Estimating Capital Requirements to Scale Health Microinsurance Serving Rural Poor Populations
46 Pages Posted: 4 Apr 2018
Date Written: April 4, 2018
Objective The objective is to estimate the amount of money health microinsurance plans (a.k.a. Community-based health insurance - CBHI) require to launch, scale and reach sustainable operations in rural India.
Methods We develop the methodology to calculate the capital required for a CBHI plan to reach sustainability. It includes algorithms to estimate operating costs, capital requirements, loan requirements, interest earned, loan repayment installments and scaling projections. We apply these methods to examine the sustainability of a prototype plan. We check the plausibility of assumptions posited for the model with data of 2 CBHI plans.
Results A prototype CBHI plan, covering 40k persons requires US$ 62,477 to offset deficits in the initial years. Repayment of principal and interest requires 15 years. Plans could bear up to 14% p.a. Assuming 10.96% interest in local currency (INR) ≈ 5% in US$, the NPV is US$ 18,455 or 30% of the original investment. When expressed per person, this amount is US$1.56, and per policy-year (over 20 years) it is a mere US$0.10. Even the poorest populations can pay such overhead (while simultaneously paying the claims and operations costs). The per-capita operating costs drop as enrollment and renewal rates and average insured household size increase. Even with very low per capita annual premiums (US$ 3.51 to US$ 4.71), cumulative claims ratios stabilize around 70% (benchmark: 73% and 69%, in Bihar and Nepal, respectively). The CBHI plans can generate considerable additional resources as premiums for healthcare, estimated at US$52 (over 15 years) and US$85 (over 20 years) for every US$1 borrowed at inception.
Conclusions The financial gains to investors flow from interest payments. Impact investors and CBHI plans have a margin to negotiate the interest rate from zero to 14 percent. The financial gains to the insured consist of the assets accumulated over and beyond payments of benefits. The amounts and the income smoothing effects are considerable.
The social effects include extending health insurance to uninsured rural populations. The governance gains flow from large-scale standardization of rule-based participatory management of these mutual-aid plans.
This investment opportunity is scalable from a small to substantial ticket size because the amount per CBHI plan is modest. The size of the investment determines the scale of populations covered.
Governments and policymakers may contribute by creating a supportive regulatory environment. Governments could also consider collateral arrangements.
Such investments cum supportive regulations may enable the development of a new market for reinsurance of outlier risks written by CBHI plans.
Keywords: Microinsurance, health insurance, capital requirements, impact investing, sustainability, scaling, business case, entrepreneurship, finance.
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