Microinsurance – Ensuring Insurance for the Most Vulnerable
Microinsurance is widely recognized as an important tool for economic development. As many low-income people can’t access necessary risk-management tools, they are vulnerable to fall into deep poverty in times of hardship, for example when the breadwinner of the family dies, or when high hospital bills force families to take loans on high interest rates. Microinsurance also enables people to take more risks. This article discussess the relative new concept of microinsurance.
In Goud Karlakhunta – an Indian village located in Orissa state -- Nena, a 22-year-old mother of one child and a member of the Bijayinee Cooperative of Mahashakti Foundation has microinsurance to thank for her health protection. Nena, a typical villager from India, lives in a single-room tile-roof roadside house with her husband and child. Nena and her family live of agriculture as do most households in Orissa. She stores provisions of rice, the staple food in the local diet, to secure food for the family at all times.
Faced with gynecological problems, she had to go to the hospital six times within a few weeks and spent 260 Rupees (4 €) for tests, plus 45 € for three days in the local hospital, and transport for her and her husband. These expenses are by no means insignificant for her or the majority of Indians – many of whom live on less than a dollar a day. To face these expenses, Nena had to sell three sacks of rice for a total of 23 € and to borrow 3 € from her neighbour.
As luck would have it, just a few weeks earlier, Nena had paid 5 € to enroll herself and her family in the Niramaya microinsurance scheme. The scheme is run by the Bijaynee Cooperative. Following her hospitalization, she submitted a claim to a Board member of the women's cooperative. The claim was verified by the Insurance Coordinator, the main administrator of the insurance scheme. The Claim Committee, composed of nine women members of the cooperative, approved Nena's claim in full. When she received the reimbursement from Niramaya, Nena said “I didn’t believe I would get my expenditures reimbursed so quickly.”
A little later, Nena became pregnant and underwent her pre- and post- natal visits which entitled her to a maternity card from the Niramaya. The scheme pays a 8 € cash incentive when a pregnant women completes three ante and three post natal check-ups. “I did not have to panic anymore since I knew that I could manage the health expenses,” she remembers.
In a country where about 78 per cent of the population has no access to insurance, microinsurance is proving to be a life-saving boon. But as of now, there are over a million Indians who are being covered by microinsurance. These people are mostly from the poorest section of society – people who would normally be ignored by the insurance sector. Their poverty enhances their risk to disease and other natural catastrophes but they simply could not afford insurance. Until, microinsurance came along! According to Dr. David Dror, chairman of the Micro Insurance Academy (MIA), which is a leading player in the development of microinsurance in India and other parts of the world, “Financing health through out of pocket spending reduces the access to care for the poor more than for the rich because demand for healthcare payable at the point-of-service is more elastic as income is lower. Consequently, the cost of healthcare has been a cause for impoverishment that pushed non-poor persons into poverty and those already poor into deeper poverty.”
And the growth has just begun. Take Africa: Microinsurance policies have risen in this impoverished continent by 80 per cent between 2005 and 2009, although penetration is still very low. Microinsurance is a term increasingly used to refer to insurance characterized by low premium, sold as part of atypical risk-pooling and marketing arrangements. It is designed to service low-income people and businesses not served by typical social or commercial insurance schemes. Insurance functions on the concept of risk pooling, and likewise, regardless of its small unit size and its activities at the level of single communities, so does microinsurance. Such an insurance links multiple small units into larger structures, creating networks that enhance both insurance functions and support structures for improved governance. This mechanism is therefore an autonomous enterprise, independent of external financial lifelines (of a permanent nature) and it aims to pool both risks and resources of large groups for the purpose of providing protection to its members against the financial setbacks accruing from mutually determined risks.
Microinsurance is widely recognized as an important tool for economic development. As many low-income people can’t access necessary risk-management tools, they are vulnerable to fall into deep poverty in times of hardship, for example when the breadwinner of the family dies, or when high hospital bills force families to take loans on high interest rates. Microinsurance also enables people to take more risks.
Microinsurance was originally designed to cater for the most pressing problems of people exposed to risk. Experts estimate that 140 million people, mostly in Africa and Asia, are now covered by affordable insurance premiums. Studies show that the potential market is up to 3 billion: more than half of microinsurance products are currently focused on life and health, while less than 10 per cent cover farms.
The object of microinsurance is to cover the main risks that impact the lives of individuals or families. Microinsurance solutions are now available to counter local disasters. Examples include cover against extreme flooding for people in one of Asia's major cities, against tropical cyclones in the Philippines and against extreme winters in Mongolia.
There are of course many challenges for microinsurance as it spreads its wings across the world, bridging cultural, economic, political, religious and social divides by offering a service that can benefit those who need to be protected by the vagaries of life. It is becoming obvious, for example, that the microinsurance proposition needs to enhance its real value to the insured and offer insurance as part of a wider package of services. However, the benefits from microinsurance have already proved their worth to countless people like Nena in far-flung corners of our developing world and the reach is expanding rapidly with many regional and global players now offering microinsurance products and services.
Research and development, and partnering?
Such stories are a great starting point. At the same time, extending conventional insurance technology and experience for meeting such needs as described above requires research and development work. Such work can even be mutually beneficial, not only to insureds in developing countries, but also to insurers in developed countries, since it can:
- Test and develop insurance expertise in new settings (not so different from the beginnings of European mutual insurance some 200 or so years ago),
- Help the insurance industry and professions to rediscover their roots in sustainable risk and responsibility sharing, and last but not least
- Develop insurance business opportunities in “bottom of the pyramid” markets.
There is not sufficient space here to go into detail about what such research and development and partnering could look like. But a few suggestions of easily accessible further reading and a few useful web addresses can be helpful.
A well-organized and well-written source is the SwissRe outlet Sigma, which, in its no 6/2010 issue, discusses microinsurance for 32 pages (available online: http://media.swissre.com/documents/sigma6_2010_en.pdf ). Instead of simply saying that microinsurance covers micro expense risks for a micro premium, this source defines microinsurance as the sum and mix of the following five characteristics (ibid., p. 2, with further elaboration):
Figure 1: Core elements of micoinsurance
Source: Swiss Re Economic Reseach & Consulting
Another useful way of understanding microinsurance is by comparing it to conventional insurance, using criteria such as target market, product design, marketing, underwriting, administration and claims handling, asset management (cf. ibid., p. 3, with a filled-in text table). Most importantly, microinsurance can improve risk prevention and management among the poor on their own terms, as long as it balances two considerations: long term-development and commercial sustainability (cf. figures 4 and 5, ibid., p. 5).
Another excellent source with 31 (!) articles altogether is co-sponsored by MunichRe and ILO and edited by C. Churchill: Protecting the Poor: A Microinsurance Compendium, with more than 600 pages (!) - also available online: http://www.munichre-foundation.org/NR/rdonlyres/52FA02DB-B6A4-4DEB-8149-5A64B64D6A68/0/ProtectingthepoorAmicroinsurancecompendiumFullBook.pdf A good place to start is the introductory article by the editor. The last paragraph of this article provides an appetizer (ibid., p. 24): “… Microinsurance can be described as an insurance ‘back to basics’ campaign, to focus on the risk-management needs of vulnerable people, and to help them manage those risks through the solidarity of risk pooling. Although not all microinsurance schemes are true to these values, the closer they can come, the more likely they will benefit the people who need them the most…”
Websites and you-tube videos are other useful sources. Here are a few suggestions of places where one could start (in no particular order):
http://www.microinsuranceacademy.org/ - each of them with further links. Or take a look at videos such as these:
PS: A Seminar in Oslo
There will be seminar on microinsurance in Oslo April 12-14, 2011 featuring the stories of particular microinsurance initiatives, presentations of research and development work in various countries, and discussions about how one could develop small action research projects partnering between insurance companies, local initiatives and academia. The host is ROFF, the Centre of Risk and Insurance Research at BI, the Norwegian School of Management, in partnership with the Micro Insurance Academy (see www.bi.no/roff and http://www.microinsuranceacademy.org/). The seminar will take place on the BI campus Nydalen in Oslo. You can sign up via the ROFF website or by email to firstname.lastname@example.org. Or, if it is not possible for you to attend, a report with a few video-glimpses will be posted on the ROFF website after the event.
Johannes Brinkmann: Professor of business ethics and affiliated with ROFF, the BI centre for risk and insurance research, Oslo. Email: email@example.com. and Devendra Tak: Deputy Director of Communications and Fund Development, Micro Insurance Academy, New Delhi. Email: firstname.lastname@example.org