Premium Collection: Minimizing Transaction Costs and Maximizing Customer Service

This note highlights unique challenges of collecting insurance premiums in low-income markets, and suggests ways to bring down transaction costs. The note describes common ways of collecting premiums and highlights the following issues with different options:

• Collection at the point of loan disbursement incurs minimum cost, but has disadvantages in terms of limited protection, lack of transparency and poor client awareness;
• Debit order lowers transaction costs and minimizes insurers vulnerability to fraud, but its over-reliance on automation might alienate low-income clientele;
• Fixed deposit approach is one of the simplest collection modes where clients receive semi-permanent insurance coverage without additional transactions;
• Premium can be collected when customers make another financial transaction, creating efficiencies and building on existing cash collection infrastructure;
• Premiums can be collected physically by going door-to-door, but this increases transaction costs and carries the risk of fraud.

In order to expand microinsurance reach and increase viability of existing schemes, microinsurance providers should assist policy holders to finance their premiums. They should allow for a certain number of losses due to lapses or non-renewals. Hierarchical and horizontal controls help minimize fraud and errors in premium collection.