Aga Khan Agency for Microfinance

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Microinsurance

Microinsurance is a relatively new component of the broader microfinance sector, but one that holds great potential for helping poor people to manage risks in their daily lives. However, microinsurance presents providers with a whole new set of challenges, due to the limited amount of actuarial data available on common risks within poorer market segments and the fact that insurance is a product less well understood in most poor communities.

AKAM has been working on the development of insurance products since mid-2005, an initiative which has received generous financial support from the Bill & Melinda Gates Foundation. In late 2007, AKAM established a dedicated insurance entity in Pakistan, the First Microinsurance Agency (FMiA). This was a particularly important milestone in the Pakistani market as FMiA was the first insurance agent established as a corporate entity rather than as an individual. As an insurance agent, FMiA is not the legal underwriter of the insurance polices but, rather, it manages the product development, marketing, sales, and claims management for the New Jubilee Life Insurance Company, which is majority owned by AKAM’s sister agency, AKFED. This partnership arrangement with an established commercial insurer has enabled AKAM to quickly begin providing dedicated microinsurance products to poor families.

From the outset, AKAM has chosen to offer a mixture of simple and complex products developed on the basis of market research and consultation with communities. AKAM is currently testing a range of products, including: a savings completion product through women’s committees; an education savings completion product; a low-cost hospitalisation only product; and a more comprehensive health product which offers full in-patient and childbirth coverage combined with limited out-patient coverage.

AKAM is also offering credit life insurance coverage, which is one of the few well established microinsurance products and one that is increasingly common in many mature microfinance markets. It essentially protects the family of the borrower from the hardship of debt in case of the death or serious disability of the borrower – who is often the primary breadwinner in the household. Most credit life schemes also provide the family with a modicum of funeral benefits to assist the family. These policies can be provided for just a few cents per year and give the borrower significant peace of mind. All of the credit life policies have been sold through MFIs, and nearly all of the larger Pakistani MFIs are working with FMiA. By the end of 2007, nearly 300,000 people had received coverage. AKAM microfinance institutions in other countries are also providing credit life coverage for their own borrowers, using a number of risk pooling approaches.

But AKAM and FMiA’s primary focus is not on life insurance, but on products which offer potentially far greater benefits to clients, even though they are much more difficult to design and implement in a sustainable manner. Both of the health products currently being piloted in Pakistan are intended to assist poor households in mitigating the financial impacts of a serious illness or accident while encouraging early health seeking behaviour. Yet, relatively little is known about the incidence rates of many ailments and the impact that insurance coverage will have on the utilisation of health services.

The first product in the Northern Areas of Pakistan is a voluntary one offered to village members, and available to villages that can enrol 50% of the local families. It covers treatment costs related to in-patient hospitalisation. It also provides the household with a voucher for out-patient consultation with a doctor for every member of the family. The out-patient coverage is included to encourage early health care seeking behaviour, which is critical to raising overall health standards. Enrolment for 2007 was more than 1,700 families covering more than 6,000 individuals. One of the innovations associated with this product is the ability of the clients to receive treatments without having first to raise the cash and then seek a reimbursement. FMiA signed a MOU with two Aga Khan Health Service (AKHS) hospitals to provide no-cash treatment to FMiA clients. This is made possible by the use of Smart Cards and gatekeepers at each hospital. FMiA has also negotiated discounts with two pharmacies for clients to purchase medicines related to hospitalisation. For insurance to be attractive to clients, it must be responsive to client needs and generous in its coverage, with no age limits and no exclusions for pre-existing conditions.

In September 2007, FMiA also signed an agreement with Kashf, an MFI based in Lahore, Pakistan, to provide health insurance coverage to all of its borrowers from three branches, with a target enrolment of 6,000 borrowers, representing 12,000 people since both borrower and spouse are obliged to enrol. In contrast to the Northern Areas product, coverage is required for each client who takes out a new loan or renews a loan. Access to cash-less medical services will also be available to these clients as a result of agreements reached with several private hospitals, and discounts for medicines have also been arranged with local pharmacies in Lahore.

In 2008, FMiA will continue to develop a range of new microinsurance products. It also plans to expand significantly its current health microinsurance options. AKAM will also carry its microinsurance activities to new countries, such as Tanzania, where it will begin providing microinsurance services in early 2009 using a similar model to the one that has been developed in Pakistan. In Tanzania the suite of insurance products offered will differ as local needs, traditional customs, and health profiles vary considerably. Early market research from the country suggests that there will be significantly greater interest in conventional forms of life and funeral insurance given the greater prevalence of HIV and the high cost of funerals. Finally, AKAM continues to look at other opportunities to introduce insurance products through its existing MFIs, including ongoing work in the development of crops, livestock, accidental death and disability insurance products in a number of countries.