AIG Uganda's Micro-Life Insurance

In 1996--97, FINCA Uganda, a village banking microfinance institution (MFI), approached the local subsidiary of AIG (yes, that AIG) to develop a life insurance product that FINCA Uganda could sell to its borrowers. That collaboration led to what I think is considered one of the major successes in microinsurance worldwide. The AIG plan covered the cost of paying off outstanding microcredit loans and a payout for accidental death of the borrower or a family member. (Regulatory barriers prevented payouts for death from illness.) I just read an intriguing 2005 study of the case by Michael McCord, Felipe Botero, and Janet S. McCord. Looks to me like Michael McCord, now head of the MicroInsurance Centre, ran FINCA Uganda in the late 1990s and may well have initiated to whole story.By the numbers, Ugandan microinsurance is a big success. In 2005, the plan insured 1.6 million lives through 24 MFIs in Uganda and one each in Tanzania and Malawi. AIG grossed $800,000 on the plan in 2004, 20% of that profit. It shows how an insurance company, which has the financial strength to absorb risks (yes, that AIG!) can partner with MFIs, which can broker insurance through their retail operations.But the study also finds that many customers are unaware of, confused by, or angry about the insurance. Because the insurance was almost always compulsory, MFI workers had little incentive to understand and explain the policy to customers. The paperwork for filing claims was burdensome and expensive. The MFIs acquitted their role as intermediaries between customers terribly when processing claims, sometimes introducing delays longer than 6 months. (Some details below.)Impeding claims certainly makes the insurance more profitable.Take-home lessons for me:

• While I am sure enough of the value of insurance that I don't need a randomized study (RCT) to prove it, neither can I rest easy in the knowledge that many people are buying microinsurance. We need evidence that insured events such as deaths are being covered most of the time, and efficiently.
• The case shows that insurance is inherently more complex than credit and savings; that makes it harder for people to understand, harder to sell, and perhaps more expensive to administer---big challenges to selling and servicing it in bulk for the poor.
• Insurance markets require an odd mix of compulsion and competition. On the one hand, most insurance is bundled or compulsory. I get health insurance through my job; I have to buy property insurance to keep the mortgage on my home. People do not usually buy insurance stand-alone the way they buy food or credit. On the other hand, effective competition---consumer freedom---is essential to compelling good servicing of claims. After my wife got rear-ended a few months ago, both auto insurance companies involved in the accident treated us with solicitousness and efficiency. In contrast, the Ugandan MFIs are clearly not competing on how they handle claims, in part because they bundle their insurance with their credit.

Death Certificate – where applicable/available (provided by Beneficiary)Burial permit – where applicable (Beneficiary)Copy of client’s cash book (Loan officer)“Dependants/spouse schedule” (2 AIG Uganda forms) (Loan officer)A letter from the group (Group leader)A letter from the loan officer to Manager (Loan officer)A copy of the loan agreement form (Loan officer)A police report in case of road traffic accidents (Beneficiary)A letter from the L.C. 1 (local government leader) (Beneficiary)Letter from the deceased’s family (Beneficiary)

I know of someone who lost her husband and she didn’t have any money to process the documents, yet her husband had died of an accident. As a result, she gave up.

To me, the insurance is very good. I have experienced it. I lost somebody and they were able to help me. Maybe the others don’t see that point of view. Apart from helping in a sad situation, insurance can cover my loan in case I died and had a loan balance. You don’t have to move to other people, disturb other people in the group to pay your loan. The insurance will come up and pay for you the balance of the loan. So I feel it’s a very good policy.

I think the insurance is to their (the MFI’s) advantage. It’s the moneymaking project for the organization. They are trying to get more money out of the public. They are just milking the poor people.

When we are promised something and when we get a problem, the insurance company does not live up to their promise.

According to one client, when asked whether or not they were covered if their businesses burned down, her credit officer said:

Humans are crazy. They will burn down their own business for money, therefore the policy does not cover fires.

Actually, fires are covered under certain broad cases.

One client thought his MFI was insuring itself. He said the policy allows his MFI to regain its loan but it doesn’t help the client: We are paying for our MFI to be insured!