Tag Archives: low income

Returning Insurance to Its 19th Century Roots

As we celebrate the Wharton Risk Center’s 30th anniversary, we are at the same time envisioning the future of risk management. In this spirit, I would like to make the case that the insurance industry return to its 19th century roots by requiring those at risk to undertake cost-effective loss-reduction measures as a condition for insurance coverage. Back to the future!

This is the way that factory mutuals operated when they were founded in the mid-1800s, and some insurers still do today when marketing commercial policies. Firms were given an insurance policy only after they were inspected and shown to be safe. Insurance premiums reflected the best estimates of the risk; improvements were rewarded with lower premiums, reflecting the expected reduction in future claims. Firms that did not continue to keep their factories operating safely were warned that their insurance policy would be canceled unless they took corrective action.

Insurance could play a similar role with respect to providing coverage to the residential sector where, today, limited attention is given to encouraging homeowners to invest in loss-reduction measures. Premiums should reflect risk, and risk information should be communicated in a transparent manner so decision makers have accurate signals. Those at risk should also be made aware of the reduction in premiums they could receive.

Public-private partnerships are necessary for dealing with insurance against some extreme events. Low-income individuals residing in hazard-prone areas are likely to demand financial assistance if their premiums are subsidized and the increase in the cost of their insurance raises issues of affordability. Even in situations where insurers are allowed to charge risk-based premiums, they may still feel that some hazards are uninsurable without public-sector involvement if catastrophic losses would cause their surplus to be reduced to an unacceptable level and perhaps lead to insolvency.

The National Flood Insurance Program (NFIP) offers an opportunity to creatively address these issues with regard to flood hazards. The Federal Emergency Management Agency (FEMA)’s technical mapping advisory council has already begun focusing on ways to design flood maps that reflect risk, and several reports by the National Research Council are addressing ways the flood insurance program can be modified in advance of its renewal in 2017. More specifically:

  • Updated flood maps will allow insurers to more accurately assess the hazard. If private insurers can charge risk-based rates, they would have an economic incentive to market flood coverage.
  • The public sector could provide financial assistance to low-income homeowners to address issues of affordability and encourage them to undertake cost-effective measures to reduce their risk. One way to do this is through a means-tested voucher program tied to low-interest loans. Well-enforced building codes and seals of approval would provide an additional rationale for undertaking loss-reduction measures.
  • A multi-year insurance policy tied to the property would prevent policyholders from canceling, as many do today when they have not made a claim for several years. Property owners would be provided with stable annual premiums and would know that they were protected against water damage from floods and hurricanes.
  • Reinsurance and risk-transfer instruments marketed by the private sector could cover a significant portion of the catastrophic losses from future floods. Some type of federal reinsurance would provide insurers with protection against extreme losses.

The broader challenge we face is developing long-term strategies that provide short-term rewards so that change is politically viable. There is a growing interest by policy makers and other stakeholders in ways that insurance can encourage individuals, firms, communities and countries to undertake protective measures.

Insurance has an opportunity to play this role in the residential sector by going back to its basic principles that were adopted almost 200 years ago from the commercial side of the house: encourage or require investments in loss-reduction measures today while providing claims payments should one suffer a severe loss.

The full Wharton risk newsletter is here.

Don’t Be Dissuaded by Medicaid Myths

Brokers hesitate to offer Medicaid enrollment services to their clients because of the perceived stigma surrounding them.

But the reality is that those stigmas are all talk and no bite – most Americans don’t have a problem with public benefits like Medicaid. In fact, those who qualify for it generally prefer it because it offers lower costs and better coverage than many private plans do. Brokers who offer this government-subsidized coverage give themselves an advantage over those who don’t while better meeting workers’ healthcare needs.

Busting the Medicaid Myths

The common notion that Medicaid provides inferior coverage when compared with private plans is patently false. Study after study has shown that Medicaid recipients are actually happier with their coverage than enrollees in individually purchased plans or employer-sponsored private plans. In three southern states, low-income residents said they preferred Medicaid’s quality of care to that of private plans. Nationwide, 87% of Medicaid enrollees feel positive about their health insurance, compared with 73% of those with private plans.

Medicaid’s doubters note that only 66% of those eligible for Medicaid are enrolled and say the figures demonstrates inadequacies in the program. Under-enrollment has many causes, but pride is not among them. Many people don’t know they’re eligible for Medicaid, and the application process is complex. In addition, the application process is largely online, and a significant number of low-income individuals lack computer skills or access to the Internet.

The Truth About Medicaid

The reality is that Medicaid provides affordable, high-quality care to working people. It also presents brokers and business leaders an opportunity to lower costs while increasing the number of employees who have health coverage.

Contrary to the misconception that Medicaid offers little coverage, the program provides more comprehensive coverage than most private plans. Medicaid includes vision and dental benefits for children throughout the country and for adults in most states. It also includes benefits like non-emergency transportation and substance abuse treatment.

What’s more, care under Medicaid is just as accessible as care under private plans. Only 2.8% of Medicaid enrollees can’t access nearby care – while that number isn’t zero, it does suggest that the vast majority of enrollees can find primary and secondary care.

Not only does Medicaid cover a wide range of services, but it’s also quite affordable. The vast majority of Medicaid enrollees pay no premiums, and employers pay no additional cash for their employees enrolled in Medicaid. Even in the handful of states that do have premiums, enrollees typically can’t lose coverage for failing to pay. Medicaid has no deductibles and minimal co-pays, often charging just a few dollars for prescriptions and doctor visits. Medicaid covers the whole family; unlike many private plans, there are no drastic rate spikes for dependent coverage. For many families, Medicaid is the only path toward insuring the whole family.

In addition to saving money on premiums, people who have Medicaid are significantly less likely to incur significant medical debt than eligible people who do not sign up for Medicaid. Medical debt remains the most common cause of bankruptcies in the U.S., and Medicaid reduces the risk that a devastating medical complication will also bankrupt an individual.

When brokers help companies provide Medicaid enrollment services in the workplace, most employees are grateful to get help with this process in a comfortable and familiar venue without having to make appointments during their limited hours outside work.

How Brokers Can Benefit

It’s clear that Medicaid benefits enrollees, but what about the brokers who provide the benefits? Medicaid helps them, too.

Offering Medicaid enrollment support sets brokers apart in a crowded field. By bringing a new solution to the table – particularly one that many people are unaware of – brokers distinguish themselves.

Medicaid options also represent cost savings for employers, so brokers can find footing among business clients if they choose to offer Medicaid. In an increasingly commodified health insurance market, the ability to provide an option that requires minimal or no payroll deductions while offering access to high-quality care gives brokers an edge over the competition.

If attracting business clients wasn’t incentive enough, brokers can also earn sizable commissions through third-party enrollers on all workers they enroll in Medicaid, including those who were previously uninsured and thus generating no commission at all. At the end of the day, these additional commissions can actually generate more revenue for brokers than they would receive without offering Medicaid enrollment services.

Employers associate high costs with high quality, but that’s not always the case in the world of healthcare. Brokers who help employees find the right coverage for the right price help everyone save money while providing high-quality care to those who need it.

With Medicaid myths busted, it’s up to brokers to help individuals access care when they need it – and for a reasonable price. As the American population becomes increasingly insured, Medicaid enrollment continues to climb. Brokers who don’t offer Medicaid enrollment support might find themselves on the outside looking in if they fail to provide their clients with the cost savings, coverage and care that Medicaid brings to the table.

5 Innovations in Microinsurance

Earlier this year, a group of eight leading insurers and brokers established a consortium to promote microinsurance ventures in developing countries, unsurprisingly called Microinsurance Venture Incubator (MVI). Together, AIG, Aspen Insurance, XL Catlin, Guy Carpenter, Marsh & McLennan, Hamilton Insurance, Transatlantic Reinsurance and Zurich plan to launch 10 microinsurance ventures over the next 10 years.

While conventional insurance targets middle to high-income urban dwellers, microinsurance targets rural residents living on the edge of poverty. Most popular are microinsurance products that offer life, health, accident or property insurance.

However, to really be the “can-do” coverage for the poor, it is not enough for microinsurance to be affordable and accessible; it also has to be tailored to the unique environment in which it is being offered. After all, context is king.

So with the context of “poor people deserve innovation too,” here are five examples of innovative microinsurance schemes that target different risk pools:

1. The Use of Technology to Combat Fraud

Insurers providing livestock insurance in India have been struggling with high claims ratios, mostly because of fraud. Typically, to get coverage, a veterinarian would place an external plastic tag on the animal’s ear as an indication that that specific animal is insured. However, this produced zero controls in place, and insurers learned that these plastic tags somehow made their way to dead cattle, way too frequently.

Nowadays, India’s IFFCO-Tokio (ITGI) insurance company is using radio frequency identification (RFID) chips that are injected under the skin of the animal (which is less painful than tagging!). These chips are accessible through a reader, which allows an insurance official to easily verify that the RFID reading coincides with the identification number on the policy, when a farmer reports a claim. This results in fewer fraudulent cases and faster claim processing.

Almost a fairy tale ending if it wasn’t for the high price of these microchips. Nonetheless ITGI is using a combination of external plastic tags and RFID chips to control their costs yet still prevent excessive fraud. It’s working.

2. Forming Index-Based Insurance to Build Trust

Another promising innovation is index-based insurance, where an external indicator triggers payments to clients rather than the traditional “I’m calling to report a claim.”

Kilimo Salama, AKA Safe Farming, combines mobile phone payment system with solar powered weather stations to offer farmers in Kenya “pay as you plant” insurance.

Here’s how it works:

  • A farmer goes to an approved dealer and buys a bag of fertilizer, which he pays 5% extra for to get climate coverage.
  • The dealer scans a special bar code, which immediately registers the policy with the insurance provider and sends a text message confirming the insurance policy to the farmer’s mobile phone.
  • When data transmitted from a particular weather station indicates drought or other extreme condition is taking place, the farmer registered with that station automatically receives payouts via a mobile money transfer service.
  • Similarly, a more recent entrant called ClimateSecure says it will “work hand-in-hand with [its] clients, meteorologists, financial experts and other brokers in order to build indexes that most accurately reflect [their] clients’ risk.”

3. Targeting the Cash Poor by Relaxing Liquidity Constraints

In China, pork composes roughly 48% of livestock production, with most pigs generally raised in small numbers by rural families in their backyards, forcing Chinese hog farmers to face the risk of hog diseases. Yet, despite the obvious benefits of microinsurance products, the demand is still low because of cash constraints and a lack of trust in insurance providers.

Yet a pig insurance scheme, which offered credit vouchers that allowed farmers to take up insurance while delaying the premium payment until the end of the insured period, coinciding with when pigs are sold, saw their insurance premiums go up by 11%.

By the same token, telecommunications companies embed insurance premiums in their service contracts, with the advantage of offering (oftentimes free) coverage as part of a pre-existing plan. In Africa, for instance, free insurance is linked to phone data usage; the more airtime one buys, the more coverage he/she gets.

4. Product Bundling to Attract Customers

The 2014 winner of the prestigious Hult Prize, NanoHealth, is a social enterprise that not only offers microinsurance but also tackles chronic diseases by providing door-to-door diagnostics via its network of community health workers, which it equips with a low-cost point-of-care device called Doc-in-a-Bag. This startup is slowly but surely creating India’s largest slum-based electronic medical record system and disease landscape map.

5. Coverage Within Reach via Garbage in, Coverage out

Forget bitcoin, garbage is the new currency with this Indonesian startup called Garbage Clinical Insurance (GCI), which was founded by a 26 year-old doctor named Gamal Albinsaid. Through GCI, community residents are encouraged to recycle and get healthcare coverage at the same time because trash is translated to funds that can later be used to pay for medical insurance.

In sum, in this micro world of microinsurance, where only 260 million of the world’s low-income citizens are covered, words like big data and claim history could not matter less. What matters is how quickly an insurer can scale, how low can its margins go and how clearly can it communicate its offering to the low-income farmer all in the name of for-profit social enterprise.

Expect more entrants.