A recent report produced by the International Cooperative and Mutual Insurance Federation (ICMIF) and the Institute of Policy Studies of Sri Lanka (IPS) highlighted the challenges of microinsurance in Sri Lanka. This includes the lack of policies and regulatory mechanisms to facilitate microinsurance, in particular minimum capital and reinsurance requirements as well as Risk-Based Capital (RBC). This also includes the segregation of life and general insurance business, as a reality of microinsurance is that ideally a variety of covers would be offered in one package, including both life, health and general insurance coverage.

An additional challenge for microinsurance is a strong reluctance of microinsurance organisations to partner with formal insurance providers. This is an issue of trust as many informal, community-based organisations feel that the profit-maximising outlook of formal insurance companies is potentially damaging to their welfare-maximising endeavours.

A further challenge is the presence of the government in the microinsurance industry and resulting reliance on government assistance in times of disaster. In addition to the government’s assistance, low-income households were found to be highly reliant on community-based networks as a risk management strategy. The high level of social organisation in village communities points to the availability of room for growth for mutual and cooperative microinsurance providers, yet to be fully exploited.

The low demand for insurance among low-income households also contributes to impeding the growth of the microinsurance industry. A major reason for the low demand is the lack of insurance awareness among low income households. Additionally, these households express high levels of mistrust towards insurance companies due to past experiences. Furthermore, the microinsurance industry targets the low-income households which can often be characterised by highly irregular and seasonal income patterns; the inability of such households to commit to periodical premium payments has also contributed to shrinking their demand for insurance.

These above challenges are the perfect storm for a discretionary mutual approach:

• As discretionary mutuals are not even classified as insurers in some countries, wherever discretionary mutuals are developed the regulations should allow for actuarially appropriate levels of RBC and capital levels. Since benefits are not guaranteed the risks in such an operation would be significantly lower than traditional insurance. Similarly all classes of coverage, life and general, should be allowed for together in the discretionary mutual structure.
• The issue of trust does not enter into discussions with respect to discretionary mutuals as pools are created for the participants, with the surplus of the pool being given back to participants either directly or through the group the participant is a member of. The use of groups of participants rather than selling on an individual basis also leads to increased trust.

• Discretionary mutual pools can offer very precise coverage desired by the participant and can thus work around coverage being provided by the government.