Small steps: Opportunities exist for the further development of micro-insurance

Mongolia is an ideal country for micro-insurance. While the urban and the wealthy have access to a wide range of commercial products, and all the people of Mongolia can technically be covered under the country’s social security programme, much of the population is falling through the cracks. The poor and the nomadic, which make up more than half the country, are facing risks that cannot be insured away given the cost of mainstream insurance, the current product range available and the geographic reach of the insurers. This is a huge market and one that the country would do well to cover, as it will be difficult to tackle poverty if so many of the poor are vulnerable to unexpected and uninsured losses.

Index-Based Livestock Insurance (IBLI) has been available since 2006 and has done quite a bit to address the needs of rural Mongolia. Anywhere from 40-50% of the population depends on livestock for their livelihoods, and because of the harsh climactic conditions, these people often face devastating financial losses (see analysis). The IBLI has offered them a way of insuring away most of that risk and has helped alleviate insecurity in rural Mongolia. However, much remains to be covered. The vast majority of the country is still just one event away from destitution. A death in the family, the loss of a job, fire and theft are risks that could devastate the average Mongolian, but few, if any, products exist that could adequately cover them.

An Area Of Focus

 Mongolia is prosperous place. In recent years the country has had one of the fastest growing economies in the world, GDP per capita in current dollar terms broke $3500 in 2012 and the country is blessed with plentiful natural resources. Importantly, the prosperity does seem to have trickled down. Overall, Mongolia’s poverty rate was 27.4% in 2012, according to the World Bank. This is dramatic improvement from 38.7% in 2010. However, Mongolia remains a country with a significant number of poor and near poor, especially in the areas outside the main urban centres. While the poverty rate in Ulaanbaatar in only 19.8%, it is 38.6% in the highland region and 39.8% in the countryside.

Micro-finance in general terms has been actively pursued and managed by the country for a number of years, and with some success. The reasons are many. Just after the transition to democracy, the government faced a nation that was very poor and in need of the most basic of financial services. A number of micro-credit programmes were initiated, primarily with donor support. After that, the collapse of savings and credit cooperatives forced the regulators to get more involved in the regulation of the financial system below the level of the major commercial banks. And now, the government needs to pay attention to the needs to the less fortunate, as the mining boom and subsequent slowdown left some people behind and fuelled a certain measure of resentment. As a result of these and other forces – especially the global push for financial inclusion – microfinance has been an area of focus for the past two decades. However, micro-insurance has not received the same level of commitment, and as a result serious gaps continue to exist.

Prosucts Available

Even areas such as health, which are meant to be covered by the government, currently present considerable risk for the poor. Patients will often find that they have to pay fees despite national coverage, for surgical supplies, food, a room or an appointment with a doctor, according to Kelly Rendek, who provided technical assistance to Tenger Insurance in 2010 under a grant as part of the International Labour Organisation’s Microinsurance Innovation Facility. These medical costs are potentially enough to break a poor family.

As a result of Rendek’s technical assistance, a product was devised for Tenger Insurance that could cover these extra expenses and provide other important protection. The product bundled an accidental death benefit with a hospital cash benefit. If a person were to be admitted to hospital, they would receive a certain lump sum per day after a waiting period of one to two days.

At the launch, three levels of protection were offered, with the death benefit ranging from MNT500,000 ($300) to MNT1m ($600) and the daily hospital payout ranging from MNT15,000 ($9) to MNT25,000 ($15). Premiums were priced from MNT30,000 ($18) to MNT50,000 ($30) a year.

The UN Development Programme (UNDP) has also been developing micro-insurance products under a programme that ran from May 2009 to May 2014. In addition to conducting market research, building capacity, increasing awareness and making recommendations, the $3m programme launched two products: a health insurance product and a property insurance product. In its research, conducted in the poorer sections of the capital city, the UNDP found that while people did not have a full understanding of insurance, they were very interested in being insured to protect themselves against unexpected losses. Health problems was the number-one concern (mentioned by 51.5% of those surveyed), the loss of employment was mentioned by 40.5% and death of a family member by 37.7%.

Still A Challenge

As in many markets, microinsurance is proving to be a challenge. The lack of understanding of the product on the part of the customers is certainly a problem, as is affordability. While premiums are set low, the very poor may still find that the outlay is beyond their means. The take up, indeed, has been minimal for the few products available. The insurers, meanwhile, are not all that interested in offering micro-insurance products, as it is not a very profitable proposition. The premiums are low and the administrative costs are high, as agents have to contact a large number of individuals in order to generate sufficient premiums and many small claims have to be processed, often from people who live in remote areas.

Research done on the sector found that the institutions may be unprepared for micro-insurance in terms of their systems, their technical expertise and their administrative structures. And the insurers, according to the UNDP, do not have a good understanding of the product.

In addition to these, pricing may be a challenge as well, as the insurance sector overall is not well developed and has very little history of covering claims, especially small claims. However, both the UNDP and Rendek found that the legal and regulatory side was relatively straightforward, though sometimes a bit sparse. Moreover, Rendek noted that institutionally Mongolia was well suited to microinsurance. During the period under communist rule, data was regularly and systematically collected, and many of the relevant processes have stayed in place.