noted how the subprime fallacy causes product designers to equate housing finance with traditional mortgages and to conclude that they cannot serve the base of the pyramid.

23. Housing Finance • Banks face other obstacles to providing low-end housing finance, too. Without secondary markets to purchase bundled housing loans, the loans tie up liquidity and cause a term mismatch on balance sheets.

24. Housing Finance • Longer loan terms would make loans more affordable and suit borrowers, but this leaves lenders vulnerable to interest-rate fluctuations.

25. Housing Finance • A major constraint is the cost of new home construction, which requires long amortization if purchase is to be financed affordably. Governments could also work faster to help residents turn their informal squatters’ rights into legal title.

26. Housing Finance • On the other hand, there are clear advantages to making low-income housing loans. Repayment rates are even higher than for microenterprise loans, because housing is a top priority for borrowers.

27. Housing Finance • This makes housing loan portfolios very stable and good for client loyalty. Operational costs are lower, because loans are longer term than business or personal loans. And there is little competition in most countries, with a huge market for early entrants.

28. Some Creative Approaches • Consider the examples of creative product design of the Micasa housing microfinance product of Mibanco and the Patrimonio Hoy program of CEMEX. They illustrate the key design principle of a good fit to local patterns.

29. Some Creative Approaches • In both these programs, the choice to supply housing microfinance for home improvement rather than whole house finance works for Latin Americans in the informal sector, since they often expect to build their houses incrementally.

30. Some Creative Approaches • Home-improvement loans also tap into the enormous quality gap in housing, where the number of people living in homes needing basic improvements is at least as large as the demand for new homes. At the same time it sidesteps the difficulty of making long-term mortgages in informal areas.

31. Mibanco Housing Finance Loans • Housing microfinance looks more like microcredit than like home mortgages: loans are small, generally ranging in term from one to three years, backed by nontraditional collateral.

32. Mibanco Housing Finance Loans • At Mibanco, housing microfinance loans are secured in the same way microenterprise loans are secured: with personal and business assets.

33. Mibanco Housing Finance Loans • Since the homes of the poor are not readily bought and sold, the housing market and asset price cannot be the foundations for loan repayment.

34. Mibanco Housing Finance Loans • An assessment of repayment capacity based on income and cash flow predicts loan quality more effectively than house value—a lesson U.S. subprime lenders failed to heed.

35. Summary • THREE PRODUCTS: INSURANCE, HOUSINGFINANCE, AND REMITTANCES