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«Protecting the poor A microinsurance compendium Edited by Craig Churchill Protecting the poor A microinsurance compendium Protecting the poor A ...»

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Another limitation is that microinsurance policies for many microcredit providers are linked to their loans and therefore available only to their clients. If microinsurance is to be open to all low-income households, it is essential for credit and insurance to be de-linked and for the payment of the premium to be separate from the disbursement of loans.

4.3 Timeliness By definition, low-income households are vulnerable to shocks because they lack cash reserves to cover immediate expenses. Consequently, the timeliness of claim payments is crucial for product adoption. People in eastern and southern Africa prefer welfare associations because they require little or no paperwork to verify a death, and payouts can be immediately available. In contrast, claim payments by insurance companies can take months.

4.4 Pricing and affordability Evidence shows that demand for microinsurance is high and there is a willingness to pay. In some countries, people are particularly interested in insurance that is coupled with asset building. In Indonesia, for example, the first priority is an insured savings product for education, with payouts made as needed to cover selected school fees (McCord et al., 2005b).

With microinsurance consumers increasingly discerning and heterogeneous, there is a need for premium payments to be structured in ways that make sense to the policyholders. As discussed in Chapter 3.3, insurance providers would do well to match the premium payments to the cash flow of low-income households. In this respect, informal mechanisms have proven more responsive to client needs than many current microinsurance providers. For example, in Albania, Opportunity International found that an existing insurance product failed not because the terms and pricing were unacceptable, but because the premium had to be paid in advance. The up-front payment requirements were not in line with the potential policyholders’ cash flow (Leftley, 2002).

The demand for microinsurance 41 So what is the capacity to pay? This is difficult to determine. As Matul and Tounitsky (2006) have noted, this is not only a function of income levels but also very subjective. The level of financial literacy strongly influences what people think they can afford; client education on the insurance product influences what people think they are getting for the price.

There is mounting evidence that some policyholders are very sensitive to the value of the costs and benefits of a microinsurance policy. Across three countries in West Africa, CIDR found that the contribution of household income to health insurance is consistently between 1.5 and 2.5 per cent of household income. When the premium price is raised above 2 per cent, households adjust by reducing the number of household members covered by insurance, rather than increasing their premium payments (Galland, 2005a). In Ukraine, market research showed that a decrease in the premium by 30 per cent was met by a 10 per cent increase in policyholders (Matul, 2006). Indeed, market research is critical to better understand ability and willingness to pay (see Box 9).

Understanding the demand for microinsurance in Sri LankaBox 9

Yasiru policyholders in Sri Lanka found that the benefit payments were not proportionate to premiums that they were paying and that the insurance policy did not clearly define the number of family members covered. An assessment of client preferences led to policy adjustments to ensure that premiums better matched benefits and the relationship between premiums and the number of family members covered was clearer.

Source: Adapted from Fokoma, 2004.

Poverty limits the number of financial obligations a person can take on.

Experience from an MFI-linked insurance scheme in Nepal suggests that many poor households find the burden of an insurance premium on top of a loan repayment to be a strain. Policyholders who already had health insurance were unwilling to pay a second premium for voluntary life insurance (CMF, 2005). However, the mandatory nature of many insurance products makes it difficult to predict the demand (and willingness to pay) among poor households for voluntary insurance at different premium levels.

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seen as the province of the rich. Indeed, confidence in the insurance industry is often low and negative perceptions abound. There is a reluctance to pay in advance for services one may not receive, especially an intangible service that one may not even understand. For those who have had experience with insurance or have heard about the experiences of others, the limited scope of coverage and the long delays in settling claims exacerbate the negative perception. In some cultures, it is not always socially acceptable to bet on negative events: any focus on illness and death is seen as wishing for bad luck.

If microinsurance is to succeed, there is a vital need for strategic investments in consumer education to change these perceptions. The knowledge and attitudes of low-income households and insurance agents need to be improved. While some organizations selling microinsurance give potential policyholders information describing the premium, benefits and claims procedures, this has limited value if the policyholders – and often the insurance agents – lack a basic understanding of insurance and risk management. As illustrated in Box 10, many poor persons are interested in learning more about insurance.





The success of microinsurance adoption is not simply a function of making certain that products are appropriate and affordable, but is also dependent on a level of financial literacy that enables consumers to assess what they are getting when they pay a premium. Changing the consumer’s knowledge, skills and attitudes toward insurance, and creating an insurance culture, are important in facilitating the adoption of this formal financial service.

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1. Malawi While the MUSCCO members were aware of insurance, they did not necessarily know what an insurance policy was. They wanted more information about insurance, including its costs and benefits (Enarsson and Wirén, 2005).

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4.6 One size does not fit all Demand research shows that generalizing across countries and regions is risky when considering the attributes of risk-managing financial services.

One size does not fit all. For example, in Nepal and Indonesia there is limited demand for life and funeral insurance as funeral expenses are kept at a level that the family can afford (Simkhada et al., 2000; McCord et al., 2005b). By contrast, life and funeral insurance are very much in demand in Uganda and South Africa. In both countries, there are high levels of expenditure on the rites associated with funerals; meanwhile traditional systems of community support have been under a lot of stress, especially in regions affected by HIV/AIDS (Sebageni, 2003; Bester et al., 2004).

Demand studies also reveal different insurance priorities for different market segments. The one-size-fits-all approach that characterizes the design of many life insurance products does not typically consider differences in gender, location or life-cycle position of the policyholder. For example, for poor middle-aged women, life cover for their spouses is likely to have a higher priority than cover for their own lives.6 SEWA Bank clients in India made this point and were successful in securing life insurance policies for their husbands even though the bank manager assumed they would find it unaffordable. As alternative delivery channels are used to reach the working poor, such as those described in Chapters 4.5 and 4.5, other market segments will be reached, bringing a demand for different products or product features.

The experience of low-income households illustrates the importance of complementary activities across different market segments, not only to mitigate losses resulting from insurable risks (e.g. loss of life), but also to help build and protect assets – thereby strengthening the longer-term capacity of households to manage risks. Stress events such as weddings, payment of school fees and housing expenses often exert great financial pressure, especially for women. Insured savings or endowments offer potential solutions.

These endowment products, offered by insurance companies in Indonesia, Bangladesh and Ghana, for example, have proved popular among the poor (though less so in Sri Lanka). They build assets while protecting people against potential losses. However, they are not without the risks associated with long-term macroeconomic and corporate stability, and may not be the most cost-effective way for the poor to manage risks (see Chapter 2.2).

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5 Conclusion The growing number of demand studies is beginning to provide a credible base of information which can be used to estimate market demand and help design appropriate products in selected countries. This is enabling service providers to move away from simply downsizing existing insurance products originally aimed at the middle class to developing products and services that work for the “bottom of the pyramid”.

The market for microinsurance is large. All stakeholders, insurance companies, their agents and policyholders have much to gain from this market being served well. However, getting everyone working together will take time. In the absence of a strong insurance culture among low-income households, client demand in many places is still evolving. Where insurance has worked well for low-income households – where the coverage is appropriate, accessible, affordable and well understood – it has been met with considerable and growing success. It reduces risk and vulnerability in the lives of poor people, allowing them to move from reactive to proactive behaviour and thus plan for the future. With more financial control, poor people have more options. Research on client demand can continue to play a key role in the development of successful microinsurance products.

1.3 The social protection perspective on microinsurance Christian Jacquier, Gabriele Ramm, Philippe Marcadent and Valérie Schmitt-Diabate1 The authors appreciate the comments provided by Bruno Galland (CIDR) and Rüdiger Krech (GTZ).

1 Introduction

Access to social security is a fundamental human right. Moreover, social security and social protection are increasingly recognized in the global debate as indispensable components of poverty reduction, sustainable economic development, fair globalization and decent work. In this respect, the World Commission on the Social Dimension of Globalization stresses that a minimum amount of social protection must be accepted as being an integral part of the socio-economic base of the global economy. Social protection is also a key tool for the attainment of the Millenium Development Goals (MDGs).

Therefore, social protection is much more than a risk-management instrument for individuals. It is a comprehensive, collective tool to reduce poverty, inequality and vulnerability. It promotes equity and solidarity through redistribution. And it provides fair access to healthcare, income security and basic social services. However, more than half of the world’s population does not benefit from any form of social protection.

Facing exclusion from social protection, local communities are taking initiatives to organize microinsurance schemes. Microinsurance is delivered through a diversity of organizations covering various risks or contingencies including health, maternity, life and disability. Some schemes are not just risk-management instruments, but have the potential to contribute to the extension of social protection to excluded groups. Furthermore, these schemes can improve the governance of social protection providers (e.g.

healthcare) and raise supplementary resources that enhance social protection as a whole. This is particularly necessary where the state has limited financial and institutional capacity.

–  –  –

Microinsurance schemes can be components of social protection systems,

as illustrated in Figure 4, although this has several implications:

– Microinsurance schemes may assume some social protection functions, such as redistribution through internal cross-subsidies or by channelling public subsidies to their members.



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