Senegal: Opportunity for microinsurance?
In February 2012, the former State Minister of Economy and Finance of Senegal, Abdoulaye Diop, sent an official memorandum to all heads of decentralised financial systems (DFS name used in the West African Economic and Monetary Union (WAEMU) for microfinance institutions) in the country to recall the prohibition of developing insurance business, particularly life insurance.
It is true that since the growth of microfinance, microfinance institutions (MFIs) have developed some sort of self insurance, usually in the form of a solidarity fund. This usually consists of the compulsory deduction of a percentage of credit, ranging from 0.5% of the initial loan to much higher. Having deducted the percentage, the premium sustains a solidarity fund that allows the microfinance institution to protect against the risk of default upon death (all causes) and sometimes even absolute disability of its borrowers.
This practice is well known and common in most areas of microfinance, especially where microinsurance is still relatively under developed. Thus, on top of protecting itself against the relatively small risk of default; the MFI also creates a significant additional financial reserve. This is possible due to the legal ambiguity of the Parmec law, which governs credit unions in the WAEMU states.
However, since 2008, the new provisions in force in the WAEMU zone, Law N°2008-47, are now much clearer on the subject, and are detailed in the following articles:
- Article 4: "The operations that the decentralised financial systems can perform are (1) the collection of deposits (...), (2) Lending operations (…), and (3) the commitment operations upon signature: Is considered a commitment based on operations upon signature, any act by which a decentralised financial system assumes, an endorsement, bond or other security in the interest of a member or client."
- Article 6: (...) “The microfinance institutions that plan to promote activities or professions governed by specific provisions should seek the required approvals and comply with the regulations applicable to the proposed transactions, except as otherwise provided in this Act.”
- Article 36: “A decentralised financial system may enter into agreements with other similar institutions, organisations or other financial institutions to assist its members or its customers to purchase goods and services offered by third parties in connection with the pursuit of its objectives. It may sign insurance contracts to cover risks associated with its business and also sign any insurance contract for the benefit of its members or its clients, individually or collectively.”
Therefore, it is now explicitly stated that microfinance institutions are authorised to process credit and savings, but as for any other financial service, such as insurance, it is necessary to refer to the regulations in force and obtain the necessary permits. Consequently, a microfinance institution can still protect itself against the risk of default, but only by signing an insurance contract, and outsourcing the risk. If the MFI desires to retain this risk, the best solution is to either create an insurance company, or take shares in an existing company. Furthermore, as stated in Article 104, the DFS union “can organise financial solidarity between its members in case of failure of one or more of them, while ensuring the preservation of the financial equilibrium of the network.” Although this article does not indicate what form of solidarity can be used, one can argue that, in accordance with Article 6, if it takes the form of insurance, it must be outsourced to an insurance company.
A culture of tolerance
A certain tolerance was granted to the DFSs in the sub region to form solidarity funds against the event of death of a member, even though the CIMA code strictly prohibits it. Taking into account the fact that this practice does not comply with the laws and regulations governing the insurance sector, and it is forbidden for MFIs to subscribe insurance contracts without authorisation, Abdoulaye Diop expressed his determination to end this tolerance vis-à-vis the creation of solidarity funds and has urged the industry to adopt a professional insurance business.
Senegal is as a result the first country of WAEMU to remind MFIs that their activities should be limited to savings and credit. In most other countries of the sub region, the governments have rarely taken any action to protect the microfinance sectors, which are clearly struggling to draw the attention of insurers.
It must be noted that in these countries, there is a very limited legal framework for microinsurance that would enable MFIs to offer legal insurance products to their customers. The "partner agent" model allows MFIs to offer additional services to their clients, as well as to develop a new economic model that is based on the distribution of a financial product that they are not experts in. The new regulation of microinsurance, which has recently been signed by CIMA, needs to address this issue, while also strictly supervising the distribution of insurance products and properly training agents.
Behind the discussion to enforce the ban on MFIs to insure directly, is the question whether insurers can meet the needs of the MFIs clients, including micro enterprises, borrowers, savers and all those excluded from traditional financial systems. It is indeed easy to forget that MFIs are not insurers, and that the activity necessitates specific technical and financial capabilities. However, if insurers make a greater effort to enter the market, it is conceivable that the MFIs would be less reluctant to transfer their risks.
The alliance between insurers and MFIs has been successful to a certain degree. For example, the life insurance product developed by Allianz Ivory Coast and offered to clients of UNACOOPEC, has succeeded because they found a suitable system that involves both institutions operationally and financially.
In some cases, insurers are deeply involved in the development of a microinsurance solution, as is the case of the Cauri d'Or (life insurance) product offered by UAB Vie in Burkina Faso for women working in the markets of Ouagadougou. However, with the exception of a few pilot projects, insurers mainly specialise in the life insurance market, and are limited in their capacity by the lack of specific reinsurance opportunities. If insurers were able to better serve this market, DFSs might be more willing to outsource their insurance.
New microinsurance regulations
With the recently signed new microinsurance regulations for the region, it remains to be seen whether they will encourage insurers to invest in this market. However, they do represent a significant step in the development of the sector, as well as illustrating a drive by governments to regulate the sector. A noteworthy aspect of the new regulations is the introduction of the Key Performance Indicators (nine out of the 10), which were identified by the Performance Working Group of the Microinsurance Network. These indicators, which must be reported on a yearly basis, are applicable to all microinsurance providers irrespective of legal structure, environment, organisational setup and type of microinsurance product offered.
An alternative way of dealing with the issue is to create an insurance company or a mutual structure that will fulfil all the legal requirements of offering insurance. This is the case of PAPME that established PAPME with Africaine Vie in Benin, or CIF that wants to establish CIF Vie in Burkina Faso. However, this approach is very complicated in West Africa due to the complexity of riskier products and the lack of financial capacity to bear the risk.
Finally, the words of Abdoulaye Diop have had a direct impact on the MFIs in the region, some of which immediately decided to outsource their term life insurance borrowers in favour of insurers. Hopefully this shall pave the way for better cooperation between the MFIs and insurers to ultimately better protect income-generating activities and living conditions for low-income households.
Abdoulaye Diop, former Minister of Economy and Finance in Senegal