Microinsurance: A critical need for the poor

Finance is the glue that holds all the pieces of our life together. It enables money to be in the right place at the right time for the right situation. To borrow and save is to move money from the future to the present or from the present to the future. To insure is to move money from a “good” situation to a “bad” one. Ideal financial societies are those which provide safe and convenient ways of managing these simple monetary affairs.

This year marks the 25th anniversary of the declaration by the United Nations of October 17 as the International Day for the Eradication of Poverty. We have still a long way to go for making this world poverty free. One of the key strategies for eliminating poverty is equipping poor with the right financial tools. Access to the right financial tools at critical moments can determine whether a poor household is able to capture an opportunity to move out of poverty or absorb a shock without being pushed deeper into debt.

Low-income persons live on the edge, in constant fear of a catastrophe or tragedy. They live in risky environments, vulnerable to numerous risks and economic shocks such as a loss of a job, loss of property due to theft or fire, crop failure, the death of a breadwinner, and disasters of both natural and manmade varieties. Although poor households often have informal means to manage risks, these coping strategies generally provide inadequate protection. One way for them to protect themselves is through insurance. The poor need insurance more than wealthier people because they are more vulnerable to many of these risks than the rest of the population, and they are the least able to cope when a crisis does occur. 

Studies on the impact of microinsurance — cheap insurance policies aimed at the poor — have shown they can improve healthcare outcomes, smooth income shocks in vulnerable households and raise school attendance rates.

In the developed world, insurance is an everyday part of life. However, insurance coverage is much patchier in the developing world. More than 80 per cent of India’s poor are not covered in any way. However, what was a once-unthinkable luxury that allows the poor to secure their gains and plan for the future with confidence is now becoming a reality on account of several innovative models developed by institutions. The entire micro-insurance segment is growing and is now worth about 15 per cent of the worldwide insurance industry. India is now a major site of a rapidly growing microinsurance revolution. Micro-insurance is most prevalent in India and the Philippines, which have proper policies and regulations in place. India accounted for 65 per cent of Asia’s micro-insurance market, according to the Munich Re and GIZ report, with some 37 million poor families signed up to Rashtriya Swasthya Bima Yojana (RSBY) or national health insurance programme, the flagship programme of the government for health insurance.

Enrolment in RSBY costs just '30 rupees per family and coverage includes an annual benefit cap of '30,000 for a family of five. Members use a biometric smart card to minimise fraud. The government is working with private insurers to roll out health insurance plans across different states. 

Microinsurance, by definition, is the protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved. It has ultra-low premiums and low coverage. Designed to protect the poor against specific losses, it leverages economies of scale (large volumes of small policies). Because of its affordability, more people can get policies. And more policies mean greater business for the company — and viable coverage for clients.

Poverty and vulnerability reinforce each other in an escalating downward spiral. Often, the trigger for poverty is illness. Illnesses are a severe risk and can shave off most of the hard-earned savings. They are the number one route to bankruptcy. The Indian ministry of health found that a quarter of all people hospitalised were pushed into poverty by their hospital costs — not including the cost of missed work. In these and other emergencies microinsurance can help families avoid desperate measures such as incurring debts or selling assets or abandoning children or taking them out of school.

Insurance can provide low income communities with a greater degree of protection against health, property, disability and death risk, because the risk of these events occurring is pooled over a large number of people, at a much lower cost or premium per person. The cost of insuring against an uncertain event is considerably lower than self-insuring through savings, and is small relative to a household budget. Governments, donors, development agencies and others engaged in combating poverty need to have insurance as one of the weapons in their arsenal.

The key challenge for microinsurance is the high costs of administering it. Most 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 global revolution in mobile communications, along with rapid advances in digital payment systems, is 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. They both reach the poor and reduce the cost of servicing remote clients.

For the poor to reap the real benefits of microinsurance, companies need to practice responsible insurance. On account of lack of proper awareness and failure of institutions to properly guide them, people buy insurance policies without proper planning and give up mid-way because they don’t have money to pay the premium. Aggressive selling prevents the agents from properly assessing the consistency in income streams of buyers for servicing their policies. The customers end up losing heavily as penalties are very harsh. The greatest challenge for microinsurance schemes is finding the right balance between adequate protection and affordability to deliver real value to the insured.

Microinsurance is certainly a way to end the cycle of poverty — to provide the safety net that families need. But it is more than that. If the poor know they are covered, they’re more likely to invest in expanding businesses, diversifying their crops, or sending their children to school, without fear of losing their little and only savings if something were to happen. The whole capacity to take risks changes. Thus from just being a safety net, microinsurance provides something that earlier generations could never imagine: hope in the future.

The writer is a well-known banker, author and Islamic researcher. He can be reached at moinqazi123@gmail.com