Microinsurance FAQs
- What is microinsurance?
- What are the differences between conventional insurance and microinsurance?
- What is the role of microinsurance in poverty reduction?
- How is microinsurance delivered?
- What types of microinsurance products are offered?
- What are the obstacles to designing a microinsurance product?
1. What is microinsurance?
Microinsurance refers to insurance designed to protect under-served low-income people against specific perils in exchange for low premiums. The emphasis on protecting the poor highlights the need that microinsurance should be responsive to the risks the poor are most exposed to. The emphasis on low-income people stresses that premiums should be low yet proportionate to the likelihood and cost of the risk involved. Reaching the under-served means servicing low-income people through delivery channels that are atypical compared to the traditional distribution of top-down social or commercial insurance schemes.
The “micro-” in microinsurance may refer to the subset of insurance products that are characterized by low premiums and low coverage limits, on the assumption that these suit the needs of low-income people. Alternatively, the term “micro” may refer to the grassroots level at which decisions are taken: by groups of under-served poor people who organize in self-help groups, social-collateral groups and similar reciprocal and mutual formations through which the poor pool risks and resources among themselves, in a process they know and trust.
Microinsurance does not refer to the size of the risk-carrier. Some risk carriers are small and even informal, while others are large companies. Microinsurance does not refer to the size of the delivery channel or the scope of the risk. The risks themselves are not “micro” to the households that experience them.
Microinsurance can be delivered through a variety of channels, including small, community-based organizations, credit unions and other microfinance institutions, utility companies, schools, churches, retail stores and many others. Providers can range from small informal schemes to large insurance companies such as AIG Uganda, Mapfre in Colombia or Delta Life in Bangladesh.
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2. What are the differences between conventional insurance and microinsurance?
Microinsurance products are targeted at low income populations and differ from conventional insurance as shown in this matrix adapted from McCord and Churchill (2005).
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Conventional Insurance*
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Microinsurance
(Commercial model: Partner-Agent)
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Microinsurance
(Nonprofit model: Mutual)
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Premium collected in cash or mostly from deductions in bank account
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For credit, life and loans that are tied to index-based insurance, premiums are usually collected at source, i.e. deducted from the loan associated with another transaction such as loan repayment or asset purchase.
Premiums for other types of insurance (e.g. health) are usually collected in cash, sometimes through irregular cash flows, but more often through single premium payments.
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Premium often collected in cash or even in kind (e.g. milk in the care of dairy cooperatives etc.).
Collection modes often respond to market’s irregular cash flows, and payments can entail frequent but partial premium payments.
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Sold by licensed intermediaries.
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Often sold by licensed or unlicensed intermediaries.
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The roles of shareholders, administrators and clients are unified in this model. As such, the group can design its own products, and agents are not required.
This means that agent fees (commission) can be converted into more value for money for the group.
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Agents and brokers are responsible for sales and services. Direct sales are also common.
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Agents manage entire customer relationship, sometimes including premium collection. Microinsurance is usually directly sold to MFIs and more rarely to groups.
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Targeted generally at wealthy or middle class clients in emerging markets.
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Targeted at low-income persons.
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Targeted at low-income persons.
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Corporate clients are familiar with insurance. Individual clients in the informal sector are less familiar with insurance in emerging markets.
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Market is often unfamiliar with insurance and requires specific efforts in explaining the value of insurance to clients (“consumer education”).
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By involving clients in product design and process of administering the after-sale relationship (claims and dispute resolution), this model may achieve both enhanced awareness and higher willingness to pay for package.
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Screening requirements may be applied for certain types of insurance, e.g. a medical examination might be required for term life insurance.
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Screening requirements are kept to a minimum; usually limited to a declaration of good health.
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Where the affiliation unit to insurance is the group rather than an individual, there are no screening requirements.
This model offers trade-off of covering a broader range of (pre-existing) conditions in return for group affiliation. Local information is used to control moral hazard and reduce adverse selection.
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Large sums insured.
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Small sums insured.
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Small sums insured.
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Priced based on individual risk rating (e.g. age/specific risk assessment).
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Community or group pricing, based on national data/estimates or comparisons to risk rated schemes; in case of individual pricing often higher premium due to risk level of policyholders and lack of competition on supply side.
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Premiums based on community-rating derived from local information and conditions.
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Limited eligibility with standard exclusions.
Complex policy document.
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Limited eligibility with standard exclusions.
Simple, easy to understand policy document.
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The group defines its own package, reducing or eliminating the need for complex legal documentation.
Tends to opt for more inclusive and holistic packages.
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Market data available, and consequently accurate actuarial expertise.
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Little or unavailable market data.
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Little or unavailable market data.
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Claims process may be difficult for policyholders.
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Claims process is simple while still controlling for fraud. In reality, transactions that are business-to-business do not concern the clients. In transactions between insurance and client, the process often takes a long time.
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Claims process should be simple and managed by the group at the lowest possible level to reduce reimbursement delays and leverage local information to control for moral hazard and fraud.
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* Not applicable for large group insurance.
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3. What is the role of microinsurance in poverty reduction?
Poor people live and work in risky environments, vulnerable to illness, accidental death and disability, loss of property due to theft or fire, agricultural losses, and natural and man-made disasters. Not only can exposure to these risks result in substantial financial losses, but vulnerable households suffer from the ongoing uncertainty about whether and when a loss might occur. The poor are less likely to take advantage of income-generating opportunities that might reduce poverty because of this perpetual apprehension. Although there is little evidence-based knowledge of the impact of insurance on poverty reduction, microinsurance can help reduce the vulnerability that poor households face and as a consequence, enable the poor to improve their lives.
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4. How is microinsurance delivered?
One of the greatest challenges for microinsurance is the actual delivery to clients. There are four main methods for offering microinsurance: partner-agent model, community-based model, full-service model, and provider-driven model. There are also a number of hybrid models. Each of these models has its own advantages and disadvantages. (Adapted from Radermacher and Dror, 2006)
- Partner-agent model: The MFI acts as the agent, marketing and selling the product to its existing clientele through a distribution network it has already established for its other financial services. The insurance provider acts as the partner, providing actuarial, financial, and claims-processing expertise, and the capital required for initial investments and reserves as required by law. The insurer also absorbs the risk.
- Community-based/mutual model: The policyholders or clients are in charge, managing and owning the operations, and working with external healthcare providers to offer services. This model is advantageous for its ability to design and market products more easily and effectively, yet is disadvantaged by its small size and scope of operations.
- Full service model: The MFI providing insurance services is in charge of everything; both the design and delivery of products to the clients, sales, services and claims assessment. The MFI works with external healthcare providers to provide the services. The insurers (MFIs) are wholly responsible for all insurance-related costs and losses, but they also retain all profits. This model has the advantage of offering MFIs full control, yet the disadvantage of higher risks and an eventual lack of insurance technical knowledge.
- Provider-driven model: Under this model, the service provider and insurer are the same. Similar to the full-service model, the insurer is responsible for all operations, delivery, design, and service. There is an advantage once more in the amount of control retained, yet disadvantage in the limitations on products and services.
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5. What types of microinsurance products are offered?
- Credit life insurance is the most common and ensures the “debt dies with the debtor.” It is actually used to protect lenders, not the families, from the death of their clients and is often offered directly by MFIs
- Term life or personal accident insurance is often offered alongside credit life insurance to cover the family if a borrower dies.
- Savings life insurance is often used to stimulate savings.
- Health insurance is probably the product in greatest demand among poor and low-income households; however, it is also the most complex risk to cover due to higher information asymmetries between the insurer and insured. These information asymmetries lead to potential higher risks of moral hazard and adverse selection, which have so far proven tricky for commercial insurers. As a result, many often write-off health as an area where it is difficult to provide microinsurance on a viable basis, and prefer to focus on the simpler products described above. However, organizations following the mutual model can leverage local information and peer pressure to address moral hazard issues, and by affiliating “en-bloc” can greatly reduce the risk of adverse selection.
- Property insurance is nearly always linked to a loan and may help a borrower continue repaying his or her loan only if something happens to the property (usually livestock). In some cases, replacement of the property is also covered. Endowment policies combine long-term savings and insurance with emergency loans against the savings balance. In this case, the premium payments accumulate value.
- Agricultural insurance is particularly tricky, and little evidence exists of viable programs. The problem is that insured farmers are less likely to pursue sound practices and therefore are more likely to lose their crops. It is difficult to calculate the probability of loss because so many factors can influence crop yields. At the same time, premiums that farmers can afford are not usually sufficient to cover claims and administrative costs. Recent innovations that link insurance to rainfall and other weather conditions are promising, because they may be more measurable, objective, and viable.
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6. What are obstacles to designing a microinsurance product?
Designing a sound microinsurance scheme is challenging and complex, requiring specific technical expertise and/or data that most MFIs and community based organizations do not possess. Trial and error often help institutions to arrive at the right combination of prices and services, but technical assistance can help resolve this issue and avoid costly errors.
In poor areas, demand is often thin due to the regular premiums members must pay, lack of education on insurance and bad image of insurers vis-à-vis the poor. If the pool of policyholders is too small, volatility in the number of claims can lead to an unexpected increase in claims, thereby bankrupting the plan. Although no precise minimum number of policyholders can be established, fewer than 1,000-2,000 people are likely to create undue risk for the provider.
Covariant risk is another challenge for insurers. Risks covered by insurance should affect only a relatively small portion of the total insured population at any given time. If a risk such as a flood or HIV/AIDS is likely to cause similar damage to a large portion of an MFI’s clients at the same time, a single occurrence of the risk would bankrupt the plan.
Moral hazard and adverse selection also make it difficult to provide insurance. Moral hazard arises when individuals can take advantage of the insurance to deliberately overvalue their assets and make claims for losses that they help incur. Adverse selection occurs because individuals with health problems or expectations of health problems are more likely to purchase insurance. This raises the cost of insurance provision.
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