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New insurance products for home remittances business

Problem & context

Remittances represent significant financial flows between both developing and developed countries that have rapidly increased in volume in recent years. The global sum of remittances currently equals three times of all official development aid worldwide, reaching over $700 billion in 2017. Migrant workers commonly use remittances to support their families; after going abroad for more-promising work opportunities, they send some of their earnings home. Families who are dependent on remittances from family members abroad are generally in a position of higher risk, and insurance is well suited to reducing the risk of lower-income families. Bancassuarance seeks to bring insurance products to a market segment that cannot afford or access traditional forms of insurance. Presently, there are few insurance products available that are specifically tailored to meet the needs of remittance-dependent families.

The article recommends two new forms of insurance, “Income Stream Insurance (ISI)” and “Family Remittance Insurance (FRI)”. ISI insures the stream of income sent from migrant workers to their home countries in case they meet with an accident or fall sick. FRI directs a portion of the stream of remittance money into health insurance to help protect the livelihood of the families of the migrant workers. FRI product would give migrant workers who prefer that their remittances be used for investment over consumption the opportunity to invest directly in their families’ well-being.

Families and migrant workers may sign up for either ISI, FRI, or both. Figure 1 depicts a hypothetical flow of remittance money from a migrant worker to Pakistan when the worker is signed up for both ISI and FRI. Migrants will decide with their families how much money to allocate toward their ISI and FRI accounts. The first stream of money is a PKR 10,000/- base amount of remittance money that families in Pakistan would directly receive. An additional PKR 500/- premium each will be paid into the FRI and ISI account. The remittance service provider (RSP) receives a PKR 200/- transaction fee. Under the proposed plan, the RSP is responsible for distribution of the remittance base amount of PKR 10,000/- to the family. The Bank is responsible for holding insurance premiums in an account under the family’s name and distributing insurance payouts when the conditions of the FRI or ISI products apply.

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An essential element of this idea is a partnership between RSPs and FIs. RSPs will have a strong incentive to cooperate with FIs because a segment of the population that did not previously use RSPs will now be drawn to use their services because their payments would be safeguarded against risk. These insurance products would not only expand insurance penetration among low-income families but also target the needs of a population heavily involved in remittance transactions. FIs and RSPs have significant profit potential in accessing new sources of revenue and cross-selling to existing customers by implementing this idea as well.

 

Expected impact

These two products will improve the lives of lower-class families in Pakistan in several ways:

  • Risk reduction: The proposed insurance products tied to the RSP services can reduce risks for families whose lives are already particularly vulnerable to many unexpected events (such as health and weather-related shocks).
  • Financial literacy: The families these two products target will also become more financially literate regarding the importance of insurance and various ways of spending and saving their money.
  • Worker empowerment: They will enable migrant workers to invest in their families’ welfare through insurance. Migrant workers will feel more secure about their families’ safety and future.
  • Remittance growth: More migrants may be attracted to RSP services, increasing the remittances consequently sent overseas to families in Pakistan that depend on these funds to sustain their livelihoods.
The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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