Insurance Product

Date last updated: 27 Mar,2007 – vinodhn

Business Need

Most MFIs provide loans to their customers/groups. But by providing loans alone is not sufficient to break the cycle of poverty in the lives of their customers. Microfinance professionals are discovering increasingly that providing access to credit exposes the poor to new, unfamiliar risks that can seriously threaten any transformation they may have begun in their life.

When a poor client is taking a loan, either as a group or as an individual, they not only occur debt but they also sometimes use their property/other belongings as a collateral for the loan. A serious illness/death of a working family member can cause serious damages to the benefits that the loan was supposed to bring. The best way to support this kind of scenario would be to have the MFI provide their clients with insurance (or micro-insurance) products. For example, If the breadwinner in the family were to die during a loan cycle, credit insurance on the loan would pay off the loan. There are two key benefits:

• Mitigates the liability for the poor family,
• Also mitigates what would likely become a bad debt for the loan partner, given that the breadwinner has died.

What follows is a small primer on how Insurance premiums are calculated.

Insurance Pricing

Rate ----

The price per unit of insurance is commonly referred to as its rate. The best way to illustrate this is by way of analogy, comparing insurance to beans at the grocery store. The price of a can of beans would be equivalent to the insurance premium, and the price per ounce, the rate.

Exposure

Exposure is the unit of risk the insurance policy insures against. Examples are amount of property and # persons. It's what needs to get multiplied against the rate to get the premium.

Unit of Time

Rates are provided by insurance companies to pay for risk over a specific period of time. For example, if an insurance agent tells you the 6 month premium on 2 cars is $800, then we know the following: Premium = $800; Rate = $400 (2 units); Time = 6 months. These are just averages; however, the theory will still work. If I need to buy insurance for two months, we could determine the annual premium and divide by 12:

$800 X 2 = $1,600 / 12 = $133.33 per month per car

While the annual rate is $800 per car or $400 every six months, the monthly rate per car is $133.33. The important thing to remember is rates are often expressed as annual rates, and they may need to restated for a different period, i.e. in case the company only sells 16 week policies.

Premium calculation

The general formula for calculating premium under an insurance policy takes the following form:

Exposure x rate x modification factor = premium per unit of time

Pricing insurance is very much like pricing other anything else. For example: A 12 oz. can of peas, at 4.5 cents per oz. would cost: 12 x $0.045 = $0.72 And in the same way: If a stereo valued at USD 15,000 was insured at a $0.15 per 100, the annual premium would be:

Rate

Value $100

Standard Premium

.150

150

USD 225.0

Different insurance products have different rating bases, however, the methodology is the same, and pricing can be built into rules for the different products designed.

Feature Summary

The feature would allow an admin to define new insurance products and also enable the admin to edit/view the insurance products. Note: The insurance products would be available only to Individuals.

User Flow: Defining an Insurance Product

• User navigates to the Admin page and clicks on "Define new Insurance product"
• User is taken to the Create Insurance product page, the system displays the following fields * The first section is called "Insurance Product details" and has the following fields
  • Product instance name
  • Short name
  • Description
  • Product category (Drop down with two options: Loan and Non Loan)
  • Applicable for: (Drop down with only one option: Individuals) Question: Is this needed, aren't we looking at insurance just for individuals?
  • The next section is "Premium calculation" and it has the following fields. The information from this section will be used to calculate the premium. _ Rate _ Unit of time * Exposure
  • The next section is "Premium payment schedule" * Frequency of payments : (Two radio button options : Weeks and Months)
  • The next section is "Fees & Penalties" and has the following fields (Similar to loan products) _ Attach fees _ Penalty type _ Penalty rate _ Grace period for penalty
  • The next section is "Accounting" with the following fields _ Product GL code Premium: (Drop down) _ Penalties: (Drop down)
• After entering the above details, user clicks on "Preview"
• A snapshot of the data entered by the user is shown and the user also has the option of editing the entered information by clicking on "Edit insurance product information"
• User then clicks on Submit and is taken to the confirmation page.

Alternate Flow: Defining an Insurance Product

• User navigates to the Admin page and clicks on "View insurance products"
• User clicks on "add a new insurance product" link and is taken to the Create insurance product page.

User Flow: Viewing and editing Insurance Products

• User navigates to the Admin page and clicks on "View insurance products"
• User is taken to the "View edit insurance product" page where a list of defined insurnace products are shown to the user.
• Clicking on a defined insurance product, takes the user to the Insurance Product details page which contains information of the Insurance product sorted under the headers _ Insurance product details _ Premium payment schedule _ Fees & Penalties _ Accounting
• The user also has a option for editing the editing the insurance product information.
• Clicking on this button, takes the user to the Edit Insurance product page where the details of configuration for the insurance product can be changed.

Open Issues

– Main.vinodhn - 27 Mar 2007