Assessment of Microinsurance as Emerging Microfinance Service for the Poor

The Case of the Philippines

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• Publisher: Asian Development Bank
• Year: 2013
• Print ISBN: 9789290929550
• eBook ISBN: 9789290929567
• Edition: 1
• Topic: Business
• Subtopic: Insurance
• Index: Business

The Asian Development Bank (ADB) has been one of the few active partners for microfinance development in the Philippines. It has contributed to the growth of formal microfinance activities, including expanding the outreach of diversified formal financial services to poor clients at the most affordable costs. The risk of making poor clients worse off because of unexpected events gave rise to the formation of ADB's intervention focusing on microinsurance development. This report provides the initial sector assessment on emerging microinsurance activities and hopefully guidance on the way forward.

1 Sector Assessment: Development and Strategic Issues

Sector Overview

Microfinance Development in the Philippines

Just like other countries where a sizable proportion of the population does not have access to financial services, the Government of the Philippines had been largely engaged in the provision of subsidized credit programs from the early 1970s to the 1990s. These credit programs were mostly directed to the agriculture sector and the small entrepreneurs in the industry sector. In 1997, the National Credit Council reported that about 86 directed subsidized credit programs were implemented by almost 20 government nonfinancial agencies.¹ Despite the number, these credit programs did not result in providing the poor access to credit and other financial services. More often than not, these programs were seen as dole outs by a majority of borrowers, resulting in very poor repayment rates and large fiscal losses on the part of the government.

Recognizing the ineffectiveness and inefficiencies of implementing directed subsidized credit programs, the government, in consultation with the private sector (consisting mostly of financial institutions, nongovernment organizations [NGOs], cooperatives, and people’s organizations), adopted and issued the National Strategy for Microfinance in 1997. The strategy envisions the establishment of a viable and sustainable microfinancial market through the adoption and implementation of the following policy principles: (i) greater role of the private sector or microfinance institutions (MFIs) in the provision of financial services; (ii) establishment of an enabling policy environment that will facilitate the increased participation of the private sector in microfinance; (iii) adoption of market-oriented financial and credit policies, e.g., market-oriented interest rates on loans and deposits; and (iv) nonparticipation of government line agencies in the implementation of credit and guarantee programs.

The adoption of the National Strategy for Microfinance led to the issuance of policy measures and relevant regulations, and the enactment of laws that prompted the government to veer from implementing subsidized credit programs. Foremost of these are the following: (i) Agriculture and Fisheries Modernization Act (RA 8425), which provides for the nonprovision of credit subsidies, phaseout of directed subsidized agriculture credit programs, and adoption of market-based interest rates for agricultural credit; and (ii) Executive Order No. 138, which provides for the adoption of market-based financial and credit policies and the nonparticipation of government nonfinancial agencies in the implementation of credit programs. As a result of these issuances, government nonfinancial agencies were no longer allowed to implement credit programs. Government financial institutions, on the other hand, are allowed to lend by providing wholesale funds to private financial institutions using market-based interest rates.

In line with the policy espoused in the national strategy, the General Banking Act of 2000 was also enacted, which mandated the Bangko Sentral ng Pilipinas (BSP) to formulate and issue regulations that recognize the peculiar characteristics of microfinance. As a result, the BSP issued relevant circulars that allow noncollateralized cash flow-based lending. Succeeding circulars providing the appropriate regulatory environment that encourages banks to engage in microfinance were also issued (e.g., lifting of the moratorium on bank branching for banks engaged in microfinance operations). These circulars, together with the adoption of market-based interest rate policy, opened the gate for banks to provide microfinance services to the low-income sector. As of 30 June 2011, 198 banks have already engaged in microfinance operations. Recognizing the viability of microfinance as an industry, several commercial banks are currently providing wholesale funds to private financial institutions engaged in retail microfinance services. Some commercial banks, however, have opted to establish their own rural or thrift banks that are wholly engaged in microfinance operations.

These landmark reforms paved the way for increased private sector participation in the provision of financial services to the low-income sector. Aside from the banks, cooperatives and microfinance NGOs also provide microfinance services to this sector. Thus, from less than 500 microfinance institutions engaged in the provision of microfinance services in 1997, currently there are more than 2,000 MFIs, including branches, and about 7 million microfinance clients from only about less than 500 thousand before the year.

Given these developments, the Philippines is considered one of the countries in Asia with a relatively developed microfinance industry that provides financial services to the low-income sector. In fact, for three consecutive years (2009–2011), the Economist Intelligence Unit has recognized the Philippines as one of the countries in Asia with “very strong regulatory regimes and good prospects for MFIs to enter the sector (i.e., provision of financial services to the low-income market) and perform effectively.”² In 2010–2011, the country was adjudged as having the best microfinance regulatory framework among 54 countries.

Based on 2009 report, 26.5% of the Philippine population lives below the poverty line.³ This constitutes about 3.86 million poor families or 23.1 million individuals providing a huge market for microfinance products and services. As MFIs became more familiar with the needs and demands of their clients, various types of microfinance products that cater to both the clients’ entrepreneurial and consumption smoothing needs have been developed. Payment transfers and remittance products and services have also been made available to cater to the needs of low-income households with family members leaving or working abroad or in other localities.

Aside from these services, an increasing number of MFIs recognize the need of the low-income sector for risk protection. Savings and credit alone are not enough to protect the poor from unforeseen and unfortunate events, such as death, injury, illness, and loss of property. The poor are most vulnerable to these types of contingency. Without appropriate risk protection, income gains from microfinance can easily be eroded, preventing them and their dependents from improving their lives and overcoming poverty.

Recognizing the need of the low-income sector for risk protection, a number of MFIs started to provide and facilitate the provision of insurance products to their clients. Some MFIs partnered with commercial insurance companies by buying group insurance policies for their members. Most of these insurance policies, however, were credit life insurance aimed at protecting the lending institution rather than the client. Other MFIs opted to organize their clients into a mutual benefit association (MBA), an entity separate from an MFI, which provides basic insurance products to its members. Cooperatives, on the other hand, invested in cooperative insurance societies, which provide and sell insurance products to their members.

A good number of MFIs are engaged in informal insurance schemes. These schemes involve the regular collection of a fixed amount from the clients with a promise to pay a guaranteed amount of benefit when a contingency happens. Since these entities do not have any certificate of authority from the Insurance Commission to provide insurance products and services, the schemes are classified informal insurance activities. The study conducted by Llanto, Geron, and Almario (2008) estimated that about half of the 22,000 operating cooperatives in the country provide some form of insurance to their members through “mutual fund schemes,” which are not licensed by the Insurance Commission.

The Philippine Insurance Industry

The Insurance Code of the Philippines⁴ provides the framework for the regulatory and policy environment of the insurance industry in the Philippines. The code designates the Insurance Commission as the regulatory authority mandated to supervise and examine all the players in the industry.

The insurance industry in the Philippines comprises the commercial life and nonlife insurance companies, MBAs, cooperative insurance societies, agents, and brokers. All entities providing insurance products and services are required to secure a license to operate from the Insurance Commission.

As of 14 August 2012, there are 103 ...

Table of contents

• Front Cover
• Title Page
• Copyright Page
• Contents
• Abbreviations
• Acknowledgments
• 1 Sector Assessment: Development and Strategic Issues
• 2 Remaining Development and Strategic Issues
• References
• Back Cover