«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»
Depletion of assets is a last resort. With it goes the loss of the household’s productive base and capacity to generate future income. When productive assets are sold, resuming productive activities is much more difficult and stressful. As observed in Albania, crises often require selling productive assets and inventory at great discounts to pay expenses and debt. The household is then doubly punished when it seeks the money to repurchase the assets. Repeated shocks combined with depleted reserves to reduce the household’s ability to resume productive activities, recover and cope with future risks (Szubert, 2004).
People also self-insure through other precautionary measures. In East Africa, shopkeepers invest in burglar bars on windows and night watchmen;
alternatively, they sleep in their shops or simply take their inventory home with them (Cohen and Sebstad, 2005).
3.2 Informal group-based mechanisms Low-income households in many countries use diverse types of welfare associations for sharing risk (Table 4). Their underlying basis is reciprocal exchange in times of need. Ethnically or geographically based welfare associations help their members manage cash flow or pool risk. Many are governed by well-defined charters and require payment of dues in return for the right to access group resources, in cash or in kind, for a specified need.
Table 4 Examples of informal group-based insurance systems
When a death occurs, welfare associations are particularly adept at responding quickly. A major weakness can be the limited coverage provided
by a single burial society; also a series of shocks can deplete its reserves. As a result, households often belong to multiple associations and incur the high transaction costs that accompany each membership (see Box 7).
Membership in multiple burial societies Box 7 In South Africa, people willingly hold numerous policies, because each may be insufficient or provide different funeral coverage. Membership of numerous welfare associations is also common. The first is intended to cover the funeral costs, the second to provide food for the children and the third one is for the secondary impacts, to keep food on the table, keep the children in school and help the household recover.
Source: Adapted from Bester et al., 2004.
Households sometimes fall out of informal group-based funeral societies in their communities because they are socially excluded or too poor to participate. In the absence of this support, life insurance is often a more important need than among those who are not socially or economically excluded.
Informal group-based mechanisms also include ROSCAs and accumulating savings and credit associations (ASCAs), which are used as a way to save.
Depending on the size of the cash contribution, they can be useful when a relatively large amount of cash is needed. However, these mechanisms may not be sufficiently flexible to provide the funds when they are most needed, since members often need to wait their turn. In Indonesia, members faced with an emergency can apply to take their turn early, but receive only a discounted amount (McCord et al., 2005b). In situations where the ROSCA mechanism is not sufficiently responsive to emergencies, however, membership of such a group often creates social capital on which the members can draw in times of need.
Madison Insurance in Zambia has developed a funeral insurance product that is distributed through MFIs. Since funerals in Zambia can cost between US$300 and US$500 (the GDP per capita is US$900), this was a welcome addition to the financial services offered to the poor. In the words of one client: “Thandizo (the insurance product) is one of the best services I have received from Pulse (one of Madison’s MFI agents). For the insured members of my house, I am assured I will not have to struggle to meet funeral costs, and my business income is spared.” Source: Adapted from Manje, 2005.
In some parts of Africa and elsewhere, women are especially vulnerable following the death of a husband when they lose their property to other relatives (in the absence of property rights or knowledge of ways to exercise their property rights). For many women, their priority is life insurance for their husbands. In the event of their own death, women fear that their husbands may use an insurance payout intended for the children’s education to invest in a new wife. Increasingly, women prepare for their own death by designating their friends as beneficiaries and instructing them to use the money for the children’s school fees and other necessities (Cohen and Sebstad, 2005).
Health insurance is in high demand, but difficult to deliver (see Chapter 2.1). Households want comprehensive coverage, but often lack both the capacity to pay and access to quality services. As rural Nepalis noted, “in the absence of good health services, paying for health insurance is simply a waste” (Simkhada, et al., 2000). Furthermore, as discussed in Chapter 1.3, the role of the state in the provision of health insurance cannot be ignored. It will continue to be important in determining the likely role of health insurance in many countries.
Despite its potential, the effective demand for microinsurance is still unclear. Many microinsurance products are bundled with loans, and the
premium is included as a fee paid at the time of loan disbursement. This has two effects: 1) people are often unaware of how much they are paying and what they are actually paying for and 2) when clients stop borrowing, they generally lose their insurance coverage.
3.4 Social protection For many of the working poor, government health services could be an option to cover health and disability risks. However, many poor households prefer private services to low-quality public healthcare. Indeed, with lowincome households bearing as much as 80 per cent of their health costs in some countries, many poor people see an obvious opportunity for microinsurance (McCord, 2005).
In transition countries, the decline of universal social protection has left a different gap and opportunity for microinsurance. Despite the declining role of the state in the provision of healthcare, people’s behaviour has lagged behind. Few households budget for their health expenses (Matul, 2006).
Governments have a role in allocating funds to protect the destitute and those with no ability to generate sufficient funds for risk management. Private insurance will never be an option for this market.
4 Opportunities for microinsurance In deciding where microinsurance can most effectively fit into the mix of risk-management strategies, it is first necessary to determine which risks best lend themselves to insurance. The ICMIF test for an insurable risk suggests one approach (Table 5).
The next question is where microinsurance can add value for the client.
The above review suggests that managing risk is currently an ex post rather than an ex ante activity for low-income households. Self-insurance is the most common risk-management option, but its effectiveness is limited because it generally covers only a small portion of the loss. This has a negative effect on income and assets in the short term, and on the capacity to manage future risks in the longer term. People often get by with great difficulty, trying to stay one step ahead of the next crisis. By increasing the portion of the loss covered, insurance could meet a need and reduce the stresses associated with poverty.
38 Principles and practices Table 5 Test for an insurable risk
Analysts of demand data need to be discriminating in interpreting the findings. While poor people experience many risks and their coping mechanisms are imperfect, this does not necessarily translate into demand for insurance. Experience with informal group-based insurance is not always transferable to microinsurance. For example, according to McCord and Buczkowski (2004), even though the members of CARD MBA in the Philippines participate in damayan-type schemes, they have little knowledge of formal insurance concepts and products.
The review of risk-management strategies provides insight into the product attributes that might be integrated into the design and delivery of microinsurance products. This section considers six aspects of insurance demand:
1) coverage, 2) accessibility, 3) timeliness, 4) pricing and affordability, 5) client education and 6) market segmentation.
4.1 Coverage Health coverage is a top priority for low-income households in most countries. The most common insurance products available to the poor include life and funeral insurance. On a smaller scale, there are initiatives concerned with health protection, livestock, crop and property insurance.
While the level of coverage varies for different products, typically no single form of insurance provides full coverage to low-income households.
Many clients would prefer more coverage, but cannot afford it. In South Africa, where funeral insurance is available, the cost of funerals is most often covered by income, savings, borrowing and gifts, in that order. Insurance benefits, in cash and in kind, come fifth and sixth and account for less than 20 per cent of the expenses (Financial Diaries, 2005).
The demand for microinsurance 39 Even with access to insurance, low-income households will continue to cover the costs of shocks from a mix of financial services, i.e. formal, informal and self-insurance. In developing insurance products, it is important to recognize the complementarities among different financial services, as well as different institutional providers of social protection, to see how they might work together to better manage risks.
While disability risk is covered by some policies, insurance usually provides a one-off payment rather than a replacement for loss of income or salary. Thus, only a part of the loss is covered. This creates high stress for the working poor when health risks affect their ability to earn income.
Flexible schemes that offer different levels and types of coverage provide people with more options, but can be more complex to administer and require more client and staff education. Coverage levels and product features, especially policy exclusions, are rarely explained or fully understood by the target market. For example, in Uganda, policyholders’ lack of knowledge about the insurance product was consistent across the MFIs that offer coverage backed by AIG Uganda. Many were not aware of all of the product’s benefits, and they often did not distinguish between family members covered by the policy and the person who is to receive the cash payout if the policyholder dies by accident. They considered all of them as beneficiaries of insurance (McCord et al., 2005a).
4.2 Accessibility Self-insurance is the only option open to everyone. Group-based informal insurance depends on trust and reciprocity, features that also have been important to the success of solidarity group lending. Access is closely associated with being part of a social network. The groups provide the basis for risk pooling and a platform for administering regular contributions and payouts. Membership in a group is an important way that poor people build social capital and access informal insurance. The extent to which existing groups might provide an institutional base for expanding the outreach and access to microinsurance is unknown. Some mutual health schemes have pursued this route (see Chapter 4.3).
The ability to obtain birth and death certificates or identity cards also affects the accessibility of microinsurance. Providing claims documentation can be even more challenging for poor people in remote areas where bureaucratic systems do not function well, or in areas where civil conflict affects the security and mobility of people. Complex payment and claims processes can also affect accessibility. Formal insurance is frequently plagued with claim payout problems. The claims process is often too complex and impersonal 40 Principles and practices for people whose previous experience with risk-management instruments is with their communal welfare associations.
To date, MFIs have played an important role in developing microinsurance and making it accessible to low-income groups. The advantage is their outreach to the poor. One limitation, however, is that not all types of insurance are relevant to the interests of the MFI (in terms of reducing arrears).