Potential of Micro Insurance in Developing Countries

• Kishunkumar Buddha

ABSTRACT

The strong growth of microinsurance markets in recent years has increasingly helped provide a tool for poor communities to diminish the risks they face. Microinsurance already covers around 135 million people, but that is only 5% of the potential market (Lloyds, 2009). Besides being a source of finance for the poor, there are several benefits for the main suppliers of microinsurance – commercial insurers. In the short term, it provides a larger and diversified risk pool, benefits to reputation and market intelligence (Lloyds, 2009). In the long term, being the first mover into such a huge market and having sustained growth in developing markets can lead to strong future prospects.

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However, the microinsurance market is not seen as purely beneficial to insurers and consumers. Critical aspects which hinder the development of the microinsurance market include insufficient resources for risk evaluation, information asymmetries and religious issues. These problems add to the high degree of risk and geographical coverage leaving large segments of developing countries’ population with reduced access to microinsurance products.

While there are many challenges in the microinsurance market, there are promising solutions to reduce the impact of these challenges. It is imperative to advertise effectively to reduce information asymmetries which have a strong impact on the viability on microinsurance schemes. Trust is a major aspect affecting the potential and simple strategies such as increasing the pay-out frequency and communication could help increase microinsurance transactions.

This dissertation is based on a literature review where information and views on the potential of microinsurance in developing countries were collected and analysed.

1 INTRODUCTION

1. Aim

The aim of this dissertation is to understand and explore the potential of microinsurance in developing countries. The dissertation will also identify the problems affecting the potential, and propose solutions to rectify these problems.

2. Background of microinsurance

Microinsurance can be defined as an arrangement that offers financial protection to people with a low-income against specific risks in exchange for premium payments. Simply put, it is an insurance that is designed specifically for the low income market. Although it has similar risk coverage to regular insurance, microinsurance products are different. Trimming down the cost of insurance products is not an efficient way to obtain microinsurance products.

Microinsurance can be a powerful tool for protecting the poor and their assets from negative external shocks such as natural disasters, addressing gender-specific vulnerabilities and allowing investment opportunities through freeing up household capital. It can also help households to avoid poverty traps as people may require a significant amount of capital in order to earn enough and escape poverty. (Marc M, 2008)

Microinsurance can be viewed differently to different people. Commercial insurers may view the potential of microinsurance as a way of reaching large untapped or under-served markets. Development institutions such as the UN may see its potential to reduce poverty. In essence, microinsurance is designed to improve exposure of human necessities included in business lines i.e. health, property and agriculture.

In developing countries, access to microinsurance markets has been difficult while insurance products have mostly been accessible to the high-income and corporate markets. Due to most low-income people being either self-employed or employed in small firms, they have not had much access to microinsurance products which fit their needs. The main factors adding to this inaccessibility is the inadequate delivery channels, product simply, coverage, premiums and premium collection methods.

3. Structure

The dissertation will be split into 3 main parts. The first part will identify the factors driving the potential of microinsurance, and use facts and figures to show the future growth in developing countries. The second part will describe the challenges microinsurance markets face in satisfying its potential. The final part will discuss solutions to reduce the impact of the problems affecting the potential of microinsurance markets.

4. Problems and Limitations

While the dissertation was produced, the literature consulted may have changed for example, a regulatory framed which is being developed in Mexico for integrated waste management would have been completed by the end of completion of the dissertation. Facts and figures measuring the potential of microinsurance may be skewed if company resources which were consulted for this dissertation are portrayed to look good rather than true.

2. Potential for Microinsurance

There are a number of factors which affect the potential development for microinsurance markets. These include public private partnerships, economic growth and technology.

2.1 Public Private Partnership

INTRODUCTION TO PPP

The potential of microinsurance can be enhanced through government and private-firms working together. The government and private firms can combine their individual strength and contribute to better microinsurance products and services. A Public Private Partnership (PPP) is a contractually-guaranteed institutional relationship between the public sector (state or public funded donor agencies) and private sector (private for profit/non-profit) (Ramm, 2011). As both partners develop common ground on objectives and methods, they aim to use comparative advantage of each other to find the most effective and efficient way of working together. They share resources and risks and provide core competences in operations, knowledge and technology.

WHEN AND WHERE PPP IS USEFUL

The PPP is especially convenient when operations carried out go beyond the core business of the private partner, for example, starting up microinsurance products in an untapped market. This can be emerged in different ways with multiple actors ranging from limited short-term partnerships between two actors to multiple long-term partnerships between multiple actors. Cooperation in microinsurance markets may include

• Developing the microinsurance market through demand, risk assessment and management, product design, and identifying and enhancing delivery channels.
• Financing and organising research, educational programmes, and other human resources development measures for improving people’s knowledge on microinsurance products and insurance culture.
• Providing an infrastructure to implement microinsurance products. E.g. the provision of health care services and agricultural services.
• Providing finance for services such as health care, subsidising benefits (e.g. discount drugs for HIV) and providing subsidies that could help the private sector to access the low-income market e.g. financing start-up-costs of a private firm to reduce the investment risk of insurers
• Regulation and supervision in favour of microinsurance and related areas. E.g. consumer protection and setting microinsurance product delivery quality standards without product design being altered too much
• Integrating microinsurance into applicable policies for better protection of the low-income market. Types of protection could include social protection, financial inclusion and disaster management.

THE PARTNERS

The parties involved in a PPP can be few or many. For the public sector, governments and international donor agencies play a vital role. For the private sector, actors are much larger and includes insurers, health care providers, technology section, private enterprises and the private not-for-profit sector.

While there are several types of partnerships, two variants of PPP are common:

• Donors who collaborate with the private sector (mainly the insurance industry)
• Local governments who collaborate with commercial insurers and other private partners

The donor-insurer PPP acts as the main source to enter the microinsurance market. E.g. PPP may aim to explore the microinsurance market by testing innovative products or enhancing delivery channels. While PPP with donor agencies are important in initiating new approaches, cooperation between the local government and the private section is crucial for sustaining the initiated new approach and strengthening PPP with local partners. To fulfil the potential of PPP, the roles and responsibilities of the different parties involved need to be identified clearly from the commencement of the partnership.

International donor agencies

Multilateral and bilateral PPP can provide technical knowledge for projects and support market research by identifying the demands of the client including gender-specific needs and impact studies (Ramm, 2011). PPP can also contribute to combining microinsurance with preventive measures and other programmes creating an environment in encouraging the introduction of microinsurance. Furthermore, donor agencies can enable learning procedures and capacity enhancement by creating partnerships with the private sector; called Capacity Development Partnerships (CDP). Within these CDPs there are a wide range of advisory and training packages. These packages are offered to public partner organisation to strengthen their capacity when working with private organisations.

In Mexico, the Urban Development and Environment administration is developing a regulatory framework for integrated waste management that is combined with awareness raising among hoteliers and others. Such PPP may not exist yet but within the scheme of a CDP, potentially donors could support local governments in establishing financial strategies to help microinsurance products reach the people in need e.g. using different types of smart subsidies.