Microinsurance on the Horizon for Puerto Rico
A La Fortaleza bill that would establish a financial protection system to encourage the development of affordable private insurance products for Puerto Rico’s low-income population, or what is called “microinsurance,” is closer to becoming law.
The Puerto Rico Senate recently passed House Bill 1729 that would make the island the first U.S. jurisdiction to incorporate microinsurance in the local market. Microinsurance is characterized as a financial protection instrument against specific risks and is designed for low-income individuals who are unable to afford regular insurance.
Microinsurance is also an additional option for every citizen seeking alternative protection against specific risks through limited coverage benefits, low-cost premiums, agile and efficient claim-resolution models, as well as the use of wide distribution channels.
The financial protection instrument comes at a time when regular insurers are being criticized for failing to process or pay claims. As a matter of fact, the Puerto Rico Insurance Companies Association (Acodese by its Spanish acronym) opposes the bill because it is a response to “a sector of the population that has not completed the claims process for the damages caused by Hurricane Maria.” Acodese warned about the impact microinsurance will have on regular insurance costs, availability of insurance products or the determination of some insurers about whether they should continue to do business in Puerto Rico.
This new form of insurance, however, does not replace traditional or conventional coverage. According to the Insurance Commissioner’s Office (OCS by its Spanish initials), the entity that will regulate this new type of insurance, microinsurance is an additional tool available to help poor people deal with financial losses due to catastrophic events.
“Through HB 1729, we are offering a new market alternative to consumers to protect against financial risks,” said Insurance Commissioner Javier Rivera Ríos.
The microinsurance market is emerging in India, the Philippines, Mexico, Peru, Brazil, Colombia, Guatemala and in other Asian and African jurisdictions. This type of insurance has become a new risk-management tool for low-income people in developing countries because poor people are already vulnerable and having losses exacerbates their poverty.
According to the nonprofit group Advocates for Development, microinsurance is different from regular insurance in that transaction sizes are smaller and premiums are lower; the target audience consists of those with low incomes; products offered are simpler, often providing just one type of coverage rather than bundles; the claims process is faster and less complicated, involving substantially less documentation; there is less regulation and the underwriting process is simpler. As a result, microinsurance claims are usually resolved quicker than most insurance claims, which must go through a more stringent assessment process.
Microinsurance products are offered by licensed insurers, microfinance institutions, nongovernmental organizations, healthcare providers and informal mutual assistance/friendly societies or community groups.
Although the bill was proposed by La Fortaleza, the local Treasury Department refrained from giving it the green light. According to a report on the measure, the agency recognized the “possible impact” on the general fund, so it granted deference to the Fiscal Agency & Financial Advisory Authority (Fafaa, or Aafaf by its Spanish acronym) and the Office of Management & Budget (OMB) to provide their opinions.
Fafaa, however, stated in written testimony that the fact microinsurance is exempted from the special tax on accrued premiums for Medicare Advantage, Medicaid, Mi Salud and annuities has no impact on the Fiscal Plan for Puerto Rico nor on any of the insurance products offered in Puerto Rico.
Meanwhile, the OMB indicated that an opinion from the agency on microinsurance does not fall into its area of expertise. The measure will now go back to the House of Representatives, which must decide whether it will concur with Senate amendments to the legislation.