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Social reinsurance: An innovative way
to sustain community health insurance schemes
The International Labour Office (ILO) and the World Bank have joined forces to devise a new way of helping small health insurers overcome financial crises caused by the unpredictable cost of severe or chronic illness. This innovative approach specifically addresses the "micro" health insurers' precarious financial situation, which is rooted in the small size of their groups, underfunding, low technical and managerial skills and their lack of access to reinsurance which is normally available to all large insurers worldwide. The approach is called "social reinsurance" (or "social re").
Why is a new approach necessary?
In low-income countries, low GDP, minimal tax collection, and regressive tax structures restrict government revenues. For instance, in India, only about 5 per cent of GDP is collected as Government income. With insufficient revenues, governments cannot finance universal health insurance coverage.
Moreover, most people are not only unable to pay for high and unexpected health costs, but they are also unable to access health insurance. A large share of the poor population eke out a living in the informal economy. The irregular income typical of this sector means people cannot pay health insurance contributions regularly. Also, paying for insurance only makes sense if it can be relied upon to provide services when necessary. But many stories circulate of schemes, including public ones, defaulting on their obligations, or absent altogether from rural or slum areas, which erode people's trust in insurance and their willingness to adhere to an insurance scheme. The resulting low affiliation levels make insurance unprofitable and inefficient. A vicious cycle ensues where people have to finance the crippling costs of their own health care and risk falling into the so-called "health-poverty trap", where treatment depends on having a job, but getting or holding a job depends on being treated.
How do the poor cope with health risk?
The most common alternative is to pay for health services on the spot. However, cash payments require liquidity, something that the poor do not have. In cases where treatment is vital, a family may be obliged to sell its assets (crops, livestock, house, etc.) to raise cash. Insurance is the best way out of this illness-poverty trap, except that those who need insurance most are not only least likely to buy insurance, but also least likely to get a fair deal out of it. Instead, poor households rely on social relationships and seek help from the extended family, the community, and those in similar situations. Community self-help and mutual help are based on the notion of balanced reciprocity - in other words, that today's giver might be tomorrow's receiver. Given this reality, micro health-insurance units (MIUs) have emerged and bear witness to the fact that unity and a large network strengthens everyone. MIUs are often the only locally accessible safety nets with little red tape and an immediate response time.
MIUs are themselves exposed to various risks, the most serious of which are insolvency and the danger that they might default on their commitments. Given the difficulties, help for the poor can best be provided by ensuring that existing community health schemes provide solvent and efficient insurance for informal economy workers, with special protection against unpredictable and large claims. In an ideal world, this would mean transferring the risks to reinsurers. However, in the private sector they have so far refrained from doing business with MIUs because of the relatively small profit margin they can expect to achieve compared to that obtainable in rich countries, and the lack of reliable information to quantify the expected financial risks and opportunities. Unfortunately, governments have also not been very supportive of MIUs. Enter social re.
What does social re do?
Social re opens the way to transfer risk from MIUs to a reinsurer. The reinsurer agrees to cover medical expenses above an agreed threshold in return for a small contribution from MIUs - initial calculations suggest that the premium would be US$0.075 per family per month to cover risks up to US$1,000 - a small price to pay to prevent insolvency.
In order to succeed, social re needs to access information on risk profiles and the costs of health benefits in rural and informal settings where MIUs operate. Until recently, MIUs lacked the technology and skills necessary to supply such data. However, higher levels of education, computer literacy, the availability of electricity both in urban and rural areas, decreases in the cost of computers, and widespread access to the Internet and telephones, have provided them with the means to transform the way they function. It is now feasible to introduce an efficient framework for the collection, analysis, and transfer of data, thus creating the essential link between MIUs and reinsurance operations. Thus, social re can now start working in support of MIUs.
Designed to operate modern risk management techniques for the informal economy, social re is breaking new ground. It is not competing with other reinsurers; its activities are socially oriented. It will provide technical support for IT systems and claims settlement at no cost to the affiliated microinsurers, thus reducing the insurers' administrative overheads. Moreover, the premiums for this non-profit, pro-poor concept are calculated as low as possible. Social re also gives back to MIUs an exceptionally high share of the premiums (both through reinsurance benefits and through discretionary budgets in years with few claims). Social re's social emphasis is also seen in the design of different financing channels for insurable and uninsurable benefits. Pure public health interventions should be financed through subsidies and donor support, which can best be channelled through MIUs, whereas random and future risks can be managed at affordable costs.
The result of this work is the Social Reinsurance Model. The book * which describes this new approach and provides a gold mine of new analytical information is just out. The concept still has to be tried and tested on the ground, and a pilot project is planned once the necessary start-up capital has been raised. Several countries have been considered for the pilot. The Philippine Government has expressed interest in including social re in the ILO Decent Work Country Initiative, because the approach fits well with its overall anti-poverty policy and its plan to extend health insurance coverage to rural and informal workers.
Social re cannot replace the role of governments in low-income countries in striving for universal health insurance. But it seeks to improve the solvency of micro health insurers in the informal economy, thus converting informal mutual assistance into an adequately capitalized, more equitable, better run, sustainable risk management system. If local insurance schemes are able to provide health services and drugs much more reliably than in the past, without running out of money when the number of expensive cases exceeds the norm, then the programme will be a success. Successful and affordable MIUs are bound to attract more people.
Ultimately, social re should shorten the time when a case of severe or even chronic illness in the informal sector of a poor country will be similar to that in a wealthy one - unfortunate for the individual involved, but it will neither mean bankruptcy for his family nor a disaster for his community health insurance scheme.
For more information on social re, please see the Web site www.ilo.org/socialre, or send an e-mail to: socialre@ilo.org.
The book on social reinsurance (see footnote) can be bought from ILO publications at: pubvente@ilo.org, or www.ilo.org/publns, or from World Bank publications at: books@worldbank.org or www.worldbank.org/publications.
* Dror, D.M., Preker, A.S. (Editors): Social Reinsurance: A New Approach to Sustainable Community Health Financing, Washington, World Bank and ILO, September 2002.