By Dr Wimal Wickramasinghe
Introduction
Microinsurance is defined as insurance provided to low-income group of the society and the poor. Though the literature on microinsurance in Sri Lanka is meagre, it is essentially a vast subject in theory and practice. The present writer in his forthcoming book entitled ‘Situation Essays’ on Insurance in Sri Lanka has dealt with this subject comprehensively, especially in the context of Sri Lanka, this essay is the views expressed by the International Association of Insurance Supervisors (IAIS) that has membership of insurance regulators in about 180 countries in the world. The composition of the IAIS and its role in insurance management should be a separate article and it will be done in a separate paper later.

The object of this paper is to examine and narrate the views expressed by the IAIS on the subject of microinsurance, the one most appealing to the insurance regulator and insurance companies in Sri Lanka. Though the subject appears to be technical, it should be interesting to students of economics and insurance as well. The present writer will try do this paper in simple and lucid language so that the normal reader would also be able to understand microinsurance. Our reference to the views of the IAIS is only cursory and limited.

The Consultative Group for Assisting the Poor (CGAP) of the IAIS released on June 1, 2007, a paper entitled Issues in regulation and supervision of microinsurance, prepared by the IAIS-CGAP Joint Working Group Regulators and Supervisors in emerging market jurisdictions. It said that a more conducive and enabling regulatory environment creates an “inclusive” insurance market that works effectively for the upper as well as the lower income segments, with the latter being the focus of “microinsurance”.

What is Microinsurance?
Microinsurance is insurance accessed by the low-income population, provided by a variety of different entities, but run in accordance with generally accepted insurance practices. Importantly, this means that the risk insured under a microinsurance policy is managed, based on insurance principles and funded by premiums. According to a document entitled “Issues in Regulation and Supervision of Microinsurance, June 2007 that has been prepared by the IAIS-CGAP Joint Working Group on Microinsurance in consultation with IAIS Members and Observers and the CGAP Working Group on Microinsurance, June 2007, the supervision of microinsurance may be mandated under the insurance law or some other law, and the cases exist where it is recognised as a permissible activity without being supervised at all.

According to the IAIS-CGAP Joint Working Group on Microinsurance, a closer examination and analysis of different unique aspects of microinsurance and a continuous dialogue with supervisors will assist in determining the key principles in its regulation and supervision.

microinsurance will certainly be useful to the insurance regulators, insurance companies that are interested in microinsurance and others. Though regulators and supervisors in emerging market jurisdictions have little experience, these supervisors and other microinsurance promoters (such as insurers, governments, donors, consumer lobbies) in many of these jurisdictions realise that a more conducive and enabling regulatory environment is required for the development of microinsurance is required.

These initiatives are aimed at adapting laws and regulations which support the evolution of more inclusive insurance systems by encouraging existing insurers to serve low-income segments or by allowing microinsurers to evolve and integrate with the formal insurance sector. Microinsurance can be provided by entities that are for profit or not for profit, and can be privately or publicly funded, or a combination of both. It is well recognised that every jurisdiction has the freedom to decide on the mode of financing for the development of microinsurance within its territory.

The primary audience of this paper is insurance supervisors, particularly IAIS members in developing countries, who are responsible for supervising entities licensed under insurance laws.

This is where the IBSL comes into play. Microinsurance is not confined to any specific product or product line or a specific provider type. Although it aims at providing coverage to low-income households, it is also important to clarify that the term microinsurance in this paper refers to servicing a specific income segment in the emerging market jurisdictions where the insurance markets are not well developed.

The IAIS has developed Insurance Core Principles (ICPs) that will enable insurance regulators to promote microinsurance in line with it. It is said that microinsurance experts have a long track record in insurance and pro-poor financial systems development. This paper explains the current state of microinsurance which is being developed for the low income population on the basis of prudent insurance business principles; its important role in developing inclusive financial systems particularly in emerging markets, and why it needs to be regulated and supervised along professional lines.

Sri Lankan Context
The above is very important to the Insurance Board of Sri Lanka (IBSL) which is yet to prepare and implement a microinsurance policy for Sri Lanka. The present writer has independently suggested to the government and the IBSL that a suitable addition be made to the Regulation of Insurance Industry Act, No. 43 of 2000 giving legal responsibility to the IBSL for development of a suitable microinsurance system for Sri Lanka.

The IBSL should, in consultation with the insurance companies and other bodies such as the IAIS, ADB, some other donor agencies, micro finance institutes, such as Sarvodaya Economic Enterprise Development Services Ltd (SEEDS), and NGOs, prepare a tailor-made scheme of microinsurance for development of a microinsurance scheme for Sri Lanka.

Microinsurance means different things for different supervisors and regulators. In most jurisdictions, microinsurance is not considered as a separate type of insurance and is just viewed as insurance available in small sums. This could be cited as one of the reasons for non-development of a separate set of rules for microinsurance in many jurisdictions.

However, the IAIS paper defines Microinsurance as insurance that is accessed by low-income population, provided by a variety of different entities, but run in accordance with generally accepted insurance practices (which should include the Insurance Core Principles).

Importantly, this means that the risk insured under a microinsurance policy is managed based on insurance principles and funded by premiums. The microinsurance activity itself should therefore fall within the purview of the relevant domestic insurance regulator/ supervisor or any other competent body under the national laws of any jurisdiction. Even the ADB stressed that there is no microinsurance system in Sri Lanka and hinted that it would help the IBSL for preparing a regulatory mechanism, as shown by us in the preceding section.

In this context, microinsurance is aimed towards low-income households that may not typically be covered by other insurance and/or social security schemes – people who have not had access to appropriate insurance or social security services. Of particular interest is the provision of coverage to persons working in the informal economy that do not have access to formal insurance nor social protection benefits provided by employers directly, or by the government through employers.

Low-income workers in the formal sector may also demand microinsurance services. This is the crux of the issue as far as Sri Lanka is concerned. It would appear from the above that it is a challenging task.

Not all microinsurers are regulated by the insurance law. This is the case in Sri Lanka too. India has of course mandated, through the provisions of the IRDA Act of 1999 and regulations enacted afterwards that insurance companies should have a certain compulsory share of insurance in rural and social markets.

While insurance companies tend to exclude low-income households, microinsurance schemes generally strive to be inclusive. Since the sums insured are small, the costs of identifying high-risk persons, such as those with pre-existing illnesses, may be higher than the benefits of excluding them in the first place.

Microinsurance contracts have to be in plain language, (preferably local language) and kept as simple so that everyone has a clear understanding of what is covered and what is excluded. Microinsurance is intended to serve the poorest of the poor in any country who are generally literate but not educated and therefore, Sri Lankan insurance companies or any other allied organizations should issue pamphlets, insurance proposals and policies in vernacular languages, so that they would easily understand what the policy conditions are. Otherwise, they generally become sceptical about the system of microinsurance.

The IAIS suggests some new delivery channels that include “barefoot” agents, microfinance institutions, credit unions, and cooperative staff to sell basic microinsurance products.

Microinsurance is not a new phenomenon. In most markets, including emerging markets, one finds a variety of microinsurance schemes, though not termed as micronisurance products.

Insurance regulators can have a facilitative role in making the regulatory environment more conducive to microinsurance, thereby stimulating its development without compromising on prudential aspects. To fulfil these functions, insurance supervisors would have to:

a) understand the strengths, opportunities, and the threats inherent in microinsurance;

b) study examples in microinsurance regulation and supervision of other jurisdictions;

c) promote a national dialogue on microinsurance in their jurisdiction between policymakers, operators, intermediaries and low-income consumers;

d) implement appropriate regulations for microinsurance, including a possible adaptation of their supervisory practices;

f) facilitate training of supervisory staff in specific aspects of microinsurance, etc.

The insurers who have tried to venture in this area have felt the need to
• understand the demand and risk incidences of an unfamiliar market;
• partner with new agents or delivery channels;
• adjust their control environment to address microinsurance risks;
• educate or train their workforce about microinsurance;
• identify and educate prospective microinsurance customers;
• understand that regulatory minimums, if mandated, can be a constraint.

Without an insurer’s licence, the microinsurer is trapped in a vicious cycle: no licence and no reinsurance means greater risk of failure and the risk of being shut down by the regulator or police services.

One of the greatest challenges for microinsurance is the target market’s lack of insurance information and understanding. This leads to weak demand for such services. Educating the market and overcoming its bias against insurance is therefore a major challenge.

In Sri Lanka, there is no regulation for licensing microinsurers – only the insurance companies to which stringent conditions are imposed for registration. Even the insurance agents have to be individual persons.

When the suggestion made by the IBSL for accommodating corporate entities to engage in the sale of insurance policies, they too will concentrate on the formal sector. Surely, they will have no interest in microinsurance. That suggestion by the IBSL would mostly encourage commercial banks to engage in Bancassurance as such banks are well placed for issue of insurance policies to its clientele under a one-stop shop.

Conclusion
The issue of microinsurance is still at a formative stage despite work on it has been done by the IAIS, ADB and other international agencies. Giving a summary of the observations and proposals by the International Association of Insurance Supervisors is only one facet of microinsurance. They are many views on this issue. Our views on microinsurance in the context of Sri Lanka is not comprehensive at all.