Lecture Micro financing and micro leasing - An Introduction - Lecture 13.pptx (Micro financing)

Summary of Last Lecture • PRODUCTS FOR THE BOP MARKET THREE PRODUCTS: INSURANCE, HOUSING FINANCE, AND REMITTANCES Introduction • In this lecture we take a close look at three products: insurance, housing finance, and remittance transfers. We selected these products because they have strong growth potential and are well enough developed that best practices are emerging and growth is under way. Introduction • Yet the field is still wide-open in each area. Vast numbers of clients would be thrilled to have these financial needs served well for the first time in their lives. Insurance • The sale of used fleece outerwear is a thriving business for micro entrepreneurs in Kenya’s chilly highlands. Insurance • Dozens of vendors in Karatina Market, the largest open-air market in East Africa, borrow working capital from Equity Bank and other lenders to purchase clothing bundles from wholesalers in the city. Insurance • If a fire rips through a section of the market, as it did a few years back in neighboring Kampala, Uganda, a vendor faces a loss that can take months or years to recover. Insurance • However, vendors in Karatina have no place to store their inventory overnight except in their open stalls beside the railroad tracks. Insurance • This is just one illustration of the vulnerability that is an ever-present threat in the lives of low-income people. Insurance • Without insurance, any shock—flood, accident, death, or illness—can send a family into a downward economic spiral. Uninsured shocks can also turn a good borrower into a defaulter, so lenders have a special interest in seeing that their clients are insured. Insurance • When entering this market, private-sector insurance providers typically start with the easiest product—credit life insurance—and gradually introduce more complex products that are also more valuable to clients. Insurance • Globally, microinsurance programs have come a long way, but compared with the potential market, they are still small, and their experience still relatively new. Insurance • In a 2007 review the International Labor Organization (ILO) found vast regional disparities in microinsurance among the world’s poorest countries. Insurance • Health microinsurance is more common in West and Central Africa, while there is still almost no microinsurance in North Africa and the Middle East. Rural coverage in India has expanded to 30 million low-income people, mainly due to quotas set by government regulation. Insurance • Overall, however, the ILO found a thriving, evolving industry, with 246 microinsurers, 357 microinsurance products (separate from government social security schemes), and 78 million people with some kind of microinsurance coverage. Insurance • Prior to 2002, only a small fraction of this coverage existed. While government-owned insurance companies serve much of this market, private insurers account for the fastest recent growth. Insurance • With a large uninsured population worldwide, the study enthusiastically predicts the market will double within five years. Designing Microinsurance Products and Services • Microinsurance product designers face exactly the same kinds of challenges that microcredit pioneers once faced. They must overcome the subprime fallacy by fitting their products to local customs, and at the same time lower cost by simplifying products and developing efficient delivery channels. Designing Microinsurance Products and Services • They need to assess risk and set premiums accurately, even though the actuarial risks in bottom-of-the-pyramid populations are not yet well understood and often assumed to be excessive. Designing Microinsurance Products and Services • The microcredit pioneers gradually overcame such challenges and misperceptions, and we are starting to see the same kind of experimentation demonstrating the viability of microinsurance. Let’s look more closely at the strategies successful microinsurers use. Fitting Products to Local Customs and Cultures. • A poignant example of the need for cultural sensitivity is the preference low-income women in South Asia show for insuring their husbands’ lives rather than their own. Fitting Products to Local Customs and Cultures. • In settings where women have a lesser claim to their husbands’ assets than other family members (such as the husband’s brothers), an insurance policy on the husband’s life protects a wife from becoming destitute after his death. Simplifying. • Insurance is notoriously complicated, even for mainstream clients, so there is much room for radical simplification. The pages of fine print in an insurance policy may be thrown out, and instead the client receives a one-page certificate in clear language. Simplifying. • Where clients lack birth certificates, insurers can find other ways to verify their birth dates and identities. Perhaps most important, microinsurers do away with the kinds of exclusions that complicate insurance policies for the middle class. Simplifying. • The exclusions are too difficult to explain to clients who are barely familiar with the concept of insurance in the first place, and the absence of exclusions makes claims straightforward, which increases client trust while reducing processing costs. Building the Market. • For most BOP clients, insurance is a strange new idea. They need providers to explain what insurance is and how it works. Thus, in new markets, intensive and ongoing client education is a must. Building the Market. • For informal-sector clients, many of whom are wary of any formal institution, trust takes time to establish. Information clarity and rapid payout of claims are two essentials for creating that trust. Covering the Last Mile • Finding the right delivery channel may be the greatest challenge of micro insurance. The channel must be inexpensive to operate so that premiums remain affordable, and at the same time it must be sensitive to the costs of travel and time borne by clients. Covering the Last Mile • A trip to an insurance office that costs a client bus fares and lost work time may be a trip not taken. Agents for Delta in Bangladesh and Tata-AIG in India market their products doorto-door because women there rarely leave their homes. Covering the Last Mile • The search for successful channels leads insurers to partner with organizations that already have regular contact with clients, such as microfinance institutions. We will examine several such models in a moment. Products That Matter. • Credit life insurance, by far the most widespread microinsurance product today, reimburses lenders for the amount of a loan that remains outstanding upon a client’s death. Products That Matter. • This product is easy to provide and beneficial for the lender, which explains why it is so common. However, credit life is only moderately helpful for the client’s family. Products That Matter. • Companies that seriously pursue microinsurance move up the ladder of complexity to straight life insurance with a cash benefit, accident and disability, and finally to health insurance. Products That Matter. • Property and crop insurance are still less common, and many such experiments still require subsidy. Products That Matter. • Health insurance has become a hot area for innovation. It addresses a fundamental social and economic problem, and client demand is great. Products That Matter. • However, because health insurance requires health-care providers as partners, and because of serious moral hazard and adverse selection challenges, it is by far the most complex product to put in place. A few successful examples are starting to emerge. Products That Matter. • In the next lecture we will examine some of these successful cases that exemplify the principles of good product design. Summary • THREE PRODUCTS: INSURANCE, HOUSING FINANCE, AND REMITTANCES

Lecture Micro financing and micro leasing - An Introduction - Lecture 13

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