Pillar: Adaptation and Resilience

Exploring the potential of remittance-linked insurance products to improve the resilience of households in sub-Saharan Africa (SSA)

Remittances are particularly important on the continent and serve as a lifeline to many households. Yet insurance products that enable the sustained flow of remittances or the resilience of senders and receivers remain unexplored in SSA.  Both remittance senders and receivers face unexpected risk events that have negative effects on their livelihoods:

• Sender risk events: Senders may no longer being able to send remittances when they are faced with unexpected risk events such as death, disability, accident or illness. Exposure to risk events is exacerbated by the fact that many migrants work in the informal sector and are unable to access basic safety nets. Senders also face income shocks when remittance receivers face a risk event that has a large financial implication and requires senders to send additional money to receivers to cover the financial cost of the risk event. These types of events are unplanned and therefore put additional financial strain on remittance senders. 

• Receiver risk events: Remittance receivers face shocks to their disposable income due to health, life, asset or business-related risks, which in turn negatively affect their ability to maintain their livelihoods. When this happens, receivers require greater support from remittance senders. Additionally, receivers also face reduced income if senders face shocks and are unable to send money to them. This could be shocks to the sender such as health or business risks, but also more severe risk events like disability or death.  

However, both senders and receivers often do not employ appropriate coping mechanisms to manage these risk events. Distributing insurance through remittance service providers (RSPs), e.g. remittance-linked insurance products, has the potential to build resilience by unlocking greater formal remittance flows to SSA, as well as by increasing insurance uptake to help close the risk protection gap. Transferring risk to an insurer will enable the continued flow of remittances despite senders facing a risk event. Consequently, the welfare of the remittance receivers, who are often highly dependent on remittances for their livelihoods, is protected by ensuring that remittance flows are sustained despite risk events faced by senders. Insurance can also help to smooth the financial burden on senders when remittance receivers incur a shock and require senders to help tide them over. 

This note outlines why remittance-linked insurance products are important, what forms they could take, the business case for such products and the regulatory challenges that still need to be overcome to enable the introduction of such products on the continent. 

The Access to Insurance Initiative (A2ii) celebrates its 10 year anniversary in 2019. On 2 and 3 September, the A2ii hosted its 10-Year Anniversary Conference High-Level Forum and Expert Symposium in Frankfurt and launched the “A2ii: 10 Years On” publication. This publication focuses on the evolution of inclusive insurance over the last decade, probing the impact of inclusive insurance regulations and the way forward to address the gaps that remain.

It includes detailed country case studies on Ghana and Mongolia that are based on a range of interviews with public and private insurance industry stakeholders. In its capacity as a specialist development agency, FSD Africa and DFID supported Cenfri in its collaboration with the A2ii to develop the publication.

You can download the publication from here.

In June 2019, the i2i Facility published three reports that explore the behavioural interventions which have proven to influence financial decisions. The first report  provided an overview on Behavioural
interventions for financial services. It identified four focus areas with  23  related behavioural interventions for financial service providers.

As we explore how behavioural science can narrow the gap between customer intention and customer action, the other two reports have started to look at examples from specific financial services with a focus on Behavioural Interventions for Insurance  and Behavioural Interventions for Remittances respectively.

These reports were prepared collaboratively with FSD Africa and form part of the insights being generated through our Risk, Remittances and Integrity Programme, which is a partnership between FSD Africa and Cenfri.

Below is an extract from the reports, highlighting key concepts, behavioural interventions and their application in financial services.

What is behavioural science?

Behavioural science is the scientific study of human actions. It seeks to understand the underlying factors that influence judgement and decision-making. These can relate to the individual or to the contextual environment. Someone living with very little income, for example, will find it more difficult to make long-term decisions around savings or accessing credit. Their constrained circumstances will force them to focus on their immediate needs.

Application of behavioral science to financial services

Financial service providers (FSPs) are increasingly seeking to translate new insights from behavioural science into the design and delivery of financial services. These insights have been mostly used by financial service providers to reduce the cost of acquiring new customers, improve the retention of existing customers and to achieve positive customer outcomes such as timely loan repayments. These FSPs use behavioural interventions to influence the financial decisions (or behavior) of potential customers or existing customers.

Types of behavioural interventions

According to studies done globally by behavioural scientists in 2017 and 2018, there are 23 behaviour interventions for financial service providers with respect to the savings, credit, payment and insurance decisions of financial service customers. These interventions are categorized into 4 main intervention areas i.e. (i) client choice architecture, (ii) commitment features, (iii) pricing and financial benefits and (iv) client communications.

Client choice architecture refers to how product choices (e.g. loan sizes or monthly pension contribution levels) are presented to the customer during the sales or services process. Commitment features relate to product features that commit an individual to a predefined course of action or goal e.g. labelling as an intervention under this area refers to tagging services e.g. ‘Education or holiday savings. The first two intervention areas and interventions are as illustrated below:

More details on the intervention areas and interventions can be found in the report by the i2i Facility titled Behavioural Interventions for Financial
Services

Application in insurance

Insights from behavioural science can be used to inform the design and delivery of insurance products and increase uptake and retention of existing consumers.

Fourteen studies by 44 authors tested 10 interventions on insurance uptake and usage, across eight countries. Key findings based on the application of various interventions were as below:

Under the intervention area Client choice architecture, utilizing the choice set intervention

a) Among Mexican MFIs, the uptake of life insurance policies decreased by 30% when customers were asked to pay insurance premiums in an upfront lump-sum amount, as opposed to paying in weekly installments.

b) The number of cotton farmers in Burkina Faso buying weather index insurance increased by 15.5% when claim payments consisted of both a pay-out of the loss event and a rebate of the premiums paid to date. Farmers were willing to pay 10% more for the premium rebate policy than the traditional policy in which only a claims payment would be received if a loss were incurred

More key findings under the report by the i2i Facility titled Behavioural
Interventions for Insurance.

Application in remittances

Remittance providers are increasingly looking for innovative ways to increase formal remittance flows, in terms of number of customers and frequency and value of transactions. Behavioural interventions can be applied to reduce the cost of acquiring new customers, to improve retention of, and usage by, existing customers and to achieve positive customer outcomes.

Nine studies by 16 authors tested four interventions on remittance behaviour. The studies were conducted in three countries with senders from ten different countries. Key findings were as below:

Under the intervention area Commitment features, utilizing the labelling intervention:

a) Filipino migrants in Rome were willing to remit 15% more to family members in the Philippines when the transfer was labelled as being for educational purposes. When the label was enforced by sending the money directly to the school, Filipino migrants in Rome were willing to remit 17.2% more.

b) When given up to US$400 to remit, Salvadoran migrants in the United States remitted 16% more (US$35) when they had the option for the recipient to receive the funds in cash, as opposed to in grocery vouchers.

More key findings under the report by the i2i Facility titled Behavioural
Interventions for Remittances.

Innovation has the ability to create opportunities, improve inefficiencies, increase competition, drive scale and improve the reach and value of financial products and services. However, innovation also comes with risk, and due to the novel nature of innovation, it is often not fully accommodated in current regulatory frameworks.

Given that innovation brings with it both benefits and risks, it is the regulator’s role to proactively consider the trade-offs between the two, which requires the regulator to balance its mandate to develop the market with its mandate to protect consumers.

The first note explored approaches to regulating for responsible market innovation, with particular focus on the test-and-learn approach as well as the concept of the regulatory sandbox, underpinned by it. Drawing on case study country examples, it explores the potential benefits, prerequisites and considerations required by regulators to effectively implement approaches to encouraging innovation in their markets.

This focus note unpacks the range of tools available to financial sector regulators to regulate for innovation in the changing financial services landscape. It serves as a toolkit for regulators on how they can better encourage and facilitate innovation in their markets, whilst protecting consumers thereby fulfilling both market development and consumer protection mandates.

This “living” framework has its genesis in insurance; however, its applicability spans the entire financial sector, striving to guide decision makers regardless of the jurisdiction’s divisions of roles, or the regulatory and supervisory model in place.

Read the report here.

Our partner for our Risk, Remittances and Integrity Programme – Cenfri, produced a study that explores the potential role of cell captives in the development of insurance markets in sub-Saharan Africa (SSA).

What is cell captive insurance?

Cell captive insurance is a relatively new concept that grew out of the captive insurance concept. Captive insurance is a model where a corporate entity self-insures its own assets by setting up its own dedicated insurance license. The cell captive concept follows a hub-and-spoke model whereby one central licensed insurer (referred to as the “sponsor” or “promoter”) forms ring-fenced cells issued to other organisations (referred to as the “cell owners”) for the insurance of the cell owner’s own assets or the insurable risks of its client or membership base.

The cell captive insurer is accountable for all regulatory compliance and holds the insurance license that covers the business of all the cells. The cell captive structure thus emerged as a way entity to access the benefits of captive insurance without setting up its own insurance company. Cell captives have been one of the most important steps in the evolution of the captive insurance space and have become an integral component of the self-insurance market in many of the established captive domiciles.

A cell captive in practice

In Ghana, a recent insurance diagnostic study by Cenfri (2018) showed that certain sectors of the economy (such as oil and gas or the energy sector) are unable to fully access appropriate insurance policies from the local insurance industry due to the market’s lack of capacity to cover large, specialised risks. This situation is likely to continue with the expected increase in the growth of the Ghanaian oil and gas sector. At the same time, local content requirements imply added costs and procedures for local corporates to access foreign cover. Cell captive arrangements could, in principle, address this constraint by allowing corporates to capitalise a cell accounto self-insure their risks via a cell captive arrangement, tailoring the coverage to meet their specific needs. Should this be the case, the cell captive arrangement would be hosted by a local insurer licensed for this purpose, with centralised reinsurance arrangements as appropriate, and would serve to crowd in capital from the large players in the extractive industries for each cell.

At present, cell captives, have yet to be extensively explored or implemented across the SSA region. Cell captive innovations in SSA are largely concentrated in S.Africa, Mauritius, Namibia and Seychelles.  An example from S. Africa is the SA Taxi which is a company that provides credit to finance the purchase of minibus taxis. SA Taxi decided to branch out into the provision of insurance cover to its clients. It wanted autonomy in the design of its offering to fit the realities of its particular customer base but lacked in-house insurance experience and expertise and therefore acquired a cell with trong>Guardrisk, the largest South African cell captive insurer, rather than set up its own insurance license.

Read more on how cell captives could stimulate insurance markets in sub Saharan Africa here.