Microinsurance: A safety net for the poor?



© CARE/ Josh Estey



It is becoming widely acknowledged that the provision of financial services to the poor is critical in the fight to alleviate poverty. One such financial service, which has been implemented relatively widely and successfully throughout much of the developing world, is microcredit. However, access to credit alone is not enough to guarantee financial security or stability. After all, microfinance is not just the provision of small loans but the provision of a whole host of financial services and includes microsavings, money transfer and microinsurance as well.

As the recent destruction wreaked on the southern Filipino island of Mindanao reminds us, it is often the poorest groups in our society who are most exposed to risks and without the adequate tools to deal with disaster, the most likely to live perpetually in poverty. One effective tool is microcredit, however as a woman in Zambia explained to Richard Leftley, CEO of MicroEnsure, one tool is not enough: “My life is like this snakes and ladders board (game) … the loans are like ladders, they give me growth. But where are you when disaster strikes?” It is with this in mind that the microfinance community has started to pay a lot of attention to the benefits of microinsurance.

CARE International UK has decades of experience in both microfinance and microinsurance. CARE India, for example, works with Bajaj Allianz to provide comprehensive, affordable insurance policies to over 300,000 people in the state of Tamil Nadu, India. Unlike other microinsurance products sold to poor communities in India, and around the world, Bajaj Allianz – and CARE are offering bespoke, rather than off-the-shelf products, to this vulnerable group of people and the communities themselves are involved in designing the new policies. These policies include a wide variety of cover from death to paying wages during illness.

In addition, CARE has shown that microinsurance does not need to take the shape of formal policies. CARE works with local community groups around the world, helping them organise and finance their own Village Savings and Loans Associations (VSLAs). VSLAs are groups formed by communities that begin by pooling the savings of those involved and ultimately use these savings to make loans to individual members. Last year, CARE helped more than 17 million people improve their household income through village savings and loan associations, access to services and new work related skills. At each meeting, group members pay tiny amounts into an informal social fund, which gets paid out should a member hit hard times – such as covering the costs of funeral and medical bills.

A study conducted on the landscape of microinsurance in the world’s 100 poorest countries discovered that although the world’s poorest were most at risk of financial disruption (whether this is due to illness (including death), property damage (including crop damage/loss) or job loss) they were the least protected against these consequences and that although microinsurance for the world’s poor was growing rapidly, just 1.96% of the potential market were being served. In addition, as Richard Leftley states, this 1.96% is limited to simple credit life protection, which does not always meet the complex needs of a poor household (click here to read Richard Leftley’s paper in full). Health and agricultural microinsurance have been identified as the most pertinent to low-income households, yet these are being dwarfed (particularly agricultural microinsurance) by life protection that is often linked to the provision of microcredit.

© CARE/Josh Estey

However, microinsurance is a new field that is still in its experimental stages and although it is right for the microfinance community to identify a need, we must be careful not to implement it too hastily. Insurance is complex and there are a number of barriers that need to be overcome, not least how it is regulated and who distributes it to the poor, before it can be implemented on a large scale. It is important that microinsurance schemes which set out to aid the poor do just that and do not become too focused on their own expansion in a vast untapped insurance market. The right balance needs to be achieved of creating a good quality product that is affordable. After all bad insurance in the hands of the world’s most vulnerable can only have catastrophic results.

One such way that microinsurance is being delivered trustworthily is through local Microfinance Institutions (MFIs) that are already working with large numbers of low-income households and are often trusted by the individuals and communities they deal with. Lendwithcare’s MFI partner in the Philippines, SEEDFINANCE, is an example of this increasingly common relationship between commercial insurers and MFIs. A year ago SEEDFINANCE started a project called SEADASSURE in partnership with CLIMBS, a leading microinsurance provider in the Philippines, to provide life and non-life (typically property and casualty) insurance coverage to SEEDFINANCE’s clients. Since this project was launched it has provided coverage to 1,138 clients, with a total coverage of 36,525,954.98 Philippine pesos (approximately £540,000).

Microinsurance, like that provided by SEADASSURE, works in a similar way to normal insurance, where clients pay a premium (in the case of microinsurance this will be a low premium to reflect their low incomes) and when/if the client suffers a loss the insurers will compensate him or her a proportion of this loss. So for example, if a farmer’s crop suffers a loss of $100 as a result of flooding, the insurance policy s/he has may cover half of this loss. However, not all MFIs are currently in a position to offer crop insurance and in instances of natural calamities MFIs will often employ their own internal policies to help their clients cope with the effects of disaster. Our MFI partner in Cambodia for example, to deal with the effects of the floods in September last year, suspended any loan delinquency penalties for those who had been affected by the floods and reworked repayment schedules to manageable and realistic ones.     

Like SEADASSURE a number of the microinsurance schemes that are being introduced around the world are still in their infancy and as they start to grow in number and coverage they will need to be monitored closely to make sure that protecting the poor remains their overriding goal. If this goal is achieved then, like microcredit and microsavings, microinsurance can be and will be a powerful safety net for the poor.

By Nancy Thomas, assistant at lendwithcare.org