Originally appeared in Center for Financial Inclusion Blog.
“I can’t thank BRAC enough for standing beside me when I needed help the most,” Rahela, 24, a microfinance borrower and recipient of BRAC’s credit shield insurance, tells us. She borrowed USD 385 in January 2015 to invest in a small clothing business. Recalling her experience, she reveals, “My husband was not interested initially in having a joint insurance policy, but when the customer service assistant explained it in detail, we decided that we should pay the small premium.”
Just a few months later, Rahela’s husband suffered a fatal cardiac arrest, leaving her to care for and support their child on her own. Her first step was to claim the insurance that they had wisely bought. Within two weeks, Rahela received the claim, of USD 135, alongside an additional USD 64 benefit provided as standard to cover funeral costs. She chose not to withdraw any of her savings of USD 63.
In Bangladesh many people with low income are reluctant to take insurance products, like Rahela’s husband, due in large part to the lack of transparency in, and lack of understanding of many insurance products. There are no standards for how much insurers can charge and often the premium rates contain hidden charges. Project features can be rigid, making some features mandatory for the user, which reflect their typical supply side origins (ie, convenient for providers but not necessarily for clients). Moreover, there are cases where clients complain about not receiving promised services, breaking the clients’ trust and generating healthy skepticism towards any promises of future benefits that have to be paid for in advance.
Most successful microinsurance schemes in Bangladesh, therefore, are involuntary – being provided alongside other services, such as telecommunications. In light of the seemingly low demand for microinsurance in the country, then, BRAC’s pilot experiment with credit shield insurance has been uniquely successful.
Why did we bother?
BRAC has been experimenting with several new microfinance products that prioritise usefulness for our clients, but finding a workable model for life insurance made particular financial sense due to relatively high client mortality rates. BRAC’s microfinance programme in Bangladesh currently operates 2,067 branches and data indicates that, in the past four years, there has been 63,000 client or client family member deaths, working out to about seven deaths per branch per year.
How does credit shield insurance work?
BRAC’s existing microfinance clients can opt in for credit shield insurance when applying for their loan by making a one-time premium payment set at 0.3 per cent of the loan for individual coverage or 0.7 per cent to cover a couple. If the insured passes away (suicide not covered!) while they have a loan with BRAC, the household will not have to pay any of the outstanding loan amount. Furthermore, they will get back the principal amount of the loan that they had already paid back, in addition to the USD 64 ‘death benefit’ to help cover the costs of a funeral, and their savings are not affected. Meanwhile the third-party insurance company pays the equivalent loan outstanding amount to BRAC to cover its losses.
The client informs and submits supporting documentation to BRAC, which is sent for processing by the insurance company, which then takes around six to seven working days. The client receives the claim money from their local branch office.
How did we get clients to be comfortable with us?
Cautious that this might be a tricky product to sell, BRAC prioritised ensuring that clients understood the products clearly, and that they would be simple and straightforward to use.
BRAC’s first challenge was to build clients’ awareness of how insurance works and to correct preconceived attitudes towards it. We took two approaches – distribution of promotional materials and leaflets they could take with them, and explaining in person. In the end, investing in BRAC’s human relationships was the most effective in earning clients’ confidence. Customer service assistants located at the branch explained the product to new clients, while field officers discussed the policy during installment collection meetings.
BRAC’s second challenge was in making the product user-friendly and the claim settlement process as smooth as possible for the clients and insurance company. To make the product simple to understand and use, BRAC sought to avoid instituting a long list of complicated terms and conditions – after all, this segment is largely illiterate and has limited experience interacting with large institutions. When it came to the claims application process, although BRAC managers were well trained in administering the claims process, we found that in many cases clients found it difficult to get a death certificate from a doctor. Mediating with the insurance company to make the processes easier for our clients, BRAC negotiated for them to be able to submit a certificate issued from the local government office instead. BRAC is also working on reducing the amount of time claim settlement takes.
Between November 2014 and November 2015, 69,000 BRAC clients have opted for coverage, and BRAC and its partners have successfully settled more than 113 out of 131 claims within two weeks of their being made. While the product is working well for clients, BRAC is still testing how to deliver the product most operationally efficiently. Having started the pilot by working with an intermediary, in June 2015 BRAC entered an additional partnership model whereby BRAC itself interacts directly between clients and the insurance company. Both come with their own advantages, but BRAC is yet to see which one prevails (stay tuned!)
Credit shield insurance has been a double win for BRAC – by improving the risk tolerance of clients at an affordable cost so that they may borrow and use microfinance more actively; and by improving BRAC’s financial sustainability by minimising losses from loan defaults. BRAC hopes to expand insurance availability to all its ‘microfinance for women’ clients, positioning it as an integral part of the financial services package offered by BRAC.
Today Rahela is doing well too. She took out another loan in October 2015 (this time USD 513) and has savings of USD 97 – modest amounts, yet a clear sign that she not only survived the shock but with support from the credit shield insurance was able to continue to grow her business and savings.
Alvina Zafar is deputy manager and Monirul Hoque is a management professional at BRAC Microfinance.