How inclusive insurance can help beat poverty
Poverty remains a significant global challenge
Author: Katharine Pulvermacher, Executive Director of the Micro Insurance Network
Since the turn of the century, the concerted effort to reduce poverty around the world has generally seen significant success, although as of 2015, 3.4 billion people – 46% – were still living on less than $5.50 a day.1 There is little room for complacency. In Latin America and the Caribbean, for example, the percentage of the population living in poverty has actually increased since 2015.2
Households that emerge from deep poverty are fragile
When a household succeeds in emerging from deep poverty, relatively ordinary events – that ordinary middle-class families in wealthier countries could take in their stride thanks to access to credit, savings, effective social security and more affluent social networks – can be enough to destroy this fragile success. Things as simple as a family member falling ill can and often do engender difficult choices: to pay for medical care or to pay for school fees, or supplies to be sold in a market.
Insurance can help prevent them falling back into poverty
People living in rural areas – who rely on farming to survive – are still more likely to be poor, and poorer, than their urban counterparts. Because of this, natural disasters and adverse weather conditions can see crop yields fall dramatically or even see harvests completely destroyed.
Solutions based on insurance principles offer an obvious way to mitigate such situations.
Microinsurance focuses on solving these problems
Such solutions, which aim to meet the needs of low-income households, have commonly been referred to as microinsurance. They are typically simple insurance products with relatively low premiums that may be collected at higher frequency than traditional insurance products. In some countries, microinsurance is governed by specific regulatory frameworks that take into account – more or less successfully – the special purpose and special needs of products and services targeting low income people.
The effectiveness of some microinsurance products leaves room for improvement
In practice, microinsurance evolved as the microfinance sector expanded and became more sophisticated, and credit-life insurance still represents the largest share of the market. Often, this type of insurance is required as a condition of granting a loan (microcredit). And in many cases, the client may not even be aware that she or he has the insurance, which may only cover the amount of the loan that is outstanding at the time a claim is made.
Best practice products serve to protect lenders against non-performing loan risk, while offering additional protection to borrowers, e.g. insuring more than just the amount of the loan that is outstanding. Crop insurance may include technical assistance to reduce the risk of low yields. Micro-health insurance may include hospital cash benefits and access to a medical helpline.
Insurance for emerging consumers can be challenging for service providers
Emerging consumers present some particular challenges to insurers and distribution channels seeking to provide them with services:
- Hard – and therefore costly – to reach (many live in rural areas for example, or in urban areas that may be less accessible)
- Margins may be thin – reaching scale can be difficult
- Lack of data on risk may result in inaccurate pricing, with products that are too expensive or under-priced
- Lack of data on low-income consumers may result in unsuitable products that do not resonate, with low take-up
- Existing (traditional) business models may not be “fit for purpose”
The Microinsurance Network exists to limit and remove these constraints
The Microinsurance Network is a not-for-profit organisation that brings together a community of experts from around the world in order to share and develop knowledge around best practice. We believe that access to insurance is essential to sustainable development and that the world’s poor will not achieve lasting prosperity without it. Existing access is insufficient and approaches based on insurance principles are the best way to provide access to risk management tools. The collective action by Network members provides the critical knowledge to the organisations that drive improvement to yield lasting prosperity for the billions of people and small businesses who need it.
A track record of concrete action
The Microinsurance Network has a track record of more than fifteen years, pre-dating its launch as an independent organisation in 2012. In collaboration with highly respected partners such as ILO’s Impact Insurance Facility, the Access to Insurance Initiative (A2ii), the International Association of Insurance Supervisors, global, regional and national insurance companies, universities, think tanks, development agencies, policymakers and cutting-edge start-ups, we organise knowledge-sharing events around the world and produce key reports and data to support the development and use of effective insurance services designed to mitigate the risks faced by low-income households. In addition to 30 individual members, we represent more than 70 institutions working in more than 50 countries: a total of 375 experts.
1 World Development Indicators, Poverty headcount ratio at $5.50 a day (2011 PPP) (% of population)
2 Economic Commission for Latin America and the Caribbean (ECLAC) reported that 30% of households in Latin America, representing around 186 million people, were living in poverty, up from around 25% in 2015. See https://www.cepal.org/en/pressreleases/poverty-increased-2016-latin-america-and-reached-307-population-percentage-seen
This article has been previously published on the website of Micro Insurance Network. You can find it here.