Creating Regulatory Frameworks for Microinsurance Mainstreaming the Margins: Social Security Annual Policy Conference on Greater Inclusion: Possibilities

Creating Regulatory Frameworks for MicroinsuranceCreating Regulatory Frameworks for Microinsurance

Mainstreaming the Margins: Social Security

Annual Policy Conference on

Greater Inclusion: Possibilities and Prospects New Delhi, India

17 January 2007

Arup ChatterjeePrincipal Administrator

International Association of Insurance Supervisors

Basel, Switzerland

Creating Enabling Frameworks for MicroinsuranceSession on Greater Inclusion: Possibilities and ProspectsSession on Greater Inclusion: Possibilities and Prospects

Annual Policy Conference on Greater Inclusion: Possibilities and ProspectsAnnual Policy Conference on Greater Inclusion: Possibilities and Prospects

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17 January 2007Arup Chatterjee

International Association of Insurance International Association of Insurance SupervisorsSupervisors

• 1994: IAIS was created

• 1998: Secretariat in Basel

• Objectives– Cooperate to contribute to

improved supervision of the insurance industry for benefit and protection of policyholders

– Promote the development of well-regulated insurance markets

– Contribute to global financial stability

IAIS is recognised as the international standard setter for insurance regulation



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IAIS’s strengthsIAIS’s strengths

• Depth & breadth of membership

• Members from more than 100 countries

• Members regulate more than 90% of the world’s insurance markets

• More than 100 Observers


Framework for Insurance SupervisionFramework for Insurance Supervision

the insurance sector and insurance supervision

basic conditions for the effective functioning of

financial governance market conduct

supervisory assessment and intervention

the insurance supervisory authority

preconditions

regulatoryrequirements

supervisory action

LEVEL 1

LEVEL 2

LEVEL 3

the insurance sector and insurance supervision

basic conditions for the effective functioning of

financial governance market conduct

supervisory assessment and intervention

the insurance supervisory authority

preconditions

regulatoryrequirements

supervisory

LEVEL 1

LEVEL 2

LEVEL 3 Common SolvencyStructure and Standards



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Developmental Role of Supervisors

“Yes … but what steps are required to adapt regulations for promoting microinsurance?“



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IAIS-CGAP Joint Working Group on IAIS-CGAP Joint Working Group on MicroinsuranceMicroinsurance

- Established in February 2006- Issues Paper on the regulation and supervision of

microinsurance (likely adoption in February 2007)- Develops a common understanding of microinsurance- Recognizes that microinsurance activities should not be held to a lower supervisory standards- Focus on prudential, governance, market conduct and operational issues- Identifies areas where IAIS Insurance Core Principles can be customized to the supervision of microinsurance

- Further work on developing guidance on regulation and supervision of microinsurance



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Inclusive Financial Systems + Poverty

AlleviationThe Situation• Coverage of formal

insurance services in emerging markets low- India: premiums 3.38 % of

GDP- Compared to 15 EU

countries with approx. 8 %

• Millennium Development Goal 1 “ Eradicate extreme poverty and hunger” – Microfinance Indicators = “percentage of households with access to

quality financial services, including credit, savings and insurance



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Actors

Policymakers aim at easing public budgets while seeking to provide safety-nets for low-income segments

Donors promote private sector development, microfinance and increasingly microinsurance by fostering innovations and the application of good practices

Insurance providers struggle to innovate, grow, expand and formalize

Supervisors have an important role to expand the frontier of formal insurance services for low-income households and promote innovation



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Scenarios in MicroinsuranceA- Funeral and health insurance based on associations, mutuals or friendly societies

often under a different regulatory authority or unregulated; operating outside of the insurance laws and beyond insurance supervision

growth can be problematic for customer protection (weak controls by members, managing large schemes is a complex task)

Oversight of insurance supervisors required!

B - Microfinance institutions develop credit life insurance products

mostly unregulated NGOs customers demand more products Unregulated growth and expansion

problematic Formalization or linkage with insurer required!

C - Commercial insurers develop products for poor customers and struggle with certain regulatory provisions

Regulatory adaptations required!



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Regulatory Frameworks for Microinsurance

Barriers: - High capital requirements- Agent/ broker licencing and

training requirements for agents

- Composite insurers/ products not encouraged

- Operators outside ambit of insurance laws

- Cost of regulatory compliance

- Taxation

New approaches:

1) Agent regulations for microinsurance in India

2) New tier of Microinsurance Institutions = Mutual Benefit Associations in the Philippines

3) Taxation relief for life-group microinsurance in Brazil



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Early learning

“Regulation of

microinsurance” is a complex

task, with many different

issues and actors involved

“Regulation” does not

necessarily mean an

entirely separate

regulatory framework

Regulation of microinsurance aims foremost at sound development of insurance market and consumer protection

Lessons from microfinance

•Experimentation in product offerings is one factor that allowed microcredit to grow into a sustainable industry

• Don’t regulate what you cannot supervise (cost aspect)

• Microfinance (microinsurance) is a line of business and not tied to ONE institutional type

•Careful design of a regulatory framework takes time and resources



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Challenges in Regulating Microinsurance

- Striking right balance of extending insurance to the low-income people while protecting their investments and confidence - without putting an undue burden on supervisors

- Semi- or informal schemes can do harm coupled with consumer protection concerns, especially for low-income people

- Doing away with responsibility crossings between different supervisors of microinsurance schemes in the same jurisdiction

- Defining a threshold beyond which informal schemes have to obtain license (clear division between regulated and non-regulated institutions)

- Encouraging innovations (products, delivery models) and adopt new approaches (such as risk based supervision)

- Developing regulatory solutions that fit the great variety of country contexts in terms of different institutional solutions (tiers) and organisational solutions (e.g. products, delivery channels)



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What can supervisors do?

1° …seek political mandate from their authorities (political AND financial

support)

2° …establish dialogue with their formal and informal industry partners

(open mind)

3°…strengthen their capacities in terms of microinsurance (complex task)

4° …can study the potentials and risks in their particular jurisdiction

(no template solutions)

5° …can learn from other supervisors (south-south dialogue)

6°… can facilitate capacity building for operators and policymakers

7°… allow for and encourage innovation



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Creating Regulatory Frameworks for Microinsurance Mainstreaming the Margins: Social Security Annual Policy Conference on Greater Inclusion: Possibilities