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(Micro)Insurance 101
Would love to get everyone's thoughts on this blog post by Avana Microinsurance on what exactly IS Microinsurance. There is some food for thought here that can lead to a good discussion. Thanks!
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A question asked time and time again by Avana Microinsurance readers and followers is “What exactly is microinsurance??” So let’s tackle it…
Microinsurance is a term used to describe any insurance policy that is priced to be affordable to a person living in poverty. It can include insurance against any type of risk: death, illness, accident or injury, property damage, livestock, or crop loss are some common examples.
In order to understand why microinsurance is so important, let’s take a step back and ask “What is insurance?” Insurance is a financial product purchased as protection against a loss. By purchasing insurance, the risk of this loss is transferred from the individual (person buying) to an entity (an insurance company) that is better equipped to manage it. Depending on where you live or work, the quality and affordability of your choices vary widely and are sometimes inadequate. Nevertheless, living above the poverty line usually ensures that you do have the option to use insurance as a tool to protect yourself.
Now let’s break this down further…So what types of insurance do you have? Health? Hopefully! Car insurance? If you own a car, probably–unless you are looking for some legal trouble. Property? Usually of some sort. Life insurance? Maybe. Why did you buy these policies? Your decisions were likely influenced by a slew of factors – Do other people rely upon your income for their well-being? Who will bear the burden of your death/illness/property loss? Ultimately, when it’s not required by our governments, bank or mortgage lenders or provided by our employers, we choose to buy insurance because we calculate that the price we pay to do so (the premium) is worth the protection that it affords us and our loved ones.
Sometimes, even though we know it might be a “good idea” to finally get around to buying that renters insurance, we go without. When we decide against purchasing a particular policy, we are de facto choosing to manage our risk of a loss in another way — like relying upon government programs or drawing on our own savings or the support of our families.
These same “calculations” are performed every single day by households around the world. But because poor families have a harder time saving, commonly live in countries with inadequate government social safety programs, and come from communities also entrenched in poverty, they have fewer tools to manage the risks they confront every day.
Unfortunately for these poor families, the consequences of an uninsured loss are even more severe. Would you finally have gotten around to buying that insurance if you knew that if you did not, your children couldn’t stay in school, your business wouldn’t continue to operate, or your family couldn’t continue to eat? Probably. And this is the type of desperate situation poor families face every day.
But insurance is too frequently not a viable option for poor families. Sometimes this is due to a lack of awareness of its existence (which can be combated through targeted education programs). More often however, it is because it doesn’t (affordably) exist at all in their communities.
This, then, is microinsurance and why it is so important! When done well, microinsurance products are designed specifically to be valuable to low-income households and are accompanied by education to explain this value. When the right products are made available at the right prices, there will be a functioning market. With only 5% of the poor covered by any insurance whatsoever, the microinsurance market still has a long way to go.
Tags: business, enterprise, insurance, microfinance, microinsurance, social
Views: 9
Replies to This Discussion
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Permalink Reply by Nita Nehru on -
Thanks guys, really glad you enjoyed it.
Please spread around to anyone you think may be interested in learning more about microinsurance.
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Permalink Reply by Tom Murphy on -
I want to play a little bit of devil's advocate with this post. If rates of savings are so low for the poor, what about microinsurance will cause them to want to take part? A second question: wouldn't it be more important to try to find ways to encourage savings in general so that people have future money? Even in the United States the rate of savings is disappointing. Shouldn't there be a greater focus on the education of people on how they can effectively save?
Again, just tossing out some questions to get the conversation going. Great post and definition.
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Permalink Reply by Tom Murphy on
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It seems like there is a distinction between the types and insurance on crops, from what I know, sounds like it is a tricky business to enter. With so much varying from season to season, the organizations will have to do a lot of work to perfect what rates are appropriate for the farmers. Chris Udury presented a study on this and generally found that people were happy with the program, but the trick seemed to be getting them to want to engage on it by their own choice.
I guess, my larger thought was that it is important to provide education to show that saving in general is beneficial for future expected and unexpected expenses. The rate of savings is low and that is a pretty straightforward idea. Insurance, on the other hand, is a little more abstract in that it will only be paid out when something goes wrong. The question is not the benefit of both savings and insurance, but how to explain that it is to people who already struggle to meet expenses throughout the year. Maybe some government subsidies or programs could be a way to introduce people to insurance and show the benefit of using it.
Thanks for your response, Liza. Thoughtful as always.
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Permalink Reply by Nita Nehru on
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Liza - thank you for sharing that article. Great anecdotes in there.
Tom - I agree with what Liza says re: microinsurance. I completely agree with you however, that a conspicuously missing element in all these poverty reduction schemes is education. When one is already struggling to live day to day, putting even the most miniscule amount into something without immediate and direct returns seems daunting and perhaps foolish. But there needs to be education and accurate explanation around the purpose of savings and insurance so that they can realize the importance of these safety nets.
This is the reason that Avana Microinsurance has a two pronged approach -- one element of what it does is provide the customized insurance products to cover the poor, but the second element is education. These include education modules for distribution partners to provide to low-income communities.
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Permalink Reply by Casey Gheen on -
I agree with Tom's devil's advocate position. I think the real key is providing holistic financial services - credit, savings, and insurance - so that each of these services can be accessed when it is most needed. As you point out, education here is instrumental - and should include a discussion of the roles of both savings and insurance. Nita it's great how you point out that we all make insurance decisions based on a range of factors; the poor should be able to make these same choices, based on their own circumstances, and have access to the tools they need to do so. Insurance programs coupled with education have been shown to be viable if the products themselves are designed with the customers needs in mind (rather than just downsized versions of policies that make sense for higher income people). Besides education, there are ingenious ways of increasing the perceived utility of insurance products in markets where people want to "see" benefits while they are alive. For example, in Brazil, products have a lottery type prize component that pays out regularly to the insured. Interesting...
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Permalink Reply by Tom Murphy on
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Nita - Do you think that it is trying too much to do both at the same time? Could it be better to start with edu, then savings, then insurance (or some other incremental order)? Or can a full offering at once be successful?
I really am not well versed in microinsurance myself, so will not try to lean on anything other than pure conjecture. Thanks for answering and looking forward to learning more from you.
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Permalink Reply by Tom Murphy on
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Do you have any more information about the Brazil example? That sounds like a really interesting idea.
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