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Market Feasibility Study: Microinsurance in the Republic of Moldova

Zurich Financial Services Global Microinsurance Practice

Alexandra Mihailescu
University of St. Gallen, Full-time MBA Program, Class of 2009 MBA Project Professor Dr. Steven Floyd May 2009

Acknowledgements

I

Acknowledgements
First of all, special thanks to Professor Dr. Steven Floyd at the University of St. Gallen, who not only served as my MBA academic advisor, but also provided guidance and encouragement throughout the process. Your humanity, open-mindedness and intellect will remain an inspiration to me throughout my career. Thank you also to Zurich Financial Services for sponsoring this project, and for giving me the incredible opportunity to learn more about microinsurance and to bring attention to an often overlooked, but very special corner of Europe. In particular, I would like to express my sincere appreciation to Raymond Risler who patiently and kindly provided continuous support and feedback. In addition, I would like to acknowledge and extend my heartfelt gratitude to all of the organizations and persons who generously provided their time and valuable insights – and without whom this paper would not have been possible. The hospitability and kind cooperation I experienced in Moldova was extraordinary. In particular, I would like to recognize Microinvest, who served as my on-site research partner; the help of Artur Munteanu and Olga Fretescu was indispensable for helping organize interviews and focus groups. Furthermore, I benefited greatly from the experience and assistance of Roxana Savescu, Natalia Dubencu, Margarita Lalayan, Severine Deboos, Maria Ekström Johansson and Michael McCord. Finally, I cannot overlook the support of three extraordinary people in my life: my parents, Anda and Nick, and my partner, Arthur, were my relentless champions – providing constant motivation and acquiescing my moments of uncertainty. Thank you!

Executive Summary

II

Executive Summary
As one microfinance client in the Philippines cleverly stated, “Life is one long risk.”1 Although risk is an inherent part of life, lower-income households are particularly vulnerable to economic shocks. Without effective risk management tools, low-income households are often the most vulnerable and yet, the least protected. This is where microinsurance comes in. Microinsurance is part of the broader concept of microfinance, which includes a variety of “micro” financial services targeted to lower-income households. In definition, microinsurance is not very different from traditional insurance, except that it targets a different segment of a population. In reality, however, this entails an entirely different way of thinking about insurance: new, simpler products, alternative distribution channels and marketing instruments, as well as a focus on efficient operations. With an annual per capita income of approximately $2,500 (PPP), the Republic of Moldova is consistently ranked as one of the poorest countries in Europe. Often shuffled between Russia and Romania, Moldova has a history peppered with cultural conflicts that have left their mark on the small land-locked country. Today, it is heavily dependent on agriculture and on remittances from labor migrants, as well as on its larger neighbor, Russia for energy and for trade. About 30 percent of its 4.2 million population lives in poverty (under $2 per day), and about 95 percent live on under $10 a day.2 The purpose of the present study was to assess the feasibility of introducing microinsurance in Moldova. To address this key question, an understanding of both the supply side (current insurance market) and the demand side (risks faced by low-income persons and the coping strategies used to manage these risks) was necessary. The majority of the primary research was conducted on-site in Moldova, in Chisinau and its environs, during the month of March 2009. Qualitative research techniques were utilized, including focus group discussions (FGD) and guided individual interviews with members of both the public and private sector, as well as with international non-governmental organizations, such as the World Bank, IMF and ILO. Demand research revealed the following main risks faced by low-income households: death or serious illness of a breadwinner, loss of the year’s harvest due to natural disaster, and property loss. Currently, most households use self-insurance and informal insurance as their primary risk management tools; savings and the purchase of fixed assets are

1 Cohen, M., & Sebstad. How poor people manage risk. The Microinsurance Centre Briefing Note #2. 2 World Bank PovcalNet, online poverty analysis tool. www.worldbank.org Retrieved April 2009.

Executive Summary

III

utilized ex-ante, while borrowing or migrating for work are used to cover expenses expost. Clearly, the effectiveness of such strategies is limited. However, most low-income persons do not currently consider insurance as a viable alternative. There are many ways to explain this: firstly, there is a lack of financial education among the population about the purpose and benefits of insurance. Secondly, there is a widespread lack of trust in institutions. In addition, most low-income households feel they do not have sufficient financial resources, perceiving insurance as an “extra” or even “wasteful” expense, or as a luxury product. Finally, most insurance firms do not offer any products targeted to the lower-income population, nor are most firms making a distinct effort to reach out to this segment. Despite the passivity of firms in reaching out to lower-income people, a sentiment of excitement surrounds the current insurance market. Supply research demonstrated that the market is still small and underdeveloped, but has a good deal of potential. In the last three years, there has been a marked consolidation among firms and brokerages while total premiums have steadily increased. Simultaneously, there has been an explosion of activity concerning trade associations and industry-specialized publications, which signify the dynamic nature of the market. The driving force behind these changes is primarily the 2006 insurance legislation which outlined a plethora of regulations that is helping raise Moldova’s market to international standards. Currently, most insurance firms offer a traditional product range, many relying on automobile and other compulsory insurances. Direct sales through intermediaries (agents and brokers) is very common, and marketing is primarily executed through traditional mass media (television, radio, print advertising). One of the main issues with the current product offering is that most products are not affordable, while payment is required in full and upfront. Microinsurance is a mostly unknown concept in Moldova. possibility of developing one in the future. microinsurance into a new market. There is a clear need and demand for microinsurance in Moldova. The potential market is estimated to include approximately 2.5 million persons.3 A microinsurance product would need to offer both quality and flexibility, at a reasonable cost and with a flexible There is no specific

microinsurance legislation, although the government has expressed openness to the Microfinance, however, is quite welldeveloped and regulated, which is often a pre-requisite for the successful launch of

3 Calculated as percentage of population living under $10 per day, based on World Bank figures. Further details can be found in chapter 4.5

Executive Summary

IV

payment plan. To address the key risks facing low-income Moldovans, the recommended microinsurance products are personal accident, credit life, agriculture and property insurance. Furthermore, trustworthy and far-reaching distribution channels which would reliably provide access to the maximum number of people is important. For Moldova, the recommended distribution channels are microfinance institutions and SCAs. Premium payments and claims disbursements could also be handled through the Post Office, which has the widest and most accessible branch network of any institution in Moldova. For operations, the partnership model is recommended, whereby Zurich would liaise with an on-site partner, who would in turn coordinate the respective delivery channels and manage regulatory compliance. Finally, investment in financial education is necessary for the success of microinsurance. Raising the financial education and helping to build an insurance culture fosters a favorable environment for all parties involved – buyers and suppliers. Therefore, it is recommended that educational programs be implemented in collaboration with the government as well as international organizations, trade associations and rural organizations.

Exchange rate:
11.27 Moldovan Lei (MDL) = 1 USD The above exchange rate is used throughout the paper for conversion into current figures. All computations have been rounded and are therefore estimates.

Table of Contents

V

Table of Contents
Acknowledgements ....................................................................................................... I Executive Summary ..................................................................................................... II Table of Contents ........................................................................................................ V Index of Figures ....................................................................................................... VIII Index of Tables ............................................................................................................ IX List of Acronyms and Abbreviations ........................................................................ 1 1 Introduction to microinsurance .............................................................................. 2 1.1 Understanding the risks and vulnerabilities of low-income households ... 2 1.2 Overview of microinsurance .............................................................................. 4 1.3 Zurich Financial Services – Global Microinsurance Practice ........................ 7 2 Country context: the Republic of Moldova .......................................................... 9 2.1 Brief historical and cultural overview .............................................................. 9 2.2 Economic and political environment .............................................................. 11 2.3 Health in Moldova ............................................................................................. 14 2.4 Climate and natural disasters .......................................................................... 15 3 Supply: The insurance industry in Moldova .................................................... 17 3.1 Industry overview ............................................................................................. 17 3.2 The role of government in insurance .............................................................. 19 3.2.1 The National Commission on Financial Markets ............................... 19 3.2.2 The Department of Insurance Supervision ......................................... 21 3.2.3 Insurance legislation ............................................................................... 21 3.2.3.1 Microinsurance legislation ........................................................ 22 3.2.3.2 Compulsory insurances ............................................................. 22 3.2.4 The National Health Insurance Company .......................................... 24 3.2.5 State-subsidized agricultural insurance .............................................. 25 3.3 Insurance trade associations ............................................................................ 26 3.3.1 The Moldovan Union of Insurance Providers .................................... 26 3.3.2 The Actuary Association of Moldova .................................................. 27 3.3.3 The Association of Insurance Brokers of Moldova ............................ 28 3.3.4 The National Office of Automobile Insurers ...................................... 28 3.4 Industry-specific publications ......................................................................... 29 3.4.1 ARS Assecuratiorum: the Art of Insurance Magazine ..................... 29

Table of Contents

VI

3.4.2 Asigurare.md: the Online Insurance Portal ....................................... 30 3.5 Overview of insurance firms............................................................................ 30 3.5.1 Moldasig ................................................................................................... 32 3.5.2 ASITO ....................................................................................................... 33 3.5.3 Grawe Carat ............................................................................................. 34 3.5.4 MOLDCARGO ........................................................................................ 35 3.5.5 Donaris Group ......................................................................................... 35 3.5.6 Garantie .................................................................................................... 36 3.6 Insurance products ............................................................................................ 37 3.6.1 Supplementary health insurance .......................................................... 38 3.6.2 Property insurance.................................................................................. 39 3.6.3 Automobile insurance ............................................................................ 40 3.6.3.1 RCA: Compulsory motor third party liability insurance .... 40 3.6.3.2 Autocasco: Supplementary comprehensive automobile insurance.................................................................................... 41 3.6.3.3 “Carte verde” – the International Green Card System ......... 41 3.6.4 Life insurance .......................................................................................... 42 3.6.5 Credit Life Insurance .............................................................................. 43 3.7 Distribution channels and marketing ............................................................. 43 3.7.1 Distribution channels: General overview........................................... 43 3.7.2 Distribution channel: Insurance brokers ............................................ 44 3.7.3 Marketing overview ............................................................................... 45 4 Demand: Profile of potential microinsurance customers ............................... 47 4.1 Risks and lifecycle events faced by low-income persons............................. 47 4.1.1 Lifecycle risks .......................................................................................... 47 4.1.2 Environmental risks ............................................................................... 49 4.1.3 Business risks ........................................................................................... 50 4.2 Coping strategies and their effectiveness ....................................................... 50 4.2.1 Ex-ante strategies .................................................................................... 50 4.2.2 Ex-post strategies .................................................................................... 52 4.2.3 Assessment of coping strategies ........................................................... 52 4.3 General attitudes about insurance .................................................................. 53 4.4 Reasons for lack of insurance ........................................................................... 55 4.5 Demand and potential microinsurance market ............................................ 58

Table of Contents

VII

5 Recommendations: Introducing microinsurance to Moldova ....................... 59 5.1 Product recommendations ............................................................................... 59 5.1.1 Health insurance ..................................................................................... 60 5.1.2 Agricultural insurance ........................................................................... 61 5.1.3 Property insurance.................................................................................. 62 5.1.4 Life, personal accident and credit life insurance ................................ 63 5.2 Distribution channels recommendations ....................................................... 64 5.2.1 Microfinance institutions ....................................................................... 64 5.2.1.1 Overview of MFIs ....................................................................... 64 5.2.1.2 Policies on credit life insurance at MFIs.................................. 66 5.2.1.3 Criteria for microinsurance ....................................................... 67 5.2.2 Savings and Credit Associations .......................................................... 68 5.2.2.1 Overview of SCAs ...................................................................... 68 5.2.2.2 Policies on credit life insurance ................................................ 70 5.2.2.3 Criteria for microinsurance ....................................................... 71 5.2.3 The Post Office of Moldova ................................................................... 71 5.2.3.1 Overview ..................................................................................... 71 5.2.3.2 Criteria for microinsurance distribution ................................. 72 5.2.4 Additional alternative distribution channels...................................... 72 5.3 Marketing recommendations ........................................................................... 73 5.4 Operational model recommendations ............................................................ 75 6 Conclusions .............................................................................................................. 78 Bibliography: Articles, reports and studies .......................................................... 80 Bibliography: Web pages ......................................................................................... 84 Bibliography: Interviews ......................................................................................... 87 Appendix 1: Methodology ....................................................................................... 93 Appendix 2: Additional tables and figures .......................................................... 98 Appendix 3: Photos ................................................................................................. 101 Appendix 4: Additional information on MFIs and SCAs................................ 108 Appendix 5: Declaration of authorship ............................................................... 122

Index of Figures

VIII

Index of Figures
Figure 1: Risks and the cycle of vulnerability and poverty .................................. 2 Figure 2: The impacts of risks facing low-income people .................................... 3 Figure 3: Types and examples of insurances ........................................................... 4 Figure 4: The microinsurance supply chain ............................................................ 6 Figure 5: Insurance market premiums, 2002-2008................................................. 17 Figure 6: Organizational structure of the CNPF ................................................... 20 Figure 7: Market share of five top insurance firms, in 2008 ............................... 31 Figure 8: 2008 total premiums, top ten insurance firms ...................................... 32 Figure 9: Percentage of total insurance premiums by category ......................... 37 Figure 10: Distribution of SCAs among microfinance institutions .................. 66 Figure 11: Risks, uncertainties and responses....................................................... 98 Figure 12: Characteristics of an insurable risk ...................................................... 98 Figure 13: Selection from UAM 2009 Plan of Activities .................................... 100 Figure 14: Selection from ABAR 2009 Charter .................................................... 100 Figure 15: Microinvest loan portfolio, 2004-2009* .............................................. 110 Figure 16: Microinvest number of active contracts, 2004-2009* ...................... 110 Figure 17: RFC portfolio composition, 2005-2008 .............................................. 113 Figure 18: Organizational structure of SCAs in Moldova ................................ 117 Figure 19: Overview of SCA licensing requirements ........................................ 118 Figure 20: Fee structure between MFIs and SCAs ............................................. 121

Index of Tables

IX

Index of Tables
Table 1: ZFS’s microinsurance markets, products and distribution channels.. 8 Table 2: Demographic overview of Moldovan population ................................ 11 Table 3: Macroeconomic overview of Moldova .................................................... 14 Table 4: Health statistics overview of Moldova ................................................... 15 Table 5: Top causes of death in Moldova .............................................................. 15 Table 6: 2008 key figures of the Moldovan insurance market ........................... 18 Table 7: Listing of compulsory insurances ............................................................ 23 Table 8: 2008 Key figures for Moldova’s top insurance firms ........................... 32 Table 9: Overview of select insurance products in Moldova, 2008 ................... 38 Table 10: Overview of risks faced by low-income persons in Moldova.......... 47 Table 11: Reasons for lack of insurance in Moldova ........................................... 55 Table 12: Summary of risks and recommended insurance products ................ 59 Table 13: 2008 Key figures of Moldovan SCAs, December 2008 ....................... 69 Table 14: Overview of SCAs interviewed, March 2009 ....................................... 94 Table 15: Listing of insurance firms, March 2009 ................................................. 99 Table 16: Listing of insurance brokerages, March 2009 ...................................... 99 Table 17: Summary of 2008 SCA balance sheet .................................................. 119 Table 18: Overview of 2008 SCA loan portfolio ................................................. 119

Introduction to microinsurance

1

List of Acronyms and Abbreviations
AAM ABAR BNAA CBO CEE CNAM CNPF DIS EFSE EBRD IAA IAIS IFAD ILO IMF IOM MAFI MBA MMA MDL NGO NIS RDC RFC SCA SDC UAM WHO ZFS Actuarial Association of Moldova Association of Insurance Brokers National Office of Automobile Insurers of Moldova Community-Based Organization Central and Eastern Europe National Health Insurance Company National Commission on Financial Markets Department of Insurance Supervision European Fund for Southeast Europe European Bank of Reconstruction and Development International Actuarial Association International Association of Insurance Supervisors International Fund for Agricultural Development International Labour Organization International Monetary Fund International Organization for Migration Ministry of Agriculture and Food Industry Mutual Benefit Association Microfinance Alliance of Moldova Moldovan leu Non-governmental organization New Independent States Rural Development Center Rural Finance Corporation Savings and Credit Association Swiss Agency for Development and Cooperation Union of Moldovan Insurance Providers World Health Organization Zurich Financial Services

Introduction to microinsurance

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1 Introduction to microinsurance
1.1 Understanding the risks and vulnerabilities of low-income households
As one microfinance client in the Philippines cleverly stated, “Life is one long risk.”4 Although risk is an inherent part of everyone’s life, lower-income households are particularly vulnerable to the economic shocks caused by events such as the death of a breadwinner or loss of the year’s harvest due to natural disaster. Without effective risk management tools, many low-income households resort to strategies that result in the perpetuation of the cycle of vulnerability and poverty, as depicted in figure 1 below. This ongoing sequence of uncertainty and apprehension means that lower-income households are generally less likely to take advantage of potential opportunities to invest and generate income that could help reduce poverty.5 Figure 1: Risks and the cycle of vulnerability and poverty

Source: Adapted by author from Churchill, 2003.

Figure 2 below outlines the three stages that ensue once a risk occurs: first is the actual risk event, followed by the short-term response and then, potential long-term consequences. Some response strategies are lower-stress ones such as reducing consumption, while others are medium-stress strategies such as migrating to find

4 Cohen, M., & Sebstad. How poor people manage risk. The Microinsurance Centre Briefing Note #2. 5 Churchill, C. (ed). 2007. Protecting the poor: A microinsurance compendium. Geneva, CH: International Labour Organization and Munich Re Foundation.

Introduction to microinsurance

3

additional work. Still others are high stress mechanisms, such as selling productive assets or taking children out of school. Figure 2: The impacts of risks facing low-income people

Source: Adapted by author from Cohen and Sebstad, 2005.

In order to cope with uncertainty, many low-income households employ a variety of informal risk management techniques, some ex-ante (before risk occurs) but primarily expost (after the risk occurs). Most lower-income households are forced by their circumstances to manage risks reactively rather than proactively. Meanwhile, many expost strategies can drain households of their assets and resources, while also placing claims on future cash flows.6 As Craig Churchill stated, most low-income households have to “patch together support from a variety of sources,” and even this does not “stand up well against a series of perils.”7 In general, insurance can be classified into four categories, as outlined in figure 3 below. Some low-income persons may benefit from government-subsidized social security, although statistics show that over half of the world’s population has no access to social protection.8 Very few have access to formal insurance, and indeed, many perceive

6 Microinsurance Centre LLC. www.microinsurancecentre.org. Retrieved February 2009. 7 Churchill, C. (ed). 2007. Protecting the poor: A microinsurance compendium. Geneva, CH: International Labour Organization and Munich Re Foundation. 8 Churchill, C. (ed). 2007. Protecting the poor: A microinsurance compendium. Geneva, CH: International Labour Organization and Munich Re Foundation.

Introduction to microinsurance

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insurance as a luxury product reserved for wealthy persons. The majority of low-income households utilize self-insurance or informal insurance, which may work well for smallerimpact or shorter-term losses. However, the key criteria used to judge the effectiveness of such strategies – affordability, accessibility, coverage and timeliness – unfortunately are not met by any of the strategies primarily employed by low-income households.9 Studies have shown that many resort to borrowing, an inadequate strategy often leading to a vicious cycle of heavy indebtedness.10 Indeed, low-income households are the most vulnerable and yet, the least protected. This is where microinsurance comes in. Figure 3: Types and examples of insurances

Source: Adapted by author from Churchill, 2007.

1.2 Overview of microinsurance
Microinsurance is insurance that targets low-income persons – many employed in the informal economy – who are typically underserved by traditional insurance firms. It is part of the broader concept of microfinance, which includes “micro” financial services such as credit and savings targeted to lower-income households. Interestingly, when insurance started to be widely employed in the late 1800s, it was considered a “poor man’s service,” since wealthier persons were deemed capable of insuring themselves.11

9 Cohen, M., & Sebstad. Making microinsurance work for clients. The Microinsurance Centre Briefing Note #3. 10 Roth, J., McCord, M., Liber, D. 2007. The landscape of microinsurance in the world’s 100 poorest countries. The Microinsurance Centre, April. 11 Churchill, C. (ed). 2007. Protecting the poor: A microinsurance compendium. Geneva, CH: International Labour Organization and Munich Re Foundation.

Introduction to microinsurance

5

As the industry evolved, the perceptions have become transposed. Today, most insurance firms do not offer products targeted to low-income populations, nor do they utilize distribution channels that reach low-income people. In definition, microinsurance is not very different from traditional insurance, except that it targets the lower-income segment. In reality, however, this entails an entirely different way of thinking about insurance: new, simpler products, alternative distribution channels and marketing instruments, as well as a focus on efficient operations. Volume is necessary to lower transaction costs, and therefore, streamlined processes and automated systems are often utilized. It also requires an adequate regulatory environment, and preferably, specific microinsurance legislation. A microinsurance product should fulfill several key characteristics: • • • • • • Relevant to the risks of low-income households As inclusive as possible Affordable premiums Preferably grouped for efficiencies Have clearly defined, simple rules and restrictions Have easily accessible claims documentation requirements

The most common microinsurance product is credit life, since microinsurance first stemmed from the microfinance industry, whereby creditors searched for a method to cover their losses in case of the death or incapacity of the borrower. Other common microinsurance products are health and life insurances, with agricultural, property and automobile insurance growing gradually. Compared to microfinance, however, microinsurance faces specific challenges: the ubiquitous lack of insurance culture and financial education in most developing countries was identified as the single largest obstacle to the growth of microinsurance.12 In addition, unlike a bank loan or a savings deposit, insurance is an intangible product that requires a deep sense of trust between the insured and the insurer – something often absent in many countries.13 Figure 4 below outlines the supply chain of microinsurance. The role of microinsurer has been undertaken by a variety of actors, including governments, NGOs, CBOs and even commercial insurers. The insurer designs the product, receives premiums and pays claims, and of course, carries the insurance risk. The delivery channel, on the other hand, is usually the frontline contact with policyholders in the local market; they perform the

12 Roth, J., McCord, M., Liber, D. 2007. The landscape of microinsurance in the world’s 100 poorest countries. The Microinsurance Centre, April. 13 Schwarz, M. 2008. From microcredit to microinsurance. Review: Swiss Re Academy Alumni Magazine, July 2008.

Introduction to microinsurance

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important tasks of selling the product and providing client service.

In many Broker

microinsurance schemes, MFIs have often been the typical delivery channel. utility companies and church groups are increasingly being utilized.14 Figure 4: The microinsurance supply chain

activity is still very limited, while other alternative channels such as mobile phone firms,

Source: Adapted by author from Roth, McCord and Liber, 2007.

Although still in a nascent stage, microinsurance has already shown the promise of playing a significant role in reducing the vulnerability of low-income households to economic shocks, thereby playing a key function in poverty alleviation.15 A 2007 landscape study that analyzed the presence of microinsurance in the world’s poorest countries found that over 78 million persons were covered by microinsurance, although Michael McCord, President of the Microinsurance Centre, stated that today the figure has reached over 100 million.16 Microinsurance is indeed growing fast, and much of that growth has been fueled by the private sector.

14 Roth, J., McCord, M., Liber, D. 2007. The landscape of microinsurance in the world’s 100 poorest countries. The Microinsurance Centre, April. 15 Roth, J., McCord, M., Liber, D. 2007. The landscape of microinsurance in the world’s 100 poorest countries. The Microinsurance Centre, April. 16 Interview with Michael McCord, President of the Microinsurance Centre LLC. Date: February 26, 2009 via telephone.

Introduction to microinsurance

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1.3 Zurich Financial Services – Global Microinsurance Practice
Founded in 1872, Zurich Financial Services (ZFS) is an insurance-based financial services firm, with over 60,000 employees and headquarters in Zurich, Switzerland. With a global network of subsidiaries, offices and partners, Zurich serves customers in more than 170 countries across all continents. Within the field of microinsurance, Zurich is one of the early movers among the large global insurers. Through its microinsurance practice, Zurich aims to achieve dual objectives: enhancing social development and reducing poverty by providing innovative insurance products to disadvantaged, underserved populations in emerging economies, while simultaneously accessing new markets and achieving a strategy for sustainable financial growth. According to Zurich, “insurance allows the poor to weather shocks as well as break from low-risk, low-reward strategies and as a result, put assets to more productive use.”17 In order to broaden its knowledge of local communities and lowincome populations, Zurich has engaged in a public-private partnership with the SDG and ILO. Additionally, Zurich partners with a variety of universities and research institutions in order to perform market, product and distribution assessments. Although its Global Microinsurance Practice was officially launched in January 2007, Zurich has been active in this sector for over one decade through its various country subsidiaries. Its first microinsurance program started in Bolivia in 1999. Currently, Zurich is active in eleven countries spanning four continents. It offers its clients a wide range of products, depending on the market. To reach its approximately one million customers, it employs various formal and non-traditional distributions channels. Table 1 outlines the details of ZFS’s Global Microinsurance Practice.

17 Zurich Financial Services: Global Microinsurance Practice Factsheet, June 2008.

Introduction to microinsurance

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Table 1: ZFS’s microinsurance markets, products and distribution channels

Markets
South America Bolivia Brazil Chile Mexico Venezuela Asia China* Indonesia*

Products
General Insurance Personal accident Personal property Motor Legal protection Unemployment* Life and Health Credit life Term life Funeral Health* Hospital cash

Distribution
Financial Institutions Microfinance banks Commercial banks* Credit unions

Retail Grocery stores Clothing stores

Services Morocco Remittance* South Africa Mobile phone* Utility firms* Newspaper Europe Other Russia* Direct-to-consumer Turkey* Worksite Network marketing* Community-based* * marked items are in early development Multinationals* Source: Adapted from Zurich Global Microinsurance Practice Factsheet, June 2008.

Africa

Country context: the Republic of Moldova

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2 Country context: the Republic of Moldova
2.1 Brief historical and cultural overview
The Republic of Moldova is a small, landlocked country situated in Eastern Europe between northeast Romania and the Ukraine, just north of the Black Sea. Within its approximately 33,700 square kilometers live about 4.2 million people, although the resident population fluctuates between 3.5 and 4 million due to labor migration. The majority of migrants leave Moldova in search of better job opportunities, the top destination being Russia, particularly Moscow; Italy, Turkey and Spain are also target destinations.18 Chisinau is Moldova’s capital and largest city, with a population of over 750,000. The only other city with a population over 100,000 is Balti, in the north. The Prut and Nistru Rivers are not only Moldova’s main tributaries, but also its unofficial cultural borders. Between the two rivers is what was formerly known as Bessarabia (“Basarabia”) which is historically and culturally linked to Romania. Conversely, the area east of the Nistru River was traditionally Slavic. During World War II, these two areas were united, instigating a period of political and cultural strife that continues to this day, to the detriment of both areas. Today, the area found between the Prut and Nistru is the independent Republic of Moldova. To its east lies the de facto independent Pridnestrovian Moldavian Republic – widely known as Transnistria – governed by a Russophile separatist regime without official recognition from the international community. Moldova has its Latin roots from its ties to the Roman Empire. It has a history peppered with cultural conflicts and influences from the Russians, Romanians, Greeks, Turks, Germans and others. Present-day Moldova was seized by the Russian Empire in the early 1800s. After the culmination of World War I, Moldova briefly declared its independence, but shortly after, united with Romania. It became engulfed again into the USSR after World War II, which ushered in a period marked by a momentous campaign of Sovietization. This era came to an end when the Iron Curtin fell in the late 1980s. After holding its first free elections, Moldova originally declared its independence from the Soviet Union in 1990, which became official on August 27th, 1991. However, the early days of sovereignty were bumpy, characterized by severe political strife within its borders: firstly, the

18 Luecke, M., Mahmoud, T.O., Steinmayr, A. 2008. Labor migration and remittances in Moldova: Is the boom over? International Organization for Migration, February 15.

Country context: the Republic of Moldova

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Turkish-Christian region of Gagauz, in the southern region of Moldova, declared autonomy – granted to them in August of 1990. In the autumn, Transnistria unilaterally separated from Moldova, sparking a short but bloody civil war later in 1992. Although Moldova heavily struggled to gain its independence, it ironically became the first post-Communist country to elect a Communist president: Vladimir Voronin was first elected in 2001 and then re-elected in 2005 and 2009. The last re-election of the Communist party in April of this year was heavily criticized by opponents, and sparked violent protests in the capital. However, hopes for the next Rose or Orange Revolution did not materialize.19 Today, almost 80 percent of the population is comprised of ethic Moldovans, who share the Romanian culture and language which was greatly influenced by the Eastern Orthodox religion. Significant and influential minority groups hail from Moldova’s The official language is Moldovan, essentially identical to neighbors, with Ukrainians comprising 8.4 percent of the population and Russians comprising 6 percent. Romanian. Sixteen percent of the population uses Russian as their first language, and Russian-Moldovan bilingualism is characteristic of the country.20 Moldova gained international recognition upon the publication of Eric Weiner’s 2008 bestseller, “The Geography of Bliss,” in which the author traveled throughout the world to find and rank the happiest countries. Moldova ranked as the unhappiest place in the world.21 The World Database of Happiness in the Netherlands also ranks Moldova consistently near the bottom rung of countries.22 This is most likely due to the enormous instability that characterized its early years of independence when Moldova was plagued by corruption, plummeting incomes and living standards, soaring unemployment and other economic and political maladies. Table 2 below provides a demographic overview of Moldova.

19 Cashu, I. 2009. Analysis: Why an orange revolution is not likely in Moldova. Radio Free Europe. www.rferl.org. Retrieved April 2009. 20 “Conceptia politicii nationale a Republicii Moldova”. www.parlament.md/download/laws/ro/546XV.19.12.2003.doc Moldovan parliament officicial website. 21 Weiner, Eric. 2008. The geography of bliss: One grump’s search for the happiest places in the world. Twelve Books: January. 22 The World Database of Happiness. www.worlddatabaseofhappiness.eur.nl. Retrieved April 2009.

Country context: the Republic of Moldova

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Table 2: Demographic overview of Moldovan population Item
Population Population density (per km2) Population growth rate Population below poverty line Percentage rural/urban Urban Rural Adult literacy rate

Value
4.324 million 121.9 -0.092 percent 29.5 percent

Year
July 2008 2006 2008 2006 2006

Source
CIA United Nations USA CIA UN Human Development Report UN Human Development Report UN Human Development Report USA CIA Moldovan Statistical Bureau Moldovan Statistical Bureau Moldovan Statistical Bureau Moldovan Statistical Bureau

46 percent 54 percent 99.1 percent

2006

Internet users Number of TV stations Number of radio stations Telephone landlines Urban Rural Mobile phones

727,000 (17%) 94 55

2007 2008 2008 2008

41 percent 23 percent 1.88 million (52.7 percent)

2008

2.2 Economic and political environment
Moldova is a parliamentary democracy, with a president who serves as the head of state, and a prime minister who is the head of government. Moldova currently participates in a plethora of international organizations, including the WTO, UN, IMF, ILO, IFC, World Bank, Interpol and WHO. It also aspires to EU accession, and in pursuing this goal, has transformed its economy into a more liberalized, market-oriented one. Recently, Moldova lowered corporate income tax to 0 percent, among the lowest in the world.23 The Communist Party, in control since 2001 and re-elected twice, is often criticized for being slow to liberalize the economy. According to several international organizations, including the World Bank and IMF, the state maintains controls over some banks, insurance companies, as well as several television and radio channels.24 The lack of settlement with Transnistria is controversial as well as economically and politically

23 Piatkowski, M. & Jarmuzek, M. 2008. Zero corporate income tax in Moldova: Tax competition and its implications for Eastern Europe. IMF Working Paper, August. 24 IMF. 2008. The Republic of Moldova – Financial Sector Assessment. World Bank-IMF: August.

Country context: the Republic of Moldova

12

damaging, since the region contains the majority of Moldova’s industry. In addition, corruption is still rampant, with Moldova scoring 2.9 out of 10 on Transparency International’s 2008 Corruption Perceptions Index.25 Moldova’s economy is in a fragile state. With a per capita income of approximately $2,500 (PPP), it is consistently ranked as one of the poorest countries in Europe. About 30 percent of the population lives in poverty, earning less than $2 per day (PPP). 26 About 90 percent of the population lives on about $10 per day (PPP).27
th

In the UN’s Human

Development Index, Moldova’s score was 0.708, ranked as 111 out of the 177 countries captured.28 In addition, the US-based think tank Fund for Peace gave Moldova a score of 85.7 on its Failed State Index of economically and politically unstable countries, the lowest score received by any European nation.29 According to an interview with the IMF Chief of Mission to Moldova, the public sector contributes approximately 30-40 percent of the GDP; in most developing countries, this figure falls within the 15-20 percent range. It is over-reliant on agriculture, with an additional 30-40 percent of the GDP stemming from this sector. This leaves the entire private sector to contribute the remaining 20-30 percent – mostly driven by domestic consumption (in turn driven by remittances), rather than production. Moldova is, in fact, ranked as the country most heavily dependent on remittances, which constitute almost one-third of its GDP.30 Moreover, the government’s budget is heavily dependent on imports – 80 percent of its revenues originate from VAT (value added tax) and other import taxes (in other countries, this figure is about 15-25 percent).31 Unfortunately, this sometimes signifies that Moldova imports products it already produces domestically.32 Moldova’s economy has a large trade deficit and is heavily dependent on its large neighbor, Russia – who is both its largest export partner as well as the largest importer of Moldovan products. Equally significant is that Moldova gets most of its energy supply from Russia. Evidently, Moldova often finds itself at the mercy of the whims of the Russian government. Two prominent examples both occurred in 2006: firstly, Gazprom

25 Transparency International. www.transparency.org. Retrieved February 2009. 26 World Bank. 2006. Moldova: Poverty Update. 27 World Bank PovcalNet, online poverty analysis tool. www.worldbank.org Retrieved April 2009. 28 The HDI serves as an additional measure which incoprates a broader definition of well-being, including health, education and standard of living. United Nations Development Programme. www.undp.org. Retrieved April 2009. 29 Fund for Peace website. www.fundforpeace.org. Retrieved April 2009. 30 Luecke, M., Mahmoud, T.O., Steinmayr, A. 2008. Labor migration and remittances in Moldova: Is the boom over? International Organization for Migration, February 15. 31 Interview with Johann Mathisen, Chief of Mission to Moldova, IMF. Date: March 23rd, 2009 in Chisinau, Moldova 32 Interview with Roxana Savescu, Assistant Professor at Lucian Blaga University in Sibiu, Romania, and microfinance consultant. Date: March 23rd, 2009 via telephone.

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discontinued the energy supply to Moldova and refused to reinstate it until the government paid double the previous prices. During the same time period, Russia stopped importing Moldovan wine leaving thousands without income – a move many speculated served as punishment for Moldova’s break with Moscow.33 Additionally, Moldova has mounting external debts, estimated at over $4 billion as of December 31st, 2008.34 The IMF recently named Moldova a Heavily Indebted Poor Country (HIPC), the first European country in history to have this status. Like much of Eastern Europe, Moldova experienced an economic boom in recent years, mainly fueled by FDI, increased access to credit and increased consumption due to the heavy inflow of remittances. 35 Growth has averaged over six percent per year. Now, the reversal of growth is expected as the economy experiences contractions. At the onset of the economic crisis in mid-2008, Moldova was relatively shielded from the impacts due to a low level of internationalization. However, significant reverberations began later in 2008 as the crisis spread and deepened.36 The current economic outlook for not only Moldova, but the entire CIS region, is not good.37 FDI will decrease, as will exports due to decreased international demand. Meanwhile, imports will also decline as domestic demand drops as remittance inflows tumble – leading to a government budgetary crisis. As jobs disappear, emigrants will return from abroad, creating a jolt in the domestic labor supply, which will most likely lead to higher unemployment and lower wages in the formal economy. Table 3 below offers a glimpse of Moldova’s macroeconomic indicators.

33 BBC World News. Russian wine move draws protests. www.bbc.co.uk. Retrieved February 2009. 34 CIA World Factbook 2008. www.cia.gov/library. Retrieved February 2009. 35 World Bank Country Brief 2007, January 2008. Retrieved February 4, 2009. 36 Interview with Johann Mathisen, Chief of Mission to Moldova, IMF. Date: March 23rd, 2009 in Chisinau, Moldova 37 IMF. 2009. World Economic Outlook – Crisis and recovery. IMF Report, April.

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Table 3: Macroeconomic overview of Moldova Item
GDP (PPP) GDP per capita (PPP) GDP real growth rate GDP (nominal) GDP per capita (nominal) Annual inflow of FDI percent of GDP Inflation rate Remittances as percent GDP Exchange rate per US dollar Labor force Unemployment rate

Value
$10.7 billion $2500 5.7 percent $6.1 billion $1,800 7 percent 7.5 percent 30.5 percent 11.48 MDL 1.2 million 7.4 percent

Year
2008 2008 2008 2008 2008 2006 2008

Source
USA CIA USA CIA USA CIA IMF IMF UN Human Development Report USA CIA UN Human Development Report www.oanda.com Moldovan Statistical Bureau Moldovan Statistical Bureau

May 2009 2008 2008

2.3 Health in Moldova
According to the WHO, Moldova previously had one of the most wide-ranging healthcare networks not only in Europe, but in the world. Sadly, in the early days of independence, there was a marked deterioration in the health care system and consequently, in the health of the population. This deterioration was primarily due to the political and economic instability Moldova faced during the 1990s, which led to severe reductions in state healthcare expenditures. Numerous hospitals and clinics were subsequently closed, leaving thousands of Moldovans without proper access to quality healthcare. In the last few years, Moldova has implemented compulsory health insurance, which is discussed further in section 3.2.4. Currently, Moldova has one of the lowest life expectancy in Europe, with an average of 68 years.38 Communicable diseases, such as tuberculosis, viral hepatitis and HIV/AIDS, Poor health care has also contribute significantly to morbidity and mortality rates.

negatively affected infant and maternal mortality rates and has led to an increase in noncommunicable diseases. Another widespread concern is the increased prevalence of lifestyle-related conditions: excessive alcohol consumption, smoking, unhealthy diet and

38 World Health Organization, Country Cooperation Strategy Report, 2006. February 7th, 2009.

www.who.org.

Retrieved

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obesity all contribute to the mortality burden. 39 Additional health data can be found in tables 4 and 5 below. Table 4: Health statistics overview of Moldova Item Value Life expectancy at birth 68 years Male 64 years Female 72 years Infant mortality 16
(per 1000 live births)

Year 2006 2006 2006 2006 2006 2006 2006 2004

Under 5 mortality
(per 1000 live births)

19 36 237

Maternal mortality
(per 100,000 live births)

Adult mortality
(Between 15-60 years, per 1000)

Health expenditures
as % of GDP as % of government expenditures

7.5 percent 11.3 percent

Source: Adapted from the WHO World Health Statistics 2008 Report and the WHO 2006 Country Factsheet for Moldova

Table 5: Top causes of death in Moldova Cause of death Percent Cardiovascular diseases 55.8 Cancer 12.6 Digestive system diseases 10.2 Accidents, poisoning 8.7 Respiratory system diseases 6.1 Other 6.6
Source: Adapted from the Statistical Bureau of Moldova, 2007, www.statistica.md.

2.4 Climate and natural disasters
With a temperate continental climate, Moldova’s terrain of rolling steppe, farmland and woodland lends itself to excellent agricultural conditions. Moldova, like its neighbor Romania, has a long-standing agricultural tradition, and today, agriculture employs about 40 percent of the population and contributes more than 30 percent of the GDP.40 Approximately 70 to 80 percent of the total land surface area is cultivated, and it is a wellknown regional wine producer.

39 World Health Organization, Country Fact Sheet 2006. www.who.org. Retrieved February 7th, 2009. 40 CIA World Factbook, 2008. www.cia.gov/library Retrieved January 28, 2009.

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Despite these fortuitous conditions, there are several environmental concerns:

Soil and

water were contaminated throughout the 1980s and 1990s due to the liberal use of agricultural chemicals, such as now-banned DDT. Additionally, soil erosion is quite extensive as a result of poor farming methods. Moreover, Moldova is quite susceptible to natural disasters that can devastate cropland, mainly earthquakes, landslides, drought and flood. natural hazard.41 According to the 2009 AXCO Insurance Market Report on Moldova, some insurers consider flood as the primary The risk of flood is exacerbated by the 3,000 small dams built These dams are throughout the Moldovan countryside to help irrigate cropland.

vulnerable to damage from earthquakes as well as from overflow due to heavy rains. Several incidences have occurred over the last two decades, including in 1994, 2003, 2005 and 2006. In the summer of 2008, the Prut and Nistru Rivers severely flooded due to torrential rains, resulting in another $120 million in damages, 15 percent ($18 million) of which were attributed to agricultural losses. Out of the 4.5 million hectares that were destroyed, over 20 percent belonged to small local farmers.42 In addition to floods, earthquakes in Moldova stem from its proximity to the Vrancea subduction zone in Romania, where high magnitude earthquakes usually occur every 30 to 40 years. The last two major earthquakes were in 1977 and 1990. Both earthquakes and heavy rains can instigate landslides and cause extensive damage. One of the last major landslides was in 1999, where over 140 towns and villages were affected and over 36 million MDL of losses were incurred. According to the AXCO report, little or no records of insured losses exist for any of the aforementioned natural disasters.43 In light of global climate change, the World Bank and others organized a strategic project to address climate change and natural risks. One of the objectives is to develop and implement an insurance against natural disasters. However, the project proposes seeking resources for this agricultural insurance fund from the EU, and not from, for example, Moldova’s own insurance market.44

41 AXCO Insurance Market Report: Moldova Non-life (P&C), 2009. 42 ARS Assecuratiorum Insurance Magazine, December 2008. Retribution for ignorance. 43 AXCO Insurance Market Report: Moldova Non-life (P&C), 2009. 44 ARS Assecuratorium Insurance Magazine, December 2008. Agricultural Insurance.

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3 Supply: The insurance industry in Moldova
3.1 Industry overview
A sentiment of excitement surrounds the current insurance market in Moldova. In the last three years, there has been a marked consolidation among insurance firms and brokerages while total premiums have steadily increased (figure 5 below). Simultaneously, there has been an explosion of activity concerning trade associations and industry-specialized publications, which signify the dynamic nature of the market. A driving factor of these changes is the 2006 insurance legislation that increased minimum capital requirements and outlined a plethora of regulations that is helping raise Moldova’s market to international standards. That same year, a gathering of insurance firms and supervisory authorities created the first symbol of the Moldovan insurance industry, seen in Appendix 3, with the slogan, “Egali, Eterni, Solidari” (equality, eternity, solidarity).45 Figure 5: Insurance market premiums, 2002-2008

73.9
USD millions

64.2

41.6 28.5 15.8 19.8 31.3

2002

2003

2004

2005

2006

2007

2008

Source: The National Commission on Financial Markets website. www.cnpf.md.

Despite this progress, Moldova’s insurance market is one of the smallest in Europe. Both the insurance density and insurance penetration imply that the Moldovan market is still underdeveloped. Firstly, insurance density provides a good measure of insurance activity in a nation, and is measured as the annual insurance premiums per capita. For 2008, the insurance density was 192 MDL ($17.10), indicating very low activity in the market. In most western countries, this figure ranges from $2,000 to $6,500. Even in many Eastern

45 ARS Assecuratiorum Insurance Magazine, December 2008. The symbol: A fundamental attribute.

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European countries, densities are much higher: Romania had $94.50 in 2006, while the Ukraine had $59.60.46 Insurance penetration, a good measure of an insurance market’s strength, is equivalent to total insurance premiums as a percentage of the nominal GDP. In 2008, penetration was only 1.2 percent (with 833.2 million MDL - $73.9 million in premiums underwritten). For comparison, the insurance penetration in most western countries is between 7 and 15 percent. Moldova’s figures are low even in comparison to its neighbors; Romania and Bulgaria, had penetration rates of 1.7 and 2.3 percent respectively.47 The insurance authority in Moldova, the National Commission on Financial Markets (CNPF), separates insurances into four categories: compulsory insurances, and three types voluntary insurances: goods, personal and accident, and professional indemnity. Table 6 below outlines key figures of the Moldovan insurance market. Table 6: 2008 key figures of the Moldovan insurance market Product category
Compulsory Voluntary, goods & property Voluntary, personal & accident Voluntary, professional indemnity TOTAL

Total premiums*
336.8 million MDL 333.1 million MDL 114.7 million MDL 48.6 million MDL 833.2 million MDL

Insurance density
77.90 MDL ($6.91) 77.0 MDL ($6.83) 26.50 MDL ($2.35) 11.2 MDL ($1.00) 192.70 MDL ($17.10)

Insurance penetration
0.5% 0.5% 0.17% 0.05% 1.2%

* Figures have been rounded to the nearest .1

Source: National Commission on Financial Markets. www.cnpf.md.

Microinsurance is a mostly unknown concept in Moldova. specific legislation in the future. for lower-income persons.

There is no specific

microinsurance legislation, although the government has expressed interest in developing Although no microinsurance products exist, some current products, such as property and credit life, are relatively affordable and accessible

The remainder of the chapter will outline the various actors present in the Moldovan insurance industry. Understanding their history and activities will provide a better understanding of the current status and future potential of the insurance (and microinsurance) industry in Moldova. Firstly, the role of government will be discussed,

46 Swiss Re Reinsurance Company website. www.swissre.com. Retrieved April 2009. 47 Swiss Re Reinsurance Company website. www.swissre.com. Retrieved April 2009.

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including the insurance regulatory environment and pertinent legislation. Secondly, the role of insurance trade associations, as well as the new insurance publications, will be outlined. marketing. Subsequently, an overview of the several insurance firms will be given, followed by a look at select insurance products, and finally, distribution channels and

3.2 The role of government in insurance
3.2.1 The National Commission on Financial Markets
The National Commission on Financial Markets (“Comisia Nationala al Pietei Financiare,” CNPF) is the autonomous authority responsible for the oversight and administration of the nonbanking financial sector in Moldova, including insurance firms and brokers, pension funds, securities issuers and microfinance providers. Mr. Mihail Cibotaru has been the Chairman of the Commission since its inception in July 2007. Theoretically, the CNPF is an independent and self-financing organization. Nevertheless, a joint World Bank-IMF report from March 2008 raised questions whether this was, in fact, the case.48 Commercial banks are supervised by a separate authority, under the jurisdiction of the Ministry of Finance. The CNPF was created according to law nr. 129-XVI of June 6th, 2007, which consolidated the following three regulatory offices under one jurisdiction: the National Commission on Securities; the State Office for Insurance Supervision and Pension Funds, and the State Supervision Office of Savings and Credit Associations. These three now constitute the main departments of the commission. The CNPF currently has over 110 employees, including two regional offices. An organizational chart can be seen below in figure 6.

48 World Bank-IMF. 2005. Moldova: Financial sector assessment. World Bank-IMF Financial Sector Assessment Program (FSAP), March.

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Figure 6: Organizational structure of the CNPF

Source: The National Commission on Financial Markets website. www.cnpf.md.

The mission of the CNPF is to authorize and regulate the activities of market participants in order to ensure the stability, transparency and efficiency of the financial sector in Moldova, and to protect the interests of citizens and investors. All decisions are made by the five-member Administration Council (“Consiliul de Administratie”) who meets on a weekly basis. According to Veronica Cuhal, Advisor to the Council President, the Council’s guiding principle and goal is to conform the CNPF’s structure, activities and legislation to international standards.49 The CNPF is in the process of applying to the International Association of Insurance Supervisors (IAIS), with expectations of becoming an official member in fall 2009.50 The CNPF is presently implementing a collaborative program with the World Bank, with the objective of strengthening institutional capacities and improving operational efficiency. The project’s action plan includes a national PR campaign for financial services, including insurance, launching later in 2009. The campaign, whose goal is to

49 Interview with Veronica Cahul, Advisor to the President, National Commission on Financial Markets. Date: March 20, 2009 in Chisinau, Moldova 50 Founded in 1994, the IAIS promotes international supervision standards in over 130 member countries; its goal is to contribute to global financial stability and support the development of well-regulated insurance markets. IAIS website. www.iaisweb.org. Retrieved March 29, 2009.

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raise awareness among the general population, will include TV spots, radio, print advertising, and brochures for mass distribution.51

3.2.2 The Department of Insurance Supervision
The State Office for Insurance Supervision (“Serviciul de State pentru Supravegherea Asigurarilor”) was first instituted within the Ministry of Finance on June 12th, 1991 (law nr. 296). Law nr. 1508-XII from June 15th, 1993, established the principles and guidelines by which the Office would operate. The Office was engulfed by the CNPF in July 2007. The current Department of Insurance Supervision (DIS) is headed by Mr. Vladimir Stirbu and has a staff of 17 persons. There are two subdivisions: the first approves premium and policy terms and conditions, and also grants licenses for insurers and intermediaries. The second is the directorate for monitoring and controlling, which ensures that firms meet the minimum capitalization and solvency requirements, and operate in accordance with the law.

3.2.3 Insurance legislation
In October 1992, Moldova passed its first insurance law, later amended in 1996. The next milestone for general insurance legislation was in December 2002. One of its main stipulations was the increase of the minimum capital prerequisite from 300,000 MDL to 2 million MDL ($26,600 to $177,500). Another provision outlined that all insurance agents and brokers required a license. However, these two intermediaries were still not legally differentiated and no minimum capital requirements existed for opening an insurance brokerage.52 In addition, foreign insurance firms were given permission to fully own a subsidiary in Moldova (previously capped at 49 percent), but were not allowed to establish branches. A significant turning point for the insurance industry was in 2006, when law nr. 407-XVI of December 21st, was passed. Its intention was to bring the Moldova’s insurance sector in line with international standards.53 One of its main provisions separated the market into life and general (non-life) insurance. Firms have been given the mandate to separate their activities by 2012. The law raised the minimum capital requirements for all new insurers: 15 million MDL ($1.3 million) for general insurance, 22.5 million MDL ($2 million) for life, and 30 million MDL ($2.7 million) for reinsurance. Present insurers, however, have until

51 Interview with Andrei Darie, Head of External Relations and European Integration, National Commission on Financial Markets. Date: March 20, 2009 in Chisinau, Moldova. 52 Interview with Roman Gutu, Founder and former President, Asigest Insurance Brokers. Date: March 24th, 2009 in Chisinau, Moldova. 53 Interview with Oleg Verejan, President of AAM. Date: March 25th, 2009 in Chisinau, Moldova.

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2012 to meet these requirements, but must reach the capitalization increase on April 6th of each year. This particular provision has already produced a consolidation within the Moldovan insurance market. In 2008, the minimum was increased to 4 million MDL ($355,000), which resulted in four of the 33 existing firms to lose their operating licenses. For 2009, firms had to satisfy a 6 million MDL ($532,000) minimum. In addition, the law finally legally distinguished between agents and brokers. Both were required to fulfill minimum professional qualifications and to obtain a license from the DIS. Brokers also must meet a minimum capital requirement of 25,000 MDL ($2,200).54 The law was also the first in Moldova to regulate the actuarial profession. Before 2006, there was no mention of actuaries in the legislation, and the Office of Insurance Supervision did not have one actuary among its ten employees, who oversaw over 50 firms at the time. Only one company, ASITO, had an actuary because it was then owned by Australia’s QBE Group. Today, only two other firms besides ASITO have actuaries, Austrian-owned Grawe Carat and life insurer Sigur-Asigur. One of the law’s provisions is that as of April 6th, 2007, all life insurance firms are obligated to utilize actuarial services while non-life insurance firms have until April 6th, 2012 to implement this practice.55

3.2.3.1 Microinsurance legislation
There is no specific microinsurance regulation. However, Vladimir Stirbu confirmed that the DIS is open to proposing specific microinsurance legislation and is interested in developing microinsurance in Moldova. However, the department currently has both financial and personnel constraints, and would therefore necessitate external support in order to proceed. Mr. Stirbu also shared that he received a letter from the World Bank earlier this year which included the “Insurance for the Poor” booklet written by Olivier Mahul, which was his first introduction to the concept.56

3.2.3.2 Compulsory insurances
The 2006 insurance law also differentiated between compulsory and voluntary insurances. Currently, there are 12 types of compulsory insurances in Moldova, listed in Table 7 below.

54 National Commission on Financial Markets website. www.cnpf.md. Retrieved March 2009. 55 National Commission on Financial Markets, legislative acts. Law regarding insurance, nr. 407-XVI, December 31, 2006. www.cnpf.md. Retrieved April 8, 2009. 56 Interview with Vladimir Stirbu, Director of Insurance Supervision Department, National Commission on Financial Markets. Date: March 26, 2009 in Chisinau, Moldova.

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Table 7: Listing of compulsory insurances Insurance
Motor third party liability Professional indemnity for notaries Professional indemnity for insurance brokers Professional indemnity for auditors Professional indemnity for quality controllers Third party liability for hazardous chemicals Personal accident for passengers on public transportation Traveler insurance through tourist agencies Life and health insurance for clinical trial participants Insurance of leased goods Insurance for collateral used in banking transactions Insurance for securities guarantees

Law
Law nr. 414-XVI Law nr. 1453, article 12 Law nr. 407-XVI Law nr. 61, article 9 Law nr. 186, article 21(2) Law nr. 803 Law nr. 1553 Law nr. 798 Law nr. 1409 Law nr. 59, article 7 Law nr. 142, article 22 Law nr. 199, article 18

Date enacted
December 22nd, 2006 November 8th, 2002 December 21st, 2006 March 16th, 2008 April 24th, 2003 February 11th, 2000 February 25th, 1998 February 11th, 2000 December 17th, 1997 April 28th, 2005 June 26th, 2008 November 18th, 1998

Source: Adapted from Cernica, Veaceslav. The palette of obligatory insurances. ARS Assecuratiorum Magazine, February 2009.

Evidently, most insurers want the government to legislate additional mandatory insurances, particularly property and agricultural insurance.57 When asked whether he expects the government to pass more legislation mandating insurance, Mr. Stirbu disclosed that a proposal for mandatory property insurance is currently under review but will likely be rejected, as it was in Romania. legislation. Mr. Stirbu explains that mandatory insurance is difficult to promote to the public and therefore difficult to pass through

57 Cernica, Veaceslav. The palette of obligatory insurances. ARS Assecuratiorum Magazine, February 2009.

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3.2.4 The National Health Insurance Company
Health insurance is the primary form of insurance where the government plays a significant role in Moldova. Law nr. 1585-XIII of February 27th, 1998, outlines the provision of mandatory health insurance for all citizens. Law nr. 950 from September 7th, 2001 created the National Health Insurance Company (“Compania Nationala de Asigurari in Medicina,” CNAM), a government-run non-profit organization that administers and manages the state-subsidized medical insurance system. Through the CNAM, coverage includes a variety of services, including maternity, pediatrics and urgent care, as well as a limited number of pharmaceuticals (usually, just the essentials). Through this system, a patient is assigned to a family doctor and a selection of hospitals, all organized on a territorial basis. The family doctor is the first stop and intermediary for all medical services. For instance, the family doctor receives monthly “coupons” for diagnostic and laboratory tests, which in turn are literally rationed out to patients. Evidently, this can lead to long waiting times. If a patient visits a doctor or institution outside of their designated territory, the insurance is rendered invalid and the patient is responsible for all charges. Payment of the insurance depends on employment status. If employed in the formal economy, a certain percentage of the employee’s monthly salary is allocated from each salary for the CNAM, according to law nr. 1593-XV of December 26th, 2002; the employer and employee split this amount. This percentage has successively increased over the years: from two percent (each) for 2004 through 2006; 2.5 percent for 2007; three percent in 2008 and 3.5 percent in 2009. If self-employed, or employed within the informal economy, one must purchase the insurance policy by applying directly at a CNAM branch. The cost for 2009 is 2,637.6 MDL ($250), to be paid in full. From January 1st to March 31st of every year, however, the CNAM usually offers half-price promotions.58 Although this is likely implemented to serve as an incentive, it does not always produce the intended consequence. According to public health specialists at the Soros Foundation, many lower-income people simply do not purchase the insurance unless they fall ill throughout the year.59 At that point, they must first undergo a complicated application process, including a health examination. Furthermore, the price discount is lost – a penalty which exists precisely because the government wants to discourage such reactive use of the policy.

58 National Company of Medical Insurance (CNAM) Website. www.cnam.md Legislation regarding the 2009 funds for obligatory health insurance, law nr. 263-XVI from December 11, 2008. 59 Interview with Liliana Gherman, Program Director, Public Health Program; Ana Capcelea; Vitalie Slobozian. Soros Foundation of Moldova. Interview date: March 17, 2009 in Chisinau, Moldova.

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Only approximately 67 percent of the population in Moldova actually subscribe to the mandated state insurance.60 Many without formal employment choose not to subscribe for various reasons, but lack of money is usually one of the driving factors.61 Critics maintain the system is inefficient and not of particularly high quality. According to Mr. Ion Cebotari of Moldasig Insurance Company, “many people are not only dissatisfied, but indignant about this system.”62

3.2.5 State-subsidized agricultural insurance
The government of Moldova has subsidized agricultural insurance since 2004, when the Law nr 243-XV of July 8th was passed. The crops subsidized (plus livestock and animals), the risks covered (e.g. flood, drought, frost), and the percentage of government contribution, is decided annually. For both 2007 and 2008, the Ministry of Agriculture and Food Industry (MAFI) subsidized 80 percent of the coverage, while the remaining 20 percent was paid by the insured. Due to the financial crisis, the subsidies were lowered for 2009: 60 percent for certain primary crops and 50 percent for the remaining crops and livestock. (Ukraine, for example, cancelled all agricultural insurance subsidies for 2009 because of the crisis).63 Two firms are sanctioned to sell the state-subsidized policies: Moldasig (with approximately 65 percent market share) and MOLDCARGO (35 percent market). Both basically serve as intermediaries between the state and the insured party. The annual cost is based on total land surface area, type of crop(s), average yield over the previous three years, and the average market price of the crop. The applicant selects the risks for which coverage is desired, which are paid à la carte. The tariffs differ for each risk, and are established in advance by the Ministry of Agriculture. For example, a more expensive risk is drought, where the premium is equivalent to six percent of the insured amount; flooding is less expensive, with premiums equivalent to 0.2 percent of the insured value. It is important to note that the legislation only offers subsidies to incorporated entities, like farm cooperatives – not to individual farmers. Individuals can still voluntarily purchase agricultural insurance, but must fully cover the costs themselves. As Mr. Ion Buza of MOLDCARGO diplomatically stated, “It is just not convenient. Basically, the costs are high relative to rural incomes, and if the insurance is voluntary, people choose not to insure.”64 Other firms, including Grawe Carat and Donaris, offer voluntary

60 National Company of Medical Insurance (CNAM) 2007 Annual Report. 61 Interview with Liliana Gherman, Program Director, Public Health Program; Ana Capcelea; Vitalie Slobozian. Soros Foundation of Moldova. Interview date: March 17, 2009 in Chisinau, Moldova. 62 Interview with Ion Cebotari, Manager of the Supplementary Medical Insurance Department, Moldasig. Interview date: March 19, 2009 in Chisinau, Moldova. 63 ARS Assecuratiorum Magazine, February 2009. 64 Interview with Ion Buza, Manager of the Agricultural Insurance Department, Moldcargo. Date: April 14,

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agricultural insurance, but rarely effectuate more than a few contracts per year. For example, even at Moldasig, 90-95 percent of agricultural insurance premiums are from incorporated entities.65 According to statistics from the MAFI, only one percent of all agricultural surface area is insured.66 In 2008, the total premiums collected were 45 million MDL, with the Ministry subsidizing 36 million MDL (80 percent). 13.1 million MDL (29.1 percent) was paid in claims.67

3.3 Insurance trade associations
The organization of firms into trade associations is an indication that a certain level of professionalism exists within an industry. Until 2008, Moldova had no insurance trade associations. Card System. However, 2008 witnessed the emergence of three insurance organizations, most notably the Moldovan Union of Insurance Providers. All are in an incipient stage, yet each has outlined a detailed action plan with ambitious objectives that will contribute to the development of the insurance industry in Moldova. Although none of these plans include microinsurance, most of them do include plans to invest resources in raising the awareness and knowledge of the population about insurance. A summary of the four associations and their respective missions and activities will be outlined below. The only insurance-related organization was the National Office of Automobile Insurers, which is rather a local service office for the International Green

3.3.1 The Moldovan Union of Insurance Providers
In October 2008, Capital Market Magazine (a publication of the CNPF), announced the establishment of the Moldovan Union of Insurance Providers (“Uniunea Asiguratorilor din Republica Moldova” (UAM). As Alexei Toporov, Director of Garantie Insurance Company, stated in December 2008, “The need for such as association is long overdue. The creation of the UAM is one of the most significant events in insurance of 2008.”68 The UAM was originally founded by three insurance firms: Moldova-Astrovaz, SigurAsigur and Victoria Asigurari. Currently, 14 of Moldova’s 29 insurance firms are members, who collectively possess 80 percent market share and who each have an equal

2009 via telephone. 65 Interview with Oleg Galbura, Manager of the Agricultural Insurance and Risk Department, Moldasig. Interview date: March 19, 2009 in Chisinau, Moldova 66 MAF of Moldova. www.maia.gov.md. Retrieved March 2009. 67 National Commission on Financial Markets. www.cnpf.md. Retrieved March 2009. 68 Petrenko, Dmitrii. Garantie: Fifteen years on the Moldova insurance market – an interview with Alexei Toporov. Capital Market Magazine, DATE. www.capitalmarket.md.

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voice in the new association.69 The UAM hopes to attract the remaining insurance firms into the association, as it believes that it can only reach its full potential when all stakeholders are represented.70 Its mission is to create a transparent insurance market and to promote the interests of all sector participants. The organization’s president is Dr. Mihail Manoli, who has held a variety of positions, including Insurance Supervisor, Minister of Finance, and Representative of Moldova at the IMF and World Bank. At the general assembly meetings of December 17th and 24th, 2008, the UAM outlined a detailed plan of activities for the new year. The plan includes about 45 tasks and objectives to help tap into the underdeveloped potential of Moldova’s growing insurance market. In a January 2009 interview, Dr. Manoli stated that the implementation and success of this plan would signify great progress for the insurance sector of Moldova.71 A selection of the plan’s key points is outlined in figure 3 in Appendix 2.72

3.3.2 The Actuary Association of Moldova
The Actuary Association of Moldova (“Asociatia de Actuariat din Moldova,” AAM) was officially founded on January 29th, 2007 and actively began activities in 2008. Its mission is the representation, support and promotion of the actuary profession in Moldova. Two short-term goals include creating a specialized research and training institute, and establishing a professional code of ethics.73 Furthermore, the AAM has been an associate member of the International Actuarial Association (IAA) since October 2007. 74 The AAM recently launched its website, www.actuariat.org.md, which remains under development. Currently, the AAM has eleven members. Its president, Dr. Oleg Verejan also serves as a member of the Expert Advisory Council to the CNPF. Dr. Verejan explains that it is difficult to find specialized and interested people to join the association, especially in Moldova where there is little educational infrastructure for actuaries.75 It is a cycle that originates from the very low awareness in Moldova that the actuarial profession exists – even within the insurance industry.76 His goal is to develop the AMM and help elevate the actuarial profession in Moldova to international standards. In the fall of 2008, the

69 ARS Assecuratiorum Magazine. A Dedicated Leader: Interview with Mihail Manoli. February 2009 issue. 70 ARS Assecuratiorum Magazine. A Dedicated Leader: Interview with Mihail Manoli. February 2009 issue. 71 Tudoreanu, Ghenadie. The Moldovan Union of Insurance Providers outlines their 2009 objectives. Capital Market Magazine, January 28, 2009. www.capital.market.md. Retrieved April 6, 2009. 72 Adapted from the Moldovan Union of Insurance Providers, Plan of Activities 2009. Approved on December 24, 2008 at the General Assembly Meeting, verbal process nr. 3 73 The International Actuarial Association website. www.actuaries.org. Retrieved April 8, 2009. 74 The IAA is a global umbrella organization originally founded in 1895, whose mission is to support the worldwide development of the actuarial profession through research, training and support of national associations. The IAA website. www.actuaries.org. Retrieved April 2009. 75 Interview date: March 25, 2009 in Chisinau, Moldova. 76 The Actuary Association of Moldova website. www.actuariat.org.md. Retrieved March 28, 2009.

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AAM drafted a proposal of recommendations to the CNPF which was subsequently approved; the AAM is now collaborating with the DIS for the implementation phase.

3.3.3 The Association of Insurance Brokers of Moldova
The Association of Insurance Brokers (ABAR) was officially registered just last month, on April 9th, 2009. ABAR’s President, Mrs. Veaceslav Gamurari, is also the director of Vestecom-Plus Insurance Brokers, one of the five founding members of the association. In a general assembly meeting on February 3rd, 2009, the association approved its first charter. Its mission is to promote and protect the interests of insurance brokers while collaborating with other market participants, particularly insurance firms, to raise professional standards and contribute to market development.77 A synopsis of its primary activities is presented in Figure 4 in Appendix 2.78 Mr. Gamurari believes that the market for insurance brokers will evolve as the overall insurance market in Moldova does. However, he asserts that brokers need to take a more proactive stance in shaping their own futures – to educate their customers and to reach out to progressively-minded insurance firms. 79 This is what he plans to accomplish while at the helm of the ABAR. According to an article with Capital Market Magazine, Mr. Gamurari will be satisfied when 30 percent of total underwritten premiums are intermediated by brokers; “that’s what I would call a good result.”80 More on insurance brokers can be found in section 3.7.2.

3.3.4 The National Office of Automobile Insurers
The National Office of Automobile Insurers (“Biroul National al Asiguratorilor de Autovehicule,” BNAA) is the Green Card National Bureau of Moldova. It is not a trade association per se. Rather, it serves as an intermediary between all domestic insurance firms who are licensed to sell Green Card insurance and the Council of Bureaux, located in Brussels, Belgium, which manages the International Green Card System. According to the Council of Bureaux website, each Green Card Bureau has two primary functions: to handle and settle accident claims taking place on Moldovan territory by a foreign driver, and to act as the guarantor of insurance carried by Moldovan citizens when traveling abroad.81 It operates with an office-to-office system, whereby all

77 The Moldovan Insurance Portal, www.Asigurare.md. Retrieved April 3, 2009. 78 Charter of the Association of Insurance Brokers. Approved at General Assembly Meeting, February 3, 2009, Chisinau, Moldova. Gathered in March 2009. 79 Gamurari, Veaceslav. The market for insurance brokers: Quo Vadis? ARS Assecuratiorum, December 2008. 80 Tudoreanu, Ghenadie. Interview with Veaceslav Gamurari. Capital Market Magazine. www.capitalmarket.md. Retrieved April 3, 2009. 81 The Council of Bureaux website. www.cobx.org. Retrieved April 2, 2009.

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transactions are handled between the respective National Bureaux involved in a claim. For example, when a Moldovan citizen has an accident in Germany, the German Bureau pays the claim and is subsequently reimbursed by the Moldovan citizen’s insurance firm via the Moldovan Bureau. Four insurance firms in Moldova are licensed to sell the Green Card: Moldasig, ASITO, Grawe Carat and Astrovaz. In order to participate, these firms need to receive licensing from the CNPF and to each contribute €500,000 to the BNAA to meet the €2 million minimum requirement of the Council of Bureaux. Other insurance firms in Moldova are permitted to sell Green Card policies, but only as intermediaries.

3.4 Industry-specific publications
The dynamic development of the insurance market in Moldova has also incited the recent launch of industry-specific publications. Assecuratiorum, and the second is The first is a specialized magazine, ARS Moldova’s first online Insurance Portal,

www.Asigurare.md. Both are supporting an environment of information dissemination and dialogue between market stakeholders. Again, microinsurance is not currently mentioned in either medium, which will be further described below.

3.4.1 ARS Assecuratiorum: the Art of Insurance Magazine
December 11th, 2008 marked the launch of aptly-named ARS Assecuratiorum (“the Art of Insurance”), the first specialized insurance publication in Moldova. Its editor-in-chief, Dr. Teodor Ungureanu stated that the magazine’s intention is to be a “platform of communication between the market participants.”82 In the December 2008 introductory issue, Dr. Ungureanu writes that he hopes the publication will positively contribute to the development of a “civilized insurance market” while providing an environment for analysis and discussion.83 The structure of each issue, published bi-monthly, includes sections covering national and international insurance news, financial analysis, pertinent politics and legislation, and a plethora of topics including reinsurance, risk management, investments, actuarial subjects, auditing and brokers. Its website is www.ars.md.

82 Fotescu, Stanislav. The consolidation of informational support for insurance: an imperative of the times. ARS Assecuratiorum, February 2009. 83 Ungureanu, Teodor. It is time for a specialized publication. ARS Assecuratiorum, December 2008.

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3.4.2 Asigurare.md: the Online Insurance Portal
Asigurare.md is Moldova’s first online insurance portal, whose mission is to facilitate the development of an insurance culture in Moldova as well as to promote the image of insurance products, firms and brokers.84 In an interview with Natalia Dubencu, the portal’s administrator, she explains how she wants the website to serve as a “one-stopshop” for all things insurance-related. To achieve these objectives, the authors collaborate with a plethora of industry specialists. Still, Mrs. Dubencu reports that it is not always easy to convince some insurance firms to furnish information: “Some do not realize that by making the portal as comprehensive and accurate as possible, everyone benefits. Unfortunately, the spirit of healthy competition has not yet been inculcated into the mentality.”85 Online, visitors can learn about almost any aspect of the Moldovan insurance market, including relevant legislation; detailed analysis, ratings and performance of firms; highlights of prominent industry figures; job opportunities, and even a divertissement section with fun facts and jokes about insurance. debate industry issues. Moreover, the portal contains interactive elements, including online polling and a discussion forum where visitors

3.5 Overview of insurance firms
In early 2008, there were 33 registered companies. As of March 2009, there were only 27 firms, after the merger of Grawe and Carat, as well as the license revocation of five firms who did not meet the minimum capitalization requirement. The country’s two largest firms, Moldasig and ASITO, underwrite over 50 percent of total premiums. ten firms collectively control 87 percent. Eighty percent of the market is controlled by the five largest firms (figure 7 below); while the top Larger firms have well-diversified portfolios and offer a wide assortment of products. Key performance indicators for Moldova’s ten largest firms are summarized in figure 8 and table 8 below. Conversely, the 17 smaller firms share the remaining 13 percent of the market. In essence, these firms fiercely compete over a small number of potential customers, with many surviving only through the sale of the obligatory motor third party liability (referred to as RCA in Moldova), or other mandatory insurances. When the annual capitalization increase occurs on April 6th of next year, it is expected that several of the smaller and less

84 The Moldovan Online Insurance Portal. www.Asigurare.md. Retrieved April 5, 2009. 85 Interview with Natalia Dubencu, Web Administrator for www.Asigurare.md and Insurance Consultant for VesteCom Plus Brokers. Interview date: March 19, 2009 in Chisinau, Moldova.

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diversified firms will disappear. Moreover, many of the smaller firms are quasi-captives, linked to larger corporations to whom they funnel back money. Microinsurance is currently not offered by any insurance firm in Moldova. None of the representatives from the eight insurance firms interviewed were familiar with the concept. Despite lack of knowledge, they found it appealing and admitted that their firms are not proactively reaching out to lower-income persons. In fact, no Moldova insurance firms are making a marked effort to target the lower-income population, instead focusing on corporate clients. In addition, many firms not only depend on compulsory insurances for their existence, but also self-admittedly do not even use these to their best advantage.86 Nevertheless, the industry is dynamic, as the 2006 legislation pushes for further professionalization and consolidation in the market. There is a great deal of activity currently in the industry, but it is in the early stages. To provide a better understanding of the insurance industry in Moldova, the history, performance and activities of Moldova’ top five firms will be briefly discussed below. In addition, Garantie Insurance Company, who is currently the on-site partner of Zurich, will be included. Figure 7: Market share of five top insurance firms, in 2008

All others 22%

Moldasig 30%

Donaris 6% MOLDCARGO 7% Grawe Carat 12% ASITO 23%

Measured by gross written premiums

Source: ARS Assecuratiorum Magazine, February 2009.

86 Cernica, Veaceslav. The palette of obligatory insurances. ARS Assecuratiorum Magazine, February 2009.

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Figure 8: 2008 total premiums, top ten insurance firms
300 250 200 150 100 50 0 189.6 101.8 59.5 49.6 37.2 15.4 13.5 12.6 12.5 250.3

MDL millions

Source: National Commission on Financial Markets. www.cnpf.md.

Table 8: 2008 Key figures for Moldova’s top insurance firms Company
Moldasig ASITO Grawe Carat MOLDCARGO Donaris Group Moldova-Astrovaz Victoria Insurance AFES-Moldova ARTAS Garantie

Total premiums*
250.3 189.6 101.8 59.5 49.6 37.2 15.4 13.5 12.6 12.5

Total claims*
75.2 66.2 15.7 23.9 22.6 16.5 5.4 13.9 4.3 3.8

Claims ratio
30.0% 34.9% 15.4% 40.2% 45.5% 44.3% 35.1% 102.9% 34.1% 30.4%

Total assets*
327.9 349.7 142.7 64.5 31.6 49.1 36.6 32.1 16.9 24.5

Profit*
61.0 22.5 11.6 12.0 1.1 1.4 4.2 10.2 2.8 8.2

* Figures are in millions MDL and have been rounded to the nearest .1 million MDL

Source: National Commission on Financial Markets. www.cnpf.md.

3.5.1 Moldasig
Moldasig (“Societatea Internationala de Asigurari Moldasig”) was founded in 2002 and within seven years, achieved the number one position in the market. It was state-owned until July 2008, when a major Russian firm, Rosgosstrah, entered the Moldovan insurance market by purchasing an 80 percent share in the company. According to their website,

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Moldasig’s mission is to protect the well-being of Moldova’s citizens by offering the most accessible insurance products.87 It currently holds a license for general (non-life), insurance and offers over thirty insurance products. It has ten offices, one in Chisinau and nine regional branches, with a total staff of over 1,100 employees and agents. Moldasig had almost 30 percent market share for both 2007 and 2008. In 2008, Moldasig collected over 250 million MDL in total premiums, of which it paid over 75 million MDL in claims (23 percent). For numerous products, it holds the first or second market position. Over 60 percent of Moldasig’s portfolio is automobile-related insurance. After Grawe Carat, it holds second place for personal insurance, with 28 percent market share. In addition, Moldasig is the only other firm besides MOLDCARGO licensed to sell the state-subsidized agricultural insurance. A slight feeling of distrust, and perhaps discomfort, was encountered when the name Moldasig was mentioned in several interviews. The general sentiment is that Moldasig monopolizes the insurance market with the tacit support of the Moldovan government. For example, almost all public sector institutions are insured through Moldasig; in addition, public sector employees are encouraged, if not forced, to purchase personal insurance products through the firm. Indeed, the President of Moldova, Vladimir This interference is not Voronin and his son, Oleg, are shareholders in various influential firms in Moldova, including the nation’s number one insurance company.88 unknown to the general population; in fact, it is a topic often discussed with distaste and cynicism on various Moldovan blogs and online discussion forums.89

3.5.2 ASITO
ASITO (“Compania Internationala de Asigurari ASITO”) was officially formed on the 6th of June, 1991, coinciding with the dismantlement of the state monopoly on insurance and the formation of a new regulatory environment. In September 1999, the QBE Insurance Group of Australia was the first international insurance firm to enter the Moldovan market when it acquired a majority shareholding in the firm. In March 2007, the QBE Group sold all of its shares. Today, ASITO holds a general insurance (non-life) license. Of all insurance companies in Moldova, it has the largest branch network; with 37 offices, there is at least one ASITO representation in every county in Moldova. Many of these offices were inherited from the Soviet Gosstrakh monopoly.90

87 The International Insurance Company Moldasig website. www.moldasig.md. Retrieved February 88 Interview with Roxana Savescu, Assistant Professor Lucian Blaga University, Sibiu, Romania, and freelance microfinance consultant. Date: March 23rd, 2009 via telephone. 89 The Site of Bassarabians in Romania. www.Basarabeni.ro and Yahoo Groups website http://groups.yahoo.com/group/romania_eu_list/message/51835 Retrieved February 22, 2009. 90 AXCO Insurance Market Report for the Republic of Moldova, 2008.

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ASITO currently occupies the second position in the Moldovan market.

In 2008, it

underwrote over 189 million MDL in premiums, representing a total market share of almost 23 percent. It earned over 22 million MDL in net profit. The company proudly declares on its website that it is Moldova’s largest payer of claims.91 For numerous products, it is often competing with Moldasig for the first or second place market position. Vehicle-related products constitute over 75 percent of its portfolio. With 18 years of experience in the Moldovan insurance market, ASITO is the industry’s oldest veteran. In fact, throughout many rural areas, it has reached eponym status, as insurance director, Nina Rabeja, stated: “Many people in rural areas equate ‘ASITO’ with insurance. They come into the office and say ‘I want to purchase an ASITO please.’”92 Stela Culicov of ARTAS Insurance Company echoed this statement and explained that this stems from the fact that ASITO was created from the remnants of the state-run insurance company of the Soviet era.93

3.5.3 Grawe Carat
Grawe Carat (“Grawe Carat Asigurari SA”) is the result of the acquisition of the Moldovan firm Carat by Austrian Group Grazer Wechselseitige (Grawe), a broadly diversified international firm with banking, insurance and real estate companies.94 In the last two decades, Grawe has expanded rapidly into Eastern Europe, where it is now present in eleven countries. Grawe entered the Moldovan market in 2003 as Grawe Life Insurance Company, quickly becoming the market leader and setting the standards for life insurance in Moldova. In 2006, it acquired Donaris Life Insurance, and continued to grow rapidly. In 2008, Grawe decided to diversify into the non-life insurance market by acquiring Carat Insurance. Carat was one of the first private insurance companies in Moldova, and was concentrated on automobile-related insurance, which represented almost 92 percent of its portfolio in 2008. Meanwhile, Grawe had over 89 percent of the market share of life insurance. In 2008, they underwrote a total of over 100 million MDL in premiums.

91 ASITO International Insurance Company. www.asito.md. Retrieved February 23, 2009. 92 Interview with Nina Rabeja, Director, Vitorasig Criuleni branch. Date: March 18, 2009 in Criuleni, Moldova. 93 Interview with Stela Culicov, Insurance Specialist, ARTAS Insurance Company. Date: March 23, 2009 in Chisinau, Moldova. 94 Founded in 1828 by Archduke Johann with the intention to provide “reliable insurance cover for all,” Grawe is currently the fifth largest insurance company in Austria, with over 1.7 million contracts under management, representing premium income of over €435 million. Grawe website. Retrieved April 2009.

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The merger between Grawe and Carat, official as of February 5th, 2009, created the third largest insurance company in Moldova. Collectively they have the broadest array of insurance products on the market – offering everything except health insurance. According to Marketing Manager, Angela Solonari, the firm is now undergoing a period of rebranding to better position itself in the market. “We want to educate our customers about Grawe’s long and respectable heritage. We also believe that financial education of the general population is necessary and we hope to contribute to that education.”95

3.5.4 MOLDCARGO
MOLDCARGO (“Societatea de Asigurari MOLDCARGO SRL”) was established in October 1999 by the International Association of Auto Transport Providers (“Asociatia Internationala a Transportatorilor Auto,” AITA), whose mission is to represent and protect the interests of its auto-transport-related enterprises and organizations.96 It currently holds a general (non-life) insurance license and offers about 20 types of insurance. Although MOLDCARGO has grown significantly in its decade of existence, it still concentrates on automobile, transportation and goods insurance, which represents over 72 percent of its portfolio.97 Last year, MOLDCARGO surpassed Donaris to become the fourth largest insurance company in Moldova, with 6.7 percent market share. In 2008, it underwrote over 59 million MDL in premium, a 30 percent increase compared to 2007. It is also the only other insurance firm, besides Moldasig, to offer the state-subsidized agricultural insurance.

3.5.5 Donaris Group
Founded in 1998, Donaris recently celebrated its ten-year anniversary in the Moldovan insurance market. Donaris’ director, Dr. Teodor Ungureanu, is also the chief editor of the recently launched ARS Assecuratiorum Magazine. percent market share. Donaris presently holds a general (non-life) insurance license, and although it has a wide offering, almost 75 percent of its portfolio stems from automobile-related insurance..98 According to an interview with Insurance Specialist, Serghei Boico, over 60 percent of It is currently the fifth largest insurance firm in Moldova, with 49 million MDL in total premiums in 2008 and 5.6

95 Interview with Angela Solonari, Marketing Manager, Grawe Carat Insurance. Date: March 19, 2009 in Chisinau, Moldova. 96 The International Association of Auto Transport Providers. www.aita.md. Retrieved April 2009. 97 MOLDCARGO Insurance Company website. www.moldcargo.md. Retrieved April 2009. 98 ARS Assecuratiorum Insurance Magazine. Results of the first nine months of 2008. February 2009

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business comes from corporate clients.99 Donaris has an extensive network of offices in Chisinau, as well as eight regional branches. In fact, Donaris actually has over 200 pointof-sale locations throughout Moldova, because it utilizes a variety of nontraditional distribution channels, such as supermarkets and petrol stations, for their automobilerelated business.100 It employs over 1,000 employees and agents nationwide. 101

3.5.6 Garantie
Wherever Zurich Financial does not have its own locally licensed entity, it selects an onsite partner to issue policies locally and to service its international corporate clients present in that country. Garantie (“Garantie Asigurari”) has been the correspondent insurer of Zurich Financial Services (ZFS) in Moldova since December 31st, 2004, a relationship managed through the ZFS hub in Stockholm, Sweden. For 2009, Garantie is servicing several multinational companies in Moldova on behalf of Zurich. According to Garantie, their strong customer service orientation, flexibility, and their easy-to-navigate policies make them a preferred on-site partner.102 In an interview with management, they expressed a keen interest in further developing their relationship with ZFS and in helping introduce a potential microinsurance product on the Moldovan market. 103 Founded in 1993, Garantie was one of the first private insurers in Moldova. Presently, Garantie focuses on general insurance (non-life), and offers a large array of products to both individual and corporate clients. They are headquartered in Chisinau and have six regional offices. Garantie, which literally translates to “guarantee,” is among the top ten largest insurance firms in Moldova. In 2008, Garantie underwrote over 12 million MDL in premiums, representing 1.6 percent of the total market. According to the firm’s director, Alexei Toporov, premiums grew by 15 percent from 2007 to 2008.104 insurance represents over 30 percent of Garantie’s total business.105 Automobile-related

99 Interview with Serghei Boico, Insurance Specialist, Donaris Insurance Company. Date: March 16, 2009 in Chisinau, Moldova. 100 The Moldovan Insurance Portal, Donaris company overview. www.Asigurare.md. Retrieved March 2009. 101 Alcaza, Lilia. Interview with Teodor Ungureanu. Capital Market Magazine. www.capitalmarket.md. Retrieved March 30, 2009. 102 Interview with Annaslav Yakovenko, Director of Corporate Reinsurance, and Alexandru Balteanu, Reinsurance and Corporate Clients Department. Date: March 26, 2009 in Chisinau, Moldova. 103 Interview with Vitalii Robu, Sales Director, and Mihail Josan, Insurance Director. Date: March 26, 2009 in Chisinau, Moldova 104 Petrenko, Dmitrii. Garantie: Fifteen years on the Moldovan insurance market – an interview with Director Alexei Toporov. Capital Market Magazine. www.capitalmarket.md. Retrieved March 29, 2009. 105 ARS Assecuratiorum Insurance Magazine, Results of the first nine months of 2008. February 2009

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3.6 Insurance products
There is currently no microinsurance product offered on the Moldovan insurance market. Although no products specifically tailored for the lower-income population exist, there are some simple insurance products that are both affordable and accessible to this segment, such as RCA or credit life. Insurances are separated into four categories by the CNPF: compulsory insurances, such as motor third party liability and Green Card; voluntary insurances of goods, including commercial enterprises, agriculture, automobile, financial risks, homes and personal items; voluntary personal and accident insurance, including pensions, annuities, life and health; voluntary professional liability insurances, such as aerial and auto transportation providers, and professional indemnities. Automobile-related insurances account for over 60 percent of total insurance premiums. Compulsory insurances comprise 40 percent of total premiums. Figure 8 and table 9 below outlines key figures for select products, and some are further discussed below. Figure 9: Percentage of total insurance premiums by category

Professional 6% P&A 14% Compulsory 40% Property 40%

Source: The National Commission on Financial Markets website. www.cnpf.md.

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Table 9: Overview of select insurance products in Moldova, 2008 Product RCA AUTOCASCO Green card Property
(home and personal goods)

*Total premiums
172.2 192.5 159.1 59.5 45.0 93.4 21.2 29.3 7.5 833.2

*Total claims
71.2 117.4 31.8 23.9 13.1 7.0 6.9 8.1 3.6 269.3

Claims ratio
41% 60% 20% 40% 29% 7.5% 33% 28% 48% 32%

Insurance density
39.80 MDL ($3.50) 44.50 MDL ($4.00) 36.80 MDL ($3.30) 13.70 MDL ($1.20) 10.40 MDL ($.90) 21.6 MDL ($1.90) 4.90 MDL ($.40) 6.80 MDL ($.60) 1.70 MDL ($.15) 192.70 MDL ($17.10)

Agriculture Life Accident and illness Supplementary health Financial risk TOTAL MARKET

* Figures are in millions MDL and have been rounded to the nearest .1 million MDL

Source: National Commission on Financial Markets. www.cnpf.md.

3.6.1 Supplementary health insurance
Supplementary health insurance is only available through a few insurance firms in Moldova. Moldasig and ASITO are currently the leading providers. In 2008, over 29 million MDL ($2.5 million) in total premiums were underwritten. The overall penetration is extremely low in Moldova, likely due to the existence of the CNAM and the high costs relative to average incomes. Most covered by supplementary health insurance are Moldasig, for example, only sells policies to employees of large international firms. stem from corporate clients. Supplementary insurance offers subscribers higher quality care, better facilities, shorter waiting times and no geographic limitations. The terms and conditions are generally more flexible than those of the CNAM. For instance, instead of being assigned to a doctor, patients can choose their own, who then coordinates the care and subsequent treatment. In hospitals, coverage usually includes salons with one, two or four persons –

corporate entities; ASITO sells to both individuals and firms but admits most contracts

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a luxury in Moldova, where the average patient is placed in large institutional salons with eight or ten others. Mr. Ion Cebotari, the Department Manager of Supplementary Health Insurance at Moldasig, claims that doctors and nurses pay more attention to patients with supplementary coverage.106 However, not all specializations and procedures are covered. For instance, maternity, pediatrics, oncology, infectious diseases, psychiatry, and some surgeries, can only be covered through CNAM programs. Regardless of whether a person purchases supplementary coverage, the law mandates that the CNAM policy still be purchased. Costs depend on the applicant’s age, pre-existing medical conditions and occupation. At Moldasig, costs for individuals range from 2,500 to 6,000 MDL ($220-530) per year, for coverage up to 20,000 MDL ($1,775). At ASITO, the average yearly cost is 10,000 MDL ($890), for coverage of 25,000 MDL ($2,220). Costs are generally lower for firms. Payment is made in full at the time of contract. Subsequently, patients do not pay for treatment, until the maximum annual coverage is reached. At that time, the patient becomes responsible for all charges. When insinuating to Mrs. Victoria Pascaru, Underwriter in the Health Insurance department at ASITO, that it must be quite difficult to reach the maximum, she retorts, “It is not that hard at all to exceed this limit.”107

3.6.2 Property insurance
During the Soviet era, household insurance was compulsory. Now, however, penetration and density of property insurance in Moldova is extremely low, in part because of the limited resources of the population and in part because of the lack of a well-developed insurance culture. Commercial and industrial property insurance was not compulsory under the Soviet system, and this tradition continues today, demonstrated by the fact that international firms comprise the majority of property insurance clients. The cost of insurance depends on the category of the goods, the type of risks insured, the deductible assumed by the insured, contract terms, as well as other factors. Personal and commercial property, household goods and animals can all be insured from a plethora of risks, including fire, natural disasters, accidents, theft and more. Insurance can be purchased for less than the total value of a good, with the premiums and claims reflecting the adjusted amount. In general, the annual cost of the insurance is 0.2 to 3 percent of the insured sum.108

106 Interview with Ion Cebotari, Manager of the Supplementary Medical Insurance Department, Moldasig. Interview date: March 19, 2009 in Chisinau, Moldova. 107 Interview with Victoria Pascaru, Underwriter, Health Insurance Department, ASITO Insurance Company. Interview date: April 10, 2009 via telephone. 108 ARTAS Insurance Company website. www.artas.md. Retrieved April 2009. ARS Assecuratiorum

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Total 2008 premiums for household and personal goods were 4.1 million MDL ($360,000), and 1.9 million MDL ($170,000) for apartments. Insurance of commercial goods was 32.7 million MDL ($21.9 million). Collectively, this represents only 4.6 percent of total market premiums. The leading insurers were ASITO (particularly for personal property), Moldasig, Exim-Asint, Donaris and Victoria Insurance.

3.6.3 Automobile insurance
Automobile-related insurance comprises over 60 percent of total underwritten premiums in Moldova, and also represents the majority of most insurance firms’ portfolios. The three primary categories of automobile insurance are discussed in further detail below.

3.6.3.1 RCA: Compulsory motor third party liability insurance
On June 27th, 1994, Moldova passed its first law which introduced obligatory motor third party liability (MTPL). In 2004, legislation was passed that required all drivers to purchase AORCA, “Asigurarea Oligatorie de Raspundere Civila Auto” (Obligatory Insurance of Automobile Civil Responsibility, commonly referred to as RCA). On the 22nd of December, 2006, law nr. 414-XVI was passed that increased liability to 500,000 MDL ($44,300) for material damage and to 350,000 MDL ($31,000) for bodily damages or death, up to a maximum of 700,000 MDL ($62,100) regardless of the number of persons. The legislation also covers other conditions such as contract terms, premiums, claims and proof of payment. Tariffs for RCA insurance are established through legislation; a recent tariff update was enacted as of October 31st, 2008. Costs depend on the vehicle category and motor For individuals, annual coverage capacity, with adjustments made for the driver’s age, residence and contract term. Costs are generally higher for commercial entities. (unadjusted) ranges from approximately 250 to 2000 MDL ($20-175). The leading insurers of automobile insurance are Moldasig, MOLDCARGO and ASITO. Total premiums were 172 million MDL ($15.2 million) in 2008, which represents over 20 percent of total premiums. Depending on the firm, RCA is sold through a variety of distribution channels, including insurance firm branches, agents, brokers, supermarkets, petrol stations, post office and automobile repair garages. ASITO even has agents at police stations who can sell new policies to drivers registering their vehicles.109

Magazine, February 2009 issue. 109 AXCO Insurance Market Report for the Republic of Moldova, 2008.

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3.6.3.2 Autocasco: Supplementary comprehensive automobile insurance
“Autocasco” is a supplementary automobile insurance available for vehicles up to 15 years old. Two types of packages are available: the first, “Casco Total,” is a comprehensive product covering both theft and damages from risks such as accidents, fire, natural disasters, and more. Conversely, “Casco Partial” only provides coverage for damages. The premium depends upon several factors, including driver’s age, term, vehicle age and type, as well as the deductible amount. Separate coverage can also be purchased for additional components such as telephone, audio or GPS (global positioning system). The firms who generate the most premiums for Autocasco are Moldasig, ASITO, MOLDCARGO and Donaris. Total insurance premiums for 2008 – for both individuals and commercial entities – was over 192 million MDL ($17.1 million), representing over 23 percent of total market premiums.

3.6.3.3 “Carte verde” – the International Green Card System
The Green Card program, administered by the Council of Bureaux in Brussels, Belgium, is an international system of 44 countries whereby motorists can freely travel among member countries without having to purchase automobile insurance for each country visited. Therefore, the Green Card (“Carte verde” in Moldova) serves as proof of motor third party liability insurance should an accident occur while traveling abroad. Moldova became a member of the International Council of Bureaux on August 1st, 1999. Currently, four insurance firms are licensed to sell the Green Card: Moldasig, ASITO, Grawe Carat and Moldova-Astrovaz – while the other insurance firms can sell these products as intermediaries. In Moldova, two types of “Carte Verde” are available for purchase: one for travel within the Ukraine and Belarus, and one valid throughout the International Green Card System. Coverage terms range from a minimum term of 15 days to a maximum of one year, and costs depend on the automobile category and term. For example, for 15 days in the international system, costs are about €50 for a typical passenger automobile; for one year, the cost is about €800.110 After Autocasco and RCA, Green Card insurance is the third most popular insurance product measured by total annual premiums. Premiums underwritten in 2008 were 159 million MDL ($14.1 million), which represents almost 20 percent of total premiums.

110 ARTAS Insurance Company website. www.artas.md. Retrieved April 2009. .

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3.6.4 Life insurance
In 1987, during the Soviet system, over one million life insurance contracts were active in Moldova. A decade later, this number was close to approaching zero.111 However, in the early 2000s, the entrance of several international insurance firms specialized in life insurance, such as the Austrian firm Grawe, infused life into this dying sector. In the last six years, the growth has been swift: in 2003, total premiums collected were 5.7 million MDL, while in 2008, this number was 15 times more, over 90 million MDL ($7.9 million). Since 2003, the annual growth rate of life insurance premiums has been 40 to 60 percent every year. Despite the seemingly impressive figures, relative to other countries, Moldova’s numbers are still quite low. Moldova’s neighbor, Romania, is often used as an example: although Romania’s population is only 6-7 times larger than that of Moldova, its total annual insurance premiums are 160 times larger.112 Although growing rapidly, the life insurance market in Moldova is still in an embryonic stage, and therefore, the product range remains traditional. Mixed life insurance, which combines life insurance with an endowment policy, is the most common product. The beneficiary also has the option to purchase supplementary protection; for example, to cover disability or accidental death. According to the Moldovan Insurance Portal, any healthy individual between the ages of 0 to 65 can purchase a life insurance policy. Terms are 10, 15, 20 or 25 years, and the minimum annual premium is 3000 MDL ($265), which is paid either quarterly or annually. Anyone who wishes coverage only up to 300,000 MDL ($26,600) can obtain the insurance without a medical examination. term and the annual premium.113 The market leader for life insurance in Moldova is by far Grawe Carat, which controls about 90 percent market share for life insurance, representing approximately 80 million MDL in annual premiums. Grawe works both with agents and brokers for distribution. Veaceslav Gamurari, President of the ABAR, asserts that most brokerages deal very little with life insurance because the acquisition costs are too high to make it profitable.”114 Beyond life insurance, personal accident and illness insurance is highly underdeveloped, with total annual premiums of 22 million MDL ($1.9 million). Supplementary pension The insurance premium is calculated depending on the insured’s age, gender, desired coverage, contract

111 Cernica, Veaceslav. Life insurance in the Republic of Moldova: its growth to the top of the populations’ preferences. ARS Assecuratiorum Insurance Magazine, December 2008. 112 Cernica, Veaceslav. Life insurance in the Republic of Moldova: its growth to the top of the populations’ preferences. ARS Assecuratiorum Insurance Magazine, December 2008. 113 The Moldovan Insurance Portal. www.asigurare.md. Retrieved April 10, 2009. 114 Interview with Veaceslav Gamurari, Director of Vestecom Plus Insurance Brokerage, and President of the Association of Insurance Brokers of Moldova. Interview date: March 17, 2009 in Chisinau, Moldova.

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products, such as rents and annuities, had total premiums of only 200,000 MDL ($17,700) in 2008.

3.6.5 Credit Life Insurance
Credit life insurance is also highly undeveloped in Moldova. Just two years ago, banks began to sell credit life insurance when disbursing loans, although this is still in early stages, according to Nadya Litvac of the EBRD.115 Currently, no commercial banks or MFIs require credit life insurance when taking out a loan. Costs are generally quite reasonable. For example, Vitoriasig provides protection in case of borrower’s death at an annual cost is 1.5 percent of the loan principle. Within the CNPF data, there is no category entitled “credit life.” However, under

voluntary goods insurance there is a product category named “financial risk” insurance, for which 7.5 million MDL ($660,000) in premiums were underwritten in 2008.

3.7 Distribution channels and marketing
The majority of insurance companies in Moldova principally utilize traditional distribution channels, such as agents and brokers, as well as traditional marketing instruments, such as print advertising and customer promotions. Many firms do not make a discernible effort to establish long-term relationships with individual customers. There is also no specific marketing towards low-income persons or rural populations. Reputable brokers are known, however, to provide good customer service, and to invest resources in customer relationship management, but again, more with corporate clients or higher-income individuals.

3.7.1 Distribution channels: General overview
At the outset, it is important to distinguish between sales and distribution channels used for individuals and those used for commercial entities. For individuals, direct sales channels and multi-level marketing, are widely used.116 Many firms rely on a direct sales force through their regional branches where agents are typically compensated with a

115 Interview with Nadja Litvac, Principle Banker, European Bank for Reconstruction and Development. Date: April 8, 2008 via telephone. 116 Multi-level marketing, otherwise known as network marketing, and sometimes associated with pyramid chemes, is a strategy that compensates distributors/salespersons for their sales, as well as for the sales of others introduced to the firm. Federal Trade Commission website, www.ftc.org. Retrieved April 2009.

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combination of salary and commission. For example, Donaris currently employs over 300 agents nationwide. Commission can range from 10-25 percent. Furthermore, many firms also have agreements with a variety of insurance brokerages. For instance, Vestecom-Plus Insurance Brokers currently works with six firms. Grawe Carat currently has a network of exclusive agents, and also partners with seven brokerages.117 It is important to note that according to the 2006 insurance legislation, insurance firms are legally liable for the mistakes and oversights of their intermediaries. More on insurance brokers can be found in section 3.7.2 below. There is little to no selling through telephone, direct mail and internet. life in the last two years.118 In addition,

bancassurance is not well-developed, although a few banks recently began selling credit Currently, insurance is not sold through non-bank microfinance institutions or through savings and credit associations. For corporate clients or commercial entities, the relationship is usually managed at the director level. Contracts are often signed on the basis of personal or political Direct sales and multilevel relationships.119 In addition, since several firms have been established as captives, most of their business comes directly from their mother firm. marketing can also be used for commercial clients as well. From interviews with eight insurance companies, the one product distributed via nontraditional distribution channels is the obligatory motor third party liability insurance (RCA). Some firms sell RCA policies through grocery stores, commercial centers and petrol stations. Other firms also sell via the post office and automobile repair garages. 120 Donaris recently began accepting premium payments through the Post Office of Moldova (POM). These alternative distribution channels could certainly be used to sell other straightforward insurance products, including microinsurance.

3.7.2 Distribution channel: Insurance brokers
Because insurance brokers were not regulated before 2002, there were countless “corner” brokerage firms whose sometime unscrupulous behavior harmed the reputation of brokers. By 2006, there were as many as 80 small insurance brokerages in Moldova. However, the 2006 insurance law, which increased the minimum capitalization and qualifications, helped raise professional standards. Today, brokerages are used by the

117 Grawe Carat Insurance Company website. www.grawe.md. Retrieved April 15, 2009. 118 Bancassurance is when a bank sells insurance products. 119 AXCO Insurance Market Report for the Republic of Moldova, 2008.. 120 Interview with Serghei Boico, Customer Service Representative, Donaris Insurance Company. Interview date: March 16, 2009 in Chisinau, Moldova.

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majority of large insurance companies in Moldova. For example, ASITO declared that almost 20 percent of its insurance contracts were secured through brokers.121 As of March 2009, the CNPF lists 35 insurance brokerages.122 Nevertheless, the overall brokerage market in Moldova is still in early development. According to an article in ARS Assecuratiorum, most brokerages are small firms, with only four or five employees and non-diversified portfolios due to an over concentration on automobile-related insurance.123 Indeed, in an interview with broker Natalia Dubencu, she affirms that the majority of her business stems from obligatory automobile insurance like RCA, and maintains that the same applies to her colleagues at other brokerages.124 In short, many insurance brokers, like many insurance firms, survive on the mandatory insurance legislated by the government. Mr. Gamurari, Vestecom-Plus Director and President of ABAR, maintains that there are several deficits affecting the current state of brokerages in Moldova. Firstly, there is lack of transparency and cooperation between insurance brokers.125 In a separate interview, he attests that there is a lack of understanding in the market – even among insurance firms – about the important role played by brokers. He explains how many perceive brokers as “just salesmen.” Furthermore, he claims that some insurance firms feel threatened by brokers, because brokers protect the client’s interests. “Independent brokers represent a filter [between the firm and the client] and do not propose just any insurance firm or product to their customers – but rather, those that correspond to the customers’ needs.”126

3.7.3 Marketing overview
For marketing and advertising, most insurance firms rely on traditional mass media channels such as television and radio; print advertising in newspapers, magazines and billboards; marketing collateral such as brochures and pamphlets. Smaller firms have limited marketing because of high costs. Several insurance representatives stated that they have ceased or limited their use of television advertising because it is prohibitively expensive, with limited ROI. Instead, they focus on radio and print advertising.127 In

121 AXCO Insurance Market Report. 2008. Southeast Europe insurance market report: Non-life (P&C). 122 National Commission on Financial Markets. www.cnpf.md. Retrieved April 2009. 123 Gamurari, Veaceslav. The market for insurance brokers: Quo vadis? ARS Assecuratiorum, December 2008. 124 Interview with Natalia Dubencu, Insurance Consultant for Vestecom Plus Insurance Brokerage, and Administrator of Moldovan Insurance Portal, www.asigurare.md. Interview date: March 17, 2009 in Chisinau, Moldova. 125 Interview with Veaceslav Gamurari, Director, Vestecom-Plus Insurance Brokers. Date: March 17, 2009 in Chisinau, Moldova. 126 Tudoreanu, Ghenadie. Interview with Veaceslav Gamurari. Capital Market Magazine. www.capitalmarket.md. Retrieved March 22, 2009. 127 Interview with Serghei Boico of Donaris (March 16, 2009) and Stela Culicov of ARTAS (March 23, 2009),

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addition, some collaborate with relevant publications to conduct interviews and write articles related to insurance. Moreover, some of the more dynamic firms engage in event sponsorship and customerfacing promotions. For example, in the summer of 2008, Garantie Insurance Company sponsored a three-month promotion entitled “Vara linistita” (“Peaceful summer”) which provided preventative health examinations to students for €3 and invited them to learn more about the benefits offered by Garantie. Also in 2008, Grawe Carat sponsored a classical music festival as well as several philanthropic events.128 This spring, Donaris is holding a special promotion for RCA and Autocasco insurance; all new subscribers have the chance to win prizes such as a travel medical kit or free gasoline.129 Certain limitations prevent firms from utilizing marketing tactics commonly utilized in other western countries. For example, telemarketing is nonexistent because the penetration of telephone landlines is only approximately 30 percent.130 Interestingly, the penetration of mobile phones is significantly higher at almost 53 percent.131 In addition, internet marketing is not used in insurance, as less than 20 percent of the population has internet access.132 However, most of the larger insurance firms do at least have websites. Finally, there is little to no direct mail marketing, mainly because customers are not particularly receptive, making the ROI for firms extremely low. Regardless of how advanced an insurance firm’s marketing department is, one thing they all seem to agree on is that word-of-mouth is not only the least expensive, but by far the best form of advertising. As Vitalii Robu, Sales Director of Garantie, stated “Word of mouth is the only credible source of information.”133 Stela Culicov of ARTAS, confirmed this opinion: “We can implement costly advertising campaigns, and maybe a handful of people will subscribe. But when a customer has had a positive experience with us, that is the best advertising. We receive quite a lot of business through referrals.”134

both in Chisinau, Moldova 128 Interview with Angela Solonari, Marketing Manager, Grawe Carat Insurance Company. Interview date: march 19, 2009 in Chisinau, Moldova. 129 Donaris Insurance Company website. www.donaris.md. Retrieved April 2009. 130 Moldovan Statistical Bureau. www.statistica.md. Retrieved April 2009. 131 National Agency for the Regulation of Electronic Communication and IT. www.anrceti.md. Retrieved March 2009. 132 National Agency for the Regulation of Electronic Communication and IT. www.anrceti.md. Retrieved March 2009. 133 Interview with Vitalii Robu, Sales Director, Garantie Insurance Company. Interview date: March 26, 2009 in Chisinau, Moldova. 134 Interview with Stela Culicov, Insurance Specialist, ARTAS Insurance Company. Interview date: March 23, 2009 in Chisinau, Moldova.

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4 Demand: Profile of potential microinsurance customers
4.1 Risks and lifecycle events faced by low-income persons
The risks faced by low-income people in Moldova are not dissimilar from those confronting low-income persons in other developing countries. The primary risks are categorized and defined in table 10 below. Table 10: Overview of risks faced by low-income persons in Moldova Risk type Lifecycle risk Definition
Related to events taking place during the course of a lifetime, which often entail large expenditures Related to the climate, physical environment and natural disasters Related to incomegenerating activities

Idiosyncratic or Co-variant
Idiosyncratic

Examples in Moldova
Births, baptisms, weddings, funerals, deaths, serious illness or accident, university education Flooding, drought, landslides and earthquakes Loss to business property, automobile, machinery and equipment

Environmental risks

Co-variant

Business risks

Idiosyncratic (generally)

Source: Compiled from author’s interviews, March-April 2009

Risks can be further classified as idiosyncratic or co-variant. An idiosyncratic risk occurs by chance to an individual or family at different times. By and large, lifecycle and business risks are idiosyncratic. Conversely, a co-variant risk simultaneously occurs to a larger segment of the population. In general, environmental risks, such as floods or drought, are co-variant. The primary risks confronting low-income persons and communities in Moldova are described further below. Although the direct damages and financial burden of these losses are mentioned, the indirect or secondary effects of such losses, such as human suffering or psychological stress, must not be overlooked.

4.1.1 Lifecycle risks
Death of the breadwinner: One of the main risks mentioned is the death of a

breadwinner. Firstly, the short-term financial burden is high due to high funeral costs. The average cost is about 10,000 MDL ($887), with many costing sometimes 20,000 MDL ($1775) or more. In the medium or long-term, this also signifies the loss of income for the family, placing additional pressure on their ability to cover daily expenses or to save for future events, such as children’s education or wedding. Additionally, if the breadwinner

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has an outstanding, uninsured loan, the family can also inherit the debt burden. If unable to repay, collateral, if given, can be repossessed, leaving families further at a loss. The overall severity of this risk is high. However, this is an insurable risk that could be covered by a life insurance product for the breadwinner, as well as credit life insurance product for microloans. Serious illness: Serious illness is also a significant risk. All Moldovan citizens are covered by the CNAM if they are formally employed. However, many rural persons are self-employed or work in the informal economy and because of their limited resources, choose not to purchase the insurance, even during the promotional period. Essentially, they gamble with their health, and simply hope they will not fall ill throughout the year. By doing so, they engage in limited prophylaxis, often self-medicating, avoiding the doctor and foregoing preventative care.135 If a major illness unfortunately occurs, some persons may choose to subscribe to the CNAM. However, if after March 31st, they must pay the original, non-promotional price of 2,637.6 MDL ($250) in full, a significant cost for low-income persons with inconsistent cash flows. Furthermore, although hospitalization stays are often covered by the CNAM, it is very common to have to pay “ciubuc” or “mita” – tips or small bribes – to hospital staff and doctors. This tendency is deeply ingrained in the culture. During the Communism era, in both Moldova and Romania it was quite appropriate to bring a small gift of coffee or chocolate as a token of appreciation for the doctor. This practice, however, has mutated over time, where larger sums of money are sometimes expected or solicited. This is often explained by the very low salaries that most doctors and nurses receive: a doctor can earn 2000-3000 MDL ($177-$266) per month, while a nurse’s assistant may earn as little as 600 MDL ($53) per month. One interviewee retold a story of an extended hospital stay where he had to live with a small stack of cash underneath his pillow, paying small amounts here and there to get better care and attention. In addition, pharmaceuticals are very expensive in Moldova. The CNAM only covers very basic medications, and therefore, those diagnosed with serious or chronic illnesses must bear the financial burden of treatment. Because of these soaring costs, low-income persons may miss doctor visits or may skip refilling their medications due to lack of resources. Serious illnesses, however, are insurable risks which can be covered by a quality, flexible health insurance product, which provides better coverage for hospitalization, chronic illnesses and pharmaceuticals.

135 Interview with Liliana Gherman, Program Director, Public Health Program; Ana Capcelea; Vitalie Slobozian. Soros Foundation of Moldova. Date: March 17, 2009 in Chisinau, Moldova.

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Household property loss: Like in several post-Communist countries, a land and home restitution program was implemented in Moldova during the 1990s. Therefore, home ownership is at a very high level, with over 90 percent of Moldovans owning their residences. For most, their homes are their most valuable assets, and evidently, any severe damage or loss can be devastating to a low-income family. Again, this is a risk that could be properly addressed through a household property microinsurance product. Educational expenses: One of the primary goals of many rural families is to send their children to university. Many of these prospective students are the first generation in their families to leave their local villages and move to the capital – clearly momentous occasions in the lives of these families. Thus, education is another lifecycle event which can place financial pressure on a family. An education at a university in Chisinau can cost 5,000 to 15,000 MDL ($443-$1330) per year. Living expenses, including food, transportation, telephone and books, can add another 500 to 1,500 MDL ($44-130) per month in expenses. The cost of this lifecycle event is not insurable, and is probably best addressed by a flexible savings product. Social and cultural lifecycle events: Beyond potentially idiosyncratic risks, there are several lifecycle events – baptisms, weddings and funerals – that are expensive, thereby placing a large financial burden on low-income families. As mentioned above, a funeral can cost 10,000-20,000 MDL ($887-$1775). Weddings can often be even more expensive, with some costing 30,000 to 50,000 MDL ($2660-$4400). It is even quite common for birthdays to become elaborate affairs. One event can be equivalent to the average annual income of a rural family. Regardless of the large expense and related financial burden, many people still find ways to pay for these events, through saving over time and through borrowing. It is important to note that these are long-standing cultural traditions that hold a high place in the life of Moldovans. There are social consequences for not fulfilling these obligations, including being shamed and “losing face” in the village. Additionally, there is an attitude of “one-upmanship,” where families compete to out-do each other. These costs can also be better handled through flexible savings product rather than through microinsurance

4.1.2 Environmental risks
Environmental risk – harvest loss: In rural areas, another major risk is the devastation of the season’s harvest, as farming is often the main source of both subsistence and revenue. For instance, there was a drought during the 2007 agricultural season which significantly reduced crop yields for many families. The following year, in the summer of 2008, severe flooding led to the destruction of millions of hectares of farmland. These are large-scale, co-variant risks concurrently affecting a large segment of the rural population, and the

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impacts on low-income families can be severe, including loss of productive capacity and interrupted income flow. Agricultural or crop microinsurance would be both relevant and necessary in a country like Moldova where agriculture plays such a significant role in the lives of people. Without insurance, the victim receives no compensation. Therefore, the probably wellintentioned state-subsidized agricultural insurance does in fact little to help lift farmers and their families from the cycle of poverty. One natural disaster, one ruined harvest – can destroy years of hard work and savings.

4.1.3 Business risks
Business risk – asset or property loss: In urban areas, major risks are related to losses of fixed assets within a business, particularly property, an automobile or machinery. Any loss to an income-generating item can lead to a loss of productive capacity and interrupted income flow. These are insurable risks which could be covered by a commercial property microinsurance product.

4.2 Coping strategies and their effectiveness
In Moldova, like in most developing countries, most people live day-to-day, struggling to cover basic expenses, and without emergency funding readily available. Over time, lowincome people in Moldova have developed a variety of coping strategies to handle uncertainty and to alleviate the negative consequences caused by a loss. People generally mitigate their risks in informal ways through self or informal insurance, reactively rather than proactively. What is most evident is that none of the coping mechanisms developed are intentionally modified for a specific risk, but are utilized as a need arises. As Margarita Lalayan of the Microfinance Center of the CEE and NIS succinctly stated, “It is not risk management, it is case management.”136 Both ex-ante and ex-post strategies employed of low-income persons are described below, followed by an evaluation of their effectiveness.

4.2.1 Ex-ante strategies
Ex-ante coping mechanisms are those employed before a risk occurs. Two main ex-ante strategies are utilized: savings and the purchase of fixed assets. Firstly, like in Romania, the savings mentality in Moldova is quite well-developed. People save in times of plenty to use in times of want. Not only money is saved, but also dried food, seeds for the next

136 Interview with Margarita Lalayan, Microfinance Consultant, Microfinance Center of the CEE and NIS. Date: March 19, 2009 via telephone.

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year’s harvest, and household items such as soap and matches. Often, these items are carefully saved over time. Victor Burunsus of the World Bank recounted a telling story where he attended a memorial service and received, among other gifts, a wooden matchbox – something that had not been manufactured for two decades. (In Romania and Moldova, in remembrance of someone’s passing, the tradition is that the family distributes food and little presents to guests and locals). Most people do not save in a structured or systematic fashion. Savings are often all placed in “one pot” – to be later used for whatever is most necessary. Many save a portion of remittances received from family members working abroad. Traditionally, few save through formal channels, although this number has gradually grown over time. According to microfinance specialists, SCAs have helped improve savings in a formal manner and are working to develop better products in the next few years.137 In addition to savings, rural persons may purchase fixed assets, such as gold and livestock. Some entrepreneurs may invest in their business by buying machinery, equipment or inputs. A number of respondents also purchase foreign currency, such as US dollars or Euros, as they are considered safer and more stable than the Moldovan currency. These assets are also accumulated during good times, and then sold during times of need. Beyond these two main strategies, people also reduce their expenditures during the nonpeak agricultural season, when income is less readily available. They may also temporarily reduce expenditures in order to prepare for the increased costs associated with lifecycle events, such as baptisms or weddings. For risks perceived as avoidable, such as illness or some types of property loss, people will implement prevention strategies. For example, upon leaving the house, they will turn off the electricity and gas access in order to prevent fire. Finally, another common strategy is income diversification, whereby persons hold a variety of jobs. Mostly this is purely done out of necessity, as one occupation can rarely provide enough income to cover living expenses. For example, one respondent was employed full-time at the local SCA during the day. Mornings and evenings, she also worked in the fields during the agricultural season, and in greenhouses collecting vegetables during the winter. Her husband also had a full-time job, helped out in the fields and greenhouses, and repaired automobiles around the village. Again, one can

137 Interview with Maria Johansson, Project Manager, International Advisory Services, Frankfurt School of Finance and Management, and Team leader of financial education project with RFC. Date: March 11, 2009 via telephone.

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argue that these strategies are not consciously-chosen, true risk-reducing strategies, but rather mechanisms of coping with the obligations of life in Moldova.

4.2.2 Ex-post strategies
Ex-post coping mechanisms are those employed after a risk or loss occurs. In absence of effective ex-ante strategies, most people in Moldova primarily employ ex-post strategies. When a loss or tragedy occurs, the first strategy is to use the existing household income to cover the initial costs. However, this is rarely sufficient. Because most low-income people do not have formal protection through the government nor through the private sector, people literally create their own “social safety nets” upon which they depend in time of need. For instance, Moldova has a special tradition of “cumetrie.” Similar to most Christian nations, when a child is baptized in Moldova, it is given a godmother and godfather. However, in Moldova, a child also receives many – sometimes twenty or thirty – “cumatrii,” who become part of the extended family. Being chosen as a “cumatru” (male) or “cumatra” (female) solidifies the relationship between families. In difficult times, people reach out to the “cumatrii,” where helping each other is not only based on a system of reciprocity, but is also a matter of tradition and honor. In addition, some may try to find extra jobs around the village, or may leave the village to work temporarily in Chisinau. When this is unsuccessful, many will leave their families to go work abroad. As Andrei Calin of the MMA, answered: “How do they cope? They go to Russia!” Russia is the primary destination, while others leave for Italy and Spain. Most return within three to nine months, having earned more in a few months abroad than they would have earned working a full year in a similar job in Moldova.138 Another loss management strategy is the selling of assets. Some may sell household items, gold and jewelry, as well as livestock. In more extreme cases, a family may need to sell their automobile or land.

4.2.3 Assessment of coping strategies
When analyzing the effectiveness of a coping strategy, several characteristics are assessed; namely, the timeliness, accessibility, affordability, totality of the coverage offered, and finally, the overall efficiency of the strategy. The limited financial education and lack of access to information among low-income persons in Moldova is exemplified by the very limited ex-ante strategies employed when faced with difficult or tragedy. Even the few ex-ante strategies employed – savings and the purchase of fixed assets – are limited in the

138 IOM. 2008. How Moldovan households manage their finances. IOM, Knowledge and Practices Survey Report

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amount of coverage they offer, and certainly may not be the most efficient use of a lowincome person’s already limited resources. Moreover, the current financial crisis has demonstrated the vulnerability of these ex-post strategies. For the few borrowing through formal institutions, credits are less readily available. Those working abroad, especially in Russia, are seeing their job opportunities disappear.139 Finally, for those borrowing through informal channels, this will become more challenging as everyone tightens their purse strings during the economic downturn. The ex-post strategies are high-stress strategies. Accessibility can be limited, coverage is rarely complete and the timeliness is uncertain. Additionally, these strategies are not very affordable. Even through MFIs or SCAs, the interest rates are quite high, ranging from 20 to 32 percent annually. One assertion often restated during the interviews was that Moldovans often live with a great deal of debt. Debt and borrowing can easily become a vicious cycle, particularly difficult to manage for low-income persons who are typically less prepared to weather economic shocks. In addition, borrowing and debt both carry not only financial consequences, but also social and psychological side effects. Low-income people in Moldova perceive their ability to manage their risks ambivalently. On one hand, they realize it is unsatisfactory, as high-stress strategies can cause long-term financial pressure. On other hand, they accept it as satisfactory because they simply do the best they can, and are unaware that better coping mechanisms may exist. As one interviewee mentioned, “They think they must predict what will happen in order to insure themselves, and because many of these risks are unpredictable, they feel they cannot manage them.” In summary, there are serious gaps in the risk management strategies outlined above – some of which can be filled by a formal insurance. A well-designed microinsurance product could help lower-income persons allocate resources more efficiently, while providing essential protection from idiosyncratic risk.

4.3 General attitudes about insurance
In Moldova, there is a low level of familiarity and consumer education regarding financial services in general (e.g. banking, savings, budgeting, etc.). Currently, less than 15 percent of the population uses banking services, although this number has steadily increased over

139 Russia was particularly hard-hit by the weak global economy, and construction – the industry employing the most male migrant workers – has all but completed ceased. Skinner, S. 2008. Russian construction hit by global economic crisis. International Construction Magazine, October 22.

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the last decade, and is expected to increase further.140 Even so, the banking sector is considered better developed than the insurance industry. The general population has a basic understanding of insurance. This largely stems from the Soviet era when life and property insurance, for instance, were mandatory. Subscription was imposed, with payments automatically deducted from peoples’ salaries. People were not given much choice or freewill and therefore, never fully developed their understanding of the benefits of such products. Today, people in Moldova generally only purchase insurance when they are obligated to do so. Over the last few years, as the product range has widened and the industry has gradually matured, there has been some growth in voluntary insurance premiums. However, the majority of people still perceive insurance as an “extra.” Even with one of the most common insurance product, RCA, people do not like to insure. Many people in rural areas resent having to pay 500-1000 MDL ($45-$90) per year to purchase insurance when their vehicles are 10 to 20 years old and are only driven locally. Therefore, unless they must complete a vehicle inspection, they choose not to purchase insurance and assume responsibility for losses. This notion is confirmed by both insurers and the government, who estimate that only approximately 50 percent of all automobiles in Moldova are covered by RCA insurance.141 As of December 31st, 2008, there were approximately 600,000 registered vehicles, 300,000 of which are driving without insurance. Mr. Stirbu, Director of the DIS, surmises that the responsibility for this low number rests between the insurance firms, who have not proactively reached out to potential consumers, and the government. For example, penalties for non-insurance were not high enough to provide incentives to insure. Until May 31st, 2008, the penalty was only 60 MDL ($5), which was subsequently raised to 200 MDL ($17) – still only about one third of the insurance cost. Finally, many low-income households have little disposable income. As one interviewee stated, “They are worried about day-to-day expenses, and therefore have no ‘space’ to worry about insurance.”142 Efim Lupanciuc, Director of the RDC, confirmed this Therefore, people statement: “They are forced to manage today without over-thinking about tomorrow. They consider that they have other priorities besides insurance.” perceive insurance as not particularly important, relegating it to an additional rather than

140 ProCredit Bank 2008 Annual Report. www.procredit.md. Retrieved March 2009. 141 Interview with Vladimir Stirbu, Director of Department of Insurance Supervision, National Commission on Financial Markets. Date: March 26, 2009 in Chisinau, Moldova. 142 Interview with Serghei Tanasiev, Microinvest branch manager. Date: March 25, 2009 in Criuleni, Moldova.

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a necessary expense. Some view insurance as a luxury. And because they perceive themselves as poor, and insurance as expensive, they do not consider these products to be conducive to their incomes or relevant for their lifestyles. Certainly, this mentality simply reflects the lack of understanding and knowledge of insurance.

4.4 Reasons for lack of insurance
There is both a need and a demand for insurance, but there are several obstacles to overcome. Table 11 outlines the responses from interviews with over 50 stakeholders regarding the lack of insurance in Moldova. Table 11: Reasons for lack of insurance in Moldova Rank Reason Total # responses (% of total)
35 (35%) 24 (24%) 17 (17%) 12 (12%) 6 (6%) 3 (3%) 2 (2%) 99

1 2 3 4 5 6 7

Lack of financial education and insurance tradition Lack of trust in institutions (both government and private sector) Lack of financial resources Inactivity on behalf of insurance firms to target lowincome persons (products, marketing, promotion) Underdeveloped institutional and governmental Capacity Lack of access (geographic) Competitive products offered by banks and SCAs TOTAL

Source: Compiled from author’s interviews, March-April 2009

Lack of financial education – 35 percent of respondents: The main reason given to explain the lack of insurance in Moldova was the lack of financial education – or as SCA director Alina Lungu, stated, “the lack of financial spirit.”143 People in general are Numerous uncertain about how to manage their resources efficiently. They are not aware of what products are available and what benefits these products may provide. interviewees reiterated that people are not even cognizant of the risk they face. As microfinance specialist, Roxana Savescu, stated, “The understanding of risk management

143 Interview with Alina Lungu, Executive director, Dubasarii Vechi SCA. Date: March 18, 2008 in Dubasarii Vechi, Moldova.

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– and the need to be prepared – is very low.”144 Stela Culicov of ARTAS explained that people are concerned with paying something for nothing, not understanding the underlying advantages of insurance.145 Lack of trust in institutions – 24 percent of respondents: The second most common response given was a lack of trust in institutions. The period of independence and privatization brought several unpleasant experiences which left an indelible mark upon the credibility of both government and private sector institutions. For example, in the early 1990s, a transition currency was established through the National Savings Bank (“Banca de Economii”), which underwent a huge and swift devaluation, leaving people without their long-earned life savings. Additionally, corruption is still a widespread problem. As Nina Rabeja of Vitoriasig stated, “when you don’t trust your government, it is hard to trust anyone else.”146 The problem does not conclude here. During the 1990s, countless “corner shop”

insurance firms appeared and then disappeared, leaving many people without the money they had entrusted to these institutions. During the 1998 Russian ruble crisis, numerous banks went bankrupt due to the rapid depreciation of the Moldovan leu, leaving many impoverished. Clearly, after such experiences, people become disillusioned. This distrust, especially pronounced among the older generation who hold these unpleasant experiences in recent memory, discourages people from trusting financial service firms. Some think a new generation must come before this hesitance will change. Moreover, and perhaps not surprisingly, awareness among the general population regarding the laws and their rights is not very high. The government has made progress the last decade in modernizing its judicial system; legislation in Moldova now provides the same protection to plaintiffs as western legal systems do. However, Moldova is not a litigious society, and many claims are handled informally outside the judicial system. The majority of cases that do reach the formal system are those related to automobile accidents.147 Even with official dispute, respondents reported negative experiences of having to “run after” the money due them.148 Lack of financial resources – 17 percent of respondents: As has been found in other microinsurance studies, lack of money was not the top-ranked reason for lack of

144 Interview with Roxana Savescu, University professor and free-lance microfinance consultant. Date: March 23, 2009 via telephone. 145 Interview with Stela Culicov, Insurance Specialist, ARTAS Insurance Company. Date: March 23, 2009 in Chisinau, Moldova. 146 Interview with Nina Rabeja, Director of Vitoriasig, Criuleni branch. Date: March 18, 2008. 147 AXCO Insurance Market Report: Moldova Non-Life (P&C). 2009. 148 Interviews with SCA directors of Slobozia Dusca and Dubasarii Vechi. Date: March 17th, 2009.

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insurance. Interestingly, however, there tended to be a discrepancy between respondents: Those with an external perspective (members of international organizations or insurance firms) often cited lack of money as a secondary or tertiary reason. Potential microinsurance consumers (Moldovan citizens such as SCA members) often blamed the lack of money as the primary reason. For example, Nina Rabeja of Vitoriasig stated, “Money is earned the hard way here. To convince someone to take another leu out of their pocket, it’s very difficult.149” SCA directors interviewed echoed this statement, explaining that by the time interest and commission are calculated, loans are already expensive. Adding insurance would therefore only increase the financial burden for the villagers.150 However, as described in chapter 4.1, Moldovans have rich cultural traditions that involve copious celebrations. Somehow, money is found or made available for these events – this fact suggests that rural families may indeed have the financial resources to pay for insurance. This brings us back full circle to the lack of insurance tradition and the low level of financial education. It can be argued that they consider insurance expensive because they do not realize the important protection it offers. Other responses: Several related responses were clustered in the same category, as they essentially articulated the same general idea: 12 percent of respondents stated that there has been inactivity on behalf of insurance companies to reach out to low-income individuals. Six percent of respondents mentioned the overall underdevelopment of the insurance market, as well as the weak regulatory capacity of the CNPF. Furthermore, others stated that low-income persons in rural areas do not have access to insurance products (3 percent of respondents). Finally, 2 percent of respondents felt that banks and SCAs offered products for low-income persons that compete with insurance products. All of the listed reasons are linked and lead to a cycle. The lack of financial education prevents lower-income persons from realizing that better strategies exist to manage risks and improve living standards. They do not trust institutions, and therefore, are less likely to gain new positive precedents with credible insurance firms who could help rebuild the lost trust. And because this segment is so inactive within the insurance market, the already passive insurance firms continue to overlook them, perceiving them perhaps as inaccessible and unprofitable. Without a concerted effort between the public and private sectors, it will be challenging to overcome these obstacles.

149 Interview with Nina Rabeja, Director of Vitoriasig, Criuleni branch. Date: March 18, 2009 in Criuleni, Moldova. 150 Interview with Executive Directors and Chief Accounts of the Molovata and Cosernita SCA. Date: March 25, 2009 in Molovata, Moldova.

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4.5 Demand and potential microinsurance market
There is both a need and a demand for microinsurance in Moldova. On-site research showed that life, health, property and agricultural insurance were in demand. A separate survey conducted by the EBRD in July 2007 demonstrated that about 20 percent of respondents stated they were “very interested” in health and life insurance.151 ZFS estimates that an individual earning approximately $7 to $10 per day (PPP) is a potential microinsurance consumer. In Moldova, about 65 percent of the population fulfills this attribute, representing about 2.5 to 2.7 million persons who earn about $5 to $10 per day (PPP). In general, most people stated that they would purchase more insurance if the products were more affordable, more easily accessible, and if they could trust the providers. The reasons for lack of insurance described above in chapter 4.4 imply that there are several obstacles to overcome for a microinsurance product to be successful. However, there are ways to mitigate these obstacles, which will be further discussed in chapter 5.

151 Moldova National Public Opinion Survey on Remittances. 2007. The European Bank for Reconstruction and Development, July.

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5 Recommendations: Introducing microinsurance to Moldova
5.1 Product recommendations
The characteristics of an adequate microinsurance product are as follows: • • Simple products specifically designed to target lower-income persons Contract wording needs to be straightforward, clearly disclosing information about premium payments, claims entitlement and other benefits • • Automation for monitoring and claims processing built into the product Affordable and accessible

Some of the main issues with the current product offering are that most products are not affordable, and that most firms require payment in full and upfront. A microinsurance product would need to offer both quality and flexibility, but at a reasonable cost and with a flexible payment plan, such as monthly or quarterly installments. Furthermore, as with any microinsurance product, accessibility is key. Therefore, it is necessary to establish a trustworthy and far-reaching network of distribution channels which would reliably provide access throughout Moldova. Recommended microinsurance distribution channels are discussed in more detail in chapter 5.2. It is recommended to first introduce one simple product, such as personal accident or credit life, and give people time to accumulate positive experiences in order to build trust and familiarity with insurance. In the longer term, integrated insurance products, such as those with a savings component, would be ideal as they address the intangibility of insurance and provide additional benefits to the policyholder. Table 12 below outlines the primary idiosyncratic risks faced by low-income persons in Moldova, as well as their respective recommended microinsurance product. products are further discussed in chapters 5.1.1 to 5.1.4. Table 12: Summary of risks and recommended insurance products Risk
Death of a breadwinner Serious illness Harvest loss, natural disaster Property damage, loss

These

Recommended microinsurance product
Life insurance Credit life insurance Health insurance Agricultural insurance Property insurance (household and business)

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5.1.1 Health insurance
Although the Moldovan government subsidizes health insurance for all citizens, the very low subscription rate of 67 percent tells a different story. There are a plethora of reasons why the turnout is so disappointing. The relative high cost, combined with the supposedly inefficient, bureaucratic system, does not paint a particularly positive outcome. Those in rural areas are particularly vulnerable, since access to both healthcare and financial resources can be difficult. Providing a product that allows for the improved flexibility and quality offered in the current supplementary health insurance products would maybe help bridge the gap in the current health insurance system and expand coverage to more Moldovans. important characteristics of a health microinsurance product would be: • • • • • • • Access to a wider range of quality facilities Few or no geographic limitations Shorter waiting times Treatment at both family and specialist physicians Hospitalization, diagnostic testing, laboratory testing Hospital transportation Coverage of a wider range of medications (preferably through providers separate from those providing treatment and diagnostics) • • No upfront payment for treatment required Monthly or quarterly premiums payment through a safe, accessible intermediary The

Currently, a significant coverage gap exists between the CNAM and supplementary policies. For example, only the state system covers maternity, pediatrics, some chronic illnesses and specialized surgeries. Therefore, a person wanting comprehensive coverage presently needs to purchase both policies. Ideally, a supplementary policy would serve as a direct extension of the state system, where low-income persons would still have access to critical treatments but also have the benefit of supplementary coverage. This integration with the state policy would help reduce overall costs by reducing potential duplication, but would also require close cooperation with the CNAM – an option that requires further investigation. The introduction of such a product would require the establishment of good relationships with trustworthy health care providers, including doctors, clinics, diagnostic testing centers, medical laboratories and hospitals. These providers would require capacitybuilding, including:

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• Ability to execute financial transactions with ZFS • System to regularly prepare and send invoices to ZFS • An inexpensive and efficient method for verifying coverage of insured party • In addition, capacity-building is necessary at the intermediary-level Historically, however, health insurance is a difficult product to introduce and manage profitably. It requires significant investment in capacity-building, as noted above, as well as the assistance of actuaries in order to price the product accurately. making an accurate risk assessment more difficult. An option to consider would be introducing “hospital cash,” an insurance product ZFS is currently developing in conjunction with its new partner Women’s World Banking.152 This product is a very simple form of health insurance whereby the policyholder receives a pre-determined amount of money per day spent in the hospital, independent of the actual medical expense incurred. This provides coverage for the most costly aspect of health insurance – hospitalization and related treatments – while decoupling the product from a government-sponsored or other private insurance program. The publicly available health statistics may not be applicable to lower-income populations, therefore

5.1.2 Agricultural insurance
In a country so dependent on agriculture, crop insurance is clearly vital. Although a

seemingly adequate agricultural insurance system is in place, the extremely low penetration is most likely due to the lack of trust in institutions, as well as a lack of knowledge among the rural population that such insurance even exists. The important characteristics of an agriculture microinsurance product would be: • • • • • Universally offered to both individuals and firms Straightforward method for calculating premiums Simple process for verifying land area, crops, etc. Product introduction accompanied by a widespread advertising campaign Efficient and quick claims processing mechanism

In order to reduce the chance of moral hazard, coverage should be limited to 70 or 80 percent of the total lost value (as the MAFI currently does). Furthermore, in order to address the potential for fraud, insurance can be offered to small groups of farmers (or
152 Women’s World Banking (WWB) is a network of MFIs whose mission is to promote “poor women as entrepreneurs and economic agents” by expanding their access to financial services and education. ZFS launched the partnership with WWB in January 2009. www.swwb.org. Retrieved April 2009.

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cooperatives), whereby fraud by one person automatically cancels the coverage for the remaining group members. One method for eliminating some of the potential subjectivity in the claims processing can be addressed through weather index-based insurance. This type of insurance is based upon changes in climate, such as rainfall, instead of changes in crop yield; for instance, a certain amount of rainfall above the average amount would automatically trigger a claims payout. This tends to be efficient while lowering opportunities for adverse selection and moral hazard. However, this type of coverage may require expensive infrastructure, such as weather stations, which could render the product unprofitable due to the small market size. Another concern is the possible introduction of basis risk, where a policyholder could receive compensation without having a loss or vice versa. Another drawback is that agricultural insurance can be risky – because the product would cover co-variant, rather than idiosyncratic, risks. In Moldova in particular, there have regularly been significant natural disasters affecting agriculture in the last decades. Therefore, it is important to undertake a more detailed risk assessment to evaluate whether profitability is possible under such circumstances.153

5.1.3 Property insurance
As mentioned in chapter 4.1.1., about 90 percent of Moldovan families own their homes, which are often their most valuable asset. The low penetration of property insurance can be likely attributed to the lack of financial education and a lack of trust in institutions. The important characteristics of a property microinsurance product would be: • Simple process for verifying property value (preferably in a stable foreign currency) • • • Straightforward method for calculating premiums Ensure simple, quick and transparent claims process Offered to both individuals and firms

Annual premiums can be calculated as a percentage of the property value, as is currently done by several insurance companies in Moldova, who offer annual coverage for approximately .5 to 3 percent of the total property value. Like agricultural insurance, coverage could be limited to 70 or 80 percent of the total lost value in order to reduce the chance for moral hazard. Moreover, in order to avoid opportunities for fraud, insurance

153 The World Bank 2007 report entitled “Rural productivity in Moldova – Managing natural vulnerability” provides a well-researched and detailed look at the agricultural risks in Moldova as well as an analysis of different risk mitigation mechanisms.

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can be offered to small groups of families, whereby fraud by one family automatically cancels the coverage for the remaining families. This product would be best distributed through SCAs in rural areas, and the groups could self-select from the roster of SCA members. Further investigation is necessary to appraise what risks would be covered in such a product (i.e. whether natural disasters would be included).

5.1.4 Life, personal accident and credit life insurance
Despite its rapid growth throughout the last decade, life insurance in Moldova is still in its early stages. For it to truly reach its full potential, the pre-requisites are not only the growth and maturity of the insurance industry, but also general, country-wide economic development.154 The death of a breadwinner was identified as one of the major risks confronting lowincome families in Moldova, yet there are currently no life insurance products targeted towards or affordable for the low-income population. A straightforward life insurance product, such as personal accident, would be recommended in order to address this major risk while addressing the need for simplicity and affordability. Personal accident, often considered the “poor man’s life insurance,” offers coverage in case of accident that results in death or disability, but not in case of illness. It is usually easier to implement then a full-fledged life insurance product, as no health screening is required and there is no opportunity for moral hazard. Preferably, the product would be linked with a longer-term savings in order to overcome the intangibility of insurance products. For example, Zurich currently offers a personal accident product in Bolivia where the payout is the average balance of the policyholder’s savings account over the previous six months. incentive to save. Credit life insurance product is often the first microinsurance product introduced in a market. Credit life already exists on the Moldovan market, however, it is highly underdeveloped. However, a suitable market exists for the launch of such a product as microfinance is quite well-developed in Moldova and is expected to experience continued steady growth. A credit life policy would need to be simply calculated and competitively priced. Over a certain loan amount (i.e. 10,000 MDL or 15,000 MDL), premium payments should be made in several installments. This not only provides protection but also serves as a good

154 Brainard, L. 2008. What is the role of insurance in economic development? Zurich, CH: Zurich Financial Services.

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5.2 Distribution channels recommendations
The characteristics of a satisfactory microinsurance distribution channel are as follows: • • • Trustworthy reputation Capacity for safe, reliable financial transactions for collections and disbursements Far-reaching network for widespread accessibility

MFIs are often natural partners for the sale and distribution of microinsurance, and Moldova is no exception. The main distribution channels recommended for Moldova are the primary MFIs, Microinvest and the RFC, as well as their respective SCAs. be considered. A partnership with the globally-oriented and well-established ProCredit Bank, would also Collectively, these institutions address the most critical obstacle to developing microinsurance in Moldova: the lack of trust in institutions. An affordable, targeted product offered through a respected institution, where payment can be made simultaneously with loan repayments, is simply a good selling proposition for a customer. MFIs and SCAs will be further described in chapters 5.2.1 and 5.2.2, with more extensive information offered in Appendix 4. Alternative distribution channels, including the Post Office of Moldova, will be discussed further in chapters 5.2.3 and 5.2.4.

5.2.1 Microfinance institutions
5.2.1.1 Overview of MFIs
The microfinance sector in Moldova has evolved rapidly throughout the last decade. According to the most recent listing by the CNPF, there are sixteen non-bank MFIs. Among these, three are the most prominent: Microinvest, the Rural Financial Corporation (RFC) and ProCredit: • Microinvest: Founded by the Soros Foundation, Microinvest is an MFI whose mission is to provide loans to small- and micro-enterprises in order to increase the socioeconomic potential and the living standards in Moldova.155 • The Rural Finance Corporation (RFC): the RFC is a cooperative-style joint stock company created in 1997 with the mission to promote rural development by serving as a central finance facility for SCAs and by collaborating with the government to help alleviate poverty.156 SCAs are both the clients and the owners

155 Microinvest Annual Report 2007. www.microinvest.md. Retrieved February 2009. 156 The Rural Finance Corporation website. www.microfinance.md Retrieved February 2009.

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of the RFC, who has grown significantly: from just a handful of SCAs at its founding to over 250 today. • ProCredit: Founded in December 1999 by a coalition of international investors, ProCredit part of a global network of “neighborhood banks,” who recently received its commercial banking license in Moldova, but continues to focus on lower-income clients traditionally underserved by its competitors. There are also several large commercial banks in Moldova who provide microfinancing options, including Banca Sociala, Fincom Bank, Mobiasbanca Société Generale and Moldova Agroindbank. Traditionally, these institutions focus on corporate clients and higher-income consumers. In recent years, however, organizations such as the EBRD have helped banks develop their microfinance capabilities. For example, in 2006, the EBRD rolled out a program with Mobiasbanca and Banca Sociala whose objective was to introduce microcredit products previously not available. Nadya Litvac, Principle Banker at the EBRD, confirmed that microinsurance was not offered by either bank at the time of the program, but that several commercial banks have started to offer credit life insurance in the last one or two years.157 Although most of the major MFIs, with exception of the RFC, focus on direct lending, many are also implicated in lending to SCAs. Figure 10 below outlines the affiliation of SCAs among MFIs. Of the 400 active SCAs, about 260 SCAs are linked to the Rural Finance Corporation (RFC) while 90 work with Microinvest. The remaining associations obtain financing from commercial banks. Microinvest and the RFC each have NGO-arms that provide financial education training and tailored consulting services to ensure the viability and sustainability of the SCAs. (More information on SCAs can be found in chapter 5.2.2 and in the appendix chapter 4).

157 Interview with Nadya Litvac, Principle Banker, European Bank of Reconstruction and Development (EBRD), Moldovan representative office. Date: April 8, 2009 via telephone.

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Figure 10: Distribution of SCAs among microfinance institutions

Source: Compiled by author during field research in Moldova, March 2009

5.2.1.2 Policies on credit life insurance at MFIs
In general, no MFIs or commercial banks have clearly defined or enforced policies regarding credit life insurance, and most requirements are decided upon on a case-bycase basis. For direct lending, guarantors are required instead, who become responsible for loan repayment in case of the original borrower’s death or incapacity. The number of guarantors depends on the loan recipient, amount borrowed and other factors. Occasionally, collateral and insurance are also necessary, though this is often at the discretion of the loan officer. At the RFC, for example, the loan recipient must provide collateral valued at 100 to 130 percent of the loan principle, usually their home, automobile or agricultural equipment. Loan recipients are sometimes required to insure the item they are planning to purchase with the loan; for instance, if they are purchasing property with their loan, that property will usually be insured. Loans to SCAs are provided without collateral or mandatory insurance. When the SCAs disburse the loans at the local level, they individually decide what type of insurance, guarantors and collateral is necessary. Most require at least one guarantor to co-sign the loan, and depending on the loan amount, some also require collateral. According to the

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RFC’s 2008 Annual Report, the majority of their SCAs lend to their respective members without requiring collateral or insurance.158 When asked why his organization does not mandate insurance, Artur Munteanu, Microinvest’s CEO, explained that the additional cost of insurance would make Microinvest’s loans more expensive compared to those available through other MFIs. Regarding loans to SCAs, he affirmed that each SCA is its own entity who follows its own procedures and policies, upon which Microinvest cannot intrude by mandating insurance.159 When this same question was posed to Valeriu Iasan, Vice-President of Finance at the RFC, he agreed with Mr. Munteanu’s statement regarding the independence of SCAs to follow their own individual rules and regulations.160 Furthermore, Mr. Iasan stated that since the SCAs are currently undergoing a process of consolidation and reorganization, the timing is not ideal for introducing mandated insurance. He did disclose, however, that once the RFC has the necessary financial and human capital, it plans to establish its own insurance subsidiary that would then provide insurance to its SCAs and direct loan beneficiaries.161

5.2.1.3 Criteria for microinsurance
Microfinance has an obvious link to microinsurance. Microinvest, in particular, already expressed an interest in partnering with ZFS to expand products and services to existing microfinance clients. Both Microinvest and the RFC are respected institutions and have built stable relationships with their customers, validated by the high number of repeat clients. In addition, since both already have the capacity for efficient and dependable financial transactions, it would be feasible to accept insurance payments through them. Moreover, they each have a sufficient network of branches. Microinvest has fifteen (four in Chisinau and 11 regional), while the RFC has nine (a headquarters in Chisinau and eight regional offices). ProCredit has an even larger network, with over 330 employees and 27 branches, including 11 in Chisinau and 16 regional branches. This far-reaching network of offices and staff signifies that most people in Moldova have access to a Microinvest, RFC or ProCredit branch in their county.

158 The Rural Finance Corporation 2008 Annual Report. www.microfinance.md. Retrieved March 2009. 159 Interview date: March 16, 2009 in Chisinau, Moldova. 160 Interview date: March 25, 2009 in Chisinau, Moldova. 161 Interview date: March 25, 2009 in Chisinau, Moldova.

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In addition, ProCredit uses innovative distribution channels to reach its remotely-located client: it operates three “creditmobiles” that serve a quarter of Moldova’s territory by literally bringing its banking services to the customers’ doorstep. Another creative tactic is the practice of “one-day offices,” whereby ProCredit employees set up a booth or stall at a local market in a city where there is no ProCredit branch. Photos can be seen in Appendix 3. Moreover, collectively, Microinvest and the RFC have a client base of over 100,000 people – each of which is a potential microinsurance customer. Of the two, the RFC is the best distribution channel for reaching rural areas as its main clients are 260s SCAs, representing over 80,000 members (about 70 percent of all SCAs members nationally). Microinvest, in turn, works with about 90 SCAs, representing about 18,000 customers. Microinvest, with its 4,000 direct lending clients, is the best channel for access to microentrepreneurs, particularly in urban areas (the RFC has 900 direct lending clients).

5.2.2 Savings and Credit Associations 5.2.2.1 Overview of SCAs
SCAs are simple financial institutions in rural villages, literally for the people and by the people. Currently, there are approximately 500 SCAs in Moldova, from which about 400 are active (the most recent listing of the National Commission on Financial Markets lists 450 SCAs.)162 SCAs play a crucial role in the rural areas of Moldova, as most villagers do not have access to larger commercial banks; these traditional financial institutions are often not present in small villages, and if they are, few offer services specifically tailored to the needs of low-income people. Furthermore, many villagers do not possess the official documents required to apply for loan at a commercial bank. Conversely, because SCAs are community organizations, all members are familiar with each other, and therefore, credits can be given based upon reputation. SCAs are organized territorially, and operate with a direct-democracy system of oneperson, one-vote. Each association has about 200 to 400 members. Being an SCA member or working for an SCA, accords social status and respect within the community;163 it is often considered that the most dynamic and determined members of the community join SCAs.164 Members meet in a General Assembly once or twice a year in order to elect their

162 National Commission on Financial Markets website. http://www.cnpf.md/file/rapoarte/ListaAEI.pdf Retrieved March 2009. 163 Interview with Maria Johansson, Project Manager, International Advisory Services, Frankfurt School of Finance and Management, and Team leader of financial education project with RFC. Date: March 11, 2009 via telephone. 164 Interview with Andrei Calin, SCA loan officer, Moldova Microfinance Alliance. Date: March 23, 2009 in Chisinau, Moldova.

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five-member Board of Directors (“Consiliul”), the three-member Internal Audit team (“Comisia de Cenzori”), as well as the Executive Director and Chief Accountant. Some larger SCAs also have cashiers and security guards. SCAs in Moldova employ almost 1,000 people. Table 13 below presents select key figures about the SCAs listed in the CNPF database. Over 66,000 microcredits were provided to members last year, representing a composite loan portfolio of 619 million MDL ($54.9 million) – an average of 9,400 MDL ($830) per loan. Only 2.4 percent of the loan portfolio was at risk. Less than six percent of SCA members (approximately 7,200) made deposits; this is most likely due to the small number of SCAs who hold “B” licenses which permit them to accept savings. The savings portfolio is 2008 was 97 million MDL ($8.6 million), roughly 13,400 MDL each ($1,190). Table 13: 2008 Key figures of Moldovan SCAs, December 2008

Item
Number of SCAs reporting Total members Total SCA employees Loans Number of loans Average loan Total loan portfolio Deposits Number of deposits Average deposit Total savings portfolio Source: CNPF Database of SCAs

Figure
423 SCAs 121,144 members 977

66,763 9,400 MDL* 619.2 million MDL* 7,204 13,400 MDL* 97.0 million MDL*

* Figures were rounded to the nearest .1 million MDL

Similar to the insurance industry, SCAs in Moldova are also characterized by a great deal of dynamism. On June 21st, 2007, new legislation (law nr. 139-XVI) was passed that outlined new regulations and restructured the SCA network by obligating each SCA to apply for either an “A,” “B” or “C” license as of January 1st, 2008. Of the 400 active SCAs, approximately 300 have applied for the basic “A” license (application deadline was March 31st, 2009), which permits the SCA to disburse credits to individual members within a designated local area. Another 90 SCAs have applied for “B” licenses, which allow them to give credits, accept savings, operate within a wider territory and set up branches. SCAs with a “C” license are allowed to serve both individual and corporate members, and can offer savings, credits and financial consulting services. This license permits them to establish branches anywhere in Moldova. Currently, no SCAs have a “C” license, as there is a pre-requisite of having a “B” license

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for at least one year.165 The National Federation of SCAs, a lobby and interest organization, existed but was liquidated and disbanded in 2008 due to ineffectiveness. Currently, the establishment of a Central SCA is underway, which will serve several purposes including providing legal support and establishing a liquidity pool. 166

5.2.2.2 Policies on credit life insurance
There are no requirements – neither at the legislative nor at the microfinance institutional level – mandating insurance for loans to SCAs, or for microcredits distributed by SCAs to their members. A review of the 2008 loan portfolio of the SCAs in the CNPF database demonstrates that only seven percent of the loan portfolio was “insured;” in this case, “insured” means that collateral was included. During interviews, SCA directors admitted that taking collateral is more of a formality, and that most SCAs have neither the time nor the resources to properly verify and document the collateral value.167 Nevertheless, all loan recipients are required to have loan guarantors. A guarantor is generally a family member or close friend who vouches for the loan recipient and is also an SCA member. Generally, a person can only serve as a guarantor on a maximum of two concurrent loans. Any default on the loan – either by the original recipient or by the guarantor – carries not only financial penalties but also the revocation of certain member privileges: they can neither receive new loans nor sign as a guarantor for others for a specified time period. Moreover, like in other community-oriented financial institutions, peer pressure plays a noteworthy role in motivating loan recipients to repay their obligations. “Non-payers” are socially reprimanded at General Assembly gatherings. Because of this pressure, people do not particularly like signing on as loan guarantors, but the system of reciprocity allows these arrangements to perpetuate. Few SCAs have decided to require credit life insurance. For example, two of the SCAs interviewed, Slobozia Dusca and Dubasarii Vechi, send their members to purchase insurance at Vitorasig, in their local county capital of Criuleni. The annual cost is 1.5 percent of the loan principle, up to 25,000 MDL ($2,200); for loans over this amount, the cost is equivalent to two percent of the principle. The director of Vitoriasig, Mrs. Nina Rabeja, provided many examples of families who were spared financial ruin because their loans were insured. She shared a story about a

165 Since the first B licenses were distributed in December 2008, the earliest applications for “C” licenses will not be submitted until the end of 2009. Nonetheless, it is expected that only a handful of SCAs will qualify in the next few years. 166 Interview with Maria Johansson, Project Manager, International Advisory Services, Frankfurt School of Finance and Management, and Team leader of financial education project with RFC. Interview date: March 11, 2009 via telephone. 167 Interview with Executive Directors and Chief Accountantss of SCAs in Molovata, Cosernita, Slobozia Dusca and Dubasarii Vechi, all linked with the Criuleni branch of Microinvest. Date: March 25, 2009.

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family where the husband took out a larger loan for his grain mill. When he unexpectedly passed away, his wife and son not only had to deal with their grief and loss, but also with the significant financial burden of repaying this loan. It took them over three years.168 These types of sad stories would cease to exist if more SCAs required credit life insurance.

5.2.2.3 Criteria for microinsurance
Over twenty persons interviewed declared that SCAs would be the best distribution channel for microinsurance because of their highly respected position within local communities.169 As Severine Deboos of the ILO, stated, “SCAs are well-managed and trustworthy. They’ve accumulated a great deal of goodwill in their local communities.”170 Furthermore, with over 400 active associations in Moldova, representing over 120,000 members, SCAs have a wide network and a large potential customer base. They also have the capacity for financial transactions, although acceptance of insurance payments would probably need to be coordinated through their respective MFI.

5.2.3 The Post Office of Moldova 5.2.3.1 Overview
Founded in 1993, the Post Office of Moldova (POM) is strategically oriented towards broadening its range of services by implementing technologically advanced, nontraditional services that provide customers with a higher-quality experience and better value.171 Indeed, in an interview with Nelea Listovoi, Manager of Sales and New Services, she substantiated this by outlining the long and diverse list of services that the POM already offers, including payment of various bills, taxes, fees, state services, media subscriptions and more.172 In rural areas, the POM even serves as a mini-mart, selling essential products like soap, detergent and office supplies. Furthermore, it sells the CNAM health insurance policies during the January-March promotional timeframe.

168 Interview with Nina Rabeja, Director of Vitoriasig, Criuleni branch. Interview date: March 18, 2009 in Criuleni, Moldova. 169 Interviews conducted by author on-site in Moldova and via telephone, March and April 2009. 170 Interview with Severine Deboos, Technical Expert, Social Finance and Corporate Social Responsibility, the International Labor Organization. Date: March 17, 2009 via telephone. 171 In 1992, Moldova became a member of the Universal Postal Union (UPU). The Post Office of Moldova (POM) was founded on April 1st, 1993 and currently resides under the domain of the Ministry of Informational Development. On April 11th, 1997, law nr. 1159-XIII was approved that implemented changes to bring the POM to UPU standards.171 (Founded in 1874 and headquartered in Switzerland, the UPU serves as a platform for cooperation among its members – postal offices and postal-related service providers – to ensure a truly global network of products and services). The Post Office of Moldova website. www.posta.md Retrieved April 2009 172 The Post Office of Moldova, marketing materials. Gathered March 2009.

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In 2008, the POM recently signed an agreement with Microinvest whereby customers can pay their loan and interest fees via the POM, making it therefore more accessible and more convenient for clients without a bank account or who do not live in close proximity to a Microinvest branch. In fact, almost any company can arrange payment acceptance or distribution services via the POM. Some local firms have chosen to disburse dividends to shareholders via the Post Office, for example. In order to arrange this service, firms must sign a contract with the POM and pay a transaction commission. The POM even has experience working with insurance firms: during the interview, Mrs. Listovoi mentioned that just one week prior, they had started accepting payments for Donaris – a pilot project which she hopes to expand to other firms in the future.173

5.2.3.2 Criteria for microinsurance distribution
If ZFS were to introduce microinsurance products to Moldova, the POM would be a natural partner. Firstly, they have a trustworthy, solid reputation, as well as the capacity for safe and reliable financial transactions. Furthermore, they have already accumulated extensive experience in working with a diverse assortment of public and private institutions – and are open to adding new services to their repertoire. In addition, Natalia Cojocar of the Marketing Department affirmed that the POM has the most extensive network of any firm or organization in Moldova.174 Indeed, with 1148 post offices managed through 36 national subsidiaries, the POM provides services to residents in over 1520 cities, towns and villages in Moldova.175 In fact, Mrs. Listovoi states, “Almost every Moldovan lives within ten kilometers of a post office – and many, much closer.”176

5.2.4 Additional alternative distribution channels
As described in chapter 3, the only insurance product that is currently distributed through alternative channels is RCA. These channels are practical because the product is simple and mandatory. Nevertheless, they may not be suitable for launch of microinsurance in Moldova – at least not until the concept is better-understood. Maxi-taxis may another good distribution channel for the future. Maxi-taxis are often the transportation of choice for Moldovans, as they are inexpensive, more flexible and have a wider reach than buses or trains. Many migrant workers use maxi-taxis; therefore, they may be good channels for selling travel medical or accident microinsurance.

173 Interview with Nelea Listovoi, Manager of the Sales and New Services, POM. Date: March 24, 2009. 174 Interview with Natalia Cojocar, Specialist, Marketing and Sales Department, the Post Office of Moldova headquarters. Date: March 24, 2009 in Chisinau, Moldova. 175 The Post Office of Moldova website. www.posta.md. Retrieved April 12, 2009. 176 Interview with Nelea Listovoi, Manager of the Sales and New Services Department, The Post Office of Moldova headquarters. Date: March 24, 2009 in Chisinau, Moldova.

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Additionally, returning migrants, who often come home with better financial management skills influenced from their time abroad, can then be targeted for the sale of products such as property, agricultural, health and life insurance for their families. In 2006, the EBRD estimated that over 580,000 people – over 20 percent of Moldovan adults – received remittances on a regular basis; the average remittance recipient received was $171, six times per year. About half received this money through a formal channel, a number that has steadily increased throughout the last decade. Thirteen percent stated they used the money for health or life insurance payments.177 Because of the ubiquity of remittances in both rural and urban areas, a link could be established between remittances received through formal channels such as banks and money transfer firms (e.g. Western Union and MoneyGram), and the purchase of microinsurance products. Distribution of microinsurance through insurance brokers is not recommended at this time. Brokerages are at nascent stage within the industry, and are currently consolidating due to the 2006 legislation. They require additional time to establish themselves as a credible, trusted source for insurance products. However, in 2-3 years, collaboration with the members of ABAR could be considered. It is important here to note that significant capacity-building is critical for the development of these abovementioned alternative distribution channels. Pre-requisites include the training and monitoring of intermediaries as well as the implementation of automated systems. In addition, time is necessary: time to allow for some rebuilding of trust in institutions, as well as time for the population and authorities to become familiar with the concept of microinsurance.

5.3 Marketing recommendations
Financial education: Regardless of the distribution channel, investment in financial

education is a must if a microinsurance product is to succeed not only in Moldova, but anywhere. Raising the financial education and helping to build an insurance culture leads to a win-win situation for all parties involved – buyers and suppliers. Educational programs can be implemented in partnership with the government (e.g. CNPF, the Ministry of Finance, the MAFI); for example, microinsurance could be incorporated in the upcoming PR campaign from the CNPF and World Bank later in 2009. Moreover, international NGOs can play a critical role. The World Bank and EBRD are already working on financial education programs. Another example is the RDC program sponsored by the SDC, with which ZFS already has a partnership.

177 Moldova National Public Opinion Survey on Remittances. 2007. The European Bank for Reconstruction and Development, July.

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Collaboration with Moldovan trade associations and rural organizations would also be relevant. The UAM has financial education listed in its 2009 plan of activities; microinsurance could certainly be included. An informational seminar could be held during meetings of the National Federation of Moldovan Farmers, the Association of Agricultural Producers or the National Agency for Rural Development. Collaboration with the Ministry of Agriculture would be appropriate as well. Marketing, media and advertising: The recommended media are television and radio, which both have quite high penetration rates in Moldova. Since less than 20 percent of the population has internet access, this medium is not currently recommended. After the launch of microinsurance, something that could be kept in mind is the use of mobile phones for direct and efficient communication with customers. For example, reminders about premium payments, special offers or policy information updates could all be sent to mobile phones. Marketing collateral, such as posters and pamphlets, as well as print advertising in major national newspapers and on billboards, would also be appropriate. For example, walletsized cards containing essential policy information could be distributed to new customers. They should be produced using simple, straightforward language, outlining product features and benefits. The focus should be on representing things pictorially versus using a lot of text. Moreover, Microinvest in particular has a well-developed marketing department that employs an array of instruments to reach both rural and urban customers. (It is hard to spend a day walking or driving through Chisinau without seeing a billboard or bus advertisement for Microinvest). Microinsurance education could be incorporated into existing marketing and advertising materials in order to publicize microinsurance. Customers could receive discounts when subscribing to multiple policies, while the MFI would receive either a fixed commission on each transaction, or a percentage of the total contract. Both Microinvest and the RFC have NGO-arms that provide financial education training and tailored consulting services to SCAs. These two organizations would therefore be suitable partners for reaching SCA members. Holding short informational speeches at General Assembly meetings as well as leaving marketing materials at SCA offices, could be considered. Moreover, the SCA leaders who themselves are advocates of insurance could be used as spokespersons to promote insurance throughout the network. For example, during a focus group in Criuleni, two of the SCAs did not mandate credit life because they were not aware of this product. Once they heard the experiences of another SCA director, their interest was immediately piqued; they then planned to propose

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mandated credit life at their organizations as well.178 Little marketing would be necessary through SCAs, since word-of-mouth is the best instrument. As Nina Rabeja of Vitorasig, affirmed, “If the service is good and the customer had a positive experience, he will bring the whole village to you.”179 ProCredit is already a recognizable and respected brand not only in Moldova, but in developing countries across the globe. It serves as a good role model for innovative marketing and the use of alternative distribution channels, such as “creditmobiles” and “one-day offices.” As Victor Burunsus of the World Bank stated, “ProCredit was the first to discover the ‘niche’ for microfinance in Moldova. They showed how it can be both socially good and profitable. They see the client differently, are very customer-oriented and are present where and when the client needs them.”180 This is exactly what a potential microinsurance provider would need to do to be successful. A good opportunity may be to establish a global partnership with ProCredit, whereby ZFS would develop the product and carry the risk, and ProCredit would sell and distribute the products through their global network of banks. This option would need to be further investigated. (Additional information on ProCredit can be found in Appendix 4, chapter 3). In summary, a better understanding of risk management and the benefits of the insurance would likely help convince the population that the small cost of insurance is not just another financial burden, but a form of long-term protection of their families and of their livelihoods. As Pavel Cater, Director of the BNAA, stated, “Insurance only seems expensive when you sign the contract. When you need it, it always seems too cheap.”181

5.4 Operational model recommendations
There are several types of operational models possible for the implementation of microinsurance. The following three are the most feasible for Moldova:

178 Interview/Focus Group Discussion with Executive Directors and Chief Accountants of SCAs of Molovata, Cosernita, Slobozia Dusca and Dubasarii Vechi, all linked with the Criuleni branch of Microinvest. 179 Interview with Nina Rabeja, Director of Vitorasig, Criuleni Branch. Date: March 18, 2009 in Criuleni, Moldova. 180 Interview with Victor Burunsus, Project Coordinator, Financial and Private Sector Development, World Bank. Date: March 20, 2009 in Chisinau, Moldova. 181 Interview with Pavel Cater, Director of the BNAA, the National Association of Automobile Insurers of Moldova. Date: March 24, 2009 in Chisinau, Moldova.

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Community-based organization (CBO) is a program whereby small groups of individuals or families voluntarily pre-pay for coverage, thereby self-generating the financing for the insurance. A few members are chosen to manage the CBO.

The great advantage associated with CBOs is that they are owned and managed by the members, similar to SCAs in Moldova, which give them credibility within the community. Such an arrangement could feasibly be implemented through existing SCAs, and managed, for example, by SCA executive directors. However, these organizations would be unregulated, and current SCA legislation may prohibit SCAs from offering products and services beyond credits and savings. Additional drawbacks include having a very limited risk pool and limited capital reserves. For this scheme to be potentially profitable, it would be best if a central coordinating facility were established that could support the individual CBOs, collect all premiums, and liaise with ZFS. Perhaps the upcoming central SCA would be the best partner, if the legislation allows for this provision. • Mutual benefit association (MBA) is a large organization of persons or families who are associated for a shared advantage, in this case, insurance. The initial capital reserves would be established through the fees paid by each member. Like CBOs, the organization is owned by the members; unlike CBOs, they are professionally managed and regulated through legislation. The establishment of an MBA would require a review of the current legislation to determine whether laws regulating such entities exist; otherwise, this would be a significant drawback. Although the risk pool is larger than with CBOs, an MBA would require significant investment in training and infrastructure. • Partnership model: In this model, ZFS would partner with local intermediaries who would serve as the delivery channels on-site in Moldova. the partner would sell and service the product. If ZFS is content with its current partnership with Garantie Insurance Company, it would be recommended to utilize this established relationship for the launch of microinsurance. Garantie has already expressed interest in further developing its relationship with ZFS. In addition, it is a well-established and respected firm, although it would require training in reaching out to the lower-income market. Preferably, at least one Garantie employee would be dedicated to microinsurance. Garantie, however, would not serve as the direct distribution channel, but rather would be the on-site coordinator, managing the various delivery channels – namely, the MFIs and SCAs recommended in chapter 5.2. Garantie would also liaise with the CNPF and ZFS, as the commercial insurer, would carry the risk, receive premiums and pay claims, while

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DIS to ensure that all activities fall within the boundaries of the law and to develop new microinsurance legislation. Regarding the MFIs, ProCredit and Microinvest would focus more on microentrepreneurs while the RFC would utilize its expertise working with SCAs. In addition, ZFS could both accept payments for insurance premiums as well as issue claim payments via the POM. This would make the insurance products more convenient, affordable and accessible. At a later stage, ZFS could even consider selling simple insurance policies directly through the POM.

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6 Conclusions
With an annual per capita income of approximately $2,500 (PPP), the Republic of Moldova is consistently ranked as one of the poorest countries in Europe. About 30 percent of its 4.2 million population lives in poverty, and over 90 percent live on $10 a day (PPP) or less. persons. Demand research revealed that the main risks faced by low-income households are death or serious illness of a breadwinner, loss of the year’s harvest due to natural disaster, and property loss. These could be addressed by simple, affordable and accessible Currently most households use self-insurance and informal microinsurance products such as credit life, personal accident, health, agricultural and property insurance. insurance, such as savings, borrowing and purchasing of fixed assets, as their primary risk management tools – all of which are limited in their effectiveness. Supply research demonstrated that the market is still small and underdeveloped, but has a great deal of potential. Most insurance firms offer on a traditional product range, many relying on automobile and other compulsory insurances. marketing instruments utilized are also quite traditional. Distribution channels and No insurance companies Research has shown that there is both a need and a demand for microinsurance in Moldova, and that the estimated potential market is 2.5 million

investigated were making a marked effort to reach out to the lower-income segment. However, in the last three years, there has been a marked consolidation among firms and brokerages while total premiums have steadily increased. Simultaneously, there has been a great deal of activity surrounding the launch of trade associations and industryspecialized publications. All of this reflects the dynamic nature of the market. A driving factor of these changes is the 2006 insurance legislation which outlined a plethora of regulations to raise Moldova’s market to international standards. Programs to improve the operational efficiency and regulatory capacity of the supervisory authority are also in progress. Microinsurance is a mostly unknown concept in Moldova. Although there is no specific microinsurance legislation, the government has expressed openness to the possibility of developing one in the future. The CNPF would require technical and financial assistance to do so. Microfinance, however, is quite well-developed and regulated, which is often a pre-requisite for the successful launch of microinsurance into a new market. Therefore, the primary channels recommended for microinsurance distribution would be MFIs and their affiliated network of SCAs.

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Several obstacles need to be overcome for microinsurance to be successful in Moldova. Firstly, there is a distinct need for investment in financial education and the building of an insurance culture, which is currently underdeveloped. This could be feasibly effectuated through cooperation with trade associations and international organizations, as well as through current government programs. In addition, trustworthy and reliable distribution channels need to be utilized in order to repair some of the lack of trust in institutions. It is recommended to first introduce one simple product, such as personal accident or credit life, and give people time to accumulate positive experiences with insurance, before introducing additional products. In the longer term, integrated insurance products, such as those with a savings component, are recommended as they address the intangibility of insurance and provide additional benefits to the policyholder. It is also recommended that Zurich or its on-site partner collaborate closely with both the government on developing relevant legislation for microinsurance and microinsurance intermediaries. Finally, a potential microinsurance product would need to offer both quality and flexibility, at a reasonable cost and with a flexible payment plan – something not available through current product offerings.

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President Insurance Specialist Founder and former President Website Administrator and Vestecom-Plus Broker Underwriter, Health Insurance Department President Customer Service Representative Principle Banker

Address
Chisinau, Moldova Alexander Pushkin Street, 4 MD-2009, Chisinau, Moldova Armeneasca Street, 18 Chisinau, Moldova Chisinau, Moldova

Phone

Interview date and location
March 25th, 2009 Chisinau, Moldova

+37322 222487 +37322929521

March 23rd, 2009 Chisinau, Moldova March 24th, 2009 Chisinau, Moldova March 19th, 2009 Chisinau, Moldova

Mitropolit Banulescu-Bodoni Street, 57/1 MD-2005, Chisinau, Moldova Chisinau, Moldova Sciusev Street, 56/3 Chisinau, Moldova Vlaicu Pircalab Street, 63 Sky Tower building, 10th floor MD-2012, Chisinau, Moldova International Advisory Services Sonnemannstr. 9-11, 60314 Frankfurt am Main, Germany Alexander Pushkin Street, 47/1 Chisinau, Moldova

+37322226212

April 10th, 2009 (telephone) March 17th, 2009 Chisinau, Moldova

Association of Insurance Brokers Donaris Insurance Company European Bank of Reconstruction and Development Frankfurt School of Finance and Management

Veaceslav Gamurari Serghei Boico Nadya Litvac

+37322225794 +37322210000

March 16th, 2009 Chisinau, Moldova April 8th, 2009 (telephone)

Maria Ekström Johansson

Project Manager

+4969154008692

March 11th, 2009 (telephone)

Garantie Insurance Company

Vitalii Robu

Sales Director

+37322 270055

March 26th, 2009 Chisinau, Moldova

Bibliography: Interviews

88

Garantie Insurance Company Garantie Insurance Company Garantie Insurance Company Grawe Carat Insurance

Mihail Josan Annaslav Yakovenki Alexandru Balteanu Angela Solonari

Insurance Director Corporate Reinsurance Director Reinsurance and Corporate Clients Marketing Manager

Alexander Pushkin Street, 47/1 Chisinau, Moldova Alexander Pushkin Street, 47/1 Chisinau, Moldova Alexander Pushkin Street, 47/1 Chisinau, Moldova Alexandru cel Bun Street, 51 MD-2012, Chisinau, Moldova

+37322270055 +37322270055 +37322270055 +37322279332

March 26th, 2009 Chisinau, Moldova March 26th, 2009 Chisinau, Moldova March 26th, 2009 Chisinau, Moldova March 19th, 2009 Chisinau, Moldova March 19th, 2009 Chisinau, Moldova March 19th, 2009 Chisinau, Moldova March 17th, 2009 (telephone) March 23rd, 2009 Chisinau, Moldova

Grawe Carat Insurance

Diana Malcuci

Insurance Agent, Life Insurance Department Assistant to Director

Alexandru cel Bun Street, 51 MD-2012, Chisinau, Moldova Alexandru cel Bun Street, 51 MD-2012, Chisinau, Moldova

+37322279332

Grawe Carat Insurance

Doina Versteac

+37322279332

International Labor Organization

Severine Deboos

Technical Expert, Social Finance and Corporate Social Responsibility Chief of Mission in Moldova

Regional Office for Central and Eastern Europe Piata Marii Adunari Nationale 1, Government Building, room 123 Chisinau, Moldova Ciuflea Street, 36/1 MD-2001, Chisinau, Moldova Koszykowa 60/62 m.52 00-673, Warsaw, Poland Pushkin Street, 16 MD-2012, Chisinau, Moldova Pushkin Street, 16 MD-2012, Chisinau, Moldova

+3613014905

International Monetary Fund

Johann Mathisen

+37322232496

International Organization for Migration Microfinance Center for CEE and NIS Microfinance Alliance of Moldova Microfinance Alliance of Moldova

Ghenadie Cretu Margarita Lalayan Andrei Calin Vladimir Vescu

Labor Migration Program Coordinator Microfinance Consultant

+37322 232940

March 26th, 2009 Chisinau, Moldova March 20th, 2009 (telephone) March 23rd, 2009 Chisinau, Moldova March 23rd, 2009 Chisinau, Moldova

+37491420118

SCA Loan Officer

+37322229904

Human Resources Manager

+37322229904

Bibliography: Interviews

89

Microinsurance Centre Microinvest (MFI) Microinvest (MFI) Microinvest (MFI) Microinvest (MFI) Microinvest (MFI) Moldasig Moldasig Moldasig

Michael McCord Artur Munteanu Igor Gudumac Daniela Dutca Olga Fretescu Sergiu Tanasiev Ion Cebotari Oleg Galbura Elena Ignatieva

President CEO Marketing and Fundraising Officer Internal Audit Assistant Branch Manager Manager, Supplementary Health Insurance Manager, Agricultural Insurance and Risk Principal Specialist, Health Insurance for Travel Manager, Agricultural Insurance Department Director of External Relations and European Integration Advisor to the Council President Director of Department of Insurance Supervision

1045 West Lynndale Drive Appleton, WI 54914, USA Pushkin Street, 16 MD-2012, Chisinau, Moldova Pushkin Street, 16 MD-2012, Chisinau, Moldova Pushkin Street, 16 MD-2012, Chisinau, Moldova Pushkin Street, 16 MD-2012, Chisinau, Moldova Criuleni, Moldova Mihai Eminescu Street, 2 MD-2009, Chisinau, Moldova Mihai Eminescu Street, 2 MD-2009, Chisinau, Moldova Mihai Eminescu Street, 2 MD-2009, Chisinau, Moldova Vasile Alecsandri Street, 97 MD-2012, Chisinau, Moldova Boulevard Stefan cel Mare, 77 MD-2012, Chisinau, Moldova Boulevard Stefan cel Mare, 77 MD-2012, Chisinau, Moldova Boulevard Stefan cel Mare, 77 MD-2012, Chisinau, Moldova

+19202572179 :+37322212764 +37322212764 +37322212764 +37322212764

February 26th, 2009 (telephone) March 16th, 2009 Chisinau, Moldova March 27th, 2009 Chisinau, Moldova March 23rd, 2009 Chisinau, Moldova March 25th, 2009 Chisinau, Moldova March 25th, 2009 Criuleni, Moldova

+37322889812 +37322889812 +37322889812

March 19th, 2009 Chisinau, Moldova March 19th, 2009 Chisinau, Moldova March 19th, 2009 Chisinau, Moldova April 14th, 2009 (telephone) March 20th, 2009 Chisinau, Moldova March 20th, 2009 Chisinau, Moldova March 26th, 2009 Chisinau, Moldova

MOLDCARGO Insurance Company National Commission of Financial Markets National Commission of Financial Markets National Commission of Financial Markets

Ion Buza Andrei Darie

+37322279293

+37322228825

Veronica Cuhal Vladimir Stirbu

+37322228825

+37322228825

Bibliography: Interviews

90

National Office of Automobile Insurers Post Office of Moldova (headquarters) Post Office of Moldova (headquarters) ProCredit Bank

Pavel Cater Nelea Listovoi Natalia Cojocar Alexandra Ogladina

Director

Stefan cel Mare Street, 182 Chisinau, Moldova Stefan cel Mare Street, 134 Chisinau, Moldova Stefan cel Mare Street, 134 Chisinau, Moldova Mihai Eminescu Street, 35 Chisinau, Moldova 10/5 Ion Creanga Street Chisinau, Moldova 10/5 Ion Creanga Street Chisinau, Moldova Lucian Blaga University Sibiu, Romania Cosernita, Moldova

+37322212258

March 24th, 2009 Chisinau, Moldova March 24th, 2009 Chisinau, Moldova March 24th, 2009 Chisinau, Moldova March 20th, 2009 Chisinau, Moldova March 25th, 2009 Chisinau, Moldova March 25th, 2009 Chisinau, Moldova March 23rd, 2009 (telephone) March 25th, 2009 Criuleni, Moldova March 25th, 2009 Criuleni, Moldova March 18th, 2009 Dubasarii Vechi, Moldova March 18th, 2009 Dubasarii Vechi, Moldova March 25th, 2009 Criuleni, Moldova March 25th, 2009 Criuleni, Moldova

Manager of Sales and New Services Specialist, Marketing and Sales Department Customer Service Representative Executive Director Vice-President and Financial Director Assistant Professor and Freelance Microfinance Consultant Executive Director

+37322251272

+37322251272

+37322204482

Rural Development Center Rural Finance Corporation (MFI)

Efim Lupanciuc Valeriu Iasan Roxana Savescu

+37322595559 +37322595559 +40269252612

Savings and Credit Association – Cosernita Savings and Credit Association – Cosernita Savings and Credit Association – Dubasarii Vechi Savings and Credit Association – Dubasarii Vechi Savings and Credit Association – Molovata Savings and Credit Association – Molovata

Nicolae Gustiuc Lidia Tricolici Alina Lungu Nina Postica Tatiana Procop Zinovia Izman

Chief Accountant

Cosernita, Moldova

Executive Director

Dubasarii Vechi, Moldova

Cashier

Dubasarii Vechi, Moldova

Executive Director

Molovata, Moldova

Chief Accountant

Molovata, Moldova

Bibliography: Interviews

91

Savings and Credit Association – Slobozia Dusca Savings and Credit Association – Slobozia Dusca Soros Foundation of Moldova Soros Foundation of Moldova Soros Foundation of Moldova Swiss Re Reinsurance Company Ltd. Vestecom Plus Insurance Brokers Vestecom Plus Insurance Brokers Vestecom Plus Insurance Brokers Vitoriasig World Bank

Victor Cauia Eugenia Frunze Liliana Gherman Ana Capcelea Vitalie Slobozian Michael Schwarz

Executive Director

Slobozia Dusca, Moldova

March 18th, 2009 Slobozia Dusca, Moldova March 18th, 2009 Slobozia Dusca, Moldova +37322270031 +37322270031 +37322270031 +41432852595 March 17th, 2009 Chisinau, Moldova March 17th, 2009 Chisinau, Moldova March 17th, 2009 Chisinau, Moldova March 5th, 2009 (telephone) March 17th, 2009 Chisinau, Moldova March 17th, 2009 Chisinau, Moldova March 17th, 2009 Chisinau, Moldova March 18th, 2009 Criuleni, Moldova March 20th, 2009 Chisinau, Moldova March 26th, 2009 Chisinau, Moldova January 19th, 2009 Zurich, Switzerland

Chief Accountant

Slobozia Dusca, Moldova

Public Health Program Director Program Coordinator Harm Reduction Program Coordinator Junior Client Manager, Insurance and Specialty Director and President of ABAR Insurance Broker

32 Bulgara Street MD-2001, Chisinau, Moldova 32 Bulgara Street MD-2001, Chisinau, Moldova 32 Bulgara Street MD-2001, Chisinau, Moldova Mythenquai 50/60 CH-8002, Zurich, Switzerland Bucuresti Street, 13/1 Chisinau, Moldova Bucuresti Street, 13/1 Chisinau, Moldova Bucuresti Street, 13/1 Chisinau, Moldova 31 August Street, 83 Criuleni, Moldova Pushkin Street, 20/1 MD-2012, Chisinau Pushkin Street, 20/1 MD-2012, Chisinau, General-Guisan Quai 34 CH-8022 Zurich, Switzerland

Veaceslav Gamurari Natalia Dubencu Sergiu Cascaval Nina Rabeja Victor Burunsus

+37322225480

+37322225480

Insurance Broker

+37322225480

Director Project Coordinator, Financial and Private Sector Development Consultant Private Sector Development, Europe and Central Asia Head of Global Microinsurance Practice

+37324822547 +37322200706

World Bank

Doina Cebotari

+37322200706

Zurich Financial Services

Brandon Matthews

+41446392010

Bibliography: Interviews

92

Zurich Financial Services Zurich Financial Services

Raymond Risler Mario Wilhelm

Microinsurance Market Development Specialist Microinsurance Consultant

General-Guisan Quai 34 CH-8022 Zurich, Switzerland Jakarta, Indonesia

+41446392011

February 18th, 2009 Zurich, Switzerland February 24th, 2009 (telephone)

Appendix 1: Methodology

93

Appendix 1: Methodology
The purpose of the study was to assess the feasibility of introducing microinsurance in Moldova. In order to analyze whether there is a case for microinsurance, it was necessary to gain a better understanding of the following issues: • Main risks and lifecycle events facing low-income persons in Moldova, and the immediate and longer-term impact of these risks • Current coping strategies used to manage these risks both before (ex-ante) and after (ex-post) they happen, as well as the effectiveness of these strategies. Establish whether there is a gap that could be filled by microinsurance products • The general knowledge and attitude about insurance, and the primary reasons for the low penetration of insurance in Moldova • The present status of the insurance market in Moldova, including the role of government, the regulatory environment, the products and distribution channels currently utilized, as well as the strengths and weaknesses of the industry Both primary and secondary research sources were utilized. The majority of the primary research was conducted on-site in Moldova, in Chisinau and its environs, during the weeks of March 16th and March 23rd, 2009. Qualitative research techniques were used, including focus group discussions (FGD) and guided individual interviews. Focus groups typically had 5 to 12 participants, with age ranges of 40 to 70 years old, and were held with employees and members of four SCAs, all of which are linked to Microinvest. FGDs were held in the local Microinvest office of Criuleni, north of Chisinau. overview of the four SCAs is outlined below in table 14. An

Appendix 1: Methodology

94

Table 14: Overview of SCAs interviewed, March 2009
SCA Molovata Overview
• • • • • • • • • • • • • • • • • • • • • • • “A” license 204 members 106 loans disbursed in 2008 Tatiana Procop, Executive Director Zinovia Izman, Chief Accountant “A” license 202 members 80 loans disbursed in 2008 Nicolae Gustiuc, Executive Director Lidia Tricolici, Chief Accountant Maria Antocica, Cashier “B” license 394 members 242 loans disbursed in 2008 Average loan 11,000 MDL ($976) Alina Lungu, Executive Director Nina Flore, Chief Accountant Nina Postica, Cashier “A” license 260 members 167 loans disbursed in 2008 Victor Cauia, Executive Director Eugenie Frunze, Chief Accountant

Cosernita

Dubasarii Vechi

Slobozia Dusca

Source: Compiled by author during on-site research in Moldova, March 2009

In addition, guided interviews were held with over 55 stakeholders, such as insurance firms, brokerages, and the government, as well as experts in the field, including international organizations, NGOs and microfinance consultants. Interviews that were not possible on-site in person were conducted via telephone. A listing of all persons and organizations interviewed can be seen in the bibliography, while the guided interview questionnaire can be seen below on pages 95 to 97 (also available in Romanian).

Appendix 1: Methodology

95

Appendix 1: Methodology

96

Appendix 1: Methodology

97

Appendix 2: Additional tables and figures

98

Appendix 2: Additional tables and figures
Figure 11: Risks, uncertainties and responses

Source: Adapted by author from Churchill, C. (ed.), 2007.

Figure 12: Characteristics of an insurable risk

Source: Churchill, C. (ed.), 2007. Protecting the poor: A microinsurance compendium.

Appendix 2: Additional tables and figures

99

Table 15: Listing of insurance firms, March 2009
Accept Insurance ASITO Edict Garantie MOLDCARGO Victoria Acord-Grup Asterra Grup Euroasig Grup Grawe Carat MoldovaAstrovaz Afes-Moldova Auto-Siguranta Exim-Asint I.P.B. Delta Notabil-Polis Vitoriasig Alianta Moldcoop Delta Galas Klassika Sigur-Asigur ARTAS Donaris Group Garant Moldasig Transelit

Source: Listing of licensed insurance and reinsurance firms, March 26th, 2009. National Commission on Financial Markets. www.cnpf.md.

Table 16: Listing of insurance brokerages, March 2009
AMP Broker Asigvital Blajco Asist Duvistar Imperbroker Okho B Ebpony Starasig Amsicons AsigcampionGrup Brokerasgi Elita-Broker IRS Management Omnis T.A.T.I Group Anavimax Asmart-Broker Broker Expert Ervax Grup Life Insurance Group Procompasgrup Top Broker Aris-Broker Autobin Grup Broker Polis EuroLife Luciada Prodeviz Vestecom-Plus Asigest AV Brokers Centrasig Extra-Asig Modernasig Profilider WVP

Source: Listing of licensed insurance and reinsurance brokers, March 23rd, 2009. National Commission on Financial Markets. www.cnpf.md.

Appendix 2: Additional tables and figures

100

Figure 13: Selection from UAM 2009 Plan of Activities • Maintain a permanent dialogue and a healthy cooperation between the UAM and the Moldovan government, parliament and the CNPF regarding insurance legislation and normative acts • Establish partnerships for cooperation and knowledge exchange with other associations, such as those in Austria, Romania, Russia, etc. • Create a professional code of ethics, a UAM website, and a detailed database of providers, clients and claims to promote a transparent system • Establish a permanent dialogue with the press and the public in order to promote the image and reputation of insurance and the UAM member firms, accomplished through diverse activities, such as generating positive publicity via articles and interviews in print publications, holding roundtable discussions and conferences about milestones within the insurance industry, etc. • Contribute to the financial literacy and insurance knowledge of the Moldovan population through special educational television and radio campaigns • Develop a dedicated training and educational facility for insurance specialists, as well as a partnership with universities • Form the Organization of Young Insurers, to promote the profession at the student and young professional level

Figure 14: Selection from ABAR 2009 Charter • Collaborate closely with both national and international insurance firms and organizations in order to advance common interests • Develop the potential of the association’s members by analyzing the challenges faced by insurance intermediaries, and collectively problem-solving • Participate in the development of insurance legislation in collaboration with the CNPF and DIS • • Contribute to the raising of the insurance culture in Moldova Partake in publications, seminars and conferences to promote insurance

Source: CIA World Factbook – Moldova, 2008. attract qualified specialists into the sector products and brokers, as well as www.cia.gov/library

Appendix 3: Photos

101

Appendix 3: Photos
1. Map and flag of the Republic of Moldova

Appendix 3: Photos

102

2. Photos of microfinance clients (from Microinvest MFI)

Appendix 3: Photos

103

3. A look at the insurance industry in Moldova
Sample policy from the CNAM

Symbol and slogan of the insurance industry: “Egali, Eterni, Solidari”

ARS Assecuratiorum (“The Art of Insurance”) – Insurance Trade Magazine

Appendix 3: Photos

104

Asigurare.md – Online Insurance Portal

Sample marketing materials from Donaris and Moldasig insurance firms

Appendix 3: Photos

105

4. A look at microfinance in Moldova
Sample marketing materials from Microinvest MFI

Appendix 3: Photos

106

Sample marketing materials from ProCredit Bank

ProCredit “one-day offices” and “creditmobile” (adapted from 2007 Annual Report)

Appendix 3: Photos

107

SCA Loan application

5. Miscellaneous
Sample marketing materials from the Post Office of Moldova

Appendix 4: Additional information on MFIs and SCAs

108

Appendix 4: Additional information on MFIs and SCAs
This appendix provides additional information on the history, operations, products and financial performance for the three major microfinance institutions – Microinvest, the RFC and ProCredit – as well as Savings and Credit Associations in Moldova.

1. Microinvest and the Moldova Microfinance Alliance
1.1 The Moldova Microfinance Alliance The Moldova Microfinance Alliance (MMA) was founded in 1997 as an NGO with the objective of creating and developing SCAs and entrepreneurial cooperatives to support economic development in Moldova. While the Moldova Agroindbank provided the financing, the MMA provided consulting services and training. Since its inception, the MMA has launched over 230 SCAs and 15 entrepreneurial cooperatives, which in turn, has provided employment opportunities for over 500 people (e.g. SCA directors and accountants) and loans for over 25,000 Moldovan entrepreneurs.182 For their work in innovatively expanding financial services to low-income clients, the Consultative Group to Assist the Poorest (CGAP) recognized the MMA with the “Rural Pro-Poor Innovation Award” in 2003. In 2002, a market study conducted by the MMA revealed a high demand for financial services focused on micro- and small-businesses, which were being underserved by the traditional banking sector. Leveraging its five years of experience within the microfinance industry, the board of directors of the MMA decided to establish its own microfinance institution. In April 2003, Microinvest was born. 1.2 Overview of Microinvest Founded by the Soros Foundation, Microinvest is an MFI whose mission is to provide loans to small- and micro-enterprises in order to increase the socioeconomic potential and the living standards in Moldova.183 A micro-enterprise is defined as having up to 9 employees and 3 million MDL ($266,000) in assets; a small enterprise has up to 49 employees and 25 million MDL ($2.2 million) in assets. Microinvest receives funds from both international lenders, including Oxfam Netherlands, Deutsche Bank and the KIVA Organization, as well as domestic lenders, such as the National Savings Bank of Moldova, Moldindconbank and FinCom Bank. Current shareholders of Microinvest include the Soros Foundation, Oikocredit, France’s International Solidarity for Development and
182 Microinvest website. http://www.microinvest.md/about/partners/amm/en.html. Retrieved March 2009. 183 Microinvest Annual Report 2007. www.microinvest.md. Retrieved February 2009.

Appendix 4: Additional information on MFIs and SCAs

109

Investment Company, Driehaus Capital Management, Development Finance Equity Partners and members of the Microinvest management team. In addition, Microinvest works with several project partners, such as Planet Finance and the Microfinance Center of the CEE and NIS. Microinvest currently services over 4000 clients in both the rural (60 percent) and urban (40 percent) areas of Moldova through their 106 employees and fifteen branches – four in the capital city of Chisinau and eleven spread throughout all regions of Moldova. These clients – and the over 14,000 beneficiaries – stem from both the agricultural sectors (55 percent) and the non-agricultural sectors (45 percent), including trade and commerce, services, tourism and production.184 Microinvest advertises its products and brand primarily through mass media channels, such as radio, newspapers, relevant magazines (such as those related to economic, agricultural or entrepreneurial matters), billboards and posters throughout urban and rural areas. In addition, it provides marketing collateral (leaflets, pamphlets, etc.) through its branch network, and relies heavily on its loan officers, as well as word-of-mouth by satisfied clients.185 1.3 Key Figures and Financial Results Since its inception, Microinvest has achieved impressive growth: from managing

approximately $1.1 million in assets in 2004 to managing over $41 million in 2008. 2008 alone saw a 70 percent growth in assets from 2007. Shareholder equity has also increased at an impressive rate: from about $375,000 in 2004 to over $7.2 million. For 2008, Microinvest had over 4,300 active loans, and an ROA of 3.3 percent and an ROE of 13.5 percent. 186 As of April 2009, Microinvest has a portfolio of over $25 million, of which 2.8 percent is at risk (defined as all loans with at least $1 past due compared to the total portfolio size). Figure 15 and 16 below outline the evolution of Microinvest’s loan portfolio and number of active contracts. For 2009, Microinvest projects about $43.2 million in total assets, $7.6 million in total equity and a loan portfolio of over $26 million. Additionally, although Microinvest strives to distribute this risk throughout different regions, sectors and tenure, the PAR (portfolio at risk) percentage could potentially increase if the financial crisis continues to deepen in Moldova in 2009.187

184 Microinvest Annual Report 2007. www.microinvest.md. Retrieved February 2009. 185 Interview with Igor Gudumac, Marketing and Fundraising Officer, Microinvest. Date: March 27, 2009 in Chisinau, Moldova. 186 Microinvest Annual Report 2007. www.microinvest.md. Retrieved February 2009. 187 Interview with Artur Munteanu, CEO of Microinvest. Interview: March 16, 2009 in Chisinau, Moldova.

Appendix 4: Additional information on MFIs and SCAs

110

Figure 15: Microinvest loan portfolio, 2004-2009*

30 25 20 15 10 5 0

Millions USD

25

26*

10.8 2.7 4.2

0.8 2004

2005

2006

2007

2008

2009

*Figures for 2009 are projected

Source: Microinvest Annual Report, 2007, and interviews with Artur Munteanu and Igor Gudumac of Microinvest.

Figure 16: Microinvest number of active contracts, 2004-2009*

5000 4000 3000 2000 1000 0 2004 2005 2006 2007 408 1,288 1,555 2,772

4,300

4,500*

2008

2009

* Figures for 2009 are projected

Source: Microinvest Annual Report, 2007, and interviews with Artur Munteanu and Igor Gudumac of Microinvest.

Appendix 4: Additional information on MFIs and SCAs

111

1.4 Loan Products Microinvest offers a variety of innovative loans products, such as group loans, direct loans, community venture capital, guarantees and more. About 80 percent of their loan portfolio originates from direct lending to entrepreneurs, while the remaining 20 percent is generated from lending to SCAs.188 Over 40 percent of its direct lending is to sole proprietorships, with the rest disbursed through cooperatives, LLCs and others. Loans range from 12 month short-term loans (41 percent), medium-term loans of 13 to 36 months (52 percent) and longer term loans of 36 to 60 months (7 percent). Loan amounts also vary quite broadly, with 46 percent being over 11,000 MDL ($976), 42 percent from 2,000 to 11,000 MDL ($177-$976), and only 12 percent being micro-loans of up to 2,000 MDL ($177).189 According to Artur Munteanu, Microinvest’s CEO, the average Microinvest loan is $4000 ($354) for 18-20 months.190 For its direct lending operations, Microinvest furnishes a range of three products: the “Simplus” loan is designated for working capital and purchasing fixed assets, and provides up to 70,000 MDL ($6210) for 24 months. Although insurance or collateral is not obligatory, a guarantor must co-sign the loan agreement. Funds can be made available to the entrepreneur within one to three days of approval. The “Start” loan is designed specifically for persons looking to launch their own micro- or small enterprise. Loans up to 600,000 MDL ($54,240) are available, with terms up to 36 months. The loan guarantee is 125 percent the loan value. Finally, for established entrepreneurs who are looking to further expand their business, the “Forte” loan offers them the ability to borrow up to 2.4 million MDL ($213,000), also for up to 36 months and with a 125 percent guarantee. Microinvest also offers tailored loans for SCAs, cooperatives and informal groups. For informal groups, such as an entrepreneur cooperative, Microinvest offers loans up to 25,000 MDL ($2,200) for a maximum period of 24 months. No collateral or guarantor is necessary, as peer pressure within the group acts as the guarantee. Microinvest currently works with 90 of the approximately 500 SCAs in Moldova. It offers them loans at an annual interest rate of 24 percent, in amounts up to 4 million MDL ($355,000); terms can be short (up to 12 months) or medium (13-36 months). In order to qualify for a loan, an SCA must be licensed, active, and have at least a three-year credit history. The relationship between Microinvest and their SCA partners is managed by the MMA, who works closely with each of the associations through the Microinvest branch network in

188 Interview with Andrei Calin, SCA loan officer. Date: March 23, 2009 in Chisinau, Moldova. 189 Microinvest Annual Report 2007. www.microinvest.md. Retrieved February 25, 2009. 190 Interview with Artur Munteanu, CEO of Microinvest. Date: March 16, 2009 in Chisinau, Moldova.

Appendix 4: Additional information on MFIs and SCAs

112

order to provide a variety of financial education training and tailored consulting services to ensure the viability and sustainability of the SCAs.

2. The Rural Finance Corporation and the Rural Development Center
2.1 Overview of the Rural Finance Corporation The Rural Finance Corporation (RFC) was created in 1997 by several SCAs, with the financial and technical support of the Moldovan government and the Rural Finance Project of the World Bank. Its mission is to promote rural development in Moldova by serving as a central finance facility for SCAs in rural areas and by collaborating with the government to help alleviate poverty.191 Throughout the last decade, the RFC has grown significantly: from about ten SCAs at its foundation to over 250 today. Each SCA is also a shareholder, making the RFC a cooperative-style joint stock company where its clients are also the owners. In general, the RFC’s funding is derived from a variety of sources, including the Credit Line Directorate at the Ministry of Finance, as well as the EBRD, the EFSE as well as several local commercial banks. 2008 saw a significant increase (55 percent compared to 2007) in the amount of borrowed resources, driven by the increased of demand for loans at the SCA-level. This increase was covered by new funding received from the EFSE as well as Oikocredit. The RFC is able to provide service to clients throughout Moldova through its Chisinau headquarters and its eight regional offices, collectively employing over 50 employees. The RFC currently counts about 260 SCAs as their primary clients, who in turn represent over 70 percent of all active SCA members in Moldova (84,000 members).192 From these, the majority of the SCAs (approximately 210) hold “A” licenses, while the remaining fifty SCAs have “B” licenses.193 Although the majority of the SCA members work within the agricultural sector, the RFC also actively seeks to provide loans to entrepreneurs whose businesses contribute to infrastructure-building and social development in rural villages.194 The RFC does not greatly concentrate on marketing campaigns, since the majority of its clients are within the SCA network. It does not utilize television or radio advertising, and employs limited print advertising (in newspapers, magazines and billboards) and some point-of-sale marketing materials available through their regional offices.

191 The Rural Finance Corporation Website. www.microfinance.md Retrieved February 2009. 192 Rural Finance Corporate Annual Report 2008. www.microfinance.md Retrieved February 2009. 193 Interview with Valeriu Iasan, Vice-President of Finance of the Rural Finance Corporation. Interview: March 25, 2009 in Chisinau, Moldova. 194 The Rural Finance Corporation Website. www.microfinance.md Retrieved February 2009.

Appendix 4: Additional information on MFIs and SCAs

113

2.2 Key Figures and Financial Results During the seasonal peak of 2008, the RFC had an active loan portfolio of over 433 million MDL ($38.4 million), over 100 million MDL larger than in 2007.195 Its net profit was 21.1 million MDL ($1.9 million) in 2008, a 50 percent increase over the previous year, and equity was 77.5 million MDL ($6.9 million), an increase of 34 percent from 2007. For 2008, its ROA was 5 percent and ROE was 27.2 percent. About 70-75 percent of the RFC’s loan portfolio is from lending to SCAs, while the remaining 25-30 percent is generated through direct lending. Figure 17 below provides an overview. At the SCA level, the average loan was about 9200 MDL ($816) in 2008 – an increase of over 30 percent from the previous year.196 For direct lending, the average loan was approximately 131,000 MDL ($11,600, over 45 percent higher than in 2007), reflecting the fact that the RFC maintains its direct lending focus on micro-, small- and mediumsized enterprises. Presently, the RFC also counts about 900 entrepreneurs among its direct lending clients, representing a loan portfolio of 110 million MDL ($9.7 million).197 Figure 17: RFC portfolio composition, 2005-2008

400 350 300 250 200 150 100 50 0

Million MDL

106

102 86 71 2005 116 2006
SCA lending

100 262 129

2007
Direct lending

2008

Source: Adapted from the Rural Finance Corporation 2008 Annual Report.

195 Rural Finance Corporate Annual Report 2007 and 2008. www.microfinance.md Retrieved February 2009. 196 Interview with Valeriu Iasan, Vice-President of Finance of the Rural Finance Corporation. Date: March 25, 2009 in Chisinau, Moldova. 197 Interview with Valeriu Iasan, Vice-President of Finance of the Rural Finance Corporation. Date: March 25, 2009 in Chisinau, Moldova.

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2.3 The Rural Development Center In 1999, the RFC established the Rural Development Center (the RDC), an NGO that works closely with SCA members and direct loan beneficiaries. It plays a similar role for the RFC that the MMA plays for Microinvest. Whereas the RFC provides the financing, the RDC provides training and consulting services on business plan development, financing and operations. For example, the RDC can help match an entrepreneur to a specific developmental program, such as the World Bank first-time borrower program.198 The RDC works closely with various international organizations, including the World Bank and International Fund for Agricultural Development (IFAD). Currently, it has a project with the Swiss Agency for Development and Cooperation (SDC) which is being rolled out in two phases: the first is focused on financial education training at the SCA level. Through workshops, SCA employees are learning financial analysis principles, budgeting, marketing, business planning and new product development. Launching later in 2009, the second phase will focus more on automating SCA operations by providing computer training and accounting software as well as training on how SCAs can manage their liquidity and attract savings. The underlying idea to further consolidate SCAs by upgrading the best and biggest SCAs to a “B” license, and then, in the words of RDC Executive Director, Efim Lupanciuc, “gluing together the smaller SCAs to the larger ones.”199 2.4 Loan Products At an annual interest rate of 24 percent, the RFC offers both short-term (2-12 months) and medium-term (13-36 months) loans to their SCAs, which respectively lend to their members per their individual loan applications. Short-term loans are primarily utilized during the agricultural season, and therefore, require a balloon repayment at maturity; medium-term repayment plans are more flexible. Short- and medium-term loans each represent approximately 50 percent of the loan portfolio. The RFC also offers mediumterm (13-36 months) credit lines to SCAs. For those who have outgrown the lending capacity of their local SCA and require larger loans for their business, the RFC provides several direct lending options, all offered at a 22-24.5 percent annual interest rate. Short-term and medium-term loans up to 36 months are available, as well as long-term loans for up to ten years. For clients with a solid credit history with the RFC, a credit line for working capital is available with terms up to 36

198 Interview with Efim Lupanciuc, Executive Director of the Rural Development Center. Date: March 25, 2009 in Chisinau, Moldova. 199 Interview date: March 25, 2009 in Chisinau, Moldova.

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months. In order to quality the recipient must contribute his own capital in the amount of 20 percent of the principle, which then serves as the minimum balance of the credit line.

3. ProCredit Company and Bank
3.1 Overview of ProCredit, Worldwide and in Moldova Operating as a public-private partnership, ProCredit Holding is the parent company of a global network of over 20 ProCredit banks, from Kosovo to Kyrgyzstan, Mexico to Mozambique. By mid-year 2008, ProCredit Group had assets totaling more than 4.5 billion Euros, and an equity base of over 370 million Euros.200 In Eastern Europe, ProCredit has subsidiaries in eleven countries, and in 2007, was the leading provider of banking services to micro-, small- and medium-sized enterprises, with over 535,000 outstanding loans.201 ProCredit Bank follows a different philosophy than most commercial retail banks: their goal is to target micro, small and medium-sized businesses, as well as the general population, in developing countries and transition economies in order to expand access to financial services. Throughout its global network, ProCredit operates a neighborhood bank concept, whereby all branches are positioned as “the financial institution in the neighborhood.” Over time, ProCredit has developed an advanced, specialized credit technology that it uses throughout all of its branches to analyze the borrower’s capacity for debt, cash flows and potential credit risks in order to provide socially responsible products. It prides itself on its culture of transparency, open communication, cultural sensitivity and excellent customer service. In its 2007 annual report, ProCredit states “ProCredit is characterized by a responsible, long-term attitude towards business development and client relationships…We aim to contribute to the economic development of the countries in which we work.”202 In Moldova, ProCredit was the first and still is the largest, microfinance institution. Founded in December 1999 by a coalition of international investors, ProCredit Bank actually start as Micro Enterprise Credit of Moldova (MEC), focused on providing microloans to populations traditionally underserved by commercial banks. In July 2004, it was renamed ProCredit Company, helping to consolidate the socially responsible chain under one brand name and image. At the end of 2007, ProCredit received its comprehensive banking license, allowing it to become a full-fledged retail bank offering a broader array of services to its clients (including savings and debit accounts, international transfers, and additional services for businesses), while still maintaining a clear focus on microfinance clients. Currently, most of ProCredit Company’s branches are in the process of being transformed into ProCredit Banks.

200 ProCredit Moldova website. www.procredit.md. Retrieved February 2009. 201 ProCredit Bank Moldova 2007 Annual Report. www.procredit.md. Retrieved February 2009. 202 ProCredit Bank Moldova 2007 Annual Report. www.procredit.md. Retrieved February 2009.

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3.2 Key Figures and Financial Results In 2007, ProCredit’s total assets reached over $50 million, an increase of over 40 percent compared to 2006; this rapid growth was primarily driven by the large increase in the loan portfolio: ProCredit disbursed over 15,000 loans, with a loan portfolio of $37 million, an increase of 22 percent over the previous year.203 fact that ProCredit is indeed a provider of microcredits. ProCredit currently has over 330 employees and 27 branches in Moldova – including 11 banks in the capital and 16 regional branches (of which only six are banks, while the rest can only disburse credits). ProCredit is innovative in reaching remotely-located clients: it operates three “creditmobiles” in Moldova that serve a quarter of Moldova’s territory by literally bringing its banking services to the customers’ doorstep. Another creative tactic is the practice of “one-day offices,” whereby ProCredit employees set up a booth or stall at a local market in a city where there is no ProCredit branch. 3.3 Loan Products ProCredit offers a variety of loan products. In fact, there are no maximum and no The average loan size is approximately $3,000, and over 96 percent of loans were under $10,000 – reinforcing the

minimum loan amounts; a customer can apply for a loan of as little as 5000 MDL ($443). Loan terms are between 12 and 48 months, and depend on the industry of the borrower: agricultural workers usually need seasonal loans of 8-18 months, while those in construction, for example, apply for longer-term loans. particular cash flow schedule. Loan repayment is usually completed monthly, although the timetable can be flexible, tailored to the client’s

4. Savings and Credit Associations in Moldova
4.1 Organizational structure and licensing SCAs are simple financial institutions in rural villages, literally for the people and by the people. Currently, there are approximately 500 SCAs in Moldova, from which about 400 are active. The most recent listing of the CNPF lists 450 SCAs.204 SCAs play a crucial role in the rural areas of Moldova, as most villagers do not have access to larger commercial banks; these traditional financial institutions are often not present in small villages, and if they are, few offer services specifically tailored to the needs of the lowestincome people. Furthermore, many villagers do not possess the official documents Conversely, because SCAs are required to apply for loan at a commercial bank.

203 ProCredit Bank Moldova 2007 Annual Report. www.procredit.md. Retrieved February 2009. 204 National Commission on Financial Markets website. http://www.cnpf.md/file/rapoarte/ListaAEI.pdf Retrieved March 2009.

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community organizations, all members are familiar with each other, and therefore, credits can be given based upon reputation. SCAs are organized territorially, and operate with a direct-democracy system of oneperson, one-vote. Each association has about 200 to 400 members. Being an SCA member or working for an SCA accords social status and respect within the community;205 it is often considered that the most dynamic and determined members of the community join SCAs.206 Members meet in a General Assembly once or twice a year in order to elect their Board of Directors (“Consiliul,” comprising of five members), the Internal Audit team (“Comisia de Cenzori,” consisting of three members), as well as the Executive Director and Chief Accountant. Some larger SCAs also have cashiers and security guards. SCAs in Moldova employ almost 1,000 people. types of SCA licenses. Figure 18: Organizational structure of SCAs in Moldova The organizational structure of SCAs in Moldova can be seen in figure 18 below, while figure 19 provides an overview of the three

Source: Adapted by author from Organizational structure of the SCA in Slobozia Dusca (valid for all SCAs in Moldova)

205 Interview with Maria Johansson, Project Manager, International Advisory Services, Frankfurt School of Finance and Management, and Team leader of financial education project with RFC. Date: March 11, 2009 via telephone. 206 Interview with Andrei Calin, SCA loan officer, Moldova Microfinance Alliance. Date: March 23, 2009 in Chisinau, Moldova.

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Figure 19: Overview of SCA licensing requirements

Source: Adapted by author from Law of Savings and Credit Associations, nr. 139-XVI of June 21st, 2007. www.cnpf.md.

4.2 Key Figures and Financial Results According to the database maintained by the CNPF, which reports information from 423 SCAs nationally, there were over 121,000 SCA members as of September 30th, 2008, of which approximately 55 percent were females. In 2008, over 66,000 microcredits were given throughout the SCA network, representing a composite loan portfolio of 619 million MDL ($54.9 million) – an average of 9,400 MDL ($834) per loan. Only 2.4 percent of the loan portfolio was at risk, categorized into one of four categories, depending on the severity of default. Less than six percent of SCA members (approximately 7,200) made deposits; this is most likely due to the small number of SCAs who hold “B” licenses which permit them to accept savings deposits. The savings portfolio is 2008 was 97 million MDL ($8.6 million), roughly 13,400 MDL each ($1190). The 2008 balance sheet of all Moldovan SCAs reported 703 million MDL ($62.4 million) in assets, 609 million MDL ($54.1 million) in liabilities and 94.6 million MDL ($8.4 million) in equity. A summary of the balance sheet can be seen below in table 17 while table 18 provides an overview of the 2008 loan portfolio in terms of insured and uninsured loans.

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Table 17: Summary of 2008 SCA balance sheet Item Assets Cash Shares Bank deposits Loan portfolio Total Assets Liabilities Savings deposits Deposits for insuring loans Bank credits and loans received Interest due Other Total Liabilities Equity Interest rates Reserves established by law Other reserves Other equity Retained earnings Net profit Total Equity
Source: CNPF Database of SCAs

Total, MDL* 9.4 million 4.2 million 59.2 million 619.2 million 703.9 million 97.0 million 54.2 million 439.9 million 14.1 million 4.1 million 609.3 million 12.1 million 25.2 million 25.9 million 145,000 10.1 million 21.2 million 94.6 million

Table 18: Overview of 2008 SCA loan portfolio Loan category Standard Supervised Substandard Dubious Comprised Total Total loans, MDL* 604.1 million 10.8 million 1.8 million 1.4 million 1.2 million 619.2 million Insured, MDL* 44.4 million 219,000 540,000 244,000 113,000 45.5 million Uninsured, MDL* 559.7 million 10.6 million 1.3 million 1.1 million 1.1 million 573.7 million

* Figures were rounded to the nearest .1 million MDL

Source: CNPF Database of SCAs

4.3 Operations: Membership, savings and credits, policies and procedures One becomes a member of a local SCA by submitting an application and a copy of identification (“buletin”) to the SCA office. Applications all must be approved by the Board of Directors. Once approved, the member pays a one-time membership fee (approximately 80-120 MDL), which helps the SCA accumulate a small capital base. For microcredits, the process is generally the same for all SCAs: every year, SCAs accept loan applications during a specified timeframe, usually January through March. After individual review by the Chief Accountant, the applications are then transferred to the

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Board of Directors for approval. At the end of the application period, the SCA applies for financial resources from its microfinance institution, and once received, disburses the individual microcredits to its members. Loan terms are generally 12 months, but can also be tailored to the individual needs of the applicant. If additional applications are received after the designated period, loans can still be offered as long as capital is still available and repayment can still be achieved within the calendar year. For those SCAs with “B” licenses who can also accept savings, the procedure is similar: a member first sends a letter requesting to deposit funds with the SCA, which must be approved by the Board of Directors. Once received, deposits are used to finance additional loans within the member network. Annual interest rates for deposits are generally 20-22 percent. Although many procedures are similar for all SCAs, each association is permitted to establish policies and guidelines by which their particular association will operate. Details such as interest rates, profit margins, loan maximums, timing of meetings, repayment schedules, penalties for late payments, insurance requirements and other rules are all established collectively and voted upon at General Assembly meetings. For example, in the “A” license association in Slobozia Dusca, just northwest of Chisinau, has 260 active members and distributed 167 loans in 2008. The maximum loan amount In for an individual is 25,000 MDL ($2,220) and 40,000 MDL ($3,550) for a family.

addition, a new member can only receive a loan of 10,000 MDL ($887) until he or she has proven him- or herself trustworthy of a larger one.207 The SCA in Dubasarii Vechi, not far from the border with Transnistria, possesses a “B” license, which allows it to increase these amounts to 35,000 MDL ($3,100) for an individual and 50,000 MDL ($4,400) for a family. This SCA has almost 400 members, and disbursed 242 loans in 2008, with an average loan of 11,000 MDL ($976).208 Interest payments are due on a quarterly basis, with the principle due in the last quarter. Penalties for late payments are severe: the member is labeled “at risk” for one year, and the interest rate jumps dramatically from 30 percent to 160 percent! For example, a 750 MDL quarterly interest payment on a 10,000 MDL annual loan becomes a payment of 1,333 MDL. However, Executive Director, Alina Lungu, proudly shared that she has not had one late payment during her tenure.209 Figure 20 below outlines the fee structure between microfinance institutions, SCAs and SCA members, using Microinvest as an example. Microinvest receives funding from its lenders, such as the World Bank or EBRD. Microinvest then lends money to an SCA at an annual interest rate of 24 percent, plus a 1.5 percent commission, charged before dispersing the funds. For example, for a one million MDL loan request from a local SCA,

207 Interview with Victor Cauia, Executive Director, and Eugenia Frunze, Chief Accountant of the Slobozia Dusca SCA. Date: March 18, 2009 in Slobozia Dusca, Moldova. 208 Interview with Alina Lungu, Executive Director; Nina Flore, Chief Accountant; and Nina Postica, Cashier of the Dubasarii Vechi SCA. Date: March 18, 2009 in Dubasarii Vechi, Moldova. 209 Interview date: March 18, 2009 in Dubasarii Vechi, Moldova.

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985,000 MDL would be provided. After one year, the SCA would have to repay the one million MDL plus 240,000 MDL in interest. The SCA then respectively lends to its SCAs also charge a members at 30-32 percent annual interest rate, thereby keeping a 6-8 percent profit margin, which becomes part of their capital base and reserves. commission of 3-4 percent. For example, 9,600 MDL is provided to an SCA member who applied for a 10,000 MDL loan at 4 percent commission. If the interest rate is 30 percent, the member must repay 13,000 MDL at year-end; of the 3,000 MDL, the SCA keeps its 6 percent profit of 600 MDL, and the remaining 2,400 MDL would be due to Microinvest. Interest payments are pro-rated; therefore, the faster the member repays, the less interest he or she must pay. According to interviews with four SCAs in the county (“raion”) of Criuleni, the average hold of a loan by an SCA member is eight months, corresponding to the agricultural season of March-October.210 Figure 20: Fee structure between MFIs and SCAs

Source: Compiled by author during field research in Moldova, March 2009.

210 Interview with Executive Directors and Chief Accountantss of SCAs in Molovata, Cosernita, Slobozia Dusca and Dubasarii Vechi, all linked with the Criuleni branch of Microinvest. Date: March 25, 2009.

Appendix 5: Declaration of authorship

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Appendix 5: Declaration of authorship

I hereby declare that I have sincerely endeavored to produce a paper of outstanding quality; I have produced this paper myself, without any outside assistance except from the people and documents that I quote; I have not copied and/or pasted this paper, or parts of it, from other papers or documents available on the internet or elsewhere, except where I have explicitly stated so; I have not submitted this paper or major parts of it to another seminar or class, either at the University of St. Gallen or elsewhere, and I will not do so in the future.

Signed:

_________________________________________
Alexandra Mihailescu, University of St. Gallen MBA Program, Class of 2009

Date: Location:

_________________________________________ _________________________________________

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