Cooperative Micro-insurance? a Global Humanitarian Concern...

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Cooperative Micro-insurance: a holistic approach for humanity...

Poor households face difficulty in generating regular and substantial income and are extremely vulnerable to economic, political and physical downturns.  For the poor and for those just above the poverty line, a drop in income or increase in expense can have a disastrous effect on their already low standard of living.  Death, sickness or accident may force the disposal of productive assets or household consumables which in turn decreases future income and current livelihood.  The frequency of losses is also greater for the poor, many of whom are exposed regularly to harsh weather, natural disasters, fire and theft and who have limited means of recovery.

 To provide protection against risks the poor have in the past developed informal insurance mechanisms such as selling assets, exchanging gifts, cash transfers and diversifying crops.  Since the 1970s pro-poor microfinance institutions have been established in the semi-formal sector.  Their success has led to the recognition that poor people can save and want to save. 

 While both savings and credit facilities are integral in assisting the poor to overcome unforeseen losses, their benefits are limited to the capacity of individuals to save or make repayments.  When bad conditions and their consequences persist for several years, for example through drought or flooding, then the use of savings as protection is constrained.  In addition, high risks of illnesses, or the death or disability of the breadwinner means outstanding loans become difficult to pay. 

For this reason insurance can be an effective mechanism for reducing the vulnerability of the poor from the impacts of disease, theft, disability and other hazards as well as safeguarding the productive use of savings and credit facilities.

  Micro-insurance? the Challenges

 There are many difficulties providing insurance to the low-income sector, established insurers’ lack of interest in the poor has been due to low collateral, high transaction costs, uncertain profitability, high risks and inability to serve their specific needs.  The provision of insurance to the poor has been left to the MFIs, NGOs, credit unions and cooperatives operating predominantly in the informal sector whom face a multitude of problems.

 The need for qualified staff, internal controls, efficient administration systems, reinsurance and resources for marketing, distribution and education means that establishing a comprehensive, sustainable and affordable insurance scheme is almost impossible in the short term.  The microinsurance provider has to compromise between how low into the poverty sector the scheme can penetrate whilst maintaining costs recovery.

Micro-insurance with Cooperative Culture

 Limited protection can be provided to the poor on a sustainable basis using cooperatives. The cooperative insurer is in a better position to serve the needs of the poor and has a history of providing necessary services.  The benefits of the cooperative structure are greatest at the local level where strong community relationships, good user networks, member involvement and democratic processes encourage greater trust and tap into policyholders’ know-how, loyalty and ideas.  As members are owners of the scheme they have greater incentive in making the scheme work and preventing fraudulent behaviour.  Community involvement also reduces resources required for information collection, education, marketing and monitoring policyholders.

However to expand the basic insurance scheme introduced at the local level the microinsurance provider needs support to overcome three key obstacles:

    * Accessing technical expertise

• Overcoming regulatory requirements
• Purchasing reinsurance.

Takaful (Islamic Insurance) with Holistic Cooperative Spirit

The cooperative values of self-help, solidarity and social responsibility are prominent in the principles of Takaful.  It is accepted that a cooperative scheme providing Shariah-approved products is permissible under Islamic Law.  In 2002 the ICMIF board agreed that the principles of Islamic Insurance were similar to the cooperative and mutual philosophy and recommended the secretariat assists the development of the sector.  There are now 21 Takaful providers as members of ICMIF.

Islamic Micro-takaful: a Global Scenario

Lebanon: The Agricultural Mutual Fund of Lebanon was established in 1997 and provides health insurance coverage for costs not covered by the government social security fund.  The fund covers 5,000 families and provides for 23,000 beneficiaries, it is open to Muslims and non-Muslims.  The premium per family is ten dollars per month per family and the target population is the economically weak.  Where even this small premium is a problem then these individuals are sponsored by the local village or other policyholders.

Malaysia: Selangor Zakat Centre has 20 branches and centres for collection of the Zakat and has 10 representing agencies in collecting the Zakat such as the Malaysian Post and The Malaysian Commercial Banks. On 28^th April an agreement was signed with Takaful Ikhlas to create `The Collective and Intensive Takaful Fund’.  The fund makes a deduction from the monthly payments to the poor and provides death, disability, critical illness, funeral and hospitalization benefits. 

Sri Lanka: Amana Takaful Insurance (ATI) of Sri Lanka is launching a micro-takaful scheme Navodaya'. Navodaya is tailor-made for low-income groups which have been denied the benefits of modern-day insurance.   Participants can obtain the policy as a group, and obtain cover against death, disability, and funeral expenses, as well as, special educational benefits. If at the end of the policy year, there are no claims made by the insured group, Amana Takaful Insurance will sponsor a special event of the said group. They will also be given a refund of their premiums in the form of Surplus if no claims are made.

Indonesia: Takaful Indonesia has undertaken a partner-agent agreement with primary savings and credit cooperatives in Java.  With assistance of a grant an entity was created to manage the relationship between the insurer and the fifteen primary cooperatives who are providing microfinance to provide credit life coverage.

Operational Structure of Micro-takaful

The objective of this proposal is to facilitate the transfer of resources from the formal Takaful sector and Zakat funds towards increasing access to Takaful for the poor either through the partner-agent model or a self-insuring cooperative based scheme. For this to be feasible it would need following commitments:

 Financial donation: A Licensed organization will use its experience to analyze and review proposals as well as administer and implement approved projects.  Funds will be allocated to cover expenses for assessing and establishing microtakaful schemes.

Technical assistance: members of the pool will be asked to consider providing staff for short term field assignments to help implement the microtakaful scheme; this could involve feasibility studies, training of local staff, actuarial analysis, shariah compliancy or advice on infrastructure.  Travel costs of the assigned Takaful staff would be covered by the fund.

Regulatory compliance:  if there is an existing Takaful company in the project country then they will be asked to consider undertaking a partner-agent arrangement with the microtakaful scheme. This should be done on a cost basis allowing the microtakaful scheme to maximize the benefits and transfer them into more affordable products for a greater portion of the poor community.

Capital: Takafuls will be approached to consider making an investment in new start-ups enabling it to achieve capital requirements, this would not be done on a commercial basis but not also as a charity.  The company must not be subsidized too heavily but assisted to stand up on its own two feet in the long term. 

Retakaful: For those microtakaful providers who have achieved regulatory requirements there may be a need to find affordable Islamic compliant reinsurance.  Again the terms and conditions provided to a microtakaful scheme should be done on an affordable basis to support the growth of the company.

 All participation in the pool will be on a VOLUNTARY basis, each member of the pool can decide their participation in a specific project as and when they occur.  The pool will be invested in a Shari'ah compliant manner and is open for anyone to participate.

The Organization Structure of Micro-takaful Fund

A steering group will be established from the contributors who will have the responsibility to oversee the activities of the fund.  A License Organization will manage the fund and oversee all projects whilst a Shariah board will ensure the fund is operating in an Islamic compliant manner.  A regular report will be sent out to all contributors updating on the projects and providing a detailed description of expenses accordingly.

* (Contributed jointly by: Sabbir Patel & Mohd. Ma'sum Billah).