Access to Finance. Kelly Rendek
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ADB joined as partners in 2010. GIZ is hosting the secretariat on behalf of BMZ.
It conducts diagnostics of the insurance market and related policy, regulatory, and supervisory environment in selected countries to (i) develop country-specific recommendations, (ii) generate cross-country learning on the most suitable approaches that facilitate the growth of microinsurance, and (iii) contribute to the standard-setting process of the IAIS.
The initiative also supports implementation efforts to enhance access to insurance markets on a selective basis. Regular dialogue and dissemination events to develop the capacity of supervisors and other authorities complement the Initiative’s activities.
Executive Summary
Mongolia is the world’s 19th largest country, landlocked between the Russian Federation and the People’s Republic of China. It has the lowest population density in the world with a population of about 2.9 million. Over 60% of the population lives in urban areas, about 40% of which dwells in the capital city of Ulaanbaatar. The remaining rural population is scattered over wide distances, resulting to challenges in transportation, service delivery, and communication.
Since 1990, Mongolia has gone through a challenging transition from a socialist state to a constitutional democracy and a free market economy. While turbulent at times, the transition has proceeded more smoothly and rapidly than in other former communist countries. The transition, however, placed considerable stress on certain segments of the population, and the cessation of financial support from the former Soviet Union has led to a decline in literacy rates, education, and health care services.
Mongolia’s finance industry also experienced difficulties during the last 2 decades, but has emerged strengthened by the process. The banking crises of 1995, 1996, and 1999 led to the enhancement of the banking system’s structure and regulation.
The commercial insurance market is still at its infancy since the Government of Mongolia was the sole and direct provider of insurance for many years. The past 2 decades saw the privatization of the government insurance entity and the emergence of new market entrants. Currently, the insurance industry accounts for only 0.9% of the total assets in the finance sector, and gross written premium amounted to only 0.54% of Mongolia’s gross domestic production 2013.
The insurance market is concentrated among the top 7 of the 16 nonlife insurers in Mongolia. The largest, and the successor of the former state insurance company, Mongol Insurance, has a market share of about 30%. An analysis of claims and expense ratios denote the relative inefficiency of Mongolia’s insurance industry. National Life, the only life insurance company in Mongolia, has yet to turn a profit since it operated in 2008.
Mongolia maintains an extensive government social insurance scheme including pensions, benefits, health, occupational injury and illnesses, and unemployment. The government assumes contributions for certain population segments such as the elderly, the disabled, and the poor. Many, particularly among voluntary participants, remain uninsured. The health care scheme is currently under review to make coverage mandatory for all citizens.
The private insurance business model presents a new paradigm in Mongolia, shifting the government’s role from a direct provider to a market facilitator. This limits the mandate of the insurance supervisor to creating an environment that facilitates innovation and fosters competition while protecting consumers.
Established in 2006, the Financial Regulatory Commission (FRC) regulates and supervises nonbanking financial institutions including credit unions and non-deposit-taking lenders, capital markets, and insurance companies. The FRC issues insurance regulations and issues licenses for insurers, agents, brokers, loss adjusters, and actuaries. Despite its relatively recent formation, it has made significant strides in issuing regulations for insurance operations, supervising performance, and promoting professionalism in the insurance industry.
While Mongolia has no specific regulation on microinsurance, the FRC internally considers policies with under MNT10,000 ($8) annual premiums as microinsurance policies. However, there are no separate categories for reporting or regulating microinsurance. The insurance regulatory environment does not specifically consider microinsurance clients, providers, or intermediaries as entities specializing in microinsurance.
Expanding access to financial services in the underserved population is part of the mandate of the Financial Stability Committee of the government. But, given the Mongolian banking crisis in the recent past, the committee’s priority has been ensuring banks’ stability to prevent a collapse of the economy. The development of the nonbanking sector, in general, has therefore received limited priority from a policy standpoint.
The microinsurance market in Mongolia is in its early stages, and microinsurance pilots have only been initiated in the last few years. Existing products include health insurance offered through the microinsurance project of the United Nations Development Programme, health and accident coverage under Tenger’s microinsurance product, and index-based livestock insurance offered through the Index-Based Livestock Insurance Program. So far, none of these programs have demonstrated sufficient success for long-term sustainability.
Analysis of these pilot projects reveal a number of emerging lessons that can be leveraged for future microinsurance development:
| (i) | Private health microinsurance products in Mongolia need to be integrated with the benefits and structure of the existing public health system. Reimbursement procedures for insured medical expenses need to be carefully designed so that incentives for policyholders, insurers, and health care providers are appropriately aligned. |
| (ii) | Cost-effective distribution is a key challenge given the large distances, low population density, and manual premium collection processes. |
| (iii) | The willingness of insurance providers to proactively drive and participate in the microinsurance market is a crucial element. Commercial insurers have shown interest in developing microinsurance programs primarily due to the significant amount of available donor funding. |
New focus group research and prior microinsurance market research reveal a sizable unmet need for insurance products in Mongolia. Health risks are identified as the primary risk faced by this market, followed by disability and business risks. Some community risk management efforts exist, but are not widespread. This suggests that with the right products and distribution approach, there is room for development in the microinsurance market.
However, the potential market is likely to be small given even optimistic assumptions. If the poorest 25% of the population, who are unlikely able to afford even low premiums, and the wealthiest 15%, who are able to purchase higher end products, are excluded from the potential microinsurance market, the maximum size of the market is only about 430,000 households. Even with this number, lack of financial education and understanding of insurance serve as a significant barrier to developing this potential market. Cultural aspects and experiences with social insurance also create a negative predisposition toward private insurance.
Perhaps the biggest challenge is the lack of widespread, cost-effective distribution channels. This is crucial to keeping microinsurance premiums affordable. Nontraditional distribution channels are often needed to reach clients in remote locations. Leveraging the existing networks of banks, microfinance institutions (MFIs) and other nonbanking financial institutions (NBFIs) would help establish microinsurance in Mongolia. Technology developments for mobile banking and payment systems may facilitate premium collection and claims payment, and demonstrate potential for new microinsurance distribution models.
Inadequate technical capacity is another constraint in developing Mongolia’s insurance market. Innovation in the microinsurance sector is not likely to succeed or be sustained without improving the current capacity of the broader insurance sector; including the industry, the financial regulator, and policy makers. Investment in capacity building will develop the entire insurance industry and support the growth of microinsurance.
Donor involvement is a key driver of microinsurance in Mongolia. Support from donors spurred important pilot projects and enabled research, capacity building, and awareness on microinsurance. Consequently, donor funding generates interest in microinsurance from industry