INSURANCE BASICS

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the very least, if the premium is outstanding, coverage should be denied. But far better, micro insurers should do whatever possible to avoid the matter to come to that. The low income market is cautious toward insurance at best. A lapsed policy could amount to a loss far greater than just one premium payment, and no possible effort should be spared to prevent such lapses.

If the policy lapses and then the beneficiary tries to make a claim, there will be huge public relations problems even if the claim is denied for legitimate reasons, because it will just reinforce the community’s view that insurers are quick to take one’s money and very slow to pay it back, if they pay it back at all.

A good, even essential, starting point is an effective premium collection system. Failing to establish such a system deprives the company of cash necessary to pay salaries, other expenses and claims. And it also limits investment returns needed to fuel the company’s growth.

A justification sometimes cited for unpaid and over due premiums is legislation, which may give a consumer 30, 60 or even 90 days to seal a deal.

Yet some insurance terms, particularly for protecting a car or home for only a specified period, may be as short as 180 days and should not belong in the category of “permanent” purchases to which such legislation may apply.

For life insurance, there is legislation to protect prospective policyholders’ right to change their minds about buying insurance, allowing them a couple of weeks or more to think things over. But money must change hands before the coverage becomes effective.

Carrying a huge load of felonious policyholders and outstanding premiums is certainly a bad practice. The worst case, however, happened to “insurance company X.” As the country’s economy took a nose dive and the balance sheet of its “corporate client Z” went into a sharp decline, paying insurance premiums became the least of their concerns.

The “insurance company X” then struck a deal with its “corporate client Z” to the extent that it would accept their buildings and other property in lieu of premiums and continue the insurance protection.

It hoped that in time it would sell the property and clear the huge debtor/unpaid premiums balance, which was shown in the balance sheet as an asset and amounted to well over 60 percent of the earned premium. The plan went sour as the property market also collapsed.

When it rains it pours. The insurance company’s days were numbered. It was yet another reminder that one should not fiddle with insurance fundamentals. The barter system “insurance company X” had tried belonged to simpler times and places that are either no more or fast disappearing.

At the time, life revolved around an extended family and the risk of loss was spread among family members. In small communities and villages, a group of families may still practice mutual aid by pledging to bear losses jointly. Such sharing of loss may also be common among farmers and traders in rural areas.

But in present day commercial and even agricultural communities, the needs of individuals, families and groups have become more complex, and so has the spreading of risk to provide security.

Insurance has evolved into a profession. It is a system with set rules to protect property and life against loss or harm in specified events.

Each element of the system must be in place and be managed according to specified standards and norms. Only then can it deliver what is expected. And only then can it work financially.

Whatever the product and the distribution channel, underpinning everything is that essential initial transaction. Protection is given only in return for a payment, or premium, proportionate to the risk involved. If no money changes hands - for instance, and later the policyholder makes a claim and says, “Now you can deduct my premium from the claim payment you owe me” - what transpires can hardly be called insurance? Perhaps it can be called hedging or gambling - but certainly not insurance.

In fact, the most severe adverse selection problem is if only policyholders with claims pay their premiums! “The boring chameleon is a safer bet than the flashy rabbit.” You have the opportunity to do all sorts of things if you do the basics right.

Business produced by the sales force and other distribution channels comes to the main office in the form of insurance applications. The underwriting department then examines the application, assesses the risk, determines the premium and issues the policy.

How well this process of risk selection is handled may result in some applications being rejected and has a direct bearing on the amount and frequency of losses later claimed and, down the line, on the insurance company’s profitability.

As applications flow in and underwriters issue policies in a steady stream, managers see the small sums or premiums adding up. This is the time for the board and management to be content with a slow but unmistakable build-up of premium volume.

It is natural to be tempted with the thought, “Wouldn’t it be wonderful to every now and then have a substantial application in for a huge face amount that would jack up the premium income say fifteen fold in one shot!”

A tidy sum for a big insurance policy would indeed be nice - but in all likelihood it would not be money in the Bank. An insurance policy is essentially a written pledge to pay, in return for a small premium, a much larger amount in the event of a future loss.

The higher the premium the greater the risk of a major claim materialising. Therefore, care is needed not only in evaluating individual risks, but also in selecting the kind and classes of risks to accept. An insurance company should only bite what it can chew.

A word of caution; once guidelines are established, a manager should not over rule staff following the guidelines. This opens the door for staff to decide for themselves which rules to follow and when.

This is why insurance companies should hire qualified staff and not relatives and friends only. This helps in keeping proper distance for good business interaction and let alone to maintain and enforce controls?

To provide cost effective service to a low-income clientele, a new insurer needs to; Adopt a suitable institutional structure for organising an insurance business - suitable for today and tomorrow, for insurance is a long term business.

Keep administrative costs low by outsourcing some functional responsibilities and leveraging existing infrastructure for distribution. Use a distribution system that is familiar and comfortable to the customers. Provide good claims service that responds quickly and fairly, and includes a formal appeals process.

Set up an effective premium collection system to minimize or prevent lapses. Only provide insurance coverage to policyholders that are current with their premiums and avoid entangling insurance and credit risks.

Remain committed to building business gradually. Select employees carefully and by all means avoid employing people on the basis of the Family Tree. Lastly, establish systems to ensure that company controls and guidelines are properly followed. Look out for Part IV.

*Note: In this column I offer general insurance information. Do not completely rely on this column in making insurance decisions. For specific guidelines email; insuculture@gmail.com

For life insurance, there is legislation to protect prospective policyholders’ right to change their minds about buying insurance, allowing them a couple of weeks or more to think things over. But money must change hands before the coverage becomes effective.