Integrated risk management — savings-linked solutions
In 2019, the ILO’s Social Finance Programme started working with eight financial institutions in India, Indonesia and the Philippines to develop integrated risk-management solutions to help members mitigate the impact of risks. Having worked on insurance solutions for a number of years, we have learned that insurance can be a relevant mechanism to manage risks that result in large losses, which they cannot cope with out of their cash flow or through the informal support of friends and relatives. To be most effective, however, insurance should be part of a broader menu of financial services that includes savings, credit and money transfers, to collectively enable the working poor to manage a diversity of risks. We refer to these as integrated risk-management solutions.
We wanted to test this hypothesis together with partners.
The projects started with market research to understand the risks faced by members of the institutions. For our partners in Indonesia (KOMIDA, PNM) and the Philippines (OIC, NICO), exposure to health events and natural calamities emerged as the top risks, and financial education fees emerged as the chief economic pressure. While education is not seen as a risk, given that it is a predictable expense, in the minds of members, not being able to pay for education was seen as a major financial risk — hence for partners, the question was how to improve members’ ability to meet these economic pressure through low-cost financing.
Partners were keen to find solutions that could be anchored on savings for a few reasons. First, most people need savings mechanisms, and hence savings-linked insurance could appeal to a wider pool of clients, not just the subset of people who borrow money. Second, savings products typically have a longer duration, providing a platform for partners to offer more permanent protection and build customer loyalty. And, lastly, savings, especially longer-term savings, could be a low-cost source of funds that could match the longer-term loan portfolio of the institutions.
A key feature of savings behaviour of members, as highlighted in this CFI blog, is that savings should be productive (make a return) and inculcate self-discipline. Instilling disciplined savings behaviour among members has been a challenge for OIC, a savings and credit cooperative based in the Mindanao region of the Philippines. Even when members have a savings balance, OIC has seen reluctance on the part of members to dip into their savings during emergencies, preferring to take out a loan to meet the unexpected expense. Part of the reason could be that the cost of the expense could be higher than the amount of savings available, but it could also be because savings are seen as a fungible nest egg that could be used for future expenses, hence if a loan is available for that specific expense, then that could be preferable.
OIC has introduced a contractual savings-linked insurance product. The product is a five-year savings product with calamity insurance. Members need to save a small deposit (a minimum of PHP 500 (USD 10) to a maximum of PHP 2,500 (USD 50)) per month for a minimum of five years. The interest rate is 5% per year. As an incentive to save, members are provided free calamity insurance once the accumulated balance reaches PHP 5,000. The insurance covers damage to property due to a natural disaster. Withdrawals in this plan are permitted only in case of a natural calamity or a health emergency. To ensure persistency and commitment by members to save for an unforeseen event, if they withdraw funds for a non-emergency, or if they are not being regular with their deposits, then the account converts into a regular savings account and attracts a pre-termination penalty. The monthly deposit requirement addresses the discipline challenge and the insurance cover provides access to funds during emergencies.
Each partner took a different approach based on its clients’ needs, the institution’s capacity and regulatory environment. For instance, KOMIDA, a non-profit microfinance institution in Indonesia, decided to introduce an education savings-linked insurance account that combines a contractual savings mechanism for members (women) to save for children’s school fees, combined with life insurance in case the member dies before the savings goal is reached. In this case, insurance pays the difference between the actual savings and the goal amount.
It remains to be seen whether clients embrace the discipline required for these savings mechanisms. Initial feedback from the KOMIDA pilot is that new members with few loans are most interested in the savings mechanisms, but older members who have more than one loan may be wary of the additional requirement on their cash flows. We will monitor the results of the pilots in terms of uptake and savings behaviour over the remainder of the year.
Join us tomorrow (March 31) for an interactive webinar we will discuss the progress of our partners in more detail. We hope to welcome many of you!
