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Microinsurancein Brazil

Research Series

Volume 2

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Microinsurancein Brazil

Research Series

Volume 2

EditorCLAUDIO CONTADOR

ENGLISH VERSION BY

GUSTAVO CALDAS

JOÃO CARLOS MARTINS

RICARDO TAVARES

SANDRA MACHADO

ESCOLA NACIONAL DE SEGUROS – FUNENSEG

Rio de Janeiro2010

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Escola Nacional de Seguros – FunensegRua Senador Dantas, 74 – Térreo, 14o andarRio de Janeiro – RJ – Brazil – CEP 20031-205Telephone 5521 3380-1082Internet: www.funenseg.org.bre-mail: faleconosco@funenseg.org.br

Printed in Brazil

No part of this work covered by the copyright herein may be reproduced, transmitted, stored or used in any forms by any means graphic, electronic, or mechanical including but not limited to photocopying, recording, scanning, digitalizing, taping, Web distribution, infor-mation networks, or information storage and retrieval systems, unless permitted by Escola Nacional de Seguros – Funenseg.

Virginia Thome – CRB-7/3242Librarian responsible for creating the catalog card

EditorClaudio Contador

Assistant EditorRonny Martins

Cover DesignerPedro Rocha

Desktop PublishingInfo Action

RevisionBrian Windus

M572 Microinsurance: research series/Organized by Claudio R. Contador; v.2 English version: Gustavo Caldas... /et al/. – Rio de Janeiro: Funenseg, 2010. 386 p., 28 cm – (Microinsurance: research series, v. 2)

Content: Part II – Studies in the Research Program by the Escola Nacional de Seguros – Funenseg: Microinsurance Consultative Committee CNSP: Kaizô Beltrão Francisco Galicia, Marcelo Cortes Neri. Volume II: Studies undertaken within the Research Program of the Escola Nacional de Seguros – Funenseg: Advisory Committee on Microinsurance of CNSP: Synergy between microinsurance and microcredit and the development of the markets in Brazil: Lauro Gonzalez; Estimate of the potential market for microinsurance in Brazil by analyzing the structure of family spending and small businesses with related products: Kaizô Beltrão; estimated mortality of low-income families: Kaizô Beltrão; Microinsurance concept evaluation among the low-income population: Datafolha; Microinsurance demand and willingness to pay: José Luiz Carvalho; Business plan modeling of a microinsurance unit: Fernando Augusto Freitas de Araújo; Microinsurance operations in an insurance company: Fernando Augusto Freitas de Araújo.

English version: v. 2 – paper 1 – João Carlos Martins; papers 2, 4 and 5 – Gustavo Caldas; papers 3

and 6 – Ricardo Tavares; paper 7 – Sandra Machado. ISBN 978-85-7052-524-6 – v. 2

1. Microinsurance – Studies and Research. I. Contador, Claudio R. II. Title. III. Series.

0010-0954 CDU 368-058.34 (07)

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Authors

CAIO TOLEDO PIZA

DANIEL BRUNO GARCIA

DATAFOLHA INSTITUTO DE PESQUISA

FERNANDA PAES LEME RITO

FERNANDO AUGUSTO FREITAS DE ARAÚJO

JOSÉ L. CARVALHO

KAIZÔ IWAKAMI BELTRÃO

LAURO GONZALEZ

LUCIANO GONÇALVES DE CASTRO E SILVA

SONOE SUGAHARA

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Contents

1 Synergy between Microinsurance and Microcredit and the Development of the Markets in Brazil, 1

Lauro Gonzalez, Caio Toledo Piza, Daniel Bruno GarciaEnglish version: João Carlos Martins

Executive Summary .............................................................................................................1Introduction ..........................................................................................................................3Part 1 – The Offer of Microcredit in Brazil .......................................................................4

Microcredit: How to Defi ne it? ..........................................................................................4The Innovations .............................................................................................................4Microcredit in Practice .................................................................................................9Government Initiatives and Types of Institutions Linked to Microcredit ....................11Assessment of Microcredit Supply in Brazil ................................................................13

Part 2 – Informal Economy and Crofi nance: Evidences from the Database of ECINF ............................................................................................................17

Defi nition of the Potential Market ...................................................................................17Socio-economic Characteristics of the Potential Market .......................................................19The Use of Insurance .......................................................................................................21Potential Market and Access to Financial Products .........................................................24

Part 3 – Microcredit and Microinsurance: Analysis of Synergy....................................26Innovations about Microcredit and Microinsurance ........................................................26

Synergy through the Credit Agent ...............................................................................27Synergy through Frequency of Payments ....................................................................28Synergy through Focus on Women ..............................................................................29Potential Interest of MFIs in Microinsurance in Brazil ..............................................29Potential Distribution Channels: the Case of Correspondents .....................................31Important Points in the Interaction Microcredit-Microfi nance .......................................33

Bibliography .......................................................................................................................35

Presentation, xiii

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2 Estimate of the Potential Microinsurance Market in Brazil from the Analysis of Families and Small Companies Expenses Framework with Related Products, 37Kaizô Iwakami Beltrão, Sonoe Sugahara, Fernanda Paes Leme Rito English version: Gustavo Caldas

Introduction ........................................................................................................................37Composition of the Household Expenditure ....................................................................40Expenses with Insurance Products ...................................................................................43

Access to Insurance Products by Occupational Status/Pension Plan ..............................50Access to Financial Products ...........................................................................................57

Expenditure with Consumption of Selected Durable Goods ..........................................59Access to Insurance, Pension Plans and Financial Products and Services for Urban Informal Companies ........................................................................................83Final Considerations ..........................................................................................................91Bibliography .......................................................................................................................93Annex I – About the POF ..................................................................................................94Annex II – Defi nition of the Informal Sector and Outline of the ECINF Universe ...............................................................................................................100Annex III – Probability of Purchasing Insurance Products and Pension Plans in Relation to Occupational/Pension Plan Benefi ciary Status of The Head of Household and Household Per Capita Income ........................................102Annex IV – Probability of Simultaneous Access to Insurance and Pension Plans Products by Occupational/Pension Plan Benefi ciary Status of the Head of Household and Household Per Capita Income ..........................107Annex V – Probability of Purchasing Selected Consumption Goods by Occupational/Pension Plan Benefi ciary Status of the Head of Household and Household Per Capita Income ..................................................................................110

3 Estimativa da Mortalidade para os Indivíduos em Famílias de Baixa Renda, 171Kaizô Iwakami Beltrão, Sonoê Sugahara Pinheiro, Luciano Gonçalves de Castro e SilvaEnglish version: Ricardo Tavares

Introduction ......................................................................................................................171Databases ..........................................................................................................................175Methodology .....................................................................................................................178Results Obtained ..............................................................................................................187

Probability of Death between the Exact Ages x and x+n (nqx) ......................................187Survivors at the Exact Age x (lx) ....................................................................................189Deaths between the Exact Ages x and x+n (ndx) ............................................................190

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Probability of Survival between the Exact Ages x e x+n (npx) ......................................191Time Lived between Ages x and x+n Years, or Equivalent, in a Stable Population, People with Age between x Years (Inclusive) and x+n Years (Exclusive) (nLx) ............192Central Rate of Mortality (nmx) ......................................................................................193Time Lived between Ages x and ω, i.e. Time Lived since the Age x Years until the Group Extinction, or Equivalently Population with Age above x Years (Tx) ...........194Life Expectancy at Exact Age x (ex) ..............................................................................195Separation Factors of Age x, (nfx or nax) .........................................................................196

Final Comments ...............................................................................................................197Bibliography .....................................................................................................................198Annex 1 – Complete Mortality Table – Male Population with Income <=1 MW ....................................................................................................................201Annex 2 – Complete Mortality Table – Female Population withIncome <=1 MW ....................................................................................................................204Annex 3 – Complete Mortality Table – Male Population withIncome <=2 MW ....................................................................................................................207Annex 4 – Complete Mortality Table – Female Population withIncome <=2 MW ....................................................................................................................210Annex 5 – Complete Mortality Table – Male Population withIncome <=3 MW ....................................................................................................................213Annex 6 – Complete Mortality Table – Female Population withIncome <=3 MW ....................................................................................................................216

4 Microinsurance Concept Evaluation among Low Income Population, 219Datafolha Instituto de PesquisasEnglish version: Gustavo Caldas

Purpose ..............................................................................................................................219Technique .......................................................................................................................219Target Population ...........................................................................................................220Sample ...........................................................................................................................220Methodology ..................................................................................................................221Comments ......................................................................................................................222

Household Profi le (in %) .................................................................................................222Household Profi le – Residents (Single, in %) ...............................................................223Household Profi le – Residents (Spontaneous and single, in %) ....................................224

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Interviewee’s Profi le (in %) .............................................................................................230Interviewee’s Profi le (Stimulated and Multiple, em %) ......................................................232Interviewee’s Profi le (Stimulated, in %) ........................................................................234

Microinsurance Concept Evaluation ..............................................................................237Main Results – Microinsurance .....................................................................................237Microinsurance Concept Evaluation –Concept Evaluated .........................................................................................................238Microinsurance Concept Evaluation –(Stimulated and Single, in % – 5-point Scale) ...............................................................239Microinsurance Concept Evaluation – (Spontaneous and multiple, in %) ...................241

Points of Disliking the Concept ................................................................................245Microinsurance Concept Evaluation – Importance of Holding Insurance(Stimulated and Single, in % – 5-point Scale) ...............................................................249Microinsurance Concept Evaluation – Insurance Market Potential (Stimulated and Multiple, in %) ....................................................................................251Microinsurance Concept Evaluation – Insurance Market Potencial (in %) ................................................................................254

Life Insurance Evaluation ...............................................................................................256Main Results – Life Insurance .......................................................................................256Main Results – Microinsurance × Life Insurance .........................................................257Microinsurance Concept Evaluation – Life Insurance Evaluated Concept for Life Insurance ..........................................................................................................257Microinsurance Concept Evaluation – Life Insurance (Stimulated and single, in % – 5-point Scale) ...................................................................................258

Life Insurance Adequacy to Interviewee and Family ................................................260Intention of Buying Life Insurance in the Next 12 Months .......................................263Reasons for Not Buying Life Insurance 64% Probably + Certainly Won’t Buy .......265Reasons for Being Uncertain About Buying Life Insurance 26% Don’t Know If Will Buy .......................................................................................................268

Interest in Receiving Information on Insurance ............................................................284Main Results .....................................................................................................................285

Gender ...........................................................................................................................286Family Income ...............................................................................................................287Age Range .....................................................................................................................287

5 Microinsurance Demand and Willingness to Pay, 289José L. CarvalhoEnglish version: Gustavo Caldas

Introduction ......................................................................................................................289Data Description ...............................................................................................................291

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Willingness to Pay ............................................................................................................293Gain in Welfare .................................................................................................................298Conclusion .........................................................................................................................306Annex I ..............................................................................................................................308Annex II............................................................................................................................318

6 Business Plan Modeling of a Microinsurance Unit, 321Fernando Augusto Freitas de AraújoEnglish version: Ricardo TavaresMicroinsurance .................................................................................................................321

Introduction ...................................................................................................................321Business Plan – Microinsurance Unit .............................................................................322

Executive Summary .......................................................................................................322Objective of the Business ..............................................................................................323Mission of the Enterprise ..............................................................................................323Strategic Objectives .......................................................................................................324Market ............................................................................................................................324Organizational Structure ................................................................................................325

Economic Scenario ...........................................................................................................327 Infl ation .........................................................................................................................327 Interest Rate ..................................................................................................................329 Activity Level ...............................................................................................................331

Financial Projections .......................................................................................................334Balance Sheet ................................................................................................................334Profi t and Loss Statement and Cash Flow .....................................................................334Sensitivity Analysis .......................................................................................................336

Investments Policy ............................................................................................................309Information Technology Policy .......................................................................................340Reinsurance Policy ...........................................................................................................341Bibliography .....................................................................................................................341Annex 1 – Susep Circular 311, of December 27, 2005 ...................................................343Annex 2 – Results of the Simulation Net Present Value ...............................................346Annex 3 – Results of the Simulation – Internal Rate of Return ..................................347

7 Microinsurance Operations in the Insurance Company, 349Fernando Augusto Freitas de AraújoEnglish version: Sandra Machado

Concept..............................................................................................................................349

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Microinsurance and its Target Audience .......................................................................349Current Regulatory Milestone (Summary) ...................................................................350Specialized Insurance Company vs. Department of a Traditional Insurance Company .........................................................................................................351Economic Environment ...................................................................................................352Products Development .....................................................................................................356

Products/Features/Phases...............................................................................................356Pricing ............................................................................................................................359

Strategy of Commercialization and Delivery ................................................................360 Financial Management ....................................................................................................362Investments Management ................................................................................................366Information Technology Policy .......................................................................................368Bibliography .....................................................................................................................371Annex 1 – Susep Circular 267, dated September 21th, 2004 .........................................372Annex 2 – Susep Circular 306, dated November 17th, 2005 ..........................................375Annex 3 – CNSP Resolution 88/2002 ..............................................................................380

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Presentation

This second volume of Microinsurance in Brazil: Research Series reproduces the continuation of the research coordinated by the Escola Nacional de Seguros in 2009 and 2010.

Examining the experience of social inclusion in other sectors and its application with respect to microinsurance, the fi rst article deals with microcredit. Indeed, microinsurance has strong synergy with microfi nance, as shown by citing international examples and experience. But what about the situation here in Brazil? We tend to follow international trends and the strong expansion of microcredit in Brazil reveals several innovative distribution channels, which can also be adopted by microinsurance. This is the theme taken up by Gonzalez1, of the Centro do Estudos em Microfi nanças da Fundação Getúlio Vargas (Centre for the Studies of Microfi nance at the Getulio Vargas Foundation), whose fi ndings hi-light the lessons learned from the implementation of microcredit in Brazil and these should be examined carefully.

International experience points to life insurance as being the fl agship and starting point for microinsurance. But to what extent do the existing mortality tables available for the Brazilian population as a whole represent Class C and D? To answer this question, Beltrão2 coordinated a survey to estimate and tabulate mortality of individuals in low-income families. It was found that there are marked regional differences. For example, one can’t say that a person who receives a minimum salary in the North and Northeast has the same life-expectancy as that of a person with the same income level that is living in the South, Southeast or Midwest. Regional differences show the importance of products that are tailored to match each environment.

What are the social benefi ts of the implementation of microinsurance in Brazil? The fundamentals of welfare theory can quantify the direct benefi ts and this requires knowledge of the characteristics of the demand for microinsurance. But how does one estimate empirically the demand for something which does not yet exist? Specifi c research concerning the reactions of low-income families to life insurance led to the establishment of

1 Gonzalez, Lauro. “Sinergy between microinsurance and microcredit, and the increase of the markets in Brazil”, in this collection.2 Kaizô Iwakami Beltrão, Sonoê Sugahara e Fernanda Paes Leme. “Estimation of mortality for individuals in low-income families” in this collection.

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a framework for a relationship between insurance policy pricing and purchase intentions3. Using the statistics from this sample, Carvalho4 estimated, empirically, the demand for microinsurance, based on methodology commonly referred to as “willingness-to-pay”. Price elasticity – that is, the sensitivity of consumption in response to price – proved to be greater than average to that typically estimated5. The implications of this empirical evidence is important; while demand for traditional insurance shows little sensitive to price, the demand for microinsurance exhibits a stronger reaction. With regard to the revenue garnered from insurance, an increase in the average price of traditional insurance policies (with inelastic demand) serves to increase it. In the case of microinsurance (with price elasticity of demand about the same or more) this effect is uncertain, and it’s likely that revenues will fall. With these characteristics for the demand for microinsurance, Carvalho estimates that the gross direct benefi t garnered by families by the purchase of a microinsurance life policy could be as much as 16.6% of the Bolsa-Família6 budget. It is a heightened social benefi t that reinforces the importance of microinsurance as an instrument of well-being in the low income population. Including the indirect benefi ts generated by positive externalities, the total benefi ts can exceed 25% of the value of the Bolsa-Família.

Finally, addressing the viability of microinsurance from a commercial point of view, Araujo7 simulated a business plan for microinsurers and noted that even in the most unfavourable conditions, sensitivity analysis using the Monte Carlo model showed a profi t return of over 20%.

In conclusion, this series of compilations is only the start of a range of promising literature discussing microinsurance in Brazil. Further research on topics not yet covered, specifi c actuarial aspects, improvement of the regulatory framework and internal procedures of the insurance providers, the reinsurance of microinsurance, and combating fraud in microinsurance, are some of the issues we will discuss and disseminate in the future.

Claudio ContadorDirector of Research and Development

Escola Nacional de Seguros

3 DataFolha. “Evaluation of the concept of microinsurance among the low-income population”, in this collection. Research in the form of interviews, was held in 428 domiciles with monthly household income declared between one and fi ve minimum wages, in the cities of São Paulo and Rio de Janeiro.4 Carvalho, Jose Luiz. “Demand for microinsurance and willingness to pay” in this collection.5 Contador, Claudio R. “Economics of Insurance: fundamentals and applications.” São Paulo: Editora Atlas, 2007. Chapter 5.6 Family bonus, Brazilian governmental welfare program.7 Araujo, Fernando. “Modeling the Business Plan, a unit of MI,” this collection.