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Contributions from
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Focus
“In the long run,
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Microcredit world record
Social control and group solidarity
“Prime example of pro-poor growth”
Mitigating risks in Uganda
Never too little
01/2006
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Never too little
Microinsurance offers poor people protection from risks, such as destitution caused by illness. Despite widespread doubt among experts, the insurance industry can serve poor people – even if they have irregular incomes. There are specific challenges, of course, but case studies have shown that they can be overcome.
[ By Dirk Reinhard ]
According to the United Nations’ capital development fund, up to 80% of the 5.1 billion people living in developing countries earn their income in the informal sector, and most of them have to make do with less than two dollars per day. Fewer than ten million of them enjoy basic insurance, which, for instance, covers illnesses. Indeed, the poor spend an inordinate share of their income on emergency expenses such as health care. This is particularly so in developing countries. According to the World Health Organisation, health care expenses make up more than 40% percent of the disposable incomes of 44 million families (with a total of at least 150 million persons) worldwide per year. There is obviously an enormous need for insurance, but this need is not being met.
The Consultative Group to Assist the Poor, an international umbrella organisation of aid agencies, started a task force on microinsurance in 2002. Its chairman, Craig Churchill of the ILO, believes that the number of people covered by microinsurance has doubled every year since 1995 – starting, however, at a very low level. Today, schemes in Bangladesh, Uganda and India offer insurance coverage to more than a million people. Clearly, people in developing countries are very interested in the services that those in the industrialised world take for granted.
Case studies show that there are four institutional ways of setting up microinsurance systems.
– The partner/agent model: An established insurance firm works with a local organisation (such as a microfinance organisation) that already has grassroots contacts. The insurance firm covers the risks, calculates the premiums, sets aside the necessary provisions and makes sure that relevant laws are upheld. The partner organisation contacts the customers. It may also expand the range of services it offers in this manner and improve the risk situation of borrowers. The US-based AIG Group has been applying this model for eight years in Uganda, where it now serves 1.6 million customers via 26 different microfinancing institutions. In India, AIG has worked with the Tata Group to sell 35,000 life insurance policies in four years – a figure it wants to increase by 300% in 2006. The partner/agent model is considered particularly promising in the initial phases.
– The cooperative model: In many countries, savings and credit cooperatives already offer reliable insurance policies to cover microloans in case of death. These products complement loans and savings products. A number of cooperatives, church-based organisations and professions unions offer their members a broad range of microinsurance products via cooperative insurance firms. One example is Colombia’s La Equidad, which was founded more than 35 years ago as a service provider for a number of small cooperatives. A total of 28,000 people are insured by this provider. As the cooperatives have holdings in La Equidad, they also reap part of the profit.
– The community model: In many sub-Saharan countries, up to 90% of the working population is not employed in the formal sector. Aside from relatives and neighbours, they do not even have a modicum of social security. Here, people have managed to set up community insurance systems. The “community-based” approach is not for profit, membership is generally voluntary. However, the lack of knowledge about insurance and financing generally means that this model requires expert support. Usually, an associated agency provides such assistance – not only in the form of technical advice but also in the sense of negotiating terms and conditions with service providers (such as health centres, clinics and hospitals), which treat the insured persons in case of need. One example is the women’s organisation AssFF in Benin. In the capital city of Cotonou and the surrounding area, AssFF now provides coverage to some 2,500 people via various microfinancing organisations. Policyholders who fall ill must cover 30 percent of their costs themselves.
– Direct sales: Established insurance firms may also, of course, offer their products directly via local brokers.
Case studies have also shown that a number of issues deserve special attention:
– Specific local needs have to be understood and taken into account. At the same time, potential clients often do not display much understanding of the need for insurance policies.
– If an insurance policy cannot be explained in a few sentences, it will probably not sell. Policies should therefore cover a limited number of clearly defined risks to keep things “sweet and simple”.
– Insurance products need to be attuned to the often irregular payment practices of clients as well as to specific risk situations.
– Trust is crucial. If the insurance brokers themselves are not covered by such policies, customers will be hard to convince.
Tackling these issues has always been essential for the insurance industry anywhere. However, illiteracy and a lack of familiarity with industry policies are particularly challenging in the case of microinsurances. Creative solutions are called for. In the case of Tata-AIG, it has proven helpful to use a short “Bollywood”-type film, which explains the rationale behind insurance policies by telling the story of a girl who loses her father. Because the family has a life insurance, the girl can finish school and become a teacher.
Microinsurance policies provide coverage to people with low and irregular incomes, as the Munich Re Foundation and other optimistic experts agree. Demand is great, especially for health insurance.
Microinsurance is still a fledgling industry. Everyone involved must do what they can to overcome current obstacles and allow millions of people to find their own ways out of poverty. Success will require the participation of the private sector. The Munich Re Foundation is doing its part by providing a platform for the exchange of knowledge and experience.
Dirk Reinhard
is Vice-Chairman of the Munich Re Foundation. This essay is based on the discussions at the international conference “Making insurance work for the poor – current practices and lessons learnt”. It was organised by the Foundation in Bavaria in October in cooperation with the CGAP Task Force on Microinsurance. Munich Re is the world’s largest reinsurance company. To celebrate its 125th anniversary last year, it founded this not-for-profit foundation.
dreinhard@munichre-foundation.org
Links:
Conference “Making insurance work for the poor”:
http://www.munichre-foundation.org/StiftungsWebsite/TopicsAndProjects/
Poverty/WorkshopMicroinsurance
CGAP Working Group on Microinsurance:
http://www.microfinancegateway.org/section/resourcecenters/microinsurance/
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