«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
The difference between microinsurance and conventional insurance policyholders is that the former are poorer, have fewer financial reserves and have incomes that fluctuate considerably throughout the year. The poor are more vulnerable to such shocks because they have fewer resources not only to meet the immediate costs of the shock, but also the secondary expenses incurred in getting back on their feet (Box 3). Once their reserves are depleted, low-income households are forced into increasingly reactive modes of behaviour. They respond to each crisis with increasingly stressful coping mechanisms (Figure 3). The challenge for microinsurance is to turn reactive risk-management practices into proactive ones.
Shocks that are minor for the non-poor can be devastating for those below the poverty line. In Viet Nam, the poor and rich can experience the same illnesses. However, compared to the wealthy, the poor tend to get sick more often, and therefore the costs are higher both in absolute terms and relative to household income. They also face difficult trade-offs: high health costs can also leave people with no money to send their children to school.
Source: Adapted from Tran and Yun, 2004.
1.2 Prioritizing risks While across countries and in different markets within countries people prioritize risk differently, low-income households consistently identify the loss of a household income earner or sickness of a family member as their greatest concerns (Table 2). Disability is also important but often subsumed under health. These shocks include both those that can be anticipated and those that cannot. Fortunately, many of the prevalent risks lend themselves to protection through insurance.
Table 2 Priority risks in selected countries
While the dominance of illness is not surprising, it is easy to lose sight of its double impact in terms of the loss of income and added expenses. For families with sick children, small expenses can quickly mount up and have huge financial impact. Accidents, as well as chronic illness such as malaria and HIV/AIDS, require extremely large sums. These overwhelming financial pressures frequently fall on women, many of whom assume primary responsibility for the welfare of their families.
2 The importance of understanding the demand for microinsurance Initial forays by insurance companies into the low-income insurance market have focused on downscaling existing formal insurance products. In the absence of market research, microinsurance providers have given limited attention to the match between products and consumer preferences. The result has been the supply of products that are not always well suited to the market. With this have come low persistence and renewal rates.
Improved understanding of demand enhances the design of appropriate products and identifies the steps that should be taken to ensure the adoption of these products by the poor. Market research improves the uptake of these unfamiliar services by determining what types of insurance low-income groups need, what types they can afford and what products it is feasible to deliver.
The range of topics for microinsurance demand research can be broad, depending on the intended use of the findings and the time and resources available. Research can be carried out at three levels, each dealing with a particular aspect of market demand: 1) understanding client needs, including their current risk-management behaviour, 2) product-specific research and 3) an analysis of the overall potential market.
The first level focuses on understanding client needs and what risks it makes sense to insure for different groups among the poor. It involves
– key risks facing poor people, – the impact of these risks, – existing coping mechanisms, – the effectiveness of the coping mechanisms, – the role microinsurance (or other financial services) can play.
This level of research emphasizes current risk-management behaviour. Information on current practices and financial strategies households use to prepare for and respond to shocks helps to identify the vulnerabilities of the target market. A focus on existing coping mechanisms, and specifically groupbased informal insurance mechanisms that involve risk pooling, can help to identify positive attributes of informal insurance systems that could be incorporated into the design of more formal microinsurance products. Understanding coping strategies can help to separate out risks that might be better addressed through savings and emergency loans. This type of research translates core needs into actual products by generating information that can be useful in identifying appropriate product attributes, such as the type and 30 Principles and practices amount of coverage, exclusions, delivery models, premium amounts, premium payment options, premium collection procedures and claims procedures.
The second level, product-specific research, can be carried out in conjunction with the development and testing of a product prototype and/or the actual delivery of an insurance product. Demand research on existing products, best undertaken after a product has been on the market for a while, addresses issues of customer satisfaction and loyalty. The focus is on people’s adoption of the product, generating information that can be used in the design, delivery and affordability of new products or the refinement of existing ones. Emphasis is placed on the extent to which products match the needs, preferences and income capacity of low-income people (Sebstad et al., 2006).
The third level of research addresses the size of the potential market for a particular microinsurance product.2 It estimates the number of potential policyholders in a particular geographic setting with potential demand and the capacity to pay. Of key importance is segmenting the market by particular types of insurance and estimating the incidence of the risk event for a particular population in a defined geographic location and within a specified time period. This information relates to the financial feasibility of an insurance product, the number of subscribers required for the product to be profitable, and pricing as well as other dimensions of a product within a market.3 This level can also address current use and knowledge of insurance, attitudes towards insurance concepts and the insurance sector. Research on these issues helps to determine the potential market over the short and medium term. It also identifies those segments of the market that have specific usage and attitude problems with respect to microinsurance. This information can be used to formulate strategies to attract potential policyholders.
3 Current coping strategies: Strengths and weaknesses In coping with shocks and stress events, precautionary measures are desirable but not always possible, especially for low-income households. Options
for protecting against risks ahead of time may include:
– diversifying income sources, – building assets by saving money, stocking food and investing in housing and healthcare, – strengthening social networks,
– participating in reciprocal borrowing and lending systems, welfare associations and other informal group-based insurance systems, – enrolling in formal insurance or pension schemes or other formal social security systems, – managing money well by controlling consumption and maintaining access to multiple sources of credit.
All of these options are widely used; however, when cash flow is limited, poor households often manage shocks and stress events ex post (see Box 4).
People in Malawi are very much aware that improving the health of individuals and animals is the best precaution against disease. However, in this very poor country, the lack of both health and veterinary services and access to appropriate financial services is an obstacle. In addition, Malawians find that the lack of transport and poor communications also restrict their capacity to cope with risk.
Source: Adapted from Enarsson and Wirén, 2005.
The options for coping with losses ex post are both extensive and creative.
Some long-standing, informal and self-insurance risk-management tools have been adapted over the years to respond to new diseases such as HIV/AIDS, new pressures such as the privatization of the health system and changes in the financial services market. Aspects of each can work for low-income households, although the levels of coverage and effectiveness will vary depending on the option. Few low-income households limit themselves to one risk-management instrument. They mix and match various options depending on the risk, the loss and their cash flow (see Box 5).
Coping strategies in Viet NamBox 5
In Viet Nam, loans are often used for healthcare. Sales of pigs, important assets, are often used to pay expenses such as school fees. Cash savings can be important, but they are limited. Cash kept at home is risky because of the continual pressure on its use. Next in importance is saving in a group, like a rotating savings and credit association (ROSCA), even though this is seen primarily as a precautionary mechanism.
Source: Adapted from Mekong Economics, 2003.
32 Principles and practices As illustrated in Table 3, both ex ante strategies (precautionary) and ex post strategies (managing a loss) for dealing with risk generally involve a mix of intra-household measures (self-insurance) and inter-household, groupbased measures (informal and formal insurance). The types and mix of strategies an individual or household uses at any given time will reflect its level of vulnerability. The pros and cons of these risk-management instruments are discussed below.
Table 3 Coping strategy by risk
ings are reluctant to draw on them as they strive to preserve these hardearned assets for earmarked purposes, such as investing in a business or building a house (Sebstad and Cohen, 2001). A study in Tanzania found that many people with significant savings prefer to borrow rather than draw on these savings when faced with an unexpected demand (Millinga, 2002). In Bolivia, many of the urban poor borrow as an instant response to a crisis.
(Velasco and del Granado, 2004). By contrast, in South Africa, savings play a key role in risk management (Bester et al., 2004).
In general, credit is ill suited for larger losses, such as expensive healthcare shocks and catastrophic events that affect large numbers of people at the same time. Protection against these losses requires other forms of social protection, disaster assistance or public support (Churchill, 2005; Siegel et al., 2001). One area where credit has proved effective in managing risk is through emergency loans, such as those introduced by CIDR in Mali. A highly popular financial product in rural areas, the funds are tapped to overcome a common hurdle in accessing healthcare, i.e. the need to pay for transport to a medical centre. Ensuring access to multiple sources of microcredit in an emergency is another risk-management strategy, but there are limitations.
Clients in the middle of repaying one loan may not be allowed to borrow extra funds from the same source. They are also at risk of assuming more debt than they can handle (see Box 6).
Risk management and over-indebtedness in GeorgiaBox 6
Research from Georgia shows that the most common risk-management strategies involve excessive borrowing and the liquidation of household assets. Over the long run, increasing over-indebtedness and a shrinking household asset base increases a household’s vulnerability to poverty. This is a particular phenomenon in transition countries where the new poor, slow to develop their own coping strategies, still expect inefficient governments to help them.
Source: Adapted from Matul, 2004.
to great lengths to maintain their access to microcredit, if only to be assured access to a lump sum in future times of need (Sebstad and Cohen, 2001).