Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Management of Financial Institutions - II - Question Paper

• Adequate Resources to Launch Product and Scale Up: The MFI already has the staff in place to launch the product, and scale up operation when improper.

• Free from Legal and Regulatory Requirements: As the MFI is only an agent in this model, it is not subject to reserve or capital requirements, investment restrictions, and other regulations.

• Potential for Stable Revenue Stream: Commission income is usually higher than profits in the early years of offering an insurance product.

With the MFI as an agent, the insurance company stands to benefit in the subsequent ways:

• Access to New Markets: The MFI opens up the insurance company's access to the market of low-income households. This helps the insurance company achieve its business quota whereby regulation it is obligatory for it to do so.

• Access to Clientele with Strong Financial Records: Repayment rates on loans in the microfinance business are generally very high. This affords the insurance company an opportunity to do business with clients who can be expected to maintain their insurance policies through regular payment of premium.

• Lower Transaction Costs for Serving a New Market: Assessment of proposals is made easier through access to the existing records of the clients with the MFI. Thus, transaction costs for the insurance company are lowered.

• Corporate Citizenship and Regulatory Compliance: Licensed insurers may benefit from the perception that they are contributing to the well-being of low-income groups and to the development of the financial sector as a whole. For foreign insurers, partnering with an MFI may also fulfill regulatory requirements for investment in domestic financial institutions.

Clients of the MFI also stand to gain from the Insurer-MFI partnership. The benefits to them include:

• Better Products at a Lower Cost: Insurers with expertise and experience in the insurance business can offer the most competitive rates, which means the MFI clientele can access appropriately-designed products at low premium.

• Greater Financial Security: Clients benefit from the financial strength of a licensed insurer, which is likely to be greater than that of the MFI.

Claims settlement, however, is 1 area that can reason concern in the Insurer-MFI model of microinsurance, provided the pre-settlement assessment exercise undertaken by the insurance company, which can require submission of different details, and thus the possibly considerable time the settlement of the claim could take. Transparency in communication and dealings is, therefore, a necessary condition for the partnership to function smoothly.

Earning:   Approval pending.