«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
What is insurance for the poor? 21 – unemployment and disability benefits, – universal healthcare, – maternity benefits, – old-age pensions, – protection for children and the disabled.
However, more than half the world’s population is excluded from any type of social security protection, including contribution-based schemes and taxfinanced social benefits. In some parts of the world, the situation is particularly severe. In sub-Saharan Africa and South Asia, the coverage of statutory social security is estimated at 5 to 10 per cent of the working population (ILO, 2001).
Developing countries face major challenges in connection with providing comprehensive social protection. The vast majority of persons work in the informal economy, so there are no effective mechanisms to reach them systematically. Since they are self-employed or working in informal businesses, there is no formal employer to make contributions to pension, unemployment or healthcare schemes. Yet, the working poor cannot afford the full cost of social security schemes. At the same time, governments in many developing countries do not have the resources to create sufficient infrastructure (e.g.
healthcare facilities) nor pay for the recurring expenses associated with social protection schemes.
Microinsurance as a social protection mechanism strives to fill the gap to provide some coverage for the excluded – which would be even more effective if it were supplemented by government schemes to facilitate a redistributive effect. In the absence of formal social protection, microinsurance responds to an urgent need while not absolving governments of their responsibilities. Indeed, as described in Chapter 1.3, microinsurance can create delivery mechanisms to extend government programmes (and subsidies) to the informal economy, and in so doing integrates the informal and formal social protection systems.
Consequently, regardless of which face of Janus one uses to view microinsurance, the intention is to reduce the vulnerability of the working poor by enticing the public (social protection) and the private sector (new market),
or both, to do what neither has so far been particularly effective in doing:
providing insurance to the poor. Indeed, since these two faces have the same head, it is reasonable to explore areas of convergence to create alternative models or systems of protecting the poor, such as public-private partnerships, mutuals and cooperatives, and government incentives to correct market failures.
22 Principles and practices 3 What a difference three words make The operational aspects of extending insurance to low-income households are largely the same, whether one is approaching it from a market or socialprotection perspective. The following key characteristics illustrate how insurance for the poor may differ from both conventional insurance and
mainstream social-protection programmes:
Relevant to the risks of low-income households Of course coverage should be linked to the greatest areas of vulnerability for low-income households, but often what is available from insurers or social security administrations does not really address the needs of the poor. Can unemployment insurance really be made relevant for casual day labourers?
Do commercial insurers really know what risks poor men and women are most concerned about, what keeps them awake at night?
As inclusive as possible While insurance companies tend to exclude high-risk persons, microinsurance schemes generally strive to be inclusive. Such an approach makes sense when microinsurance is seen as an extension of government social protection schemes. Indeed, to achieve the social mission of microinsurance, it is necessary to provide protection when vulnerable households need it the most.
However, is inclusion feasible for market-based microinsurance? Since the sums insured are small, the costs of identifying high-risk persons, such as those with pre-existing illnesses, may be higher than the benefits of excluding them in the first place. Plus, if microinsurance schemes can reach the tremendous volumes of customers required to achieve the MDG targets, many exclusions and restrictions can be just administrative nuisances that undermine efficiency rather than important insurance risk control tools.
Affordable premiums At the end of the day, microinsurance schemes have to be affordable for the poor, otherwise they will not enrol in the scheme, nor benefit from the coverage. Various strategies could make microinsurance affordable, including having small benefit packages, spreading premium payments over time to correspond with the household’s cash flow and supplementing premiums with subsidies from governments. From the social protection perspective, the redistribution function, from rich to poor, theoretically helps to make contributions affordable for the poorest. In the market model, insurers may be willing to accept low short-term returns, or even losses, to develop the market.
What is insurance for the poor? 23 Grouping for efficiencies Group insurance is more affordable than individual coverage, but how does one find groups of people in the informal economy? Even though the informal economy is sometimes known as the disorganized sector, there are groupings out there that could be used, such as women’s associations, informal savings groups, cooperatives, small business associations and the like.
Some microinsurers use these groups more effectively than conventional insurers by enlisting the support of the groups in member selection and reducing insurance risks such as over-use and moral hazard.
Clearly defined and simple rules and restrictions A CEO of a major United States insurance company once admitted that even he did not understand his homeowner’s insurance policy. Insurance contracts are generally full of complex conditions, conditional benefits, written in legalese that even lawyers struggle to discern. Although the rationale for the fine print may be consumer protection, if the consumers do not understand what is written, its very object is defeated. Moreover, its content can give the insurance company an excuse not to pay a claim. For a host of reasons, microinsurance has to be kept as simple and straightforward as possible so that everyone has a common understanding of what is and is not covered.
Easily accessible claims documentation requirements The process for accessing benefits, from social security departments or insurance companies, tends to be so arduous that it discourages all but the most persistent claimants. Such obstacles are inappropriate for low-income households that cannot afford to spend days away from work, paying “unofficial fees” to access official documents. While controls have to be in place to avoid fraudulent claims, for microinsurance to be effective, it has to be easy for low-income households to submit legitimate claims.
Strategies to overcome the wariness of customers Lastly, microinsurers must have effective strategies to overcome the apprehension of low-income households as regards insurance. One of the primary ways to achieve that objective is through client education, to raise awareness among prospective policyholders about how insurance works and how it can benefit them. Equally important, however, is upholding promises and fulfilling obligations, and creating a culture of insurance among the poor. For microinsurance to build the confidence of the market, it has to avoid many of the common criticisms of insurance providers, who are seen as quick to take one’s money, but slow to pay it out. Indeed, microinsurance needs to develop 24 Principles and practices systems to pay benefits expeditiously, to minimize or avoid claims rejections and to provide a quality of service that earns the trust of a wary market.
For both the social protection and market perspectives, insurance schemes for the poor have to find a way of balancing three competing objectives: 1) providing coverage to meet the needs of the target population, 2) minimizing operating costs for the insurer and 3) minimizing the price (including the transaction costs for the clients) to enhance affordability and accessibility. These represent difficult choices that are best answered by involving those who ultimately benefit from the coverage to choose between them.
In summary, microinsurance must be designed to help poor people manage risks. With that overarching objective forging a unique mindset, microinsurance clearly emerges as quite distinct from mainstream insurance and social protection schemes. Perhaps when they first emerged, both social and commercial insurance were also founded on the ideal of protecting the poor.
For example, some of today’s large insurance companies began in the 1800s as mutual protection schemes among factory workers. Nevertheless, over the years, efforts to prevent fraud and misuse have created a maze of bureaucratic rules and requirements that undermine their effectiveness and their appropriateness for the poor. In addition, for the market-based approach, efforts to maximize shareholder returns have led them away from their original clientele in search of more profitable customers.
Indeed, 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.
1.2 The demand for microinsurance Monique Cohen and Jennefer Sebstad The authors appreciate the insights and comments of Frank Bakx (Rabobank Foundation), Michal Matul (Micro Finance Center) and Michael McCord (MicroInsurance Centre).
Risk is ever present in the lives of the poor. Faced with shocks, poor people draw on their financial, physical, social and human assets to meet the resulting expenses. In the absence of precautionary or ex ante risk-management instruments, most are forced to rely on a range of options after the fact or ex post. When a crisis occurs, a common coping strategy is to borrow from the moneylender or microfinance institution; others might ask friends and relatives to help. Few have access to formal insurance services.
Poor people struggle endlessly to improve their lives. It is a slow and gradual process marked by tentative advances. Continually bombarded with financial pressures, low-income households find that shocks can easily erode their hard-earned gains. The result is that their trajectory out of poverty follows a zigzag route: advances reflect times of asset building and income growth; declines are the result of shocks and economic stresses that often push expenditure beyond current income (Figure 2). The role of microinsurImpact of shocks on household income and assets Figure 2
ance, like any effective risk-management instrument, is to temper these downturns, which are major impediments to escaping poverty. Confronted with a shock, poor people usually patch together a variety of resources, including formal and informal credit and savings, and seeking out additional work or income-generating opportunities to meet their expenses. Understanding these risk-management strategies is a starting point for thinking about the demand for insurance by the poor. This chapter explores the risks to which low-income people are vulnerable, analyses their primary means of coping with or managing these risks, and provides insights into how insurance could enhance the ability of the poor to deal with risks.
1 Managing risk
1.1 Shocks and stress events Vulnerability is closely associated with poverty and can be described as the ability of individuals and households to deal with risk.1 The demand for microinsurance is directly related to vulnerability; it grows out of the risks and risk-management strategies of low-income households. Research on the impact of risk events and on how poor people cope with shocks helps illuminate the demand for insurance.
Risk comes in many forms, for example illness, death of a loved one, fire or theft. These shocks occur frequently and create pressures on household cash flow that exacerbate the ever-present stress of meeting regular expenses, such as food, rent and school fees. When financial pressures exceed the cashflow capacity of the household, people must seek finance from outside sources. In some circumstances, microinsurance could be an option for filling this gap.