Fri | Apr 16, 2021
ADVISORY COLUMN: RISKS & INSURANCE

Cedric Stephens | Prioritising microinsurance policy

Published:Sunday | March 7, 2021 | 12:12 AM

Karelle Samuda and Stephanie Abrahams, officials in the Ministry of Finance and Public Service (MoF&PS), co-authored an article in this newspaper on March 2. It was about the passage of the Microcredit Act by both Houses of Parliament in January.

They ended it with an invitation to readers to provide feedback. Today’s piece is a public response to that request.

Mesdames Samuda and Abrahams should be applauded, like their minister, in using the print media to engage the public with important parts of their ministry’s policy and legislative agenda. I decided not to contact them privately because there are links between the subjects that this column regularly discusses and the Microcredit Act, which I believe are of public interest. Further, there were important related issues that were overlooked that I believe should be included in the public discussion that they started.

This new law, they wrote, “is part of a suite of legislative and policy steps being implemented by the Government aimed at improving financial stability and access to finance. These steps include the modernisation of the central bank; reforming of the pension-investment limits to allow pension funds to invest in venture capital, private equity, private securities; and the abolition of ad valorem stamp duty on financial and real estate transactions.”

The main objectives of the Microcredit Act, they said, were licensing and regulating microcredit institutions that provide financing to individuals and micro, small, and medium-sized enterprises; encouraging microcredit institutions to lend money at interest rates that are justified by the risks; outlawing predatory lending practices, threats, and intimidation; promoting greater transparency and disclosure of pricing and terms of products that offer greater consumer protection; and reducing the risks of the industry being used to facilitate money laundering.

“The Microcredit Act is important as it is expected to facilitate the provision of sustainable microcredit for formal and informal MSMEs. Greater access to finance is an important development imperative, particularly for low-income households and informally operated micro, small, and medium-sized enterprises, which are generally underserved by commercial banks,” they wrote. So far, so good.

Stalled microinsurance

MOF&PS is the parent ministry of the insurance regulator, the Financial Services Commission. It also supervises the soon-to-be independent regulator of deposit-taking institutions, the Bank of Jamaica. I was, therefore, surprised to learn that even though the article stated that the Microcredit law is “part of a suite of policy and legislative steps”, the Ministry of Finance did not appear to recognise the importance that the availability of access to credit and insurance play in providing greater financial access to low-income groups. In other words, both services are co-dependent. Insurance helps the borrower and the lender to manage their risks.

In the era of COVID-19, the island’s acute exposure to natural disasters, climate change, identifying, assessing, managing risks, and financial stability, or resilience to disasters should be top-of-mind in policymaking. Resilience has two dimensions. The first is the amount of damage sustained, and the second is speed of recovery. Insurance can improve both dimensions of financial resilience.

Insurance payouts, despite the many problems, speed recovery by making funds available more quickly than relying on governmental disaster aid, which can often be quite limited and take months to years to make its way to victims. Insurance, by contrast, can fully reimburse home or business owners – assuming adequate coverage levels – and do so relatively rapidly. In the case of Hurricane Katrina, for example, households with flood insurance were 37 per cent more likely to have rebuilt, according to a report by the US Department of Housing and Urban Development.

An assessment by the Federal Reserve Bank of New York carried out in Puerto Rico after that island suffered three back-to-back losses found that the financial impact on MSMEs took various forms, including decreased revenues (71% of firms); increased expenses (66%), asset and property damage (53%); and increased indebtedness (48%).

Financial access

In August 2014, three overseas consultants reported in a study that in Jamaica, “there is growing interest in promoting and ensuring the sustainability of micro and small and medium entrepreneurs through access to financial services, however, insurance has not been highlighted. The Ministry of Industry, Investment and Commerce adopted the MSME policy in May 2013. This policy aims to reduce or eliminate barriers to the formation, formalisation, and sustainable development and growth of businesses in the MSME sector.

“Among others, the MSME policy promotes access to financial services. Yet insurance is not specifically mentioned in the policy. Indeed, insurance is only mentioned as a mechanism to pave the way to access credit (such as in the context of loan default insurance). In other words, in terms of access to financial services, the policies address challenges related to the access of credit. Insurance only receives a general mention; the MSME policy supports the introduction of ‘innovative financial products and services such as mobile money’ and calls for the restructuring of the MFI sector to ensure ‘levels of efficiency and effective allocation of credit to the MSME sector’.”

The local study was initiated on behalf of the Financial Services Commission. Its aim was to help with the development of a “microinsurance market, and, more broadly, opening new markets to insurance” in conjunction with the development of a microcredit sector. Apparently, work on the former appears to have stalled. It would be interesting to hear from the two ministry officials what is happening.

- Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to aegis@flowja.com.