A word on Micro-insurance

 

When Big Finance, Big Donor, and Big NGO get behind something, it can quickly get to be - well - BIG. Micro-insurance is in that category, drawing a lot of interest from donors as well as the private and non-profit sectors. Micro-insurance is beginning to reach out to Savings Groups in some countries, making it appropriate to discuss it here.  

I learned much of what I know about micro-insurance from the senior staff of a Ugandan micro-insurance company, and I will pass on some important factoids to you here now, things you might not realize. 

As you know, insurance companies collect money from their clients in the form of premiums, and pay money to their clients in response to claims, when the conditions which are insured against occur. It seems logical that the amount of premiums collected would be greater than the amount of claims paid; after all, the insurance company has expenses and needs to make a profit. But have you ever wondered how much more?

If you take the amount of claims paid, and divide that by the amount of premiums collected, you get what we can call the pay-out ratio. A payout ratio of 100% would mean that the insurance company paid out everything it took in. A payout ratio of 50% would mean that for every two dollars or euros or shillings or dirhams it collected as premiums, it paid one back to its customers.

So, here are the three factoids. They concern typical pay-out ratios; transparency; and the view from the inside of insurance companies.

Typical Pay-out Ratios

Have you ever wondered what a typical pay-out ratio is for a typical insurance company? Well, in fact, there is no typical ratio. The ratio varies a lot by product and by environment. Life insurance, for instance, sometimes has a pay-out ratio near 100%, or even greater than 100% - because people insure themselves over many years or decades, and the insurance company gets to invest that money during all that time, and makes its profit from those investments. In the US health insurance industry, the pay-out ratio is typically greater than 75%, and in fact the Affordable Care Act (often called “Obama-care”) mandates that insurance companies must pay out at least 80 per-cent of what they collect as dividends. 

In the developing world, where the costs of doing business are greater, and the amounts of policies are much lower, the ratio is MUCH lower, typically less than 50%. That is, if a villager pays in a dollar, on average she will get back less than fifty cents.

Transparency

Finding out the pay-out ratio isn’t easy! Insurance companies are as reluctant to disclose that as MFIs are to disclose their real total cost of borrowing. But if I could only ask one question before embarking on a micro-insurance scheme, that would be the question I would want to ask. Because, if clients are getting back only a few cents on the dollar, isn’t that an important thing to know? 

The view from the Inside

If you talk to insurance people - and I hope you will! - you will discover that they don’t use the term “pay-out” ratio. They have a different term that reflects the way they keep their books and manage their business. In the insurance industry, the ratio of what is paid out on claims to what is taken in as dividends is called the loss ratio. That is, for an insurance company, every claim that is paid represents a loss. And, as businesses, they are motivated to reduce their losses. 

None of this is intended to suggest that insurance, nor particularly micro-insurance, is a bad thing. I’m just pointing out that it would be very good to require transparency around loss ratios, and keep in mind how insurance companies make their money. And compare commercial micro-insurance to the group’s social fund. The social fund is limited, but the pay-out ratio is normally 100%. That looks good compared to <50%, and there are ways to expand the social fund to cover more expenses. One of these is clusters of groups with Common Social Funds - but we’ll save that for another day.