1. P U B L I C S E R V I C E S Workshop on Microinsurance Insurance and Regulatory Development (IRDA) Institute of Insurance and Risk Management (IIRM) United States Agency for International Development (USAID) Hyderabad 14 & 15 October 2005 Management Standards and Prudential Indicators for Developing Microinsurance Denis Garand, Consultant, BearingPoint Inc. John J. Wipf, Consultant, BearingPoint Inc. Indian Insurance Reform Project www.bearingpoint.com

2. P U B L I C S E R V I C E S Page 1 Presentation Outline Rationale for MI Standards and Indicators (S&I) Proposed set of S&I Scoring Example Developing S&I Way forward Microinsurance Resource Center Concept Conclusions

3. P U B L I C S E R V I C E S Page 2 Rationale for Standards & Indicators MI around the world is still in early stages of development. The main challenges still remain: Finding economical solutions for distribution, premium collection, claims settlement Access to quality service providers Affordable health care Relevant product design Accurate pricing Sound financial and risk management Enabling policy Standards and Indicators are expected to boost MI development: Enables benchmarking of MI relative to peers Framework and guide for development and business planning To increase chances of long term HMI sustainability Proposed set: 27 standards and 10 indicators in 8 categories

4. P U B L I C S E R V I C E S Page 3 A. MI Organizational Structure SA.1 Separate MI operations -MI needs dedicated management and accounting -MI is not a sideline activity SA.2 All HMI partners legally registered with respective regulator (s) -Indian Partner-Agent model Others?

5. P U B L I C S E R V I C E S Page 4 B. Marketing and Distribution SB.1 Clear communication of benefits, limitations, exclusions, etc. SB.2 Clients know how to claim. SB.3 Marketing messages are refreshed frequently. SB.4 The MI sets target participation and renewal rates. SB.5 Periodic surveys are conducted to determine client satisfaction. IB.6 Participation Rates (PR) IB.7 Renewal Rates (RR) IB.8 Market diversity (no measure of this yet) Others?

6. P U B L I C S E R V I C E S Page 5 C. Financial Management and Viability SC.1 Actuarial reserves are calculated properly. IC.2 Adequacy of actuarial reserves (actual / required) IC.3 Liquidity Measure (focus is on next 12 months) IC.4 Solvency Ratio (Liabilities / Admitted Assets) SC.5 Income Statements, Balance Sheet, Cashflow Statements Others?

7. P U B L I C S E R V I C E S Page 6 D. Risk Management SD.1 Continuous monitoring -Actual to expected claims -Utilization trends by benefit category -Anti-selection and moral hazard, etc. SD.2 Reinsurance program in place (as applicable) SD.3 Long term guarantees linked to actual investment returns -applicable to long term savings products, endowment plans SD.4 Annual MI modeling to detect developing trends Others…

8. P U B L I C S E R V I C E S Page 7 E. Investment Management SE.1 Investment policy IE.2 Asset quality and diversification IE.3 Asset-liability matching for long term products Others…

9. P U B L I C S E R V I C E S Page 8 F. Operations Management SF.1 MI is managing per the S&I and aims to maximize indicators SF.2 MI reports to the HMI industry for S&I evaluation SF.3 MI partners have 3-5 year strategic business plan SF.4 Internal and external audits. SF.5 MI staff training. SF.6 MI sets service standards. SF.7 Operations manuals are updated. SF.8 MIS: Database design with actuarial input, Management reporting is used effectively, data managed as a resource. Others?

10. P U B L I C S E R V I C E S Page 9 G. Economics and Client Value H. Impact and Community Outreach H. Impact and Community Outreach -Have not developed any S&I yet I. Economics and Client Value IG.1 Expense ratios IG.2 Incurred claims ratio SG.3 Net income and sustainability Others…

11. P U B L I C S E R V I C E S Page 10 I. Health Insurance SI.1 Accreditation and auditing of providers SI.2 Client satisfaction surveys (with respect to provider) SI.3 Negotiated tariffs for service SI.4 Treatment protocols Others?

12. P U B L I C S E R V I C E S Page 11 Health Insurance: Indicator Scoring Example Indicator IB.7 Renewal rates (RR) Tracks and measures a cohort of insureds from the past year to determine how many are renewing their coverage. Requires proper design of MIS database and analytical applications. Is an indicator of marketing effectiveness and client satisfaction. Scoring of RR indicator (max score of 1 for each product): Poor to Fair, score = 0 if RR < 80% Fair to Good, score = RR 4 if 80% < RR <= 90% Good to Excellent, score = RR 4 if 90% < RR <= 95% Outstanding, score = RR 4 if RR > 95% Eg. Renewal rate of 75% scores = 0 Eg. Renewal rate of 85% scores 0.85*0.85*0.85*0.85 = 0.52 Eg. Renewal rate of 95% scores 0.95*0.95*0.95*0.95 = 0.82 Eg. Renewal rate of 98% scores 0.98*0.98*0.98*0.98 = 0.92

13. P U B L I C S E R V I C E S Page 12 How to Develop S&I INFORMATION REQUIREMENTS: Existing MI Case Studies / experiences as a guide Draw from and adapt the experiences of the commercial insurance industry Consider regulatory limitations ASSUMPTIONS NEEDED: Clear goals such as MI industry sustainability and solvency -need to establish a context -example, typical MI should be sustainable in 2 years, solvent in 3 years The PROCESS: Define the set of S&I (or adopt the BP set presented above) Utilize MI models and experiences to test plausible / achievable standards and indicator ranges Devise a scoring method for each standard and indicator based on its relative impact on MI success (or use our BP set)

14. P U B L I C S E R V I C E S Page 13 MI Industry Collaboration MI Industry players should collaborate: Develop S&I to stimulate MI / HMI development. Regularly publish ratings of MIs / HMIs that report S&I to the industry. Continuously refine S&I as needed. Develop technologies that enable MIs to meet the standards and compute the indicators. -Example, MIS, databases, and relevant applications. Philippines example: MFIs collaborate in building a microinsurance industry Several MFIs capitalized a microinsurance resource center which is developing S&I, repository, and supporting technologies

15. P U B L I C S E R V I C E S Page 14 insurance package design and negotiation MFI 1 MI 1... SHG 1 SHG 2 SHG m MI i... MFI 2 MI 2 MFI n MI n premium, commission, claims “franchise” & service fees MI services: documenting and promoting best practices negotiation with service providers, TPAs, insurers specialized actuarial services and tools product development microinsurance operations admin software and tools demand research operations and risk management training auditing networking services such as a credit bureau Sector development: data warehousing industry studies using consolidated experience Develop Standards & Indicators, MI rating advocacy Microinsurers offering MIRC “branded” products and services customized to local needs, adhering to prudential standards and to regulatory requirements. Microinsurance Resource Center (MIRC) Model RegulatorsService ProvidersInsurers rates and services negotiation advocacy Microinsurance Resource Center (MIRC) data information, technology, & services enrolment info, claims data service fees reporting, monitoring TPA authorization, accreditation

16. P U B L I C S E R V I C E S Page 15 Main Challenges Getting the industry to collaborate Reluctance of MI’s to report (fear of losing support funding if rating is low)

17. P U B L I C S E R V I C E S Page 16 Conclusions Standards and Indicators are needed for MI Development Experiences and modeling can be used to develop S&I Industry can collaborate to develop S&I and supporting technologies Microinsurance Resource Center is one way to move forward.