Impact of regulation, supervision and policy on microinsurance market development

Policy, regulation (including regulation not specific to insurance) and supervision impact on microinsurance development in various ways:

General features of the policy, regulatory and supervisory framework

• Pro-active and inclusionary regulatory approaches generally are more supportive of microinsurance development than re-active and exclusionary approaches.
• Regulatory uncertainty undermines microinsurance development.
• The overall regulatory burden determines the need for a dedicated microinsurance dispensation. If the overall regulatory burden is low, the need for a dedicated microinsurance dispensation is reduced.

Financial inclusion policy and regulation

• Financial inclusion policy and regulation can push microinsurance development but longterm market growth and scale depends on the financial viability of selling the products in the given market.
• Regulators and supervisors need a clear mandate to support development.

Prudential regulation

• Unnecessarily high regulatory barriers undermine the entry and formalisation of potentially legitimate providers. As a strategy to compensate for limited supervisory capacity, prudential barriers are not successful as the supervisor does not have the capacity to enforce the regulations on all potential market participants. The result may often be to fuel the informal sector.
• Tiering and graduation have been used in the sample countries to facilitate entry, formalisation and growth while still maintaining prudential standards.
• Unlevel playing fields introduce a bias against provision by potentially legitimate players. Following a risk-based approach, entities writing the same kind of risk should face a similar regulatory burden.
• Unnecessary restrictions on institutional types may exclude legitimate providers. Where regulators follow an exclusionary approach they may limit underwriting (and intermediation) to specific and predetermined institutional types, making it difficult for new business models with different legal identities to enter the market. This approach effectively requires the regulator to be able to ‘pick winners’, which it often does not have the capacity to do.
• Sound corporate governance allows regulators and supervisors to leverage nontraditional institutional types. Weak governance for a particular category of institution (such as cooperatives) means that a much higher regulatory effort is required to ensure compliance. However, excluding such institutional types may impede development. Where the regulator has implemented measures to improve governance structures rather than excluding such institutions, a whole new category of entities were able to support market development.
• Demarcation shapes provider models. Strict demarcation increases the cost of offering a product that combines life, non-life and health elements.

Product regulation

• Weak insurance definitions result in regulatory avoidance and arbitrage. In several of the sample countries weaknesses and gaps in insurance definitions have been exploited to avoid regulation, illustrating the need for clear definitions of insurance business. 
• Low-risk features of microinsurance products have allowed regulators to structure regulatory definitions suited to the risk.

These lessons are drawn from five case studies on the impact of regulation, supervision and policy on microinsurance market development (see box on the left).

This evidence was used to extract crosscountry lessons that seek to offer guidance to policymakers, regulators and supervisors who are looking to support the development of microinsurance in their jurisdiction. It must be emphasised that these findings do not provide an easy recipe for developing microinsurance but only identify some of the key issues that need to be considered. In fact, the findings emphasise the need for a comprehensive approach that is informed by, and tailored to, domestic conditions and adjusted continuously as the environment evolves.

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