Protecting the Poor: A Microinsurance Compendium, Edited by Craig Churchill.
Published by International Labor Office, 2006. 654 pp.

"One of the things that we have learned is that the good practices that are out there are not good enough," says Craig Churchill. Photo Credit: Microfinance Gateway

What Is Microinsurance?

Protecting the Poor defines microinsurance as 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. This definition is essentially the same as one might use for regular insurance except for the clearly prescribed target market: low-income people. As demonstrated throughout the book, these three words make a big difference.

How poor do people have to be for their insurance protection to be considered micro? Generally, microinsurance is for persons ignored by mainstream commercial and social insurance schemes, persons who have not had access to appropriate products. Since it is easier to offer insurance to persons with a predictable income - even if it is a small sum - than to cover informal economy workers with irregular cash flows, the latter represent the microinsurance frontier.

The Need for Protection

Workers in the informal economy and their families live and work in risky environments, vulnerable to numerous perils, including illness, accidental death and disability, loss of property due to theft or fire, agricultural losses, and disasters of both the natural and man-made varieties. The poor are more vulnerable to many of these risks than the rest of the population, and yet they are the least able to cope when a crisis does occur.

Insurance is one way for the poor to protect themselves. By helping low-income households manage risk, microinsurance can assist them to maintain a sense of financial confidence even in the face of significant vulnerability. If governments, donors, development agencies and others are serious about combating poverty and achieving the Millennium Development Goals, the new book, Protecting the Poor, contends that insurance has to be one of the weapons in their arsenal.

Obstacles to Overcome

Workers in the informal economy are vulnerable to numerous perils, including illness, accidental death and disability, loss of property due to theft or fire, and agricultural losses.

As this new volume points out, in many developing countries, neither governments nor insurance companies have been particularly effective in extending coverage to persons in the informal economy. Where governments have social protection schemes, they are often delivered through formal sector employers and are therefore unable to reach unorganized workers in the informal economy. And although some insurers are beginning to notice the vast under-served market of low-income households, numerous obstacles need to be overcome if they are to offer microinsurance. These obstacles include:

• Insurance distribution systems which are not designed to serve the low-income market.
• Traditional sales systems of brokers, agents and direct sales which do not reach the poor.
• Products that are not designed to meet the specific characteristics of the low-income market, including problems such as inappropriate insured amounts, complex exclusions, and indecipherable legal policy language.
• High transaction costs for very small policies.
• Bias among the poor against insurance. Many are skeptical about paying premiums for an intangible product with future benefits that may never be claimed.
• High cost of educating consumers, to create awareness about the value of insurance.
• Bias among insurers against the poor, from lack of awareness of the needs and concerns of the poor to a culture and incentives that encourage salespersons to focus on larger policies considered to be more profitable.

The Two Sides of Microinsurance - And Where They Converge

Microinsurance is essentially a variety of strategies intended to overcome these obstacles. Protecting the Poor identifies two main motivations for providing microinsurance: one focused on extending social protection to the poor in the absence of appropriate government schemes; the other focused on developing an appropriate business model that enables the poor to be a profitable (or sustainable) market segment for commercial or cooperative insurers.

The intention of Protecting the Poor is to reduce the vulnerability of the working poor by enticing the public and private sectors to do what neither has been particularly effective in doing previously: providing insurance to the poor.

Surprisingly, these two sides of microinsurance have much in common. Regardless of whether one is looking at microinsurance from a social-protection or a market-based approach, the basic operations of the insurance scheme will be largely the same. In addition, for both approaches, the intention is to reduce the vulnerability of the working poor by enticing the public (social protection) and the private (new market) sectors to do what neither has been particularly effective in doing previously: providing insurance to the poor.

Hence, Protecting the Poor draws lessons and experiences from both sides of microinsurance, exploring areas of convergence to create alternative models or systems of protecting the poor, such as public private partnerships, mutuals and cooperatives, and government-provided incentives to correct market failures.

Although this book covers many different insurance products delivered by a variety of institutional arrangements across four continents, a clear picture of microinsurance is beginning to emerge, particularly regarding the challenges of insuring the poor as well as many of the solutions. The findings reveal that microinsurance is indeed viable, and even profitable under certain circumstances.

Target Audience and Contents of the Book

A clear picture of microinsurance is beginning to emerge, particularly regarding the challenges of insuring the poor as well as many of the solutions.

The primary audience for this book is insurance professionals and practitioners working in the field who currently offer insurance to low-income people or are considering doing so. Protecting the Poor is also intended for persons who assist practitioners, such as technical assistance providers and donors, and for policymakers and regulators who influence the environment in which microinsurance operates.

Besides defining microinsurance, Protecting the Poor covers a wide range of issues, including:

• Insights into the risk-management needs of low-income households.
• The critical social protection function of microinsurance.
• Analysis of key lessons about health insurance, long-term life insurance and short-term insurance linked to savings and credit products, as well as the adaptation of insurance products to address the characteristics of women and children.
• Details of microinsurance operations, including chapters on product design, marketing, premium collection, claims, pricing, financial and risk management, governance, organizational development and loss prevention.
• Institutional arrangements for delivering insurance to the poor, including partnerships between insurers and MFIs, the community-based approach, insurance companies owned by networks of savings and credit cooperatives, and distribution through retailers.
• Roles of different stakeholders, including donors, regulators, governments, insurers and reinsurers, and technical assistance providers.
• Strategies to overcome the tradeoffs between coverage, costs and price.
• Future developments in microinsurance.

Overall, Protecting the Poor considers microinsurance as a "back to basics" campaign, to focus on the risk-management needs of vulnerable people, and to help them manage those risks through the solidarity of risk pooling. Although not all microinsurance schemes are true to these values, the book concludes that the closer they can come, the more likely it is that they will benefit the people who need them the most.




Reprinted with permission from Microfinance Gateway.

To read another Global Envision article about microfinance, see The Microfinance Moment.



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