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Milk Project

Business Case Matrix


MILK completed a landscape review of existing research related to business case, and aggregated findings in the following matrix, which summarizes findings by issue and type of product.

  Context Category
  Microinsurance Other Insurance
Issues General Life Health Other Multiple or Composite
Regulatory Issues
Microinsurance requires specialized regulatory guidelines.
Brown & Churchill 2000a (various regulations may apply; use of “member benefits” to circumvent regulation) Brown & Churchill 2000b (regulation is less pervasive in developing countries; common elements and impact of regulation) Churchill 2007 (regulators should treat MI differently; capital requirements, management credentials, reporting requirements are too high; agent licensing is restrictive) Euro Review 2010 (regulatory environment helpful in advancing MI in India) IAIS 2007 (issues and challenges to developing an enabling regulatory framework in line with IAIS Core Principles) IAIS 2010 (appropriate and effective regulation of mutuals, coops, and other community-based organizations) Lloyds 2010 (how regulation of MI should be different from traditional insurance) McCord 2002 (MFIs should be cautious when mixing insurance with other financial services because of regulation) Roth et al. 2007 (regulations are often inappropriate for MI but needed to prevent abuses) Smith et al. 2010 (regulation drives innovation) Swiss Re 2010 (regulations can help or hinder; care is needed) Manje 2005 (no specific MI regulatory regime, and insurer treats MFIs as policyholders under a group scheme, but in practice they act as agents)   Giné et al. 2010 (regulatory environment should foster new product development and consumer protection) [weather index] Hazell et al. 2010 (importance of developing an enabling regulatory environment) Churchill & Pepler 2004 (enhanced agent licensing requirements will make distribution more difficult)
           
Distribution Issues
Distribution channels must be able to reach the target market efficiently and effectively.
Allianz et al. 2006 (potential delivery partners in Indonesia) Allianz 2010 (commercial insurers can use aggregators other than MFIs) Brown 2001; Brown et al. 2000 (suggests that MFIs develop partnerships with established insurers rather than develop their own products) Brown & Churchill 2000a (agency vs. integrated distribution) Churchill 2007 (cannot use the same channels as traditional insurers) Lacey 2010 (need to know the cost of distribution) Lloyds 2010 (innovation in distribution channels) McCord 2006 (using the partner-agent model, MFIs can leverage existing interface, but success is mixed) Roth et al. 2007 (delivery is single biggest constraint to growthSmith et al. 2010 (current emphasis on passive models, trend toward using retailers and cell phones) Wipf & Garand 2006 (need to link to an existing collection system) Brown & Churchill 2000b (centralized vs. decentralized processing, marketing) Manje 2005 (Madison partners with 4 different MFIs; could play a more active role in distribution) Roth & Athreye 2005 (distribution through community rural insurance groups; micro agents are specially trained and have specialized compensation) Roth 2005 (MFI distribution produced high lapse rates; cycle of loans out of sync with cycle of insurance renewals) Brown & Churchill 2000b (dedicated health-care facilities, salaried service provision, or indemnity coverage) Leftley 2010 (advice for MFIs acting as intermediaries) Brown & Churchill 2000b (MFIs and coops can be effective in distributing) [property insurance] Hazell et al. 2010 (graft onto existing delivery channels; engage private sector from the beginning) McCord et al 2005 (delivery through AIG agent, then MFI has been effective; lack of communication can be a problem) [property insurance] Churchill & Pepler 2004 (partnership with credit union; credit union personnel had difficulty selling its products; traditional compensation incentives needed to motivate credit union staff) McCord et al. 2001 (delivery channel is strengthened through broad product and service base; SEWA switched from delivering commercial insurers’ products to direct insurer)
           
Role of Technology
Technology can reduce costs in marketing, distribution, monitoring, and claims administration.
Allianz 2010 (technology prevents fraud; smart cards and cell phones) Lloyds 2010 (potential for using mobile phones) McCord 2005a (administrative efficiency is a key consideration) McCord 2008 (technology can help achieve massification, reduce costs) Smith et al. 2010 (cell phone payment transfers are expensive) Swiss Re 2010 (tech will help overcome costs)     Hazell et al. 2010 (describes infrastructure needed for data collection) [weather index] Manuamorn 2007 (infrastructure is not well-developed) [weather index]  
           
Achieving Scale
Small policies can be profitable if sold in large numbers.
Allianz et al. 2006 (insurance density and penetration measure strength of market) Allianz 2010 (how to achieve scale; growth is fast after reaching critical mass) Brown 2010 (Wal-Mart model) Brown & Churchill 2000a (various ways to reach scale) Euro Review 2010 (slow take up in many MI programs, huge opportunity for leveraged growth at BOP) Lacey 2010 (importance of scale) McCord et al. 2005 (grew quickly and profitably, produced significant results for AIG) Roth et al. 2007 (Industry believes it will achieve 100% growth in 5 years) McCord 2008 (need for massification) Hintz 2010 (provide savings component that customers want to generate growth; use a simple distribution system) Brown & Churchill 2000b (pricing and payment options can extend outreach) Dror & Armstrong 2006 (cost of risk transfer is a function of scale) Hazell et al. 2010 (drivers of sustainability and scalability) [weather index] McCord et al 2005 (almost all MFIs in Uganda offer the AIG product) [group personal accident] Garand 2005 (difficulty reaching viable scale)
           
Risk Management
Adverse selection, moral hazard, covariant risk, and fraud.
Churchill 2007 (adverse selection, inadequate data, claims documentation requirements) Euro Review 2010 (moral hazard is an issue in MI) Lacey 2010 (covariant risk and adverse selection add cost) Smith et al. 2010 (anti-selection exacerbated by small risk pools, use waiting period to minimize the problem) Brown & Churchill 2000b (use third party proof requirements, mandatory policies, and exclusions) Roth & Athreye 2005 (exclusion for suicide in the first year; agent fraud is a concern; covariant risk not a concern because policies are so small) Churchill, C. (ed.). (2006) (discusses techniques to manage adverse selection and fraud) Brown & Churchill 2000b (limits on benefits can curb overuse, exclusions help with moral hazard, group enrollment can help with anti-selection) Brown & Churchill 2000b (deductibles, claims inspectors, credit-tied policies) [property insurance] Garand 2005 (covariate risk – earthquake – created financial strain; bundled product reduces anti selection)
           
Transaction Costs
Traditional insurance involves complexity and high transaction costs in delivery and claims administration, but small policies require lower cost administration.
McCord 2006 (MFI distribution can be costly, although cost data is often not collected and analyzed) Lloyds 2010 (need to minimize transaction costs for insurers and clients)       Churchill & Pepler 2004 (outsource admin)
           
Product Issues
Product characteristics must be desirable from the client’s perspective and profitable from the insurer’s.
Brown 2001 (prerequisites MFIs should consider if they develop their own products to ensure financial sustainability) Brown & Churchill 2000a (7 universal principles for product development; group vs. individual insurance) Churchill 2007 (products need to be different, not just smaller) Euro Review 2010; (shorter term life products, e.g., 2-5 years, with return of premium at term) McCord 2005a (need to develop appropriate products and look at premium components that will make insurance work) Roth et al. 2007 (demand for health insurance is greatest among poor) Brown & Churchill 2000b (term, endowment, permanent) Leftley 2010 (credit life is a relatively simple product, but still many ways to structure it) Brown & Churchill 2000b (determining the right mix of services; benefits and limitations of various payment mechanisms) Brown & Churchill 2000b (coverage based on type of asset, type of risk) [property insurance] Hazell et al. 2010 (contract design and coping with basis risk are complex; need to continuously monitor products) [weather index] Churchill & Pepler 2004 (simple products keep costs down and are easy for clients to understand) McCord et al. 2001 (continuous informal feedback is used to modify products rather than formal market research; analysis and modification of product at pilot stage could have been stronger)
           
Poor Understanding of Insurance
Intermediaries and clients must understand the policies. InsuranceIntermediaries and clients must understand the policies.
Churchill 2007 (educating the market is key to effective marketing) McCord 2005a (lack of understanding is a key barrier to sales, and can be solved with appropriate education) Swiss Re 2010 (need to create an insurance-buying culture among low-income households) Brown & Churchill 2000b (client education is part of marketing; staff training) Manje 2005 (clients have poor understanding because education is weak and staff doesn’t have adequate training) Roth & Athreye 2005 (client base either knows very little about insurance or has had negative experience with it) Brown & Churchill 2000b (easier to overcome skepticism toward health insurance than life) Brown & Churchill 2000b (different ways to value covered assets) [property insurance] Hazell et al. 2010 (importance of training; lack of client awareness can hinder a product’s development) [weather index]Hill & Robles 2010 (training group leaders was most effective in increasing understanding) [weather index] Manuamorn 2007 (repeated village meetings strengthened understanding of product) [weather index] McCord et al. 2005 (need ongoing education and access to information about policies) [group personal] McCord et al. 2001 (weak communication with client base has been a problem)
           
Trust and Service
Clients must trust insurers to pay claims, or they will not purchase (or renew) policies.
Garand & Wipf 2006; Wipf & Garand 2010 (quick time to payout is important) Lloyds 2010 (need to develop an insurance culture) Brown & Churchill 2000b (rapid processing builds trust) Roth & Athreye 2005 (complicated and extensive claims verification leads to customer dissatisfaction) Brown & Churchill 2000b (need to monitor healthcare providers) Hazell et al. 2010 (importance of local stakeholders) [weather index] Brown & Churchill 2000b (full-service insurer, partner-agent, group policyholder; how to determine the right model) [property insurance] McCord et al. 2001 (large integrated field staff allows for quick response at high claims rate times; processing of claims much faster than commercial insurers)
           
Profitability
How profitable can microinsurance be, and how are profits measured?
Allianz 2010 (how to achieve profitability) Brown 2010 (low margin/high volume is the key to profitability; examples of profitable insurers) Kalavakonda 2010 (benchmarking, comparison of financial performance across peer groups on microinsurance database) Lloyds 2010 (motives other than profit: larger and diversified risk pool, reputation, market intelligence and innovation) McCord 2005b (potential for and barriers to profitability) Brown & Churchill 2000b (claims ratio, expense ratio) Manje 2005 (product appears to be profitable, but insurer doesn’t keep separate cost data) Roth & Athreye 2005 (not likely to generate significant profits but has other benefits) Brown & Churchill 2000b (none of the programs had full cost recovery while reaching a predominately poor population) McCord et al. 2005 (profits of 20% on premiums) [group personal accident] McCord et al. 2001 (financials show high level of sustainability)
           
Business Models
What models and organizational structures are optimal?
McCord 2002 (commercial insurers better than MFIs as insurance risk takers) Lloyds 2010 (describes business models and participants) Swiss Re 2010 (overview of business models, participants, and market trends) Wipf & Garand 2008 (organizational aspects and the KPIs) Brown & Churchill 2000b (full-service insurer, partner-agent, group policyholder; how to determine the right model) Manje 2005 (partner-agent model; commissions vs. profit-sharing) Roth 2007 (Health insurance is riskier and more difficult than life) Brown & Churchill 2000b (mutuals, separate insurer, partner-agent; how to determine the right structure) Hazell et al. 2010 (importance of local stakeholders) [weather index] Brown & Churchill 2000b (full-service insurer, partner-agent, group policyholder; how to determine the right model) [property insurance] McCord et al. 2001 (SEWA is a mix of the partner-agent and full-service models)
           
Dual Bottom Line (CSR)
Need to balance the bottom line / profit interests with social performance.
Biener & Eling 2009 (ability to show social performance in the context of other variables) Churchill 2007 (how commercial insurers can serve the poor) Herrndorf 2010 (importance investors give to these factors will vary) Wipf & Garand 2008 (how to assess social performance and the KPIs)        
           
Composite Products
Combining types of insurance, or insurance with other financial services, can increase profits but also adds complexity.
Ahuja & & Guha-Khasnobis 2005 (most products cover only 1 risk) Brown & Churchill 2000a (life-savings, banks as insurers)     Giné et al. 2010 (combine insurance products with short-term loans) [weather index] Churchill & Pepler 2004 (agents are more effective when insurance is integrated with other products) Garand 2006 (composite products are complicated)
           

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"With microinsurance, you must think with your calculator, not with your heart." -- Aris Alip | CARD MRI

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