By Moin Qazi
People in the low-income groups live on the edge, in constant fear of a catastrophe or tragedy. They live in a risky environment, vulnerable to numerous uncertainties and economic shocks such as loss of jobs, loss of property due to theft or fire, crop failure, the death of a breadwinner, and unexpected catastrophes. This makes a case for a high demand for insurance products like health and life, agricultural, and property insurance, even catastrophe covers.
The poor need insurance more than wealthier people because they have no cushion and are more vulnerable to many of the risks. At the same time, the state’s help for the poor has shrunk. More and more low-income families are only one financial setback—a theft, natural disaster or an unexpected medication cost—away from poverty and its painful fallout.
The micro-insurance revolution
In the developed world, insurance is a part of life. However, its coverage has been patchy and woefully inadequate in the developing world. More than 80 percent of India’s poor are not covered in any way. However, what was a luxury that enabled the poor to secure their gains and plan for the future with confidence has now become a reality on account of several innovative models developed by institutions. The entire micro-insurance segment is growing and is now worth about 15 percent of the worldwide insurance industry. India is now a primary site of a rapidly growing micro-insurance revolution.
Micro-insurance, by definition, envisages the protection of low-income people against debt traps that often imperil their livelihood and even their lives. This is mostly an outgrowth of micro-finance, with the micro-finance institutions (MFIs) being the leading providers of micro-insurance. Ordinary life risks could completely wipe out a family’s entire savings. Poverty and vulnerability reinforce each other in a downward spiral. Often, the trigger for poverty is an illness. Illnesses are a severe risk and can eat away most of the hard-earned savings in low-income communities. The net result is bankruptcy. The poor prefer health insurance to life insurance. As they say, “we die once but go to the doctor many times each year”. According to the Union health ministry, 25 percent of the people admitted to hospital were driven to penury by hospital costs, added to the cost of missed work. By managing risks and avoiding debt, those who have micro-insurance policies are in a position to protect the wealth they accumulate, generate more income, and even get a fair chance to rescue themselves and their families out of the mire of poverty.
Use of digital technology to further the reach
The cost of insuring against an unforeseen development is considerably lower than self-insuring through savings and is small relative to a household budget. Governments, donors, and other development actors engaged in combating poverty and designing social protection measures need to have insurance as one of the weapons in their arsenal. The key challenge for micro-insurance is the high costs of administering the same. The poor live off the banking grid. Families are scattered across the countryside, making physical access difficult, and the transaction costs of issuing millions of small policies through service agents are too high.
The rapid advances in digital payment systems are creating opportunities to connect poor households to affordable and reliable financial tools through mobile phones and other digital interfaces. Microinsurance can piggyback on the exploding reach of cellphone banking and the infrastructure created by microcredit institutions. Insurance coverage can be widened by coupling services with existing mobile financial products or creating new mobile solutions that bring insurance services straight to a consumer’s phone.
Micro-insurance is a developed segment in both India and the Philippines, with proper policies and regulations in place. India accounts for 65 percent of Asia’s micro-insurance market, according to the Munich Re and GIZ report, with some 37 million needy families availing of the benefits provided by the Rashtriya Swasthya Bima Yojana or the national health insurance initiative, the flagship programme of the Indian government for health insurance.
Understanding micro-insurance products
Micro-insurance is a crucial strategy on a continuum of risk management options. Increasing the access of poor households to insurance can prevent them from having to rely on publicly funded support from, for example, a safety net programme to cope with economic and environmental shocks. It also helps them to adopt alternative, more productive livelihoods (for example, cultivating higher-yield crops insured against the risk of drought) that can help to lift them out of poverty.
There are three major types of micro-insurance products.
Life insurance: It is the most common form of micro-insurance, facilitated by the extension of the micro-finance model into the area of coverage. However, the life insurance provided by MFIs is mainly a way of insuring loans (“credit life insurance”) rather than providing income support in the case of the policyholder’s death.
Agricultural insurance: This mainly consists of crop insurance that covers farmers against multiple shocks and pays out against losses that the insurer assesses by observing harvest yields. Index-based insurance pays out fixed sums to farmers when an independently observed trigger (often rainfall levels, crop yields or livestock mortality rates) shows that an insured event has occurred.
Health insurance: Many countries are developing public, private, and community-based health insurance programs to pool the risks associated with health shocks. The coverage of these programmes remains quite low, particularly among the poor, but there is some growth in community health insurance for low-income populations.
The need to assess and provide guidance
For the poor to reap the real benefits of micro-insurance, the insurance companies need to function with a sense of responsibility. Because of the lack of proper awareness and failure of institutions to properly guide them, people buy insurance policies without adequate planning and give up midway because they don’t have money to pay the premium. Aggressively pushing out products without adequately assessing the consistency in income streams of the buyers for servicing their policies can mean more harm to the poor. The customers end up losing heavily as penalties are very harsh. Uninformed clients and unscrupulous providers can make for a terrible combination. The most important determinants for a financial product to seek enrolment of the poor is how far the providers engender trust. The greatest challenge for micro-insurance schemes is to strike the right balance between adequate protection and affordability to deliver real value to the insured.
Micro-insurance is certainly a way to end the cycle of poverty by providing a robust safety net that families need. If the poor know that they are covered, they are more likely to plan their future better, invest in expanding businesses, diversify crops, or send their children to school, without fear of losing their savings if something were to happen. The whole capacity to take risks changes.
Thus from just being a safety net, micro-insurance provides benefits that earlier generations could never imagine: hope for the future.
Featured Image Source: International Livestock Research Institute on Visual Hunt / CC BY-NC-SA
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