Dr. Apere
Micro Agenda as Tool to Enhance Financial Inclusion in Nigerian Insurance and Pension Industry. A Paper Presentation@
2019 National Association of Insurance & Pension Correspondents (NAIPCO) Conference. On 29th August 2019, by Dr. Pius Apere (PhD/FCII)
(Actuarial Scientist and Chartered Insurer)
MD/CEO Achor Actuarial Services Limited
Tel: +234(0)8090747971
The chairman of the event, Mr Mohammad Ahmad
The President of NAIPCO Mrs Omobola Tolu-Kusimo
Regulators of Insurance and Pension sectors here present
Participants, Distinguish ladies and gentlemen
It is my pleasure to present the lead paper for this conference, and given my good relationship with gentlemen of the Press I had no hesitation when the invitation was sent to me. I will therefore do my best to do justice to the topic.
1. Introduction
There is no universally accepted definition of financial inclusion but Wikipedia defined Financial Inclusion as where individuals and businesses have access to useful and affordable financial products and services that meet their needs that are delivered in a responsible and sustainable way.
The importance of development of a financial service sector (such as insurance and pension sectors) and its impact in accelerating economic growth and direct benefits to the poor leading to poverty reduction cannot be over-emphasized. Thus, this paper highlights the opportunities and challenges of regulatory framework and/or guidelines for micro-insurance and micro-pension plan as a way of deepening financial inclusion in Nigeria, having briefly reviewed the CBN’s National Financial Strategy.
2. National Financial Inclusion Strategy (NFIS)
Each country has its unique way of interpreting financial inclusion depending upon the stage of its development. In Nigeria, the National Financial Inclusion Strategy (NFIS) was launched by Central Bank of Nigeria (CBN) in October 2012 and it was revised in October 2018. “For the purpose of this strategy, financial inclusion is achieved when adult Nigerians have easy access to a broad range of formal financial services that meet their needs at affordable costs. The services include, but are not limited to, payments, savings, credit, insurance, pension and capital market products”.
Table 1: NFIS Financial Product Targets
% of Total Adult Population
2010
2016
2020
Target
Target
Actual
Target
Payment
21.6%
56%
38%
70%
Savings
24%
46%
36%
60%
Credits
2%
29%
3%
40%
Insurance
1%
25%
2%
40%
Pension
5%
26%
5%
40%
Source: Enhancing Financial Innovation Access (EFInA) Survey reports 2018
The overall target of the revised strategy is to reduce the percentage of adult Nigerians excluded from access to financial services from 46.3 % in 2010 to 20 % by 2020. In other word, the CBN sets a target of 80% financial inclusion for adults by 2020.The strategy also gives financial inclusion targets for specific financial products as shown in table 1.
The progress in actual financial inclusion performance (since the release of the NFIS) relative to targets had been adversely affected by unforeseen socio-economic factors such as the economic recession and security situation in some parts of the country.
Table 2: Financial Inclusion Activities of NAICOM and PENCOM
Regulators
Key Financial Inclusion related activities
Achievements
National Insurance Commission
•Awareness/sensitization and literacy programmes
•Creation of guidelines for inclusive financial products –
takaful (Halal insurance) and
micro-insurance
•Liberalization of product delivery – Permitting alternate channels
• Customer protection
• Guidelines led to creation of 3 Takaful window operators and 2 stand-alone players.
• MFBs enabled to act as insuranceagents –Providingbundled products.
• Bancassurance makes insuranceavailable at bank branches.
•Complaints bureau resolved 260 complaints amounting to ₦5.5b
National Pension Commission
•Awareness/literacy programmes.
• Introduction and revision of regulation to drive adoption of pension schemes
• Radio programme on Retirement matters
• 11% of the working population is included.
• Micro-pension scheme introduced to cater for informal workers –i.e. 70% of the population.
•Pension regulation revised to accommodate small business with fewer than 5 staff.
Source: Enhancing Financial Innovation Access (EFInA) Survey reports 2018
Considering the subject matter under discussion, it is appropriate to review the financial inclusion activities of the insurance and pension sectors (as shown in table 2 above) through several initiatives (including micro agenda) being undertaken by the regulators, NAICOM and PENCOM respectively.
Furthermore, as part of measures aimed at promoting financial inclusion, the insurance regulator (NAICOM) and pension regulator (PENCOM) have provided guidelines for the implementation of micro-insurance and micro-pension plan in the country respectively. The opportunities and challenges that are likely to arise from the implementation of the guidelines are discussed below.
3. Micro-pension Plan as Tool in Deepening Financial Inclusion
The micro-pension guidelines define micro-pension plan as an arrangement for the provision of pensions to the self-employed (i.e. an individual who earns income through conducting trade or business for him/herself) and persons operating in the informal sector (i.e. employees in business entities, organizations and/or persons that are not mandatory to participate in the Contributory Pension Scheme as provided in Section 2(1) of the Pension Reform Act, 2014).
The implementation of the Micro-pension plan (MPP) is expected to extend financial inclusion to the informal sector of the economy by ensuring that micro-pension contributors provide functional bank accounts for their contributions and withdrawals in the process of savings to meet their retirement needs, in preparation for the eventual reduction in earning capacity during old age. However, the above creates opportunities and challenges for stakeholders as highlighted below.
3.1. Opportunities Arising from Micro-pension Plan
Measures to encourage participation in micro-pension plan
The following measures (as specified in the micro-pension guidelines) would encourage a high proportion of the population of informal sector workers and self-employed, to contribute to the micro-pension plan, thereby enhancing significant financial inclusion in the country:
• Flexibility of contributions encourages contribution of small but frequent amounts resulting not only to lesser contributions but also high transaction costs and consequently low benefit payouts, e.g.
˗ “Micro-pension Contributors may make contributions daily, weekly, monthly or as may be convenient to them provided that contributions will be made in any given year”.
• Allowing for withdrawals before retirement creates incentives. Thiswould help the micro-pension contributor to meet immediate financial obligations thereby encouraging participation.
˗ The Micro-pension Contributor may withdraw the total balance of the contingent portion of his/her RSA including all accrued investment income thereto, making the first withdrawal 3 months after the initial contribution and subsequent withdrawals once in a week from the balance of the contingent portion of the RSA.
• Develop vesting policies
˗ “The Micro-pension Contributor shall be eligible to access pensions upon retirement and attaining the age of 50 years or on health grounds..”.
˗ “At retirement, the Micro-pension Contributor has the option of transferring part/all of his outstanding balance on the contingent portion to his retirement benefits portion”.
• Provision of IT infrastructure that is supportive of mass registration, contribution collection and database management. For example, the Commission requires that
˗ “PFAs shall provide secure and suitable platforms for the remittance of contributions and payments of benefits under Micro-pension Plan”.
• Insulation of the participants against volatility in investment growth
˗ “Micro-pension Contributors shall be entitled to Guaranteed Minimum Pension provided they satisfy the provision of Section 84(1) of the PRA 2014 and the Guidelines on Minimum Pension Guarantee issued by the Commission”.
• The Government sponsored empowerment programmes should support and/or encourage participants to save for their old age, as the micro-pension plan perfectly aligns with the current social empowerment programmes of the Federal Government which seeks to ensure the long term sustainability of the benefits of the empowerment programmes for the participants.
Prevention of old age poverty
People living in the informal economy have an increased risk of old age poverty. This is because the traditional family structures no longer prevail, and these elderly will have to be more self-supportive.
Micro-pension plan is aimed at creating not only the culture of long term savings but also a more secure financial future to contribute towards the prevention of old age poverty. By saving during one’s active working lifetime, the micro-pension contributors will be better financially supported when they reach old age and cannot rely on working anymore to provide themselves with an income or relying on extended family members. However, saving for the future will lower the amounts available for consumption today especially given that informal sector participants do not have enough means for a day.
With the implementation of micro-pension plan people can, instead of putting money under their matrass, save money in micro-pension plan and receive their benefits when the money is invested and protected by a trustee (PFA) and regulator (PENCOM).
Impact on nation’s economy
As the informal sector workers constitute the larger percentage of the working population in the country, there is no doubt that significant participation in micro-pension plan would make the long term investment funds in the private sector available to the government for critical infrastructure development (e.g. through infrastructure bonds) and diversification of the economy, thereby contributing to the country’s Gross Domestic Product (GDP).
Unique selling proposition (USP)
Section 6.5.3 (ix) of micro-pension guidelines states that “Micro-pension Contributors shall be entitled to Guaranteed Minimum Pension provided they satisfy the provision of Section 84(1) of the PRA 2014 and the Guidelines on Minimum Pension Guarantee issued by the Commission”. The above has created a unique selling proposition (i.e. marketing message) for micro-pension plan in the sense that it is likely to increase the number of micro-pension contributors significantly, as many informal sector workers would like to join the scheme with the aim of benefiting from Guaranteed Minimum Pension (GMP) despite their lower contributions over the years.
On the other hand, section 6.5.3 (x) of micro-pension guidelines (“Where the total amount contributed is below the amount required to qualify for Minimum Pension Guarantee, the Micro-pension retiree shall be paid enbloc in accordance with the Regulation for the Administration of Retirement and Terminal Benefits”) may limit the number of micro-pension contributors that will qualify for Guaranteed Minimum Pension (GMP) at retirement but this would not deter the uptake of the micro-pension plan provided the USP is marketed effectively by the PFAs.
However, the extent to which this noble unique selling proposition would impact on sales volume is not certain due to the non-implementation of Guaranteed Minimum Pension (GMP) by PENCOM since the CPS was introduced in 2004.
Conversion from Micro-pension Plan to Mandatory Contribution
Section 6.6.1(a) of micro-pension guidelines states that “The Micro-pension Contributor shall be eligible to participate under Section 2(1) of the Pension Reform Act, 2014 where he/she secures employment in the formal sector with an organization that has three (3) or more employees”.
The implication of the above is that, with the implementation of micro-pension plan, the application of the mandatory contributory pension scheme (CPS) under section 2(1) of PRA 2014 is limited to employees in an organization where there are 3 or more employees. Thus, it is only the employees in an organization that has less than 3 employees are to operate as micro-pension contributors. The foregoing would result in a significant increase in contributors in the mandatory contribution pension scheme.
3.2. Challenges of Micro-pension Plan
Alternative ways of meetings retirement needs
One of the major challenges to micro-pension plan is the fact that potential micro-pension contributors may already have other ways of meeting their retirement needs:
• Women accumulate small amounts until they buy gold that they use as collateral for loans or resell them when the need for cash arises.
• Potential micro-pension contributors had bought land and property in instalments for their long term cashflow generation.
• The culture of reliance on children for old age support is rampant in developing country. However, there is gradual breakdown of the traditional extended family system because of economic hardships.
• Employees in the informal sector (particularly the upper class / skilled workers) may have other investment options in place (e.g. equites and real estate) which would generate income over the long term to meet their retirement needs.
Consumer education and awareness
The current low public awareness and negative perceptions (as many people have a lot of doubt, fear and lack of confidence) about pension products and management being backed by Government have led to the low uptake of micro-pension plan since the scheme is also voluntary. Thus, to make micro-pension plan successful and reach commercially viable and stable volumes, the marketing and distribution model should be very efficient and trustworthy, different from the approach of marketing and persuasion adopted for the mandatory CPS.
Marketing in the shape of financial education is needed to create awareness of old age risks and possible actions people can take to save for their old age. Thus, the direct marketing literature needs to show the benefits of micro-pension plan over the bank savings account, with clear illustrations and projections. After initial registration motivating the micro-pension contributors to make regular deposits is important for sustainability and long term success, as contributors are likely to be more concerned with meeting day-to-day basic survival needs rather than making long term savings arrangements. Thus, the 40% contingent withdrawal option is a good incentive to attract and retain the micro-pension contributors which is a step in the right direction.
“A 2018 financial inclusion report by Enhancing Financial Innovation and Access (EFInA) says that of the total adult population that is 18 years and above put at 99.6 million, 36.8 percent are financially excluded. It is noted that out of the 40 percent financial inclusion target for pension industry in 2020 [as shown in table 2], 8 percent has been achieved, showing huge potential that needs more education and enlightenment”.
Thus, there is an urgent need for a national campaign and sensitization on the immense benefits of the micro-pension scheme. In the same vein, PENCOM and PFAs are also both required to carry out public enlightenment and education on the establishment, operations and management of micro-pension plan as stated in the micro-pension guidelines. The foregoing is to increase the penetration and financial inclusion in the pension industry despite the bottlenecks that have hindered appetite for savings, such as weak economic growth, rising unemployment, poor access to funding for business, declining standard of living among households and high inflation.
Administration
Technology enables people to access financial services including pension products and it is a driver behind realizing financial inclusiveness. Thus, potentially high front-end capital investments in information technology (IT) infrastructure as well as manpower by PFAs are required in establishing efficient micro-pension administration and delivery platforms to mobilize micro-pension contributors at the grassroots. In fact, the timing of implementation and robustness of IT infrastructure by PFAs as specified by PENCOM to meet the expected increase in micro-pension contributors in the short term may be a concern.
There is high tendency for micro-pension contributors to operate RSA as a bank savings account because of the over flexibility of the contingent withdrawal option provided in the Guidelines. For instance, the Micro-pension Contributor may withdraw the total balance of the contingent portion of his/her RSA including all accrued investment income thereto, making the first withdrawal 3 months after the initial contribution and subsequent withdrawals once in a week from the balance of the contingent portion of the RSA. In view of the above, the contingent withdrawal option would create administrative hassle for the PFAs because the amount of records keeping required would actually lead to incurring high administrative costs and processing time.
The above administrative hassle could be avoided or reduced if at the point of registration micro-pension contributors are asked to complete a weekly or monthly income and expenditure planner which would indicate and/or guide how much they can conveniently safe in a week or month. The forgoing is also in line with section 6.3(d) of the micro-pension guidelines (“The amount of contribution shall be dependent on the Micro-pension Contributor’s pension aspiration and financial capacity”).
Reputational risks
Section 6.5.3 (ix) of micro-pension guidelines relating to Guaranteed Minimum Pension (i.e. Micro-pension Contributors are entitled to Guaranteed Minimum Pension) has not only created a unique selling propositions for the PFAs (as explained above) but also a high expectation for all micro-pension contributors to benefit from GMP at retirement if their RSA balances are too low to afford a decent living in retirement. This expectation is high in the minds of all micro-pension contributors when joining the micro-pension plan despite section 6.5.3 (x) of micro-pension guidelines stating that (“Where the total amount contributed is below the amount required to qualify for Minimum Pension Guarantee, the Micro-pension retiree shall be paid enbloc in accordance with the Regulation for the Administration of Retirement and Terminal Benefits”).
Furthermore, with the contingent withdrawal option, it is more likely for micro-pension contributors to have lower RSA balances at retirement than the mandatory contributors. Thus, the micro-pension retirees will be aggrieved when they are disqualified from GMP at retirement and their expectations are not met leading to a reputational risk for the entire pension industry. This is because the micro-pension contributors would expect same eligibility criteria for GMP (as stated section 84(1) of PRA 2014) to be used for both micro-pension contributors and mandatory contributors.
Strain on pension protection fund (PPF)
As far as the micro-pension contributors are eligible to guaranteed minimum pension (GMP), it is not likely that the pension protection fund established to finance the GMP as stated in section 82 of PRA 2014 will be sufficient to cover the liability. This is mainly because of the number of micro-pension retirees that would qualify for GMP benefit will be higher than expected due to the unique selling proposition (USP) discussed above, leading a strain on the PPF.
Investment of micro-pension Fund/Assets
Considering the facts, as stated in sections 6.3 (c) and 6.5.2 (iii) of the micro-pension guidelines, that “every contribution shall be split into two comprising 40% for contingent withdrawal and 60% for retirement benefits” and the total balance of the contingent portion of micro-pension contributor’s RSA including all accrued investment income can be withdrawn on a regular basis (once a week), the investment of the contingent withdrawal portion is likely to be only in cash and/or money market instruments while the retirement benefits withdrawal option will follow the Fund V – (micro-pension fund) in the multi-fund structure.
Furthermore, investment guidelines (Fund V – micro-pension fund in the multi-fund structure) for micro-pension contributors do not consider their risks profile (in terms of age and duration) until they have the opportunity to be converted to mandatory contribution status, whereby “At conversion, the PFA shall move the Micro-pension Contributor’s RSA balance to the appropriate fund under the Multi-fund Structure”. The above would discourage a young and financially literacy employee working in the informal sector to join the micro-pension plan if has alternative ways of meeting his retirement needs.
Regulation
PENCOM needs to carry out adequate supervision and periodic reviews to monitor and ensure an efficient and effective implementation of the MPP. There is a lot of work to do by the regulator and PFAs in order to bring confidence into the pension system. A network of branch operations by PFAs with high standard of service delivery will help to bring confidence in the system.
4. Micro-insurance as Tool in Deepening Financial Inclusion
“The International Labour Organization (ILO an agency of the United Nations) defines micro-insurance as …a mechanism to protect poor people against risk (accident, illness, death in family, natural disasters etc.) in exchange for insurance premium payments tailored to their needs, income and level of risk”.
However, micro-insurance guidelinesdefine micro-insurance as “insurance developed for low income populations, low valued policies, micro and small scale enterprises provided by licensed institutions, run in accordance with generally accepted insurance principles, and funded by premiums”.
Micro-insurance is the term used for the growing market in insurance products that are characterized by low premiums and low coverage limits, for reasons of affordability, thereby protecting savings and reducing the need to use expensive money lenders. Micro-insurance is not an insurance product type in itself; it is the fact that it is aimed at those in low incomes that makes it micro insurance. The Insurance premiums can be for as little as $1 or $2 per month. By its nature micro-insurance is particularly important for the developing world and is currently developed in India, Vietnam, and some parts of Africa (e.g. Senegal, Zambia, Uganda) and thus the introduction micro-insurance in the Nigeria is a step in the right direction.
Generally, micro-insurance products are being designed and marketed to target the low income socio-economic groups of the society. Thus, this more inclusive approach might form part of an insurance company’s ethical strategy and/or regulator’s initiative to drive financial inclusion strategy in the country thereby creating the following opportunities and challenges as highlighted below.
4.1. Opportunities Arising from Micro-insurance
Increased insurance penetration
Micro-insurance can provide an insurance company with the opportunity to break into new markets and hence generate more profits which in turn increase the insurance sector penetration and contribution to the country’s GDP.
Provision of social benefit
Based on pooling or community approach, micro-insurance is generally targeted at low wealth segments of a population and provides a wider social benefit in providing access to insurance cover for such socio-economic groups i.e. insurance protects the disposable income of the poor, provides peace of mind in an uncertain environment to pursue and achieve a better standard of living. Furthermore, it must be culturally/religiously suitable for the micro-insurance market.
Ease of securing small business loan
Micro-insurance is sometimes sold alongside microfinance, sources of financial services for entrepreneurs and small business lacking access to banking and related services. So an individual can borrow a small sum to help set up a business, and can insure the repayments against death or sickness. Lenders may only be willing to give such loans if insurance is in place.
Affordable cost of Insurance
The local population who purchase the micro-insurance will benefit from having insurance at a lower cost than a traditional/conventional product. Micro-insurance enables individuals who would not otherwise be able to afford it to purchase some degree of financial protection. Those on low incomes are more vulnerable to adverse events, having fewer savings to support themselves in times of need. Without insurance, individuals may have to use savings, or sell assets or livestock which they have. It also helps to avoid the need for such individuals to rely on money lenders, who may be expensive and unscrupulous. Some provision of micro-insurance cover can be especially reassuring to families, particularly where the State welfare support system is limited.
Reduction of poverty
Savings and loan schemes for the poor are not sufficient on their own to prevent them from falling back into the viscous circle of poverty in times of crisis or severe loss. Providing insurance can ensure that the foundation on which poverty alleviation is built is strong enough to keep the individual out of poverty. Insurance can also protect those that have risen above the poverty level against unforeseen events that may cause them to fall into poverty again.
4.2. Challenges of Micro-insurance
Adequacy of tier minimum capital base for micro-insurers
It is quite likely that the policy thrust and/or rationale behind the Minimum Capital base of micro-insurance underwriters in micro-insurance guidelines, namely Unit Micro-insurer, State Micro-insurer and National Micro-insurer, followed the same principle adopted in the cancelled Tier-Based Minimum Solvency Capital (TBMSC) policy for conventional insurance companies considering the timing when the two policy guidelines were initiated.
Table 3: Categories of Micro-insurers and Minimum Capital Base
Type of Micro-Insurers
Life
Insurance Limit
General Insurance Limit
Composite Insurance Limit
Unit Micro-insurer
N15m
N25m
N40m
State Micro-insurer
N40m
N60m
N100m
National Micro-insurer
N200m
N400m
N600m
Source: Guidelines for Micro-insurance Operation in Nigeria, 1st January 2018
Thus, some of the criticisms levelled against the TBMSC policy (such as not allowing a level playing field for all conventional companies in the insurance industry) may be applicable to the current tiered micro-insurance capital structure as shown in table 3 above. In the same vein, customers would prefer to purchase insurance from National Micro-Insurers than Unit Micro-insurers due to potential risk of failure to meet claims payment obligations by the latter due to limited capital base, a scenario which is likely to arise also from no level playing field amongst micro-insurance providers.
Furthermore, the capital base may not be adequacy to meet the cost of insurance operations including new business acquisitions, particularly for Unit micro-insurers. The efficiency ratios for micro-insurers might appear worse if the costs of managing thousands of small policies are high relative to the premiums.
It is worthy of note that the Insurance Act 2003 and regulations 2003 regarding the minimum level of mathematical reserves that must be held, often combined with minimum solvency capital requirements, have the effect of (a) limiting the capital available within a company to write new business and (b) effectively placing a minimum requirement on the finance required to write a contract. Basically, the above has an indirect constraint on the amount of business that may be written.
Thus, there is a requirement for long term insurance underwriters to set aside money (free reserves, free capital or free assets) to meet the initial capital strain (or new business strain). The initial capital strain is the mathematical reserves plus any required solvency capital less the initial net cash outflow (i.e. premium income less outgo), when writing a new policy.
The capital (free assets) that an insurance company has available to write new business is the supervisory value of its assets minus the supervisory value of its liabilities including any solvency capital requirements (SCR).
The larger the value of supervisory reserves plus SCR that the insurance company has to hold on the existing in-force business, the smaller the free assets and hence less capital is available for writing new business. On the other hand, the bigger the reserves plus SCR that have to be set up for any new contract, the greater the amount of the limited capital available that will be used up when each new contract is written.
The above is an indication that the tiered micro-insurers are more likely to have the challenge of inadequate capital to write the desired level of new business volume than the conventional insurers.
Main risks facing micro-insurers
New business risks – A micro-insurance company will need to ensure that the capital and administrative requirements of writing new business are within the resources available to it. An inappropriately high volume of new business could lead to the available resources becoming inadequate. On the other hand, inappropriately low volumes of a newly introduced product line may pose a risk of not recovering the fixed development costs that will already have been incurred.
Mis-selling and reputational risk – One of the greatest challenges for micro-insurance is the target market’s lack of insurance information and understanding. This leads to weak demand for products by customers who do not get appropriate cover that meets their needs. It also opens the door to deliberate mis-selling by micro-insurance agents striving to reach sales targets or higher commission levels. This further deteriorates the reputation of insurance companies leading to increase in policy lapse rates.
The risks can be mitigated by providing the agents with suitable training of the insurer’s products and good selling practices, including good, clear sales literature.
Downscaling of un-recapitalized conventional insurers to National Micro-insurer
Now that TBMSC policy is cancelled, it will be appropriate to revisit the tiered minimum capital base approach for micro-insurance by encouraging existing conventional insurance companies that will not be able to recapitalize under the new recapitalization regime to register as national micro-insurers in order to serve the low-income segments (downscaling), thereby supporting the evolution of more inclusive insurance systems. The above would no doubt increase the number of micro-insurance providers needed significantly which in turn would accelerate the insurance penetration at the grass-roots in the country. Such un-recapitalized conventional companies would leverage more on their existing IT infrastructure, quality staff and with relatively lower expected strain on resources.
It is also observed that micro-insurance guidelines state that “Registered Insurance Companies shall be granted national micro-insurer licence upon application”, which is in line with and/or similar to the concept proposed above. However, allowing the recapitalized conventional insurance companies to enter the micro-insurance market has its implications and consequences, in terms of unethical business practices, undue price competition (e.g. rate cutting) at the detriment of other micro-insurers.
Product pricing and profitability
The main issues for the micro-insurance company will relate to pricing and profitability. Community or group pricing is usually adopted where pricing of a product reflects the risks specific to the target market, as low-income households are more exposed to a wider variety of risks than policyholders from conventional insurance business.
It can be difficult to set the premium and benefit levels accurately, and the design needs to be kept simple. Given the low premium/benefit nature of micro-insurance, margins per policy are generally also low and so micro-insurance companies need to aim for high sales volumes. Achieving this may not be straightforward, as there may be limited or no trust in insurance companies. It may take several years before a company builds sufficient scale to be profitable.
An insurer needs to invest in research and development (R & D) in order to design innovative product design for a target market and differentiate itself from competitors. The first mover advantage in entering a niche market with innovative products would enable the micro-insurer to easily recoup the costs of product development.
The profitability of a product will be a function of the volume of sales and the profit margin per policy. The premiums charged must be sufficient to cover benefits and expenses, and meet the required profit criteria.
Micro-insurers are likely to incur significant transaction costs due to the high frequency of collecting premiums where there is likely to be a lack of bank accounts and assessing and paying out small claims. Therefore, having a low-cost operating model is vital in achieving desired profitability levels.
.
Administration and Distribution
Distribution of micro-insurance products and collection of premiums can be more difficult and expensive than for conventional insurance. Thus, micro-insurers need to adopt very efficient methods of selling policies and collecting premiums. One approach has been to use mobile phone companies to sell insurance and to collect premiums.
The use of direct online marketing and selling of micro-insurance products and the training of sales personnel to keep control of sales process in order to avoid mis-selling would increase the insurance penetration.
There is need to set up systems to record in-force data e.g. premiums and benefits. There could be more data to capture as premiums and claims will likely be paid more frequently. Therefore, there is need for micro-insurers to invest heavily in good IT infrastructure for efficient record keeping while the registered (conventional) insurance companies granted national micro-insurer licence are likely to leverage on existing IT infrastructure.
Customer education and awareness
The potential policyholders in micro-insurance market may often have limited familiarity with formal insurance principles, even how insurance compares to bank savings account. They may believe that insurance is only for the rich and often don’t trust insurance companies, being highly suspicious of their motives. They are so skeptical about paying premiums for an intangible insurance product with future benefits that may never be claimed. There is, therefore, potential for expecting more than is actually provided by limited benefits (e.g. sum assured is limited to N2 million per person per micro-insurer, as provided in the micro-insurance guidelines).
Thus, the low-income market is particularly vulnerable to at least two forms of abuse. First, agents or insurance sales persons may provide misinformation or mislead low-income clients, while displaying aggressive sales practices. Second, low-income persons are often forced to purchase insurance when borrowing, or they are not informed that they have other options. With micro-insurance products, one often finds extremely low claims ratios, suggesting that many policyholders are unaware of the coverage.
In view of the above, awareness should be created about consumer rights. However, educating the market and overcoming its bias against insurance is therefore a major challenge. Promoting consumer education about the value of insurance is time-consuming and costly, although the return in terms of reduced lapse rates may be considerable.
Tier corporate governance Structure
Good corporate governance is also very important in micro-insurance operations of the micro-insurers which is similar to the conventional insurance companies, reflecting the nature, size and complexity of the operations (i.e. by applying the principle of proportionality). Micro-insurance guidelines have provided a tier corporate governance structure for the senior management of the three categories of micro-insurers whereas the conventional insurers have uniform corporate governance structure.
For example, The Chief Executive Officer for a national Micro-insurer shall have a minimum of 7 years relevant post qualification working experience for Associates of the Chartered Insurance Institute of Nigeria or its equivalent while the Chief Executive Officers for Unit Micro-insurer and State Micro-insurer shall have a minimum of 5 years. On the other hand, “The Head of Technical Department shall have a minimum of 5 years relevant post qualification working experience for Associates of the Chartered Insurance Institute of Nigeria or its equivalent” for the three categories of micro-insurers.
However, there is no clear guideline for the micro-insurers’ Board membership composition provided in the micro-insurance guidelines which means more clarification may be required in this regard. Whilst it is very important for regulators to ensure that the boards are well managed by capable persons, they also need to recognize that overburdening small insurance operations (micro-insurers) with governance arrangements designed for large conventional insurance companies may not be appropriate and therefore specific standards may need to be provided for the micro-insurers.
Regulation
The success of the micro-insurance market is largely dependent on the regulatory activities in that market, particularly the implementation, evaluation and monitoring of the micro-insurance guidelines being operated by all relevant stakeholders.
Solvency margin: It is observed that the solvency margin for non-life micro-insurance business (not less than 25% of premium income as stated in micro-insurance guidelines) is definitely more onerous than the solvency margin for non-life conventional insurance business (not less than 15% of premium income as stated in section 24(2) of Insurance Act 2003). This is an additional 10% of gross premium income (GPI), at the minimum. It is unclear if a different micro-insurance solvency margin would need to apply to a registered General Insurance company which is granted a national micro-insurer licence. Such ring-fenced arrangement carries additional operational burden. It is also not clear why the above discrepancy is not applicable to life insurance business.
Risk-based supervision – As the TBMSC is cancelled, it is more likely that the regulator would develop or propose a different framework for risk based supervision that will be suitable for the recapitalized conventional insurance companies in the insurance industry next year, reflecting a level playing field in business acquisition and the minimum level of capital based on overall level of risk retained which may be measured in terms of risk exposure, or by size of premium income or technical provisions/reserves.
When the foregoing is being implemented for the conventional insurance companies, the regulator should also ensure that the principle of proportionality be applied in the supervisory regime for the micro-insurance market.
Actuarial valuation – Micro-insurance guidelines state that an actuarial valuation should be carried out for life micro-insurance business once in every period of 5 years by an appointed Actuary. However, section 27(1) of Insurance Act 2003 states that an actuarial valuation for conventional life insurance business should be carried out once in every period of 3 years.
The choice of inter-valuation period of 5 years for life micro-insurance portfolio is quite reasonable if the high cost of actuarial valuation of the conventional life insurance portfolio being charged by the actuary is the overarching consideration.
However, all things being equal, the above decision would require that the regulator needs to scrutinize the Micro-Insurer’s risk management activities and operations on more regular basis in order to ensure that solvency is being maintained during the inter-valuation period.
Furthermore, in practice, an actuarial valuation for the non-life conventional insurance business has been carried out once a year in order to estimatethe Liability Adequacy Test (LAT) in line with IFRS requirements. However, there is no actuarial valuation guideline for the non-life micro-insurance business equivalent provided in Micro-insurance guidelines. The above needs clarification, even if it is obvious, for the purpose of consistency.
5. Conclusion
There is clear evidence that low-income socio-economic groups need a range of financial services, which is affordable and yet easily accessible, and should typically include credit, savings, remittances, insurance and pension. Thus, without micro-insurance and micro-pensionplans any improvements in alleviating poverty may be quickly lost due to the impact of risks.
