Women sell items at a Grameen America open house in New York. Originally begun in Bangladesh, the nonprofit microfinance organization now also has 600 borrowers in Queens (Source: Reuters)
Microinsurance is a fairly new concept. Renowned researcher Jonathan Morduch explains what the emerging industry can learn from the more mature microcredit sector to help low-income people improve their lives.
What role do risks play in low-income people’s lives?
Risks were very much a problem for the households interviewed for Portfolios of the Poor. In Bangladesh and India, my co-authors Stuart Rutherford and Orlanda Ruthven found that roughly half of the families had major health crises during the year.
And in South Africa
, Daryl Collins found that about 80 percent of the families had to contribute substantially to funeral costs, largely due to HIV/AIDS. So families were thinking a lot about risks.
How could microinsurance help them manage these risks?
Most low-income people rely on informal insurance. They borrow and draw on their friends and neighbors to deal with crises. This works reasonably well for small problems affecting only a few members of a community at a time.
For anything else, it can be fairly unreliable. And microinsurance promises to bring the reliability of formal insurance to the poor.
Microcredit has received a lot of attention. What additional benefits does insurance offer?
Credit is very important in risk management, and savings are important as well. But poor families often face risks that neither credit nor savings can address. Plus, microcredit is usually provided for business needs, not for paying for doctors, medicines or property loss.
Jonathan Murdoch: "Many households lack a clear understanding of how much they are paying relative to what they are actually getting out." (Source: Jonathan Morduch)
In Portfolios of the Poor, Stuart Rutherford finds that about half of Grameen Bank customers interviewed used their credits for consumption. Households used credit to deal with risks or irregular expenses because they lacked better instruments like microinsurance.
And while small enterprises are important for poor communities, they may not grow as quickly or contribute as much to the local economy as hoped. It’s possible that better risk management tools could help to foster that kind of expansion.
What can microinsurance learn from microcredit?
First, households are willing to pay reasonably high prices if products and services deliver quality. But paying premiums charged as a single lump sum can be difficult.
Breaking payments down into a series of small installments often allows households to manage their cash flows. Second, households can understand fairly complicated contracts– when described in a way that makes sense in their local context.
Could access to insurance also harm the poor? How can they be protected?
In general, not having insurance is a greater risk than having insurance. But there’s much to learn from efforts to improve consumer protection in microcredit. New measures give customers ways to resolve disputes with providers and improve the transparency of contracts.
In insurance, credit life products can be particularly hard to assess since the price is usually rolled into the credit contract itself. Many households lack a clear understanding of how much they are paying relative to what they are actually getting out.
How could microinsurance contribute to achieving the Millennium Development Goals, the United Nations’ commitment to halve poverty by 2015?
Hunger has many causes, but supporting farmers through basic crop insurance could help. And health problems are often financial problems. The poor might be able to pay for a local doctor, but lack the resources to buy medicines or go to a hospital.
Simple health insurance could cover these bigger health expenses and thus address one of the biggest problems millions around the world face.
~Reference Allianz Group~
