MOIN QAZI argues that micro-insurance is a highly effective social protection tool to end the cycle of poverty. It can help us ensure that the gains recorded by so many development programmes are not rolled back by catastrophes which are common occurrences in the lives of the poor.
——
INSURANCE covers are a part of life and are taken for granted in the developed world but its coverage is patchy and woefully inadequate in the developing world.
However, with several recent innovations, what was a luxury for the poor has now become a reality. Insurance coverage is now dramatically expanding with millions of more low-income households accessing insurance products and services.
A new class of insurance, that is more inclusive than the conventional one, has emerged for low income populations. It is popularly known as micro-insurance.
Micro-insurance has emerged in response to the inadequacy of regular insurance to provide protection to the bottom tier of the population.
Micro-insurance is specifically designed for the protection of low-income people, with affordable insurance products to help them cope with adverse consequences of risks. It is a market-based mechanism that promises to support sustainable livelihoods by empowering people to adapt and withstand stress. Micro-insurance ensures the protection of people against specific perils in exchange for regular monetary payments in the form of premiums proportionate to the likelihood and cost of the risk involved. As with all insurance, risk pooling allows many individuals or groups to share the costs of a risky event.
Although poor households often have informal means to manage risks, such strategies provide inadequate protection. They need insurance more than well-heeled people because the poor have no financial cushion and are more vulnerable to risks. If you can put a safety net – a floor – under those people, you can literally end the cycle of poverty.
“Insurance is a part of life in the developed world but its coverage is patchy and woefully inadequate in the developing world. However, with several recent innovations, what was a luxury for the poor has now become reality. Insurance coverage is now dramatically expanding with millions of more low-income households accessing insurance products and services
Low-income communities live on the edge; just a tiny misfortune away from disaster—an injury, illness, or natural calamity can precipitate them falling ever deeper into poverty as their limited resources get depleted. These events often have very grave financial consequences. Many get drawn into debt traps as they borrow beyond their means, sell productive assets, take children out of school or put them to work, compromise on food, or leave sickness untreated. The vulnerability of poor people is exacerbated each time they incur a loss, creating a vicious cycle that precludes improvements of their economic welfare.
The poor usually face two types of risks — idiosyncratic (specific to household) and covariate (in which the entire community suffers loss; the most common, for instance, are drought and epidemics).
Insurance contracts are most easily offered if risks within the relevant population are not covariate — so that only some put in a claim at the same time. Furthermore, insurance for rare and infrequent events is also typically more difficult to offer.
Micro-insurance is an important service to help poor households protect their fragile lives and livelihoods against inevitable risks and unexpected economic shocks. It has shown to deliver on the promise of what insurance is all about: Building resilience of households against the adverse consequences of risks. This is true for reducing economic shocks, and hence often impoverishing, as well as reducing average as well as expenses on medical treatment or rehabilitation in the event of a catastrophe. Financial protection however is limited by the limited coverage inherent to micro-insurance
The cost of insuring against an unforeseen development is considerably lower than self-insuring through savings. The governments, donors and other players engaged in designing social protection measures should keep insurance as a key component of their toolbox. They can reach the poor and thus reduce the cost of servicing remote clients.
Without access to risk mitigation tools, adequate social security services, or insurance, poor people are extremely vulnerable and ill-equipped to meet shocks that life inevitably brings. However, we must recognise that the world of micro-insurance is quite nuanced.
“Micro-insurance is an important service to help poor households protect their fragile lives and livelihoods against inevitable risks and unexpected economic shocks. It has shown to deliver on the promise of what insurance is all about – building the resilience of households against the adverse consequences of risks
Good insurance products protect people from catastrophes and bad ones waste people's slender resources on a product that never brings them any benefit. It all depends on the product and the consumers who are being addressed.
The mandate for insurance providers should be to continually improve, improve, improve, just like the world's best product companies do.
For the poor to reap the real benefits of micro-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 proper planning and give up midway because they don't have the money to pay the premium.
Aggressive selling prevents the agents from properly assessing the consistency in income streams of the buyers for servicing their policies. The customers end up losing heavily as penalties are very harsh.
Life insurance is the most obvious choice for micro-insurance. The consequences of death are always significant for poor households so there is a constant demand. The exclusion of suicide reduces moral hazard problems. The demand for health insurance is also rising.
Healthcare costs impose the biggest burden. The biggest challenge stems from the gap between public health coverage and the steep incidental costs involved in a health episode, such as lost income while seeking treatment or caring for unwell family members and other incidental expenses.
Health insurance policies typically don't cover outpatients or domiciliary treatment where the major expense is on account of pharmacy bills, diagnostic tests, and so on.
Several health insurance programmes cover wage loss on account of illness or other health-related issues but many don't. In such cases, even the insured beneficiaries have to incur high indirect costs during hospitalisation. They may be forced to avoid or delay treatment as they cannot afford to lose their wages. Similarly, those availing hospitalisation may join work even if they have not fully recovered.
Since many of the concerns of women are not easily insurable, e.g., maternity costs, a more relevant product would be one that combines insurance and savings. In this way, for example, a woman could use her savings to cover the cost of normal delivery, and insurance to cover the cost of unexpected complications.
The outreach of the insurance companies has been very limited. The reasons for the slow growth and outreach of micro-insurance in India include lack of awareness about micro-insurance, absence of need-based products customised to the low-income segment of our citizens, and cumbersome claims processes and procedures requiring much documentation and delays in processing claims.
Micro-insurance has to walks a tightrope to maintain a balance between affordable insurance products that are accessible for the cash-constrained population. The key challenge is the high cost of administering it.
Micro-insurance is a low-ticket business, requiring huge volumes to become sustainable. The poor live off the banking grid. Further, the transaction costs of issuing millions of small policies through service agents are high. Yet that can still break even in the face of high transaction costs. Narrow margins make scale essential because successful implementation requires significant investment in back-office technology for efficient premium collection and claims processing.
There are also problems with product design. Typically, rural insurance products are clones of products introduced in urban areas and are not suited to the local context. Risk mitigation mechanisms are weak and the complexity of people and problems make underwriting, claim processing and resolution a challenge.
Digital financial inclusion could be a game-changer.
Already it is transforming business models in the insurance sector by improving access and targeting, as well as reducing, administrative overheads. 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.
Micro-insurance can piggyback on the exploding reach of cellphone banking and the infrastructure created by microcredit institutions.
Insurance coverage can be also widened by coupling services with existing mobile financial products or creating new solutions that bring insurance services straight to a consumer's phone. Digital developments could also make the services affordable. However, a degree of caution is essential in order to protect consumers from the potential risks of new technologies.
There are countries that have witnessed a large improvement in product design and availability of a range of insurance products. Micro-insurance products tailored for the farmers' community like crop insurance, health insurance, rural accident, personal accident, irrigation, animal cart, aqua-culture, agri-allied and cattle insurance are now available.
Even niche products such as insurance covers are available for snake bites, livestock welfare, failed wells, damage caused by thunderstorms, health issues, funerals and even covering the birth of twins.
Micro-insurance can unfold a myriad of effects that not only improve the household's ability to cope with and recover from catastrophes after they happened but also importantly change the behaviour of households and can thus even generate positive effects even before the shock happens.
“Microinsurance products tailored for the farmers' community — such as crop insurance, health insurance, rural, personal, accident, irrigation, animal cart, aqua-culture, agri-allied and cattle insurance — are now available in the market. Even niche products such as insurance covers for snake bites, livestock welfare, failed wells, damage caused by thunderstorms, health issues, funerals and even covering the birth of twins are available.
The whole capacity to take risks, changes. Thus, apart from just being a safety net, micro-insurance promises something that earlier generations could never imagine: Hope for the future.
(Moin Qazi is a well-known development professional.The views expressed are personal)