Micro-insurance in the Philippines

It started at the regular seminars in applied finance and actuarial studies at Macquarie University, where Sachi’s interest in microfinance intersected with Peter’s experience in the Australian health insurance system. It resulted in the two of us heading to the Philippines in June 2013.

Geographically, the Philippines consists of more than 7,000 islands, clustered in the West Pacific, south of China, east of Vietnam and north of Indonesia. The terrain is volcanic and the climate tropical, with frequent earthquakes and cyclones.

Hopping on a plane in Sydney and emerging soon after in Manila is not quite the culture shock you might expect. Sure, the scenery is crossed by concrete highways large enough for fighter jets to use, and there are roadside shanties and guards with crisp uniforms and big guns. But the American- Hispanic culture is familiar, English is widely understood and spoken often.

The people of the Philippines trace their lineage to prehistory. Magellan dropped by in 1521, just thirty years after Columbus reached the Americas, and the Spanish colonised the islands soon afterwards. They ruled for the next three centuries, the predominant religion became Roman Catholic and Manila became a centre of the trading between Asia and South America.

The struggle for independence reached the point of revolution during the late 19th century and, in 1898, the islands were ceded to the USA by the Spanish for a price tag of $20 million. They were occupied by Japan in 1942 and re-occupied by the USA in 1945, after Manila had been virtually flattened by bombing. The country became a fully independent republic soon afterwards, with an elected President and bicameral legislative Congress. Although some legacy of Spanish occupation remains, today the American influence is evident everywhere, in the popular culture, clothing and fast food, local television and film, and the popularity of sports like basketball, boxing and ten pin bowling.

To western eyes, Filipino politics appears to be family based, with names like Marcos and Aquino, rather than split on left/right or labour/capital divides. It reached a nadir under the corrupt rule of Ferdinand Marcos and his wife Imelda when their government caused the assassination of a rival politician, Benigno Aquino, in 1983 and then defrauded Aquino’s wife Corazon out of victory in the 1986 Presidential election. A group of students set out in protest from the campus of the University of the Philippines and were joined spontaneously by millions of ordinary citizens who marched with them through the streets of Manila and peacefully surrounded the Presidential Palace until its occupants fled in helicopters and President Corazon (Cory) Aquino took office in their place. This was arguably the first ’flower power’ revolution and was the model for others, culminating in the fall of the Berlin Wall and collapse of the Soviet Union three years later in 1989.

It was in the very building where that historic student march commenced where we were provided with offices, and worked on the health micro-insurance project with two others members of our research team, local academics Mia Pang-Rey and Ivy Suan. For the next fortnight, we were shepherded through the program of visits and interviews Mia and Ivy had organised.

This was punctuated with regular samplings at the local restaurants, especially at Mia’s favourite, Chocolate Kiss, and was sustained with regular infusions of the ubiquitous San Miguel beer. The people of Manila do enjoy their food: their constant smiles may well be attributable to this.

But many Filipino people are poor. The resident population is around 100 million, with the official GDP totalling just one fifth that of Australia. There is also a large ‘informal’ economy, much of which undoubtedly escapes official reckoning. But even in greater Manila, where many of its 20 million people have no doubt been drawn to improve their standard of living, wages and prices are so low, and the shanty housing, cheap taxis, and countless small roadside enterprises are perpetual testaments to economic conditions that are very different from those in Australia. Some 12 million people, many from among the most highly educated, have left the Philippines to live and work overseas and to repatriate part of their earnings back home to support their families.

So we set off on a fortnight of meetings and explorations in this fascinating place. While we were recording interviews with executives of insurers, HMOs and NGOs, health service providers and officials of government health programs, Mia and Ivy were collecting documentary evidence to complement our learning. Our visit to a government hospital in Quezon City, near the university, was an emotional experience even for Mia and Ivy, and made the challenges real for all of us. In this capitalist and predominantly Catholic country, where children and families are most precious, we were continually told that the main two concerns of its citizens were affording good education and proper health care. The questions constantly before us were: what kind of health financing system was feasible and what could we possibly offer from our own lucky circumstances that could be of use to these industrious and generous people?

We learnt there are some 1,700 hospitals throughout the Philippines, of which 60% are privately owned and cater largely for those in the formal economy. There is a continual ’brain drain’ of doctors and nurses, trained in the Philippines, who leave and work in the USA and other Western countries. Of those doctors who remain, many practice from hospital settings, where they provide services to both inpatients and outpatients, and most seek to advance themselves by investing in private hospital ownership. There are also numerous clinics, from where nurses, midwives, community workers and traditional healers practice. Pharmaceuticals are costly and are financed largely from private out of pocket expenditures – many people find them too expensive, a particular problem for those who must rely on under-resourced government hospitals.

Private health insurance operates on the US pattern. It is an employee benefit, provided on a group basis by the major companies, using traditional risk-rated products. Familiar US organisational models, including Health Maintenance Organisations (HMOs) and Preferred Provider Organisations (PPOs), are used to manage service delivery and costs, and claims are monitored closely. Exclusions, especially for unpopular diseases such as HIV/AIDS and psychiatric illnesses, are commonly imposed to keep down the premiums paid by the sponsoring employers. This private insurance system is an adjunct to the ‘formal’ economy and caters almost exclusively for those within the 30% of the population who receive regular incomes and pay taxes.

There is another 30% of the population who are so poor they can access, without charge, government health care services relatively seamlessly. But in between those in the formal economy and the extremely poor are about 40% of the population who occupy an ’informal’ economy where, for one reason or another, they feel hampered from readily accessing government services and who cannot access the private insurance system. It is this middle group that we suspect might aspire to some new form of health insurance that would facilitate access to affordable private health care services. This, we believe, is the primary market – and opportunity – for health micro-insurance in the Philippines.

For a health insurance product to penetrate this mass market on any substantial scale, it needs to focus on the benefits most desired – modestly priced private hospital services. Facilitating demand for such directly paid services would encourage private hospital investment and introduce stronger price signalling across the health services market. This would stimulate supply in the private sector and also allow some private contributions into the public sector where the services are inevitably under-resourced.

Existing insurers do express interest in the mass market within the informal economy. We believe the forms of health insurance offered by these existing insurers, based on individual rating and actuarial pre-funding, would have major issues with complexity and on-costs, trust and acceptance if simply migrated into the micro-insurance market. This is especially so where distribution relies on one-to-one intermediation. In our view, consideration should be given to trialling Australian style private health insurance, with community rating and pay-as-you-go funding. This offers both simplicity and efficiency, and the opportunity for deep penetration. The Australian health insurance system started with small scale initiatives by not for profit community organisations, such as friendly societies and trade unions. It developed in a synergistic way with the growth of the hospital systems, both public and private. It achieved a high level of market penetration without relying on sponsorship by large employers, intermediation or on actuaries. And it has consistently returned between 80% and 90% of its premium revenues in the form of health benefits to policyholders and their families.

Insurance that is community rated and unfunded may be efficient at converting premium expenditures into benefits to consumers, but it is actuarially unstable. That instability becomes troublesome, however, only once the market has matured and competition among insurers intensifies. Intervention becomes appropriate when the market is saturated and insurers turn their attention from finding new customers to cherry-picking among the better risks of their competitors. The health insurance market in Australia was formally established in 1954 and operated for several decades and achieved penetration levels as high as 80% of the population before instability became a serious problem. Actuarial management and risk equalisation were introduced only in the 1980s, after the market had been disturbed in a major way by Medicare.

So is it financially feasible? Could an affordable premium finance the payment of benefits at levels sufficient to access the private hospital services being sought by those within the informal economy of the Philippines?

Our earlier research had indicated that the health care experience of Filipinos was significantly different from that in Australia. Where Australians go to hospitals to have babies, Filipinos generally do not. Australian hospitals treat the disorders of a long and affluent life where, in the Philippines, with its younger population and higher overall mortality, the burden of infectious disease and injuries are the more significant health concerns. Even for a disease such as Dengue, admission to a hospital generally occurs only when home remedies and local clinic treatment has proven ineffective. Comparing averages across the two populations, we estimated that hospitalisation rates in the Philippines are about half those in Australia.

Plugging our estimates of local actuarial parameters into profit testing and financial projection models, we demonstrated that a community rated premium of Php100 per month (about A$2) would, for each hospitalisation, finance an envelope of payments that we believe is sufficient – for example, a mix including a Php2,000 lump sum on admission, Php1,200 per day during admission, and a payment of Php10,000 on death of the policyholder. Such outlays could contribute substantially to charges for health services, and to meet associated administration costs of claims. From our interviews, we believe that level of premium is likely to be affordable and appealing within the target population, and that the payments on claim are likely to be sufficient to purchase relevant items within the private health services market and to provide an attractive level of financial support to the families of policyholders who are hospitalised.

Testing indicated that the financial relationships were sensitive mainly to hospital admission rates and lengths of stay, and relatively insensitive to lapses and mortality.

Our modelling is necessarily based on sparse information, and on observations made without any experience in the Philippines of the particular design features we have suggested. The emergence of private insurance of any kind affects the behaviour of policyholders and of health professionals exposed to it. The practicalities need to be tested and the establishment of pilot schemes would be a helpful next step. The first such pilot scheme commenced in a community of several hundred people on the outskirts of metropolitan Manila in April 2014.

Acknowledgement: This article and associated research has been financed in part from a grant to Dr Sachi Purcal of $15,000 by the Institute of Actuaries of Australia in November 2012.

Microfinance

Microfinance refers to the provision of financial services to people who do not have access to mainstream banking due to poverty or social exclusion, particularly in rural economies. Its objective is to assist customers to improve their lives through self-reliance, access to capital, and tools for financial risk management. It has a long history, including church sponsored pawn shops in mediaeval Europe, and community based thrift institutions, such as credit unions and friendly societies, in post-industrial Europe. A notable recent success has been the Grameen Bank formed in the 1970s in Bangladesh, which now serves millions of people. Replicating that particular model has proved difficult in less densely populated communities and in different cultures.

Micro-insurance

Micro-insurance is insurance that targets a similar market to microfinance, that is those populations who, for reasons of poverty or social exclusion, cannot access mainstream insurance services. In many communities, accessing health services is a particular concern among poor people, because of the economic consequences of poor health of a parent.

Community Rating

Community rating generally refers to a system of pricing that ignores the health status of policyholders and charges a common price based on the average risk characteristics of the community in which it applies. It often also includes guaranteed issue and pay-as-you-go funding. These characteristics simplify administration and reduce the need for complex marketing and distribution. Community rated systems often achieve high levels of efficiency, with a high proportion of the premiums being returned to policyholders as benefits. However, community rating is actuarially unstable and in practice often requires measures to counteract indirect methods of giving preference to low risks – known as cherry picking – and to rebalance the claims experience among insurers with different mixes of risks – known as risk equalisation. These latter issues however usually do not cause serious problem early in the development of community rated markets, and can be addressed as markets grow and mature.

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