30 May 2018
31 October 2018
Blog article discussing a breakthrough for Micro Insurance in Indonesia.
Micro insurance is the insurance product for those who have low income. The majority of the poor in developing countries such as in Indonesia work in the informal or agricultural sectors and they do not have the access to provider of formal insurance i.e. insurance companies. They cannot afford to purchase commercial insurance nor have the full access to social protection benefits (such as health, disability, or unemployment coverage), which are provided by employers and often co-financed by governments.
Of all socioeconomic groups and levels, the poor are most vulnerable to financial shocks but the least protected. They usually tackle the financial crisis by reducing their spending, drawing on savings if any, selling their assets even the productive ones and/or taking out emergency loans.
Micro insurance is a viable strategy to fill this gap and deliver insurance that is affordable, accessible, and appropriate to the needs of the poor. It is defined as the protection of the poor against specific risks in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved. Micro insurance is managed according to insurance principles and funded by premiums. It can cover any risk that is insurable at a reasonable cost, including illness, accidental injury, death, and property or crop loss.
Micro Insurance in Indonesia defined as Insurance or Takaful product which is designed to provide protection on financial risks faced by low income people. The characteristic that is required for the product are: simple, easy to access, affordable/economical and fast claim settlement. Main product features is that the maximum premium per policy is IDR 50,000.- and maximum Total Sum Insured is IDR 50,000,000.- per life insurance policy or per insured object for non-life product.
In terms of policy wording, micro insurance policy is written in simple Indonesian language or Bahasa which is easy to read and understand. Policy wording in addition to Islamic Aqad or contract has clauses which is not more than two pages. Exclusion of scope of cover is not more than two items. The required claim documentation is not more than 4 documents. And claim payment is maximum 10 days after required claim documents received by insurers. The distribution or marketing of Micro insurance product is distributed through at least 4 channels i.e. direct marketing, insurance agent, bancassurance and other business entity other than bank such as branchless banking agent, multi-finance, microfinance, pawnshop, primer cooperatives, retail shop, telco company, and foundation) and special Micro insurance sales force. In addition, Tele marketing or online marketing can also be used by insurance companies which use digital technology or mobile technology to offer Micro Insurance products with the requirement that they should provide clear information concerning insurance benefit, premium/contribution, and reference by which policy holder can access further information on detail product specification, policy wording and claim procedures.
OJK – Indonesian Financial Services Authority (FSA) – has already set up a plan for the future by designing the way forward i.e. Micro Takaful development as part of financial inclusion programs which is linked and interconnected with other initiatives on financial inclusions such as digital payment, branchless banking, microfinance etc. And also the need for coordinating forum between OJK, associations, insurance/Takaful companies and distribution channels as well as communities becomes the key for product design, knowledge sharing, joint public awareness campaign and the existence of a coordination among various government agencies to strengthen financial inclusion initiatives. (Taken from OJK’s article).
According to the OJK website, Perkembangan Program Asuransi Mikro or Micro Insurance Program Development for Life and Non-Life – it is recorded that Micro Insurance in 1st quarter of 2017 has reached up to 19,378,478 participants with gross premium of IDR 278.23 Billion (20.6 million USD). This shows the fact that Micro Insurance is only up to 0.6% of both Life and Non-Life Insurance Premium for 1st quarter of total IDR 40.94 trillion. Can the penetration level be accelerated? Any breakthrough available?
From few definitions, we can take some of them as follows:
- Parametric insurance is a type of insurance that does not indemnify the pure loss, but ex ante agrees to make a payment upon the occurrence of a triggering event. The triggering event is often a catastrophic natural event which may ordinarily precipitate a loss or a series of losses.
- Parametric insurance or parametric risk transfer is a type of insurance, reinsurance or risk transfer arrangement that does not indemnify the full loss for the protection buyer.
- Parametric policies are index-based solutions that trigger a payout if an event meets or exceeds certain pre-defined event parameters. These can include severity thresholds like wind speed exceedance, hurricane category, or earthquake shake intensity, as measured at specific locations where the insured has covered assets.
Other strength of Parametric insurance is simple claim payment: If the policy is triggered, you get paid in 30 days or less. It’s that simple (taken from Swiss RE CORSO). The pay-out terms are the key here, with parametric insurance featuring a parametric trigger. Thus a trigger mechanism defines when the contract is to pay-out to the protection buyer. This trigger is typically based on parameters directly related to the risk that the protection buyer seeks to acquire coverage against, such as hurricane wind speed, hurricane minimum central pressure, temperature, rainfall total, geographic location of a storm etc.
Do low income people need protection of catastrophic event? Yes, because everyone needs it. Can Micro Insurance provide? Knowing the minimum, or even uneconomical premium level compares to catastrophic event: it looks like Normal Micro Insurance cannot afford to pay the claims.
So? A combination of Micro Insurance endorsed with Parametric Insurance can provide a wider cover for the poor. The Micro Insurance can still be distributed as per original plan, wherever it is considered practicable. But additional cover can be added into the program with the support from Parametric Insurance. Who will pay the Parametric Insurance’s premium? This can be arranged into the Government Budget plan and/or Public Private Partnership or pure Private.
Micro Insurance with additional cover of Parametric Insurance is a product that can reach at least two goals, to give catastrophic protection for the poor and a breakthrough of increasing the Micro Insurance’ penetration in developing countries.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.