Microinsurance: An Examination of the Brazilian...

Microinsurance: An Examination of the

Brazilian Market

00-Tese 42-Microinsurance An Examination-Rafael Tsuzuki.indd 1 4/9/2015 10:49:21

SérieCadernos de Seguro: teses, v. 18, no 42

Escola Nacional de Seguros

PresidenteRobert Bittar

Vice-PresidenteLuiz Tavares Pereira Filho

Diretor ExecutivoRenato Campos Martins Filho

Diretor do Centro de Pesquisa e Economia do SeguroClaudio R. Contador

Diretor de Ensino SuperiorMario Couto Soares Pinto

Diretora de Ensino TécnicoMaria Helena Cardoso Monteiro

Editor ExecutivoClaudio R. [email protected]

Editora ResponsávelVera de [email protected]

Conselho EditorialClaudio ContadorFrancisco GalizaJoel GomesLauro Vieira de FariaLucio Antonio MarquesMoacyr Lamha FilhoNatalie Haanwinckel HurtadoPaulo MarracciniRicardo Bechara SantosRoberto L. M. CastroSandro Leal AlvesSergio Viola


Rio de Janeiro2015

Rafael Tsuzuki

ISSN 1414-4409

Microinsurance: An Examination of the

Brazilian Market


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Virginia L. P. de S. Thomé Bibliotecária Responsável pela elaboração da ficha catalográfica

T819m Tsuzuki, Rafael Microinsurance: an examination of the Brazilian Market/Rafael Tsuzuki. -- Rio Janeiro:

Funenseg, 2015. 56 p.; 28 cm – (Cadernos de Seguro: Teses, v. 18, n. 42)

O presente livro originou-se da Dissertação [Mestrado em Ciência Atuarial], apresentado à Cass Business School, City University London, Londres, sob a orientação do Profº Ben Rickayzen, em 2014.

ISBN nº 978-85-7052-574-1. 1. Microsseguro – Dissertação – Brasil. I. Série. II. Título.

0015-1523 CDU 368-058.34(81)

1ª edição: Setembro 2015Fundação Escola Nacional de SegurosRua Senador Dantas, 74 – Térreo, 2o, 3o , 4o e 14o andaresRio de Janeiro – RJ – Brasil – CEP 20031-205Tels. (21) 3380-1000Fax: (21) 3380-1546Internet: www.funenseg.org.bre-mail: [email protected]

Impresso no Brasil/Printed in Brazil

Nenhuma parte deste livro poderá ser reproduzida ou transmitida sejam quais forem os meios empregados: eletrônicos, mecânicos, fotográficos, gravação ou quaisquer outros, sem autorização por escrito da Fundação Escola Nacional de Seguros.

Coordenação EditorialCentro de Pesquisa e Economia do Seguro/Coordenadoria de Publicações

EdiçãoVera de SouzaMariana Santiago

Produção GráficaHercules Rabello

CapaGrifo Design

DiagramaçãoInfo Action Editoração Eletrônica Ltda. – Me

Revisão Free Talk Idiomas


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First, I would like to thank the National School of Insurance (Funenseg) for funding my studies at a foreign university and granting me this opportunity, for which I am truly grateful.

I would also like to thank sincerely my supervisor, Prof. Ben Rickayzen, for his invaluable advice and guidance in preparing and presenting this dissertation.

Thank you also to Barrie Tingley, who has supported me during my stay in London and who proofread this dissertation.

I thank my friends, both near and far, whose friendship and support has been very important to me over the years.

Finally and especially, I thank my family for their unwavering support and understanding in every decision I have made and for presenting me with the opportunities I am fortunate to have in life today. Thank you for all of this and for giving me the courage and inspiration to follow my dreams.

Acknowledgements


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Table of Contents

INTRODUCTION, 1Aim .............................................................................................................................................. 1Overview of Microinsurance ..................................................................................................... 1Issues Revealed Within this Research ...................................................................................... 2The Study .................................................................................................................................... 2Structure of the Dissertation ..................................................................................................... 2

1 MICROINSURANCE, 3What is Microinsurance?........................................................................................................... 3Why Microinsurance? ................................................................................................................ 4Microinsurance and Traditional Insurance ............................................................................. 5Key Features of Microinsurance ............................................................................................... 7

Simple Product ........................................................................................................................ 8Affordable Premium ............................................................................................................... 8Valuable Product ..................................................................................................................... 8

Summary ..................................................................................................................................... 9

2 SUPPLY AND DEMAND OF MICROINSURANCE, 11Demand ......................................................................................................................................11Supply Chain .............................................................................................................................13

Reinsurance ............................................................................................................................13Insurers...................................................................................................................................14The Delivery Channel ............................................................................................................14Policyholder ............................................................................................................................14

Foreword, xiPresentation, xiii Summary, xvResumo, xvii


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Levels of Financial System .......................................................................................................14Macro-level (Enabling Environment) ....................................................................................14Meso-level (Financial Infrastructure) ....................................................................................15Micro-level (Retail Provider) .................................................................................................15

Summary ....................................................................................................................................16

3 BACKGROUND OF MICROINSURANCE IN BRAZIL, 17Overview of Brazil ....................................................................................................................17Understanding the low-income population .............................................................................18The Issue of Target Public Definition ......................................................................................19Microinsurance Regulations ...................................................................................................21

Regulation of the Microinsurance Broker ..............................................................................21Microinsurance Intermediate “Correspondents” ...................................................................21Differentiated Delivery Channel ........................................................................................... 22

4 MICROINSURANCE VALUATION IN BRAZIL, 23The Datafolha Research........................................................................................................... 23Profile Analysis ........................................................................................................................ 24Microinsurance Evaluation ..................................................................................................... 28

Reasons to “Like” ................................................................................................................ 29Supporting the Family...................................................................................................... 29Indemnity of the Lost Asset .............................................................................................. 29

Reasons to “Dislike” ............................................................................................................. 29Losing the Invested Money ............................................................................................... 29Insurance Lack of Credibility .......................................................................................... 29

Willingness to Pay .................................................................................................................... 30Summary ....................................................................................................................................31

CONCLUSION, 33Main Findings ...........................................................................................................................33Outlook ...................................................................................................................................... 34

REFERENCES, 35

THE AUTHOR, 37


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LIST OF TABLES

Table 1 – Comparison between traditional insurance and microinsurance ................................................. 5Table 2 – Microinsurance Supply Chain .....................................................................................................13Table 3 – Low-income population consumption characteristics .................................................................19Table 4 – Low-income population education level by age ......................................................................... 25Table 5 – Population education level by income group .............................................................................. 26Table 6 – Characteristics of the population more receptive to microinsurance ......................................... 28

LIST OF FIGURES

Figure 1 – Monthly Income ........................................................................................................................18Figure 2 – Distribution of interviewed family by income ......................................................................... 24Figure 3 – Economically Active Population Distribution .......................................................................... 25Figure 4 – Non-Economically Active Population Distribution ................................................................. 26Figure 5 – Population holding insurance by income group ....................................................................... 27Figure 6 – Population holding insurance by income group ....................................................................... 27Figure 7 – Most requested insurance coverage by households ................................................................. 28


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Microinsurance is a special type of insurance aimed at lower-income households, which enables them to insure against risks such as death, illness and crop failure. It clearly provides an important function in allowing sub-populations, particularly within developing countries, to gain access to crucial insurance that would otherwise be beyond their reach. Therefore, it provides security by offering some protection to the livelihood of families, especially those employed in the informal sector (eg farming). Over the last 20 years, Microinsurance has established itself as an important component of the global insurance market.

With this in mind, I was delighted when Rafael Tsuzuki came to see me during his MSc in Actuarial Science to discuss his idea of investigating the part which Microinsurance could play in Brazil.

Rafael entered our MSc in Actuarial Science at Cass Business School, City University London, in September 2013 and completed it with this dissertation in October 2014. In order to be able to take our course at Cass, he received a prestigious scholarship from the National School of Insurance in Brazil, known as Funenseg.

It was a pleasure to supervise Rafael on this project. Not only did he initiate the idea, but was also extremely self-sufficient in carrying out the research. He met with me several times to discuss the direction in which he was taking the project and took on board my advice whenever it was needed. The end product is a very interesting and helpful analysis of how Microinsurance could be incorporated within Brazil and is something which the country’s insurance companies and policy makers should find very useful.

In conclusion, Rafael should feel proud of the piece of work he has produced and I hope that the audience enjoys reading his account!

Professor Ben RickayzenHead of Faculty of Actuarial Science and Insurance at

Cass Business School, City University London

Foreword


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It is an honour and with a great pleasure that I introduce this fine work “Microinsurance - An examination of the Brazilian Market”; carefully prepared by Rafael Tsuzuki, an actuary and young professional in the Brazilian insurance market. We met while working together at an insurance consulting firm, where we had the opportunity to work in partnership on the development of some business projects. Perhaps it is from this coexistence that his interest in studying a new business model was born and, given my long professional career in this insurance sector, I hope I may have contributed to his interest.

Since 1998, the topic of Microinsurance has taken on new importance in Brazil after several successful initiatives in mass insurance products by some foreign insurers who brought their “know how” of this business model. In an era when the Brazilian market was opening to new investors, these companies saw an opportunity to expand the sale of insurance in a way that was quite different, reaching large numbers of consumers with low-priced products and customized coverages through distribution channels with which they already had an affinity. At that time, without specific regulation by Susep, sales in this sector increased, as did the number of competitors, eventually attracting the interest of larger conglomerates. It was then that the market realized the new demand for “low premium” insurance marketed via alternative channels, and that Brazil offered an enormous potential consumer base for such insurance.

Microinsurance abroad has a slightly different notion to that of Brazil because, in poor or developing coun-tries, insurance is linked to microcredits derived from the crops of small rural producers. In Brazil, we still have some barriers with regard to costs and taxes in the sector, where the Regulator is still seeking the best solution aimed at encouraging greater distribution, which may exceed 90 million people.

In this work by Rafael Tsuzuki, the reader can better appreciate the scope offered by this market in Brazil, as well as understanding the needs and behaviours of consumers in various channels and moments of their lives, which is essential for the success of this sector.

As a professional in the industry, I highly recommend reading this study, because beyond the data and infor-mation, it offers the reflections of a young actuary who, with support from Funenseg, spent a year at Cass Business School, UK, studying the subject, and is something which contributes to the growth and evolution of Brazilian Microinsurance, a sector that I consider to be both challenging and promising for our country.

Have a pleasant reading!

Paulo Kudler

Presentation


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Microinsurance is a new niche area of insurance that is becoming more and more popular in developing countries. Its main purpose is to provide financial protection for the less wealthy population, which have not previously held any type of insurance. Therefore, a modified approach is required.

As microinsurance is tailor-made for a specific public, three key features have been determined as the foundation of its success, which are different from a standard insurance approach: the simplicity of the product, affordability of the premium and the value of the product.

As standard insurance and microinsurance share similar characteristics, a complete understanding of the microinsurance product is essential to establish its concept; therefore, in this study, the main characteristics of microinsurance will be explored, pointing out its main achievements with respect to regulatory issues in Brazil. A specific report will focus on the population’s point of view concerning microinsurance, with the aim of clearly understanding the image of the microinsurance product in the country.

This dissertation also raises the point that, for the sustainable development of microinsurance, stimulation by the government through tax relief would be essential to encourage rapid growth of local markets and new insurance competitors in Brazil. In the case of third party investment by donors or investors, comprehension of the entire financial structure of microinsurance is essential. Education levels are a major constraint factors for the uptake of microinsurance, which has a direct impact on the full comprehension of the microinsurance concept, negatively reinforcing the factor of mistrust amongst the target public.

Summary


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Microsseguro é uma nova área do nicho de seguro que tem se tornado cada vez mais popular nos países em desenvolvimento. Sua finalidade principal é fornecer proteção financeira para a população menos favorecida e que anteriormente não possuía qualquer tipo de seguro. Portanto, é necessária uma abordagem distinta.

Como o microsseguro é feito sob medida para um público específico, três principais características foram determinadas como base em seu sucesso. Estas são diferentes de uma abordagem padrão de seguro e consi-deram a acessibilidade do prêmio, a simplicidade do produto e seu valor.

Por o microsseguro e o seguro padrão possuírem semelhanças, é essencial uma compreensão completa do produto de microsseguro para estabelecer o seu conceito; portanto, neste estudo, as principais caracterís-ticas de microsseguros serão exploradas, apontando suas fundamentais realizações no que diz respeito a questões de regulamentação no Brasil. Um relatório específico enfocará o ponto de vista da população sobre microsseguros, com o objetivo de compreender claramente a imagem do produto no país.

Esta dissertação também enfatiza que, para um desenvolvimento sustentável de microsseguros, a estimu-lação pelo governo através de benefícios fiscais seria essencial para poder encorajar o rápido crescimento dos mercados locais e novos concorrentes de seguros no Brasil. No caso de investimento de terceiros, por doadores ou investidores, é central uma compreensão de toda a estrutura financeira do microsseguro. Níveis de educação são fatores de maior restrição para a absorção de microsseguros que têm um impacto direto sobre a total compreensão do conceito em questão, negativamente, reforçando possíveis desconfianças entre o público-alvo.

Resumo


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1

AIM

The aim of this dissertation is to support the development of microinsurance products, describing their features and positive factors in relation to their improvement and examining the Brazilian market in more detail.

OVERVIEW OF MICROINSURANCE

Microinsurance is commonly known as insurance with low premium, or as insurance for the low-income population. As it is a relatively recent concept, there is no one standard accepted definition of microinsurance. As a result of this, microinsurance is frequently indistinguishable from standard insurance in the eyes of the consumer. Its unique proposition, characteristics and benefits are often not fully and widely understood amongst the population.

Even though microinsurance has its own particular characteristics, it shares many features with standard insurance, such as the concept of financial protection, product diversity and, in some cases, even follows the same regulatory practices. However, to improve its effectiveness and to provide a higher benefit return of its value to the population, microinsurance has yet to establish itself as a distinctive product in the market.

According to Kalra (2010), microinsurance has a huge untapped market potential (which partially has not been reached by the standard insurance) estimated to generate a prospective USD 40 billion dollars of revenue. That potential market comprises 4 billion people worldwide where the greater part do not have access to traditional financial products nor can they afford standard insurance.

Introduction


2 • Cadernos de Seguro – Teses – Microinsurance: An Examination of the Brazilian Market

In recent years amongst the main insurance companies of the market, the number of suppliers of microinsurance has grown rapidly, showing their change in investment attitudes towards that segment and proving a solid demand for microinsurance in those developing countries (Churchill and Matul 2012).

ISSUES REVEALED WITHIN THIS RESEARCH

The major problem within this research has been to find data and specific documentation relating to microinsurance. As microinsurance is considered a relatively new type of insurance, such information is often scarce or sometimes presented in a non-reliable source, which for the latter case, special care has been taken during this research. Furthermore, numbers and facts presented in this dissertation are the most up-to-date and accurate as possible, considering the fact mentioned previously.

Microinsurance targets a new population niche previously untapped by investors or markets, and yet relatively little is known about these low-income populations. Moreover, with regard to the experiences of other countries that have already explored this niche, the know-how might not be fully replicated, since behavioural attitudes are generally unpredictable and vary in accordance with different situations.

THE STUDY

The main reason of this study is to disseminate knowledge about microinsurance, encouraging people to understand the positive aspects of the product, in a manner to support the low-income population and their current situation. As will be seen later, income inequality is a great issue present in developing countries like Brazil, where almost half of the population lives in poor or extremely poor situations.

Microinsurance is a product specifically tailored for the low-income population, providing the assurance of a future income, while also potentially contributing to their social inclusion. In this study, some of the major features of microinsurance in Brazil will be indicated: a clear comparison between standard insurance and microinsurance, characterising mainly the microinsurance product; the major achievements over regulatory issues in Brazil; and a deeper examination of the local population with regard to microinsurance products. The acknowledgement of the concept of microinsurance, if properly applied, could bring a win-win situation for both the insurance companies and the insured, where the former could extend their markets to a previously untapped public, while the latter could benefit from alternative protection against any adverse or negative event that may occur.

STRUCTURE OF THE DISSERTATION

The structure of this dissertation will start with an overview and a general concept of a microinsurance tool, highlighting the main differences between standard insurance and microinsurance. In Chapter 3, a further explanation of the microinsurance environment and its demands are explored. Chapter 4 recreates a synopsis of the current financial situation in Brazil, going further on achievements of the country in respect to regulatory issues. Chapter 5 raises the main finding of a survey: the comprehension of the target market in Brazil. Chapter 6 presents the conclusion over the main findings of this research.


3

This chapter provides a brief overview of the nature of a microinsurance product, including its objective, structure and distinctive characteristics when compared to a standard insurance product. The outstanding features of microinsurance products over their target market will also be revealed in addition to the impacts that microinsurance may have on the low-income population.

WHAT IS MICROINSURANCE?

Microinsurance is simply insurance for low-income populations. It is characterised by its low premium levels, making it affordable to its target market. In the majority of jurisdictions, microinsurance is not treated as a new type of insurance or business. As a new niche area of insurance, microinsurance has yet to establish a single definition for its ultimate purpose and instead, has many different definitions according to different local insurance supervisors1.

In essence, microinsurance shares the same basic function as traditional insurance, that of financial protection albeit with a different target market, to which the microinsurance product is specifically tailored. The main objective of microinsurance is to provide financial protection to those on a low-income and who are not covered by social insurance (i.e. those persons working in the informal sector2). The whole strategy and design of the product is driven by the fact that it is aimed at a different target market and this is something that will be explored in later chapters.

1 Insurance Supervisor refers, as appropriate, to either the insurance and reinsurance regulator or the insurance and reinsurance supervisor in a jurisdiction (IAIS, 2003).

2 The informal sector, also known as, black market, underground economy, is that part of an economy that is not taxed nor monitored by any Govt. agency, unlike the formal economy.

Microinsurance



In summary, microinsurance is an affordable financial protection tool tailored to target low-income households. However, it should be noted at this point that it is not sold exclusively to this target market.

WHY MICROINSURANCE?

The low-income population is considered to be the societal group that is most exposed to risk, yet is the least favourably protected against adverse or negative circumstances. Often located in remote areas that lack basic infrastructure and social services support, they are typically more vulnerable to a variety of risks, predominantly natural catastrophes and disease. Such risks can often lead to an unexpected (and significant) loss of income being suffered by a family where every penny counts and every available resource is an asset.

Since people in the low-income sector are less financially stable and do not have access to the traditional financial products available in the market (due to the high premium costs or even lack of credit), microinsurance can offer a viable alternative to protect them against unexpected loss of assets (both physical and financial). Microinsurance is designed specifically as a tool to protect them from such risks, which could easily push them into poverty.

Example 1: Drought in Ethiopia

A good example to illustrate the poverty scenario is a case in Northern Wollo, Ethiopia. When there was a drought in the mid-1980s, the population’s main source of income (i.e. crops) was destroyed, diminishing the income of the whole village and forcing farmers to sell their livestock assets to sustain their families. With an oversupply of livestock, market prices collapsed and families were unable to meet even their basic needs, pushing the whole community into destitution.

Source: Dercon and Kirchberger (2008)

In a poor community, any adverse or negative event may force households to make harsh choices that may include postponing investment, re-allocating assets to deal with extreme situations at the expense of addressing their urgent needs, or even withdrawing children from school to work (child labour). These choice-less options may ruin family structure, the local economy and human development prospects, having the potential effect of leaving a community in a state of lifelong poverty.

The low-income population is composed mostly of workers from the informal sector, whose assets are their main source of income. Every asset is essential to make a significant contribution to the income needed to cover their living costs. Should those assets be lost or damaged for any reason, a household’s future income and prospects of a better life could be ruined or delayed for generations.

As outlined in Example 1 above, microinsurance would have an essential role in allowing people to cope with the situation, helping to mitigate loss or even avoid depletion of assets in case of financial disruption. Securing a pay-out in case of loss could avoid changes to the allocation of assets and therefore protect incomes for the future.


Microinsurance • 5

With the presence of insurance protection, families would have new opportunities for investment, better financial management and be able to protect their assets in the event of unforeseen circumstances. Since many low-income people do not have access to adequate risk management tools, their risk exposure is higher in times of hardship.

It is also unlikely that these families would be able to move out of poverty, since in order to increase their monthly family income, they would need to invest in infrastructure (in technology, for example), expand their available land or hire extra labour. However, such options are considered as high-cost. Microinsurance is a product specifically tailored for the low-income population and is designed to meet their financial needs without any significant outlay of income, providing the assurance of a future income and letting them take control over their future financial plans. Despite the fact that microinsurance provides some income stability and freedom on investment management, it is worth mentioning that the protection does not increase the willingness of those insured to take greater risks (Goldboom, 2010).

Therefore, microinsurance has proved to be a useful tool for the low-income population, not only providing assistance with their financial needs but also potentially contributing to their social inclusion. In this matter, social inclusion is understood to be an opportunity for the low-income population to increase their marginal social status, to participate in the formal economy and in the social life of the country.

MICROINSURANCE AND TRADITIONAL INSURANCE

Microinsurance has the same basic function as standard insurance, that of financial protection. However, despite this common fundamental element, microinsurance has its own specific characteristics, as outlined below:

Table 1Comparison between traditional insurance and microinsurance

Traditional Insurance Microinsurance

Clients • Low risk environment• Established insurance culture• Majority have full knowledge of insurance• Workers from formal sector

• Higher risk exposure/high vulnerability• Weak insurance culture• Low-income population• Low level of education • High level of illiteracy• No knowledge of insurance• Workers from informal sector

Delivery Channel • Sold only by licensed agents or brokers (Brazilian rules)

• Distributed by community organisation, Micro Finance Institution (MFI) and non-traditional intermediaries

• Little or no experience in insurance

Policies • Complex policy documents• Specific insurance language• Detailed exclusions and criteria

• Clear and comprehensible policy documents

• Simple language• Few, if any, exclusions • Group policies



Traditional Insurance Microinsurance

Premium calculation • Extensive data• Good statistical analysis• Pricing based on individual risk (age, sex,

location and other characteristics)

• Scant historical data• Group pricing• Highly price-elastic market

Premium collection • Typically annually, quarterly, monthly• Paid by mail based on an invoice, or by

automatic debit orders (via bank)

• Frequent and irregular payments adapted to volatile cash flows of clients

• Payment period often linked to income cash flow (i.e. crop season)

• Often linked with other transactions (i.e. loan repayments)

• Payment usually in cash

Sum Assured • High sum assured • Low sum assured

Control of insurance risk (adverse selection, moral hazard, fraud)

• Strict eligibility • Significant documentation required• Rigorous document analyses

• Broad eligibility • Limited but effective controls• Insurance risk included in premium

calculation rather than controlled

Claims handling • Complicated processes• Extensive documentation verification

• Simple and fast procedures• Rapid claims processing• Efficient fraud control

Source: Adapted compilation from Lloyd’s Microinsurance Centre (2011) and Roth et al. (2007)

As illustrated in Table 1, microinsurance has many structural differences compared to standard insurance, the most notable of which is the premium. For example, Zurich Insurance offers health insurance coverage in Bolivia for a premium of less than 5 USD per month. Besides the extremely low premium charged, another remarkable feature is its simplicity with regard to the policy detail and eligibility. The entire health insurance policy comprises only two pages and no eligibility criteria (or previous medical check-ups) are required prior to enrolment in the plan (Lloyd’s Microinsurance Centre, 2011).

While standard insurance tends to be very strict with regard to risk eligibility, microinsurance follows a different approach, which is to generate as many premiums as possible and spread the risk between the policies, preventing anti-selection. Known as “bulk” inclusion, the policy is designed not on an individual basis but on a group basis, for example, all the members of a church, an entire community or village or sometimes even family members of insured participants living in nearby villages. Furthermore, as premiums are set for a population with a low budget, the price elasticity tends to be relatively high in this market; therefore, the premium calculation has to be as simple and accessible as possible.



Example 2: Exclusion of HIV/AIDS coverage in Zambia

In Zambia, Madison Insurance implemented a microinsurance basic life coverage in a community. However to prevent excessive payment of claims, deaths caused by HIV/AIDS have been excluded from the policy. Throughout the years, it has been disclosed that explaining HIV/AIDS exclusion to uneducated customers was time-consuming for the sales agent which, in turn, was severely limiting sales. Furthermore, analysis of death diagnoses for claims confirmation was obstructing the flow of claims payment and adding cost to the process. Two years later, Madison decided to include coverage for HIV/AIDS in an attempt to improve the flow of the process. After a period, it was shown that without the HIV/AIDS exclusion, Madison showed a higher uptake and lower costs in the claims confirmation process whilst maintaining the profits of the product.

Source: Lloyd’s Microinsurance Centre (2011)

As pointed out in Example 2, using a product model similar in design to that of a standard insurance policy – imposing exclusions or even a grace period – has not been the most efficient approach for microinsurance products. However, since microinsurance is a new niche area of insurance, some regulations have yet to be clearly defined; therefore, the practices of traditional insurance, the general actuarial and financial aspects, reinsurance and claims handling, have become accepted.

Establishing a clear distinction between microinsurance and standard insurance products is an essential step for its progress. This distinction deeply assists the legal entities in their understanding of the needs of microinsurance clients and to support its improvement accordingly, establishing specific rules to give it better prospects in its development. In the case of Brazil, the establishment of a distinct delivery channel in previous years has helped the development of the product distribution while hastening the flow of premiums collection and claims payment.

KEY FEATURES OF MICROINSURANCE

Microinsurance has yet to cement its place within the culture of the low-income population, meaning that careful attention in respect of the demands and satisfaction of this population is required. A sustainable increase in demand is related to the clients’ options, since the more well informed they are about the benefits, the higher the satisfaction with the product, strengthening the relationship between the clients and the product. Therefore, it is essential that the needs of the population are understood by the parties involved in order to develop a tailor-made product.

Several studies by reputed researchers in the field of microinsurance show common characteristics that microinsurance products should have. These characteristics are the foundation for a successful microinsurance product from the client’s perspective, and are discussed in sections “Simple Product”, “Affordable Premium”, “Valuable Product”.



Simple Product

The concept of simplicity applied to the microinsurance product facilitates its comprehension amongst the low-income population (Churchill, 2006). The fact that microinsurance is designed mainly for those who are not covered by any type of insurance (social insurance or traditional insurance), strongly affects it consumption due to the lack of familiarity with such a product. The difficult task of understanding the mechanism of the product also impedes interest in it within the population characterised by low levels of education and literacy. Therefore, to expand acceptance of microinsurance, the concept of simplicity should be applied, from the wording used in contracts and throughout the whole model of product design (i.e. flat pricing rates, no exclusions, and simple policy).

Affordable Premium

The microinsurance product, being strictly focused on the low-income population, presents a major barrier for commercialisation due to its financial cost. The premium charged for a certain level of coverage is one of the key factors that might constrain its acceptance (Leftley and Mapfumo, 2006). Due to the fact that most of the target population live on a low budget, the average monthly income can only cover essential needs, rendering investment (i.e. assets, insurance) or anything non-essential for living a low priority.

In the case of Brazil, as we shall see in Chapter 4, the recurring monthly premium bill for microinsurance protection also hinders the acceptability of its acquisition. This fact is due to the lack of credit and variable income flow of the client. Moreover, this issue is aggravated due to the lack of understanding of the microinsurance product.

That said, one of the features of microinsurance designed to facilitate its acceptance by the low-income population, is the need to keep the product affordable for their budget. In other words, we can assume this to be minimising the costs of providing the product (i.e. reduce the expenses of claims handling, lower bureaucracy, simplify the risk assessment) and avoiding any extra charges over and above the premium.

Valuable Product

According to McCord (2008), insurance, being an intangible product, presents a divergent concept from what the low-income population is familiar with; indeed, it can be a very difficult concept for them to understand. The concept of paying premiums for something that may give no return (i.e. if no claims are made) is quite objectionable for those who lack an understanding of the mechanisms behind insurance. Up to now, these people have only measured value based on tangible returns.

To overcome this obstacle and to create perceived value in the product, benefits such as capitalisation bonds or a free medical check-up (whether having a claim or not) should be tied to the product, thereby providing a certain return during the policy contract. This approach has been shown to be reliable in the Brazilian market, winning the loyalty of clients, where it has mainly influenced clients’ decisions to renew a contract or not.



SUMMARY

Microinsurance is a specific niche insurance product specifically tailored to the low-income population. Similar in concept to traditional insurance, its main objective is to provide a financial protection service for those on a low-income or for those not covered by social insurance. In essence, microinsurance shares the same basic function as traditional insurance, although with distinct characteristics.

Due to the fact that microinsurance is specifically tailored to the low-income population, its characteristics are distinctive compared to standard insurance. In a comparison between both products, it could be said that the main differences are presence of a low premium, simplicity, value for money, swift claims handling, and broad eligibility. Another appealing factor of a microinsurance product is the fact that it assists the poor in the matter of social inclusion, providing the low-income population with an alternative for their financial management.


11

To present a better structure for a microinsurance product initiative, understanding the demands of its market is very important. This section contains the estimated demand for the microinsurance sector and some factors that might increase the demand in this population. Last, but not least, we will comment on the supply chain that enables the microinsurance process to meet the required demand and the financial system that regulates the whole chain.

DEMANDThe International Finance Corporation (IFC) estimates that there are 4 billion people worldwide

living with earnings below USD 3,000 per annum, considered as relatively poor. In a deeper analysis, it is estimated that 2.6 billion people live on an amount between USD 1.25/day and USD 4/day and another 1.4 billion people live on less than USD 1.25/day. The latter group, despite its classification as extremely poor, is still a potential group for microinsurance, yet it requires financial assistance from government in order to access such facilities. This prospective market for microinsurance beneficiaries is estimated to generate USD 40 billion of revenue (Kalra, 2010).

Microinsurance has a huge untapped market potential, according to Lloyd’s Microinsurance Centre (2011), yet only 5% of this population is currently covered. In 2007, of the top 50 insurance companies, only 7 declared themselves as suppliers of microinsurance products throughout the world. Four years later, that number had almost quintupled to 33 companies, which shows the constantly growing demand in the market and companies’ change in investment attitudes towards microinsurance (Churchill and Matul, 2012). With these increasing numbers, this new segment of the population has proved that it is a sustainable source of profit for insurance companies. Poor people are aware of their risks and know what they want to mitigate, so what are the barriers to microinsurance success?

Supply and Demand of Microinsurance



As discussed in the previous section, a lack of understanding and the intangible nature of the product diminishes the perceived attraction of microinsurance services. Most of the potential buyers have never come across the concept of insurance which, coupled with ignorance and unawareness of the benefits of insurance, produces an aversion to its uptake. These perceptions contribute to generate mistrust amongst populations, which has become one of the biggest barriers to demand.

In Brazil, the formality of the language is not accessible to the low-income population. A well-trained employee introducing the concept of microinsurance, using more informal language, could positively influence the comprehension of microinsurance and its mechanics. Full understanding of the concept and its coverage is a very important and necessary step for the realisation of long-term benefit and a higher market uptake.

As an example, in South Africa, for many potential beneficiaries of deceased employees’ life insurance, the benefits go unclaimed due to unawareness of its existence (Roth et al., 2007). Given this fact, there are increased levels of mistrust by the clients, which create a strong aversion towards microinsurance products and its financial return within that population.

The next example outlines a success for microinsurance in a community. As will be seen, capturing the trust of a client and stimulating a culture of insurance is one of the main points of a long-term benefit of microinsurance.

Example 3: The power of word of mouth in microinsurance

Renata and her family are resident of a small suburb of Rio de Janeiro called Nilopolis. Several months ago, before the death of her father, Renata had an unexpected visit by a microinsurance salesperson who offered her funeral assistance for her family. Before taking up the insurance, she was very suspicious of its benefits and processes. Fortunately, her aunt had previous good experience with insurance and helped Renata to make the right decision. After her father died, she referred to the salesperson as an “angel” in her life and then she also became an active promoter of microinsurance in her community, assisting those people unaware about the valuable return of microinsurance.

Source: Adapted from Bester et al. (2010)

Example 3 illustrates the importance of insurance comprehension and how trust can positively or negatively affect the perception of a whole community. A valuable return and word of mouth can result in increasing long-term benefits for the communities and allow for a higher penetration into the market. A population without a culture of insurance has a strong and sensible aversion to the acceptance of a new, untested and intangible product. It is clear that part of the potential market for microinsurance is hindered by a cultural barrier and unsure and untrusting of its benefits. According to McCord et al. (2013), the single hindrance for microinsurance in a majority of countries is unawareness about microinsurance as a whole. Therefore, if awareness and familiarisation of the concept of insurance is spread amongst and within members of the low-income population, demand for the product will be increased and there will be greater penetration of microinsurance.


Supply and Demand of Microinsurance • 13

SUPPLY CHAIN

The microinsurance supply chain is an important process in the understanding of the distribution channel. Each of these features is also related, as seen in the financial levels outlined further in Section “Levels of Financial System”.

In Table 2 we will present the duties of each part of the supply chain, followed by an explanation of their roles and characteristics, in which providers and organisations often join forces in diverse forms to engage their efforts, to best provide service delivery and microinsurance development.

Table 2Microinsurance Supply Chain

Duties ExamplesReinsurer(Meso-level)

• Provide protection to insurers in case of catastrophic risk

• Product development

• Swiss Re• Munich Re• Interpolis Re

Insurer(Micro and Meso-Levels)

• Claim processing (payment and management)

• Manage regulatory compliance• Product development• Back office support

• Multi-national and domestic insurers• Non-governmental Organisation (NGO) • Microfinance Institutions (MFI)• Funeral parlours

Delivery Channel(Micro-level)

• Sells insurance• Claims settlement • Premium collection• Support basic issues with client• Microinsurance advertisement

• Multi-national and domestic insurers• NGO• MFIs• Banks • Agents• Retailers• Churches• Local community Headquarters

Policy Holder(Consumer)

• Microinsurance customers • Individuals• Group members• Communities

Source: Adapted from Roth et al. (2007)

Reinsurance

Reinsurance companies play an essential role in absorbing peak risks and limiting the underwriting of large losses. In the scenario of microinsurance, their role has also been essential to product design and technical support. With an expansion of insurers’ underwriting capacity, and with the know-how and expertise of the reinsurers, institutions have the security to explore adequately a better approach and product design for their providers and policyholders.

At this stage, the presence of reinsurance has been somewhat limited to microinsurance portfolio protection (covering losses), something that is likely to change in the future. Yet, its contribution has been essential for the development of product schemes, research, analysis of data and thoughtful insight into the target market.



Insurers

The fundamental role of the insurers is to settle claims, carry the risk and set premium prices. Joint product development with distributors is also common, who in several cases, initiate the collaboration.

Insurers can be regulated or unregulated. In most cases, unregulated schemes are informal and small, represented by Community Based Organisations (CBOs) and Non-governmental Organisations (NGOs). Regulated insurers are staffed by professionals and can be either mutual or commercial. A mutual is generally defined as a non-profit insurer regulated under alternative laws, and a commercial is a profit-making legal insurer regulated under a Cooperative Act.

The Delivery Channel

The delivery channel is perhaps the main key factor for the success of microinsurance. Due to the nature of low pricing in microinsurance, operations have to reach as many customers as possible in the most efficient and cost-effective way. Keeping in mind the geographical areas often involved, channels tend to be institutions rather than individual agents. Larger networks such as community organisations, NGOs, MFIs, churches, retailers and department stores have high potential to reach a substantial number of clients at a reduced cost.

For instance, as an example of success, countries such as the Philippines and India demonstrate the important distribution role played by MFIs. In Brazil, penetration of microinsurance has increased through the use of sales channels such as utilities companies and telecoms services. With the support of new technologies, even among low-income communities, mobile banking has shown to be effective as a distribution channel, becoming more popular in recent years.

Policyholder

A policyholder can be a group or an individual. In microinsurance, the practice of “bulk” sales is common, so typically a policyholder would mainly be a group (i.e. community, villages, church members) and not an individual person.

LEVELS OF FINANCIAL SYSTEM

Understanding the microinsurance environment is also an important step to reinforce the supply chain. Many different players are involved in the financial system of the process, making the regulation of microinsurance a complex task.

Macro-level (Enabling Environment)

The macro-level mainly comprises the macro-economic and political environments. At this level, the government is in charge of the whole system (i.e. regulation, supervision and legislation). Its duty is to regulate and supervise the rules by which insurance companies should operate and, thus, includes all the


Supply and Demand of Microinsurance • 15

other levels. For microinsurance matters, the government should create a supportive and stable environment for a favourable financial policy to the low-income population. Besides these duties, the government should support the creation of consumer protection and supervise the activities and conduct of the players within the macroeconomic framework.

Meso-level (Financial Infrastructure)

The intermediate level works as a financial infrastructure essential to facilitating the functioning of micro-level processes and following the macro-level regulations. Its structure mostly comprises actuaries, technical support, information technology staff, back-office functions and infrastructure such as training facilities and essential software. A critical and fundamental point at the meso-level is the quality of market information. Such data is crucial for development of the product and for the leveraging of sales, driving macro and micro-levels.

Micro-level (Retail Provider)

At the center of the system is the micro-level. Any action taken at other levels is felt within the micro-level. Agents, brokers, providers and intermediaries are present at this level. In microinsurance, a risk taker, product distributor and claim administrator could all be part of one single institution as a provider, or take the form of three single entities, according to management strategy for cost reduction. In microinsurance, depending on management strategy (and investment allocation), the provider may comprise a risk taker, product distributor and claims administrator as a single institution or even as different organisations with one carrying the risk, another delivering the product and a third settling claims.

Other players that could be considered at all levels are donors and investors, having a relevant role in encouraging, developing and supporting microinsurance practices. They may enter the process at any level of the financial system. As an example, investments and funding for the government structuring (macro-level), supporting specific research (meso-level) or by simply covering administrative expenses (micro-level).

Nonetheless, special attention should be taken at the time the investments are applied. In some situations, the lack of understanding of the financial system can also hinder funding by donors and investors. For instance, if donors only invest at the micro-level to improve the distribution channel for a higher uptake, investment could be seamless if the products are not valuable in the client’s perspective. Therefore, financing at the meso-level for research into new product would provide a better overall result in the market.

As will be further discussed on Chapter 4, in the Brazilian scenario, such investment would have a greater return if applied towards the macro-level. At this stage, if the government were to promote microinsurance as a tool for social inclusion, this may provide the incentive for its growth (i.e. reducing taxation), attracting more insurance companies and reinsurers to provide more resources to better develop the product in the country.



SUMMARY

In order to explore fully the potential demand for microinsurance, it is important that each structure join forces, engaging their efforts to create the best workflow in order to provide optimal demand. The supply of microinsurance should be a smooth process; accordingly, the comprehension of financial levels and the structure role are essential.

Having investors and donors as part of the process would also leverage demand and support the supply chain of the product, as their contribution might have a relevant role in encouraging, developing and supporting microinsurance practices. Nonetheless, special attention should be taken at the time investments are applied, to concentrate the financial efforts where the market needs it most, providing a better overall result throughout the whole structure of microinsurance.


17

OVERVIEW OF BRAZILGeographically, Brazil is the largest country in Latin America and the Caribbean and, with a total

population of approximately 202 million, the fifth most populated country in the world (IBGE, 2014a). For the last few years, it has shown rapid growth in GDP, becoming the seventh biggest in the world (The World Bank, 2014) and has become a focus for investors, as one of the world’s most promising emerging economies. Despite this huge step forward there remains, however, huge income inequality.

Brazil has one of the greatest inequalities of income and wealth amongst countries in the G201. Approximately 10% of the population (2 million people) account for more than 42% of the country’s wealth and, furthermore, 46% of the population is comprised of poor people (considered as vulnerable) earning less than 2 minimum wages2 per month (IBGE, 2014b).

As shown in Figure 1, the economic distribution of the population has a pyramidal shape where the rating goes from A (the wealthiest) to E (the extremely poor). As can be seen, wealth distribution is extremely unequal where a percentage of the group classified as A1 earns 10 times more than those at the bottom of the pyramid. Sadly, the biggest proportion of the population (almost 66%), or those mainly the base of the pyramid (classes E and D), receives less than the average overall income in Brazil estimated in BRL 1,943 (UOL, 2014).

Since the focus of this study is microinsurance, in this project we will concentrate on the low-income population and consider how people in poverty could be given an opportunity to protect their financial position through insurance.

1 G20 is a block of developing nations established by Ministerial Conference of the World Trade Organization (WTO) in August 2003.

2 Minimum monthly wage in January 2014 = BRL 724.00

Background of Microinsurance in Brazil



Figure 1Monthly Income

Monthly Household Income

Source: Canzian (2013)

This unequal distribution has been growing over the past few years, continually increasing the gap between rich and extremely poor, negatively affecting the population of the lower classes such as D and E, and also creating an increasing barrier for the low-income population to achieve a better quality of life.

UNDERSTANDING THE LOW-INCOME POPULATION

Little is known about the low-income population and its behaviour. Each group or community within this population has very specific characteristics relating to its environment and risk exposure. Behavioural attitudes vary from culture to culture and, consequently, previous success stories of microinsurance in countries like China or India may not be 100% applicable to the Brazilian population. However, for a better performance of microinsurance within the local population, knowledge of the target market is vital in order to achieve market penetration.

Parente et al. (2005) conducted a study comparing the consumption characteristics of the low-income market in Brazil. The study collected and analysed data from three retail shops in São Paulo. Table 3 displays the main findings of the study summarised by Barbosa et al. (2009):

Class – A1

Class – A2

Class – B

Class – C

Class – D

Class – E46% of the population earns less than two minimum wages per month

R$ 13,560 or above

R$ 6,780 to R$ 13,560

R$ 3,390 to R$ 6,780


Background of Microinsurance in Brazil • 19

Table 3Low-income population consumption characteristics

Characteristic Description

Conservatism The low-income population adopts more conservative behaviour in comparison to the higher-income Brazilian population.

Greed Poor people have a higher propensity for greed and abundance.

Low self-esteem X dignity: Low-income consumers can feel like inferior beings and feel that they are treated as lower-class citizens; nevertheless, they have a strong desire to maintain their dignity and not to be mistaken for delinquent and dishonest people.

Flexibility in income A great number of low-income consumers form part of the informal sector; as a result, variable and irregular incomes are common.

Paradox of “power” and frustration in the buying process

With few available options for entertainment, shopping has become a source of pleasure for low-income people. Beyond the pleasure of engaging in this activity, there is a sense of “power” linked to the acquisition of goods. Limited budgets, however, cause frustration.

Face-to-face contact Low-income consumers typically value personal contact over other transaction methods e.g. telephone.

Networking A very interesting, creative and strong channel in the low-income market is the “door-to-door” approach.

Source: Barbosa et al. (2009)

According to Barros (2007), religion also has a huge influence on household expenditures and budget administration. His study revealed that people who considered themselves devoted to religion showed a more rational use of family resources for consumption than those who are non-religious, or had different notions of family budgetary management.

Another important characteristic of the low-income population profile, which supports market segmentation and direct commercial efforts, is the fact that the majority reside in urban areas. Moreover, the majority of this population has access to lighting services (99.7%), water supply (91.6%) or a landline telephone service (53.4%) (Simoes et al., 2010a). Therefore, providers of these utilities represent a potential channel for the distribution of microinsurance, whilst also acting as networks for the collection of premiums.

THE ISSUE OF TARGET PUBLIC DEFINITION

As mentioned previously, microinsurance is a product created specifically for a certain niche of the population. Its main objective is to create a financial protection tool for the low-income population. Thus, the definition of the target market is a critical point for the effectiveness of the product, mainly comprising that part of the population for which it was specifically designed.

In order to define specifically the target market for microinsurance, a research group (SUSEP WG) was created by the Brazilian insurance regulator – SUSEP (Superintendence of Private Insurance). This group



comprised entities from the Brazilian insurance and financial sectors, beyond the essential presence of the IBGE (Brazilian Institute of Geography and Statistics), with its population database.

Initially, the definition of target public was based only on population income, this being a common criterion used for microinsurance in other countries. The proposed threshold would be the Brazilian population that falls within a monthly per capita income of up to three minimum wages, employed in either the formal or the informal sector (Simoes et al., 2010b). However, over time, it was observed that this criterion was not fully applicable due to the current economic situation of the country.

The unsatisfactory nature of using the income criterion was due to the fact that Brazil presents wide contrasts and regional differences, significantly influencing the purchasing power of income throughout the country. With currency value heterogeneity, defining a target market using such a disparate parameter would potentially lead to targeting the wrong market. Furthermore, it was noted that in previous years the minimum wage had been rising at rates well above inflation, which is a reflection of the policies adopted by the country. This fact also limits its acceptance as a reference criterion as it would show significant distortions throughout the years.

Another factor that led to the reclassification of the group was in relation to a later study reported by Funenseg – the National School of Insurance (Carvalho, 2010). In this study, it was noted that the previously defined target public was too broad compared to their expectation. Thus, the perception of the target public was remodelled considering other aspects that would more positively reflect this particular target.

Countless variables could influence the actual poverty line for the classification of low-income people. However, SUSEP WG decided to adopt three main characteristics for the population: the education level, living conditions and the income information. Understanding the education level would require carrying out a preliminary study on the profile of the potential consumer of microinsurance services. Knowledge of their household characteristics would improve the delivery channels and premium collection networks, and income factor would drive the definition of the target-public in study in relation to their monthly earnings.

Those changes would lead to a new perception of the potential market for microinsurance in Brazil, redirecting the aim of the study to its main objective. Therefore, to carry out further studies and research, SUSEP WG considered also family group type3 to be a more appropriate classification than solely per capita income.

The establishment of the definition of a target market for microinsurance had, as its main objective, the measurement and estimation of the potential market in Brazil. Besides that, the target market classification for a “low-income population” would enable greater efficacy in identifying the key product types and the parameters required by each region. According to SUSEP, this new approach is much more suitable for Brazil’s current situation, leading to a higher emphasis on product design, without presenting any noticeable distortion on its results.

3 Family group – i.e. Couple with one child, widow with two children, family with only one member.


Background of Microinsurance in Brazil • 21

MICROINSURANCE REGULATIONS

Prior to any specific regulation of microinsurance in Brazil, the low-income population had already demonstrated a certain need and appetite for a form of financial protection. According to Bester et al. (2010), the client base for microinsurance, as part of the wider Brazilian insurance market, covered between 23 and 33 million people4 in the period between 2001 and 2009. So why would any specific regulatory provision be necessary for microinsurance?

As shown in Table 1, microinsurance can be a tool for the improvement of social inclusion with particular characteristics, yet it is a little-understood market. Therefore, for there to be better performance of microinsurance in Brazil, a distinctive regulatory approach is a fundamental step.

A key step for the regulatory framework took place in 2008, with the establishment of the Microinsurance Commission Board. This committee, comprising representatives from various public and private stakeholders, aims to promote research on microinsurance and advise the CNSP (National Council of Private Insurance) on its technical and operational aspects (Simoes et al., 2010a). Many small incremental changes to the industry have taken place over the years. However, in 2012, SUSEP (Superintendence of Private Insurance) established major rules determining and explaining many characteristics of microinsurance operations in Brazil, as described in Section “Regulation of the Microinsurance Broker”, “Microinsurance Intermediate ‘Correspondents’”, “Differentiated Delivery Channel” below:

Regulation of the Microinsurance Broker

The role of the microinsurance broker was created by SUSEP to legally intermediate in the promotion of microinsurance contracts between consumers and insurers. However, in contrast to a standard insurance broker, a microinsurance broker can only take the form of an individual and not a legal entity. The eligibility criteria are less rigorous than for a standard insurance broker, requiring fewer hours of compulsory training and a lower level of qualification. Under this new regulation, standard insurance brokers are also able to work as microinsurance brokers or in the microinsurance sector.

Microinsurance Intermediate “Correspondents”

With the establishment of this current regulation, SUSEP allowed any intermediate “correspondents” (authorised by Central Bank of Brazil) to sell microinsurance; in standard insurance, sales are limited to authorised insurance brokers. Those nominated as microinsurance intermediates are able to provide services to policyholders throughout the process. They are able to supply basic information regarding the policy and its function, and are able to make payments to clients following a claim. This differs from standard insurance where claims settlements are typically only made by the insurance companies themselves and not through a network of brokers.

4 Figures of lives covered by microinsurance in Brazil cover all types of insurance (e.g. extended warranty on appliances, funeral expense coverage, credit-life).



With such a change in legislation, SUSEP has demonstrated its understanding of the need for adjustment in the current scope of regulations in order to prioritise the development of microinsurance. With a broader range of sales possibilities, market penetration has become more cost-efficient, making it feasible for previously unreachable families located in remote areas to access microinsurance.

Differentiated Delivery Channel

To facilitate distribution, SUSEP permitted the commercialisation of microinsurance policies attached to exchange of data through network communication involving technology. This includes public and private internet, telephone and electricity invoices, television, and other communications available through satellite. Considering the vast scale of this type of communication, SUSEP regulations are very strict.

Even with these significant changes in Brazilian legislation, there are many other potential adjustments that could improve the effectiveness of microinsurance. Besides the progress achieved by the regulatory party, the Microinsurance Commission Board concluded that barriers were not only driven by insurance laws but also derived from other aspects such as taxation law, the high cost of policies by insurance companies and labour legislation (Simoes et al., 2010a). In the case of tax relief, the government should participate in the development of microinsurance processes. Their contribution would lower insurance costs, encouraging insurance companies, brokers and new market entrants, stimulating the local economy and the microinsurance market.

Finally, legislation to create a template for microinsurance products and to establish itself into the market as a distinctive financial tool, objective parameters should be implemented. Parameters such as terms of contract, maximum sums assured, a maximum period for claims settlement and procedures and documentation required for claims requests, should be carefully designed for a greater product benefit.


23

As previously mentioned, the objective for the microinsurance target population in Brazil was insurance protection for the population that could not afford traditional insurance or was not covered by a social insurance scheme provided by the government. With the growing demand for microinsurance, and in order to understand better the low-income population, the National School of Insurance (Funenseg) requested a field research. In this research, Datafolha (independent Brazilian polling institute) was tasked with gathering data and analysing the behaviour of the low-income population, regarding the acquisition of an insurance product and their willingness to pay.

THE DATAFOLHA RESEARCH

The goal of this research is to assess the level of premium that the low-income population would be willing to pay for insurance protection. From the information extracted from the market research about the maximum premium that the interviewees were willing to pay, two inferences are taken. The first one is to find how much influence the characteristic of the insurer has on the client’s willingness to purchase. The second is to evaluate the satisfaction of the low-income population with the existence of financial backup such as microinsurance. Special emphasis is given to the concept of insurance and how people regard the microinsurance (positively and negatively), as well as their propensity to buy (or not to buy) an insurance policy.

The target population for this survey were families with earnings between 1 to 5 minimum wages per month. In total 428 householders (or members of the households responsible for making purchase decisions) were interviewed. The survey took place in the cities of São Paulo and Rio de Janeiro in June of 2009, with a particular focus on life insurance policies. With each interview taking around 20 minutes, the survey asked questions such as educational level, occupation, incomes and other related matters. Furthermore, with the

Microinsurance Valuation in Brazil



focus on microinsurance products, questions were put about their feelings towards insurance protection and their financial experience with such products.

It is also relevant to raise the point that risk assimilation is a subjective matter; different individuals might have distinct perceptions of a risk with the same exposition level and conditions. Carvalho (2010) states that each person’s perception may vary according to their own risk averseness (risk-averse, risk-neutral or risk taker). Apart from their attitude toward risk (which is a personal value), actions taken by individuals also depend on the premiums charged and the amount of loss expected by the risk. Therefore, the maximum premium that an individual is willing to pay is tied to their personal evaluation of risk and their level of income.

PROFILE ANALYSIS

The survey conducted by Datafolha interviewed a total of 428 households in the cities of São Paulo and Rio de Janeiro. The total number of people interviewed in each city was determined according to its proportion of families with earnings in the range of 1 to 5 minimum wages, with 216 people in Rio de Janeiro and 212 people in São Paulo. Most interviewees were women and were either the householder or the decision maker of the household. Each house had an average of 3.4 residents, with residents under 18-years-old accounting for 56% of this.

The profile of family income shows a relatively evenly spread distribution across the families surveyed, with an overall average of BRL 1,284. This figure is slightly higher than the Brazilian average due to the fact that no population up to 1 minimum wage is considered in this survey.

Figure 2Distribution of interviewed family by income

Source: Datafolha (2009)

Education level is an issue of concern within this specific public. The low-income population in Brazil is renowned for its low levels of education and literacy. Only a small proportion of the population has attended high school (32%) or college (6%) (Datafolha, 2009). The majority of residents are illiterate or have finished only their elementary or high school degree. An interesting point is the fact that amongst older people aged 45 and over, almost half of the population have only attended elementary school.

1 to 2 m.w. 2 to 3 m.w. 3 to 5 m.w.

30% 30%

40%50%

40%

30%

20%

10%

0%


Microinsurance Valuation in Brazil • 25

Table 4Low-income population education level by age

Age of Resident (in years)

Illiterate/Not Studying

Elementary School

Middle School High School College/Post

Graduate Base

0 to 5 89 11 – – – 101

6 to11 4 82 13 – – 170

12 to 17 1 7 57 35 – 152

18 to 34 0 10 21 54 14 390

35 to 44 1 24 29 38 8 182

45+ years 6 39 23 27 5 456


Almost half of the group interviewed (48%) is considered to be the economically active population (EAP*), which means a person with a formal or informal type of job. Registered employment leads the economic activity source, while the informal sector of income comes in second place (freelancer/small jobs and unregistered employees). Within the population that is not economically active, the main reason for unemployment is a high student population in addition to retirees and households.

Figure 3Economically Active Population Distribution


48% EAP*

Registered employee

Free-lancer/ Small jobs

Unregistered employees

Formal Self Employed

Government employee

Unemployed (looking for a job)

44%

27%

10%

4%

2%

13%



Figure 4Non-Economically Active Population Distribution


Another interesting finding is that income level is a factor that is strictly related to an individual’s level of education. As presented previously, the level of education is considered quite low in this specific population, which increases the propensity of households to receive a lower monthly income. Surveys have shown that the likelihood of an individual earning an income increases with that individual’s level of education. This is outlined in the table below.

Table 5Population education level by income group

Education No income 1 to 2 minimum wages

2 to 3 minimum wages


Illiterate 45% 8% 7% 5%

Elementary/ Middle School 27% 26% 17% 11%

High School 17% 31% 37% 32%

College 11% 35% 40% 53%

Total Interviewees 185 165 30 19


52% Non EAP*

Student

Retired

Household

Children from 0 to 5 years

Living on pension plans

Unemployed (not looking for a job)

46%

18%

18%

14%

2%

2%



Quite an impressive number of interviewees (44%) replied positively when asked if they held any type of insurance protection. Within the population protected by an insurance policy, a clear trend towards the population with higher monthly income has been presented:

Figure 5Population holding insurance by income group


Lack of understanding of the coverage of the policies turned out to be a constraint for microinsurance take up and acceptance. Unfamiliarity with the concept of insurance makes people uncomfortable about making a commitment to purchase.

By contrast, the fact of “liking” insurance products was more likely between families with income from 1 to 2 minimum wages. This perception is strictly related to the higher value that the protection would offer to those lower income classes, in comparison to higher classes and related to their less reliable source of income (informal market) and their lack of credit resource.

Amongst the population which held any type of insurance coverage, health insurance and life insurance has been presented as being the most common in this group:

Figure 6Population holding insurance by insurance type





No insurance

11%

14%

19%56%

Health Insurance

Life Insurance

Auto Insurance

Home Insurance



Another interesting and noteworthy point in this study related to the type of products that the population was most likely to hold. Regardless of any financial condition, the most requested types of plan were health and life insurance plans.

Figure 7Most requested insurance coverage by households


MICROINSURANCE EVALUATION

A quantitative and qualitative evaluation of the potential market perception of microinsurance has also been conducted in this survey. Within the interviewed population, 53% appreciated the concept of microinsurance, showing the following characteristics as trends for acceptance, as follows:

Table 6Characteristics of the population more receptive to microinsurance

Characteristic More receptive Less Receptive

Age 18 to 34 years old Above 55 years old

Monthly Income (in minimum wage)

1 to 2 monthly incomes above 2 monthly incomes

City São Paulo Rio de Janeiro

Gender Women Men


Health Insurance Life Insurance

If not priced If priced

46 42 3326



It is also worthwhile mentioning the concern of residents in opting for microinsurance as a form of risk mitigation. A majority of the population (70%) were in agreement on the importance of holding an insurance policy, showing a greater appreciation for healthcare and life insurance policies. Furthermore, the main pros and cons for microinsurance plans have been listed as follows:

Reasons to “Like”

Supporting the Family

The concern of households over their family members and especially their children creates the concept of family support. With that perception in mind, households showed a positive feedback for microinsurance in regard to having a form of financial support in case of any negative circumstances. In this scenario, women with an income of up to 3 minimum wages tended to better support the benefits of microinsurance.

Indemnity of the Lost Asset

Insurance tends to be accepted more by younger people who are more eager than their elders with regard to investment profile, thus more exposed to risk and requiring a higher return on their investments (either on profit or loss). That characteristic stands out among people with earnings from 3 to 5 minimum wages.

It can been noted that a trend of “liking” the concept of microinsurance is slightly more favourable for those groups comprising younger people and those with lower family income levels. Women are also more supportive of microinsurance due to its concept of greater family protection. Low-income populations are also more likely to acquire insurance protection due to their lack of financial resources in the case of a risk event.

Reasons to “Dislike”

Losing the Invested Money

It is apparent that the concept of insurance has not yet become established in the minds of the low-income population. The perception of a loss of money is clearly linked to the fact of no investment return in the case of “no claim” or not fully understanding the concept of insurance. To overcome that lack of understanding at this stage, products such as a savings bond could be tied to other products such as funeral assistance, credit-life or healthcare to guarantee a certain return at the end of the policy. The perception investment loss has been higher for the population aged between 35 and 55 years old (with a greater emphasis in the city of São Paulo).

Insurance Lack of Credibility

Mistrust of microinsurance products is mainly based on previous negative experience and is more prevalent in the elder population (with greater emphasis in the city of Rio de Janieiro). The poor image of insurance is also spread by word of mouth between neighbours or family members (as illustrated in Example 3). Other factors contributing to the lack of credibility of microinsurance products are bureaucracy on claims payment and the time taken for claims settlement.



The obligation to pay a monthly premium is another aspect that limits the acceptance of microinsurance. For a family living on a low budget, the addition of any expense into the household is an attribute that weakens the perceived attractiveness of the product.

WILLINGNESS TO PAY

The premium of a microinsurance product is a very sensitive point in relation to the value assigned to it by the client. At this stage of the research, in order to estimate the willingness to pay, the following survey was carried out for a better understanding into the relationship of the population with premium and the benefit offered by the insurance. To test the spontaneous willingness of interviewees for microinsurance coverage, two fictitious life insurance products were created:

Product A • Sum assured: BRL 30,000• Monthly premium: BRL 37.50; BRL 31.25; BRL 25.00; BRL 18.75; BRL 12.50

Product B• Sum assured: BRL 10,000• Monthly premium: BRL 15.00; BRL 12.50; BRL 10.00; BRL 7.50; BRL 5.00

Insurance products were initially offered to each interviewee at their highest premium. In the event of this being accepted, the interviewer would take note of the premium amount opted for and terminate the survey. However, if it was rejected, interviewees would be offered the next cheapest premium, as listed, until such time as the insurance was accepted or declined by the “client”.

The results obtained were based on estimating the main target public characteristics that would affect the purchase of an insurance policy. As previously mentioned, the criterion of the Brazilian target public has been established (by SUSEP) based on family composition. Therefore, with the results of the research, instead of calculating a specific premium amount (which is a very flexible criterion) according to its target public, trends in the characteristics of the group that would increase the willingness to pay were indicated as follows:

• The household’s perception of insurance has a slight change according to their family composition. The presence of a child (up to 5 years old) in the residence showed an increase the decision to opt for a higher insurance premium. On the contrary, residents with elderly residents (above 60 years old) presented a negative impact for equivalent coverages.

• An increase in the acceptance of higher premiums can be seen according to a household’s education level. The higher the level of education, the higher the premium that the household is willing to pay.



• Male householders tend to be less receptive to higher premium policies, although this value perception changes as they grow older.

• Neither the economic activity nor financial experiences of the households tend to be significant factors in their willingness to pay.

SUMMARY

The majority of the population were shown to be positive on the acceptance of the microinsurance coverage. The study also showed that in order for there to be better acceptance of the product, understanding the concept of microinsurance is essential. Some trends become clear in population characteristics, as summarised below:

• As the concept of microinsurance has not yet been properly established, no claim means “loss of money” in the mind-set of the low-income population. To overcome this misconception, aggregated benefits should be tied to a microinsurance product.

• The low-income population showed higher acceptance of the insurance product, due to a lack of financial resource/options in the case of a negative incident.

• The education level of the target population affects comprehension of concept of microinsurance.

• The acceptance of higher premiums is more likely in households with higher levels of education.


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Conclusion

Microinsurance has been proven an efficient financial tool to protect the poor, giving the assurance of a future income to those who need it the most. It is proven to have a solid demand in developing countries, raising the interest of companies that are not only concerned about social responsibility but also for those who are after a profitable market.

In this study, the main characteristics and features of a microinsurance product have been raised, giving an overview of the product itself and going on to examine it further in relation to its application in Brazil. Furthermore, specific research of the Brazilian population has been undertaken to understand the behavioural attitude of this specific group.

MAIN FINDINGS

Even with major changes in Brazilian legislation concerning the benefit of microinsurance products in recent years, aspects such as high government taxation are still a big issue for microinsurance progress. One of the key features of microinsurance is to keep the product affordable and tax reduction or relief would encourage other insurance companies (competition), brokers and new market entrants, stimulating the local economy and shaking up the microinsurance market.

Third parties that might also have a relevant role in encouraging, developing and supporting microinsurance practices are donors and investors. Investment could be made at any level but as the financial structure is quite complex, special attention should be taken at the time that investments are applied; financial investments would increase/smooth the flow of the process, achieving a better overall result in the entire context of microinsurance.

As microinsurance has the low-income population as its main target public, there is a tendency amongst individuals to have a relatively low level of education. This fact has limited the uptake and acceptance of



microinsurance due to a lack of comprehension about the concept of the coverage, generating a negative perception of the product and affecting its demand in both the short and long term. To avoid such negative perceptions, well-trained staff tasked to introduce the concept of microinsurance and the use of less formal language, could positively overcome that barrier, thereby increasing uptake in the market.

OUTLOOK

As microinsurance is a relatively new type of insurance in Brazil, there is still very little known about its market and it could be considered as still in its implementation stage. At this juncture, companies should evaluate returns only in the long term, applying themselves more to the process of first creating a culture for the product and, later, reaping the rewards.

Governments should also take the same approach, encouraging the market to build up a stronger foundation and culture of microinsurance, prior to accounting for a positive return. That attitude would grant better opportunities to the low-income population for greater inclusion in society, creating a new consumer sector in the market and generating greater financial returns in the country.


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The Author

Rafael Hideki Tsuzuki is an actuary. He holds a Master’s (M.Sc) in Actuarial Science from the Cass Business School – London and a Bachelor’s degree in Actuarial Science from the Pontifícia Universidade Católica of São Paulo (PUC-SP). He is currently coordinator of reinsurance at Zurich Insurance.

The author would appreciate any suggestions, criticisms and comments with regard to the [email protected]


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