Depending on who you talk to, microinsurance is
an extraordinary opportunity—the 500 million lowest-income policy-holders currently insured will likely double to over one billion by 2020: annual growth rates are 10% in some African countries and 15-20% in India, according to the ILO’s Microinsurance Innovation Facility’s Protecting the Poor, Current Trends in Microinsurance.
this relatively inexpensive way for very poor people to protect themselves and their livelihoods and is one of those North-Meets-South conundrums that no one has really figured out yet.
The large northern insurance companies, faced with sluggish growth and aging and unprofitable demographics at home look with increasing favour upon the much younger 2.3 billion in the developing world who can pay little and often pay irregularly, but nevertheless represent far more encouraging prospects in life, health, disability, crop, weather, and asset protection.
There is also a growing entente cordiale in many emerging markets—where regulatory constraints are often less stringent—between governments, telecoms, banks, non-governmental agencies, and insurance groups to develop mutually profitable solutions and open new distribution channels for the previously uninsurable.
Tigo, a phone carrier in Ghana, partners with MicroEnsure to offer more life insurance options with increased mobile use. Easypaisa, a Pakistani branchless banking service, and a unit of Norway’s Telenor Group are launching free life insurance for their clients in cooperation with Adamjee Life. Meanwhile, India’s Insurance regulator IRDA has relaxed written bank confirmation requirement as a proof of residence for rural micro-insurance policy seekers.
And yet nagging doubts seem to remain. We’ll look first at why customers hesitate to sign up.
- Trust and benefits: Why would a subsistence farmer hand over any of his limited resources to an outside party to insure against drought especially when pests and crop-price fluctuation or a health emergency can wreak equal or worse havoc on his fragile enterprise? Ignoring specific local needs is also a problem (insuring a house is a far lower priority in many areas than safeguarding a shop or livestock). And the lag time involved in filing for and receiving claim benefits is perilously long for too many.
- Local alternatives: A significant percentage of potential policyholders already belong to funeral societies, self-help groups, and other community mutual-fund schemes. They see no compelling reason why a microfinance sponsor and international management of risk and actuarial tables work more reliably or are more cost-effective than their village options or, for example, LIC India (Life Insurance Corporation of India).
- Cost and liquidity: This may be the most important deterrent. Even those who would prefer the more formal and long-term structure of a microinsurance contract may be hard pressed to find the cash initially and on a monthly basis. Most premium payment schedules are still not designed to accommodate the uncertain and fluctuating incomes of the very poor.
- Fraud and “moral hazard”: Figures are fuzzy when policies, people, and places can differ so radically, but the Rural Finance Learning Center is willing to estimate fraud at $6.5 billion per year for agricultural insurance alone. Cheating an insurance entity that lies well outside the policyholder’s inner circle is understandably tempting for some. “Moral hazard” is an insurance term for neglecting livestock or allowing flammable kerosene to ignite for the hefty payouts. But the inspection and personal responsibility safeguards set in place to deter such fraud chafe—and the trust relationship, so essential in any insurance agreement, can quickly erode.
Other issues impede the success of ensuring the very poor as well. MicroSave addresses them in detail in Securing the Silent: Microinsurance in India, the world’s largest microinsurance market (of the estimated 500 million current policyholders, well more than half are in India). This is where you turn to understand costs, profitability, and the long-term sustainability of microinsurance in a country where credit is still the real driver of microfinance and claims ratios can exceed 100%. In too many instances, the bold new initiatives, starring large insurance companies and local microfinance institutions, have detoured and become merely operational risk covers for the MFIs.
A MicroSave India Focus Note Challenges of Microinsurance outlines the strategic and insurance product issues, including low penetration and low commissions in many markets versus relatively high fixed costs of administration and distribution, high risk for the underwriters, and the distribution problems migratory populations impose. You can also read more about which microinsurance products sell well (or poorly), where, and why and the evolution of market trends in these reports.
Microinsurance is an important alternative to the Faustian pact borrowing seems to represent in many low-income communities. These publications help explain the financial and regulatory underpinnings of what goes wrong with the partnerships and policies, the reasons why, and how we might begin to think about them differently.