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The Actuary The magazine of the Institute & Faculty of Actuaries
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Microinsurance in Mongolia: a nomadic path

The challenge
In 2009, Tenger Insurance, a non-life company in Mongolia, received a grant from the International Labour Organization’s (ILO) Microinsurance Innovation Facility to pilot a new microinsurance product. Its proposal was to develop an accident and health insurance product for the low-income market in Mongolia. They also applied for a fellow through the Facility’s Technical Assistance programme, specifically requesting an actuary to assist with product development and pricing.

I knew little about microinsurance when I applied for this position, and even less about Mongolia, but I was intrigued: it offered an opportunity to use my actuarial skills in a non-traditional way and to experience a unique part of the world.

When I arrived in Mongolia in January 2010, the project had not progressed much beyond the planning stage, and was competing for internal resources. Battling jet lag, sub-zero temperatures and a foreign language, I set out to understand my new environment: this was not going to be an ordinary actuarial assignment.

Mongolia
Mongolia is a vast country, with an extreme climate and topography. Approximately 40% of the population of 2.7 million lives in the capital city of Ulaanbaatar, with the rest scattered widely over remote and often inaccessible areas. The primary industries are mining and manufacturing, while about 13% of the population are nomadic herders. Winters are harsh and severe livestock losses over the last several years have led many herders to abandon their traditional life and move to the slums on the edge of the city.

Many of the challenges facing modern Mongolia are a consequence of its history and relative isolation. Seventy years as a communist satellite of the Soviet Union have left their mark. With the transition to democracy in 1990, the government began a programme of modernisation which, while creating economic opportunities, has also resulted in increased poverty and decreased funding for education and healthcare.

Private insurance is a relatively new concept in Mongolia as prior to 1990 insurance was entirely state-controlled. Key challenges for the insurance industry are consumer education and reaching a scattered rural population.

There are currently 16 non-life insurers and one life insurer in Mongolia: all but the top five are relatively small. Insurance companies are regulated by the Financial Regulatory Commission established in 2006 to supervise all non-banking financial institutions. Regulations prohibit foreign insurance companies from operating in the country, although much of the domestic market is reinsured globally.

Mongolia has a government social insurance scheme that covers pensions, social welfare, health, workers’ compensation and unemployment insurance. Participation is mandatory for permanent employees, and voluntary for the self-employed. In practice, only about 20% of the total population is currently enrolled and the scheme is under review with the intent to make coverage mandatory for all citizens.

Tenger’s microinsurance project
The main objective of my fellowship was to build the capacity of the microinsurance team at Tenger and assist them with a successful pilot. After revamping the project plan, getting new members of the team in place, and conducting some initial training, we were ready to tackle the market research and data collection phase.

Market surveys and focus groups with the target market helped us identify demographic trends, income levels, and risk management priorities. Data from the National Statistics Office allowed us to calculate crude population mortality rates and accidental death rates, split by gender and age. Analysis of accident rates indicated that male accidental mortality was three to four times higher than for females; results from Russia and Ukraine showed a similar pattern. Validation against external sources was important as the experience data from Mongolia isn’t sufficient to be fully credible.

We obtained summary data on hospitalisation frequency and length of stay from the Ministry of Health, and detailed hospitalisation data from two major hospitals. Hospitalisation frequency rates were much higher than expected, between 15-50% depending on age group and gender, and the average length of stay was 8-15 days. Investigation revealed that Mongolians had developed a practice of regular hospital visits out of a sense of entitlement during the former communist regime. Hospitals are compensated by the government for all in-patient days, which encourages longer stays. We also found that, while the government scheme does give everyone access to hospital care, hospitals frequently charge additional fees for items such as food, diagnostic tests or surgical supplies.

Mongolia’s first actuarial pricing model
A further objective of my fellowship was to develop actuarial capacity and I worked closely with our assigned actuarial student and the project’s Mongolian consultant to cover basic actuarial concepts, models and standards of practice. This sub-team created a simple pricing model in Excel, using Palisade @RISK software, to model the aggregate claims distributions based on input assumptions for product features and benefit amounts. By developing a dynamic model we were able to educate our team, partners and the insurance regulator on the trade-off between benefits and premiums, and agree on the combination that would best meet the needs of our target clients. The result was a pretty simple model: all of the project members are able to use it and understand what data is needed to update the assumptions.

The final product was designed to complement the existing health system by providing a simple, flexible hospital cash benefit. The payout is a fixed amount per hospital day, after a one or two-day waiting period has been met, with a maximum number of covered days. The benefit is paid directly to the policyholder and can be used to cover not only medical expenses but indirect costs, such as transportation or childcare. The product is bundled with accidental death coverage.

With the distribution partner, Xac Bank, a sister microfinance organisation, we selected two pilot branches to launch the product, making it mandatory for new microloan clients. The product was formally launched in December 2010, and so far, the response has been very positive. The project team now needs to focus on administration and claims procedures, monitoring experience, and eventually expanding to additional branches. Sales data will be used to evaluate which benefit options are most accepted and emerging claims experience will be analysed closely to determine if the pricing assumptions need to be revised.

The benefits of fellowship
My fellowship year has just ended and, in spite of ongoing challenges and frustrations, it was a very rewarding experience. Microinsurance requires a different application of actuarial skills — less focus on complicated models and more on good product design that meets the needs of the low income market. It requires a bit of risk-taking to design and price a product in a completely new market, without as much data as you’d like, and building a process for ongoing experience monitoring becomes crucial.

Developing insurance and actuarial capacity in a developing country required a lot of patience and careful listening. It was important to always keep in mind that my goal was to transfer knowledge and to help create tools so that the project could continue in a sustainable way after I had left. I was fortunate to work with a wonderful project team who were eager to learn as much as possible. I was extremely honoured to mentor our actuarial student, who became the first person sitting exams in Mongolia to pass CT1. I also learned to be more flexible, to be innovative, to look for different solutions in the face of obstacles — not skills you are likely to learn while sitting actuarial exams, but necessary ones for working in the microinsurance field.

Of course this is only part of the story, as I had many adventures living and travelling in Mongolia, which I’ll never forget. It was an opportunity of a lifetime, and I’m glad I took it.

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The Actuarial Profession in Mongolia
Formed in 2008, the Society of Actuaries of Mongolia currently has nine members. The Financial Regulatory Commission licenses actuaries in Mongolia and is responsible for setting professional standards. The Society introduced exams from the UK actuarial syllabus in 2010 and licensed actuaries will be required to pass CT1-4 and meet work experience requirements.

However, with no fully qualified actuaries currently practicing in Mongolia, there is little guidance available on practical applications of the study material, nor any official standards of practice to ensure actuarial work is done consistently. This is an area where members of the global actuarial profession could provide significant mentoring and leadership.

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Kelly Rendek is a qualified actuary with over 20 years of experience in insurance and reinsurance in both Canada and Ireland