Response to Letter To The Editor

Letter To The Editor

Dear Editor,

Shiraz Jetha's article "Microfinance and Microinsurance" in the December/January issue was worthwhile in bringing these matters to the attention of readers, but needs to be both corrected and complemented on a number of points.

While "microfinance" is defined by some to include insurance, I believe it more commonly is understood as being restricted to lending and, often, saving (microfinance institutions, MFIs, are in many jurisdictions restricted by law to only lending). Various forms of microfinance date well over 100 years further back than the 1960s and 1970s identified by Jetha. Cooperative savings and credit societies, credit unions, caisse populaires, cooperativas des ahorros y creditos, etc., all have long histories and have greatly benefited the poor and lower middle classes.

During the Great Depression of the 1930s in the United States, the credit union movement grew rapidly because common people, even many with secure employment, couldn't obtain loans from the seriously damaged banking system. And a new type of "microinsurance" (the term hadn't yet been coined) was then launched in the form of loan protection insurance, that collectively and automatically insured all loans in a credit union against the death of a borrower, thus protecting the deceased's family as well as the credit union ("the debt dies with the debtor"). The modest premium was paid by the credit union and was indirectly a part of the very competitive interest rate.

Professor Mohamed Yunus' excellent and highly successful Grameen model began, as is correctly written in the article, first in the 1980s. However, it is not correct to write that it has evolved into many other forms including purely commercial ones. Professor Yunus has in fact protested when commercial institutions try to associate themselves with his work. The commercial actors have long been around and often exploited the poor, as many are still doing (see, for example, the Business Week report, "The Ugly Side of Microlending," in the December 13th issue).

Unfortunately, Jetha's article creates confusion by relating the Grameen model of group responsibility to microfinance in general. The peer–monitoring of the Grameen model does indeed result in very low default rates, but most microfinance doesn't involve peer–monitoring! He claims that "the social model requires ongoing donor funding," but the Grameen model has continued to function well even after donor funding ceased.

The article's content on microinsurance is also in need of considerable modification, even though we can strongly agree that the know–how of actuaries is sorely needed in this expanding area. Rather than trying to fit a thorough critique into the limits of this letter, let me just make the following points (not all of which are touched on in Jetha's article):

• Microinsurance (MI) has, in fact, existed at least since industrial life insurance policies were sold in the 1800s in the United Kingdom and the United States.
• While there is today a lot of MI sold through MFIs in connection with loans, it is not a necessary precondition or so "typical."
• Microfinance and microinsurance are currently "buzzwords" in development assistence circles, and there is entirely too much hyperbole about how much of a contribution they can make to poverty alleviation.
• Neither the 20 percent of world population with under $1 a day to live on, nor the additional 20 percent with between $1 and $2 a day, are going to be purchasing much microinsurance coverage; the very little income they have must first go to meeting basic needs of food, housing and clothing.
• The key question for MI providers will be if they can produce plans that do indeed provide real value to the poor, i.e., well–designed plans meeting real needs and demands, and that return at least 70– to 80–percent of premiums in benefits, have expenses of at most 20– to 25–percent of premiums, etc.
• It is unlikely that individual insurance products will be able to meet the aforementioned criteria so the main emphasis for some time will need to be on group insurance products for existing groups.
• Most MI today has very low real value to the poor–one clear evidence is that there are many schemes in which only 10– to 20–percent of premiums are used for paying benefits.
• It is mistaken to believe that MI can replace the need for goverments to provide meaningful and adequate social insurance programs for their citizens.
• The overwhelming majority of MI today is in the term life (including loan coverage) and health sectors.
• Property and casualty insurance, including crop and livestock coverages, as well as unit–linked or traditional whole life/endowments are scarcely plans that are relevant to the 40 percent of world population primarily in question.

Is unit–linked, whole life or endowment insurance something that is, or should be, high on the radar of poor people? Even if it is, and they can at all afford to save, do the countries they live in have the developed financial markets in which the funds can be invested with a reasonable level of safety, diversity of risk and expection of long–term returns at least above the rate of inflation? Are the insurance companies subject to modern legislation and regulation? Are insurance intermediaries properly trained and regulated? Are there IT–systems in place that can manage these complex products?

I have been involved in actual microinsurance activities since the mid–1960s and a member of the CGAP¹ Working Group on Microinsurance since it commenced its work in March 2002. Nothing would please me more than if significant progress were made in providing real value microinsurance solutions for the poor that meet real needs and demands, but I am troubled by the large number of fortune–seekers that have been attracted to the area and how uncritical some of the donors and aid agencies are. This is certainly a field where actuaries, with their unique competence can make a major contribution. Here at least, there is no disagreement between the author and me.

Ellis Wohlner, ASA, MAAA
Member of the Swedish Society of Actuaries
Stockholm, Sweden

Footnotes

• ¹ CGAP = Consultative Group to Assist the Poor. It was started in 1995 by nine leading development assistence agencies and microfinance practitioners. Today it is a consortium of 33 public and private funding organizations.

Response from Shiraz Jetha

First, I would like to thank Ellis Wohlner for elaborating on certain parts of my introductory article and for the perspectives shared from a closer knowledge of the microfinance/microinsurance (MF/MI) sectors. I have also been gratified by the e–mails I have received on the article. My response/comments follow.

1. Definition of microfinance. There does not seem to be any difference of views here. I should add that the practitioners I have talked to believe that providing an "institutional" ability to save small amounts is equally, if not more, important than the lending function in poverty alleviation. Money–transfer function (i.e., the ability to process cash in a secure, efficient way) plays an important role in facilitating commerce and is considered part of MF; however it has not been as well–developed everywhere. I would also make a distinction between microloans for income generation purposes and those for consumer expenditure. The microfinance story concerns with the former.
2. Grameen and Group lending model. Grameen's is really a remarkable story. The interested reader is encouraged to research the institution's Web site and the books published by Professor Yunus. It can only be covered very briefly in an introductory article such as mine. I hope the inference from my article is NOT that the group lending model is the only model.
3. Evolution of Microfinance models. One area where my article might have done better is to clearly convey the concept of poverty spectrum which relates to varying levels of poverty, i.e., from the very poor, the destitute to the working poor. Microfinance Institutions (MFIs) that focus on the former are quite different to those catering to the latter. Many organizations that start out addressing the poor migrate (or evolve) over time to those relatively better off, i.e., working poor. Developing agencies describe this as mission creep. Catering to the poorest requires programs that involve significant social aspects. As an example, in Kenya, Jamii Bora Trust, an MFI, concluded that substance abuse was a significant problem in the families of its membership–causing disharmony, emotional stress, physical abuse, theft (of the day's hard–earned income) in and outside the home and criminal behavior. If one wants to work at this level of poverty in Kenya, success can be very slow, especially without support programs, and requires ongoing funds over and above those generated by the lending activity. Donor agencies shy away from slow yielding and/or non self–sustaining programs; and hence the mission creep.

On the other hand, institutions which cater to the upper end of the poverty spectrum focus exclusively on lending activity leading to a more disciplined bank–type model which can either have an overall social philosophy/goals or it can be a pure commercial enterprise. Sustainability is easier, particularly in the latter form. I would describe the Grameen and the (still evolving) Jamii Bora models as socially focused corporate models.

As Wohlner states, there are all kinds of institutions–from those that want to, through MF, help increase economic activity (and reduce poverty in the process) to those that are purely after profit. In some institutions of the latter type, interest rates in excess of 100 percent are not entirely unheard of.

4. Microinsurance. Wohlner notes several points in his critique. In the interest of brevity I will respond with brief comments. First, I might perhaps have done a better job in my article of bringing out the elements of simple design, comprehensive coverage and affordable premiums as important aspects of MI products. Next, my view is that while individual insurance may not be appropriate in all parts of the poverty spectrum (it is certainly inappropriate for the very poor!) or in all countries, well–designed, affordable products can fill a need in the upper end of the spectrum. An example is the individual funeral insurance marketed in Kenya. Affordability and value are necessary attributes of products serving the poor. I am not sure we disagree much.

MI is a developing field; its role in poverty alleviation is being acknowledged by institutions engaged in development work. By providing protection from certain perils, lenders are motivated to loan funds while the borrowers are protected from financial ruin and starting over in their effort to escape poverty. Until now, as Wohlner states, most of the work has involved life primarily and health coverages next–through group products. However, experimentation is taking place in newer coverages related to crop and dairy farming so that lenders may service these sectors with more confidence.

I am aware of two sizable grants from the Gates Foundation for research in the area of MI. ILO, the Aga Khan Development Network, and Opportunity International all have projects underway in this area. The need for MI is not an issue in my mind; the design, costing and funding of the programs is where the innovation challenge lies.

Wohlner mentions the role of government in certain areas; indeed it is the very failure of governments, one would argue, that is responsible for the desperate plight of the populations of developing countries. Poverty in Kenya is around 45– to 50–percent in a country of 31 million. This failure has provided the impetus for non–governmental organizations (a whole different subject!) and philanthropic institutions as well as private individuals (e.g., Professor Yunus) to go out there and do it themselves.

Final thoughts. Are microloans the magic pill in poverty alleviation? In my opinion, no! Not everyone can turn a loan into a productive activity. But they are thought to play an important role in the battle against poverty. Grameen, for example, feels strongly that its programs have helped borrowers move out of poverty. Other elements that can improve poverty outcomes include good infrastructure, fairly constructed foreign investment initiatives (that result in job creation and benefit the nation), elimination of corruption and education.

Shiraz Jetha, FSA, actuary, Washington Insurance Commissioner.