Access to Finance. Kelly Rendek
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can also be a limiting factor to effective market development, skewing the rational allocation of scarce national resources toward the development of the insurance market.
Strategies and Recommendations
Many of the recommendations focus on the need to expand regulatory options for innovative and cost-effective distribution mechanisms. This is a key priority that will result in the immediate opening of the insurance and microinsurance market. Particularly, allowing all currently regulated financial institutions such as banks, MFIs, and NBFIs to act as both insurance agents and brokers will have an immediate impact.
Focusing initial microinsurance efforts to the urban population makes sense given the challenges in reaching the rural population. Existing community groups such as cooperatives, associations, teachers, or borrowers would seem to be the easiest market to reach. As insurers and the FRC are still learning from existing microinsurance projects, pilots in areas with higher population concentrations and more developed distribution channels will allow faster learning. These lessons can then be extrapolated to expand projects into more challenging segments.
A potential direction for the FRC to consider in expanding the microinsurance market would be a simple definition of microinsurance products allowable under both the existing “Ordinary” and “Long-Term” insurance classifications. It would permit both life and nonlife insurers to offer composite microinsurance products that qualify under the benefit definition and limits. As Mongolia currently has only one life insurance company, it will expand the microinsurance market in a controlled manner while allowing the nascent life insurance industry to develop. The initiative would be innovative within the worldwide microinsurance community, and provide leadership for other countries.
In summary, the development of microinsurance in Mongolia needs to be considered within the context of overall insurance market and regulatory environment development. It is difficult to develop the microinsurance market without a viable life insurance segment or a strong nonlife retail insurance focus. While certain regulatory achievements have already been made, there is an urgent need to improve the overall regulation and technical capacity of the insurance industry before the microinsurance segment can be sustainably developed.
Introduction
This study was commissioned by the Financial Regulatory Commission (FRC) of Mongolia, under a regional technical assistance project with the Asian Development Bank (ADB), and in collaboration with the Access to Insurance Initiative. It builds on a number of microinsurance development projects in Mongolia, as well as previous analyses of the insurance regulatory system.
The project’s objective is to study the potential opportunities and challenges for microinsurance in Mongolia, using the methodologies of the Access to Insurance Initiative. The scope includes a review of the country-specific context, supply-side and demand-side issues, as well as an analysis of the current policy and regulatory framework. This review and consultation is intended to spur a local stakeholder process that could adopt and oversee strategies to support microinsurance development in Mongolia.
Definition of Microinsurance
Microinsurance, as defined by the International Association of Insurance Supervisors (IAIS) and endorsed by the Access to Insurance Initiative, is the insurance accessed by low-income people, provided by a variety of institutions, run in accordance with generally accepted insurance principles, and funded by premiums.
This definition conveys a number of important principles. First, microinsurance is not a stand-alone concept or financial product, but is integrated into and influenced by the overall insurance environment and general financial services sector. Products under microinsurance schemes can therefore include insurance for any risk or contingency covered by traditional insurance products.
The definition of microinsurance explicitly indicates that such insurance should be funded by premiums and run in accordance with accepted insurance principles, which provide that premiums should be proportionate to the risk. Social welfare programs and emergency assistance by governments are therefore excluded. Microinsurance can include, however, insurance providers other than insurance companies or microfinance organizations, such as government, other commercial entities, and nonprofit organizations. It is also not limited to insurance for individuals, but can include insurance products developed for small businesses or other groups.
Microinsurance focuses on providing access to insurance products and services to populations that are traditionally underserved. Its definition specifically refers to low-income people, who may have less access to traditional insurance products for several reasons: unaffordable premiums, inappropriate product designs, or providers focused on serving the more traditional and profitable middle to high income market. Other definitions of microinsurance either focus more on product characteristics, or on a quantitative description such as level of benefit or premium.
Notably, majority of Mongolia’s population could be considered poor or vulnerable, and the reach of traditional insurance is very minimal; microinsurance for Mongolia’s population can be considered almost mainstream. The issues are therefore less about the income level of the microinsurance market, as they are about (i) appropriate product design;(ii) affordable premiums; and (iii) delivery mechanisms designed to meet a small, geographically dispersed, and economically vulnerable population.
An important issue in Mongolia is the negative connotation associated with labeling people as “poor” or “low income.” Due to a strong legacy from the previous communist government, there is a cultural preference to treat everyone equally. Along this line, Mongolian participants in the diagnostic process preferred defining microinsurance not as insurance for “poor” or “low-income” people, but rather as insurance that is available to all, irrespective of wealth, including those who have no access to traditional insurance products. Microinsurance in this context possibly means making insurance available and accessible to anyone who wants or needs it. This is a broader concept of microinsurance than that often used, but is still consistent with the objectives of the Access to Insurance Initiative to promote policies of financial inclusion and access to insurance for underserved populations.
Therefore, while the authors provide an analysis of income segments and poverty, they work with a broad definition of microinsurance for this review that includes, as its foundation, the premise of providing full access to appropriate and affordable insurance services to those who currently do not have such access. This broad definition hopefully fosters market development and an appropriate regulatory environment.
Methodology
This review used materials from a wide variety of sources, including previously published material, industry data from the FRC, and interviews and workshops conducted in Mongolia.
The primary in-country visit was conducted over 3 weeks in March and April 2011, which included a half-day workshop with key stakeholders and individual meetings with industry participants. The activity included interviews with the FRC’s director of insurance, FRC insurance department staff, the Ministry of Finance, the Ministry of Social Welfare, several insurance companies, current microinsurance providers and/or programs, insurance industry associations, insurance brokers, banks, nongovernment organizations (NGOs), cooperatives, mobile banking projects, as well as current and potential microinsurance clients.
Following an initial analysis, the diagnostic team returned to Mongolia in early July 2011 to present preliminary findings and suggestions. This involved a half-day dialogue workshop with many of the same key stakeholders, as well as separate meetings with the FRC insurance director and the newly appointed deputy chair of the FRC. Inputs from the interim review have been incorporated into this paper’s conclusions and recommendations.
The final report will be presented and discussed in a full stakeholder workshop with the goal of designing appropriate implementation strategies based on the findings and recommendations.