Managing Risk: Microinsurance
Microinsurance involves the provision of wide-ranging insurance services to low income populations previously unable to hedge against life’s uncertainties. Such products are extremely important in the developing world where a bad harvest, death, or a natural disaster can rapidly eradicate gains against poverty. Although still experimental today, the industry was virtually non-existent 10 years ago. According to the Microinsurance Network there are currently approximately 500 million microinsurance recipients, and there will likely be upwards of one billion by the end of the decade. Products include life insurance, health insurance, crop insurance, and livestock insurance. The International Finance Corporation (IFC) has recently estimated that the the industry has the potential to become a US$50 billion market.
One of the leading promoters of the industry is the Microinsurance Innovation Facility (MIF), housed at the International Labor Organization (ILO) and supported by institutions such as the Gates Foundation. The MIF/ILO’s goal is to guard against risk and fight against poverty by increasing low-income families’ access to quality insurance. The organization does not underwrite microinsurance programs, but it does engage in capacity building, research activities, the dissemination of knowledge on good practices, and fundraising for the development of training programs. For example, in its recent briefing note “Savings in Microinsurance: Lessons from India” it examined four savings-linked insurance products offered by Indian insurers and presented a framework for use in program design.
In addition to benefiting low income families, microinsurance also provides value to microfinance institutions themselves. By partnering with commercial insurance companies, MFIs are able to increase the probability that their loans will be repaid by protecting clients from risks such as a bad harvest or bad health. An increasing number of MFIs are requiring that loans be linked to microinsurance and premiums may be deducted from the loan upfront.
While donor organizations and foundations have provided an impetus for microinsurance, private insurers have responded by underwriting microinsurance products. SwissRe launched a microinsurance program to help Rwandan farmers protect their crops, and the company recently stated that 4 billion people can benefit from microinsurance.
In addition to international insurers, local and regional insurance firms have entered the arena to meet the challenges of providing products and services to low-premium clients. Several such approaches have been developed by AON Affinity do Brasil, which has endeavored to create cost-effective retail distribution channels.
Another alternative and innovative approach has recently been reported from Ghana, where burials are an expensive affair and produce a strain on poor households. In response to this the mobile phone developer Tigo has developed an insurance product to cover burial costs which they have been offering to their customers free of charge for one year in order to promote this type of product. A local insurance firm (partnered with Tigo) actually underwrites the insurance policies.
Besides commercial insurers, a range of other insurance providers have emerged that include mutual, cooperative and other community-based or community-led insurance organizations.
A roundup of recent microinsurance organizational activity is outlined below:
- Multilateral organizations such as the Asian Development Bank, the World Bank, and the International Finance Corporation (IFC), have focused on regulations, policies and guidelines regarding microinsurance. To this end the Asian Development Bank (ADB) recently supported a study for the Government of the Philippines aimed at strengthening the capacity of government regulators and microinsurance providers in the country.
- Recent studies have shown that microinsurance can increase agricultural output and productivity. Xavier Gine, a senior economist at the World Bank, has noted that increased access to insurance may induce farmers to replace subsistence farming with higher-return, higher-risk cash crops. Likewise, a recent study by Dean Karlan, et al has indicated that farmers who have access to insurance are disproportionately likely to increase expenditures aimed at increasing productivity.
- The Microinsurance Innovation Facility recently held a forum on the impact of health based microinsurance. The participants reviewed the impact of health microinsurance in India and found that insured study participants sought health care services more frequently, received better quality health care, and reduced their out-of-pocket expenses.
- The rapidly expanding Microinsurance Network acquired institutional legal status this past May. The organization promotes the development of effective insurance services for low-income people by encouraging shared learning, facilitating knowledge generation, and providing a multi-stakeholder platform.
- The Microinsurance Catastrophe Risk Organization (MiCRO), a reinsurance company, has been drawing significant attention for having provided microinsurance coverage to clients of Fonkoze, Haiti’s largest microfinance institution, prior to Hurricane Sandy. The insurance was designed to protect Fonkoze’s loans by protecting its clients from natural disasters, and has proven quite beneficial to many of the hurricane’s victims – so much so that the International Finance Corporation (IFC) has decided to provide the program with $1.7 million in funding.
- At the World Economic Forum in Davos prominent stakeholders in the world of microinsurance held a discussion entitled “Bringing Microinsurance to Scale”. The role of microinsurance was confirmed as an essential component of financial inclusion, however it was noted that affordable and accessible products need to be developed.
It is widely recognized that the greatest challenge for microinsurance schemes is providing real value for poor households. And, finding the right balance between adequate protection and affordability is critical.