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UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
Issue 8 / January 2005 |
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Microinsurance and Risk Mitigation for MFI clientsBy Michael J. McCord
Microinsurance products are products, specifically designed for the low-income market.
"Microinsurance" is 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. Tools currently available to and used by low-income people when faced with health crises, a death in the family, accidental injury and other tragedies include mutual support systems; risk avoidance and reduction; access to other risk-managing financial services such as savings and emergency loans; and social protection options available through the state. Low-income people also find microinsurance to be useful, where available, as an additional tool to help them when facing certain crises. Together, these tools form a complex matrix through which low-income people manage their risks.(1)
Microinsurance is not a new concept.
Microinsurance is not a new concept. Indeed, there has been some type of microinsurance for many years, and many insurance companies in developed country began essentially as microinsurers. It is a direction that naturally follows the benefits provided by microfinance. For example, credit unions and cooperatives have long offered specialised insurance products to their members. More recently, MFIs have begun venturing into the realm of microinsurance to protect their portfolios through credit life insurance. They also can help their clients manage risk with family life, disability, health, property, and long-term savings products like endowments and provident funds, which more directly address the needs of their clients.
If we really want to help our clients and their families, we need to move beyond credit life products using linkages with insurers.
MFIs usually look to risk management professionals - regulated insurers - to assist them with microinsurance products. By creating such partnerships, the MFI is able to offer their clients the same kinds of risk management tools commonly used by the wealthy, without incurring additional risk. Some MFIs see the potential to help their clients mitigate some of the risks they face through the availability of savings and emergency credit - products within the usual range of MFI offerings. Although not sufficient for medium to high cost financial shocks, immediate access to savings can be especially important for those suffering a low level financial stress.
Emergency loans give low-income people a chance to manage their finances in a controlled manner.
Emergency credit, if available quickly, can also provide low-income people with an important opportunity to cover the costs related to a crisis and financial shock in a controlled manner. For example, when Suliman's wife Farida was hospitalised after an automobile accident, Suliman had to sell the family cow at a deep discount to get the money to pay for her urgently needed surgery. Yet when An was hospitalised after her automobile accident, her husband was able to obtain an emergency loan from his MFI to cover the surgery costs. To repay the loan he also had to sell the family cow, but because he had three months before his loan was due he was able to wait until the price for cows was high and sold it for even more than he thought it was worth. Because he was able to obtain an emergency loan, An's husband was able to sell a family asset at a competitive price and, as a result, was able not only to pay off the loan but to purchase a calf with the balance. Better but not ideal since a calf is not a milk-producing animal.
Microinsurance can minimise the loss to households during a financial shock.
Microinsurance can help keep low-income people from significantly depleting their resources in the case of such crises. Take Pedro, for example. When he had an automobile accident, his wife Marianna had to pay a small co-payment to the hospital for care, which she paid from her pocket money. After that, all direct medical costs were covered by their health microinsurer, which paid the bills directly to the hospital. Their cow never even noticed, and family income generated from milk sales did not dematerialize.
Microinsurers must understand the needs of their clients to develop a successful product.
How does an MFI make sure that microinsurance products are well-designed? If organizations listen carefully to their clients, their clients will tell them what they need. Well-designed microinsurance products, like most other products, are contextual and come from listening to the market. Microinsurers must understand the array of risks their clients face, how they face them now, and what they still need to maintain financial stability and move towards growth. Conducting appropriate research, using a structured product development process, and partnering with a reputable insurer can best ensure success for microinsurance products. To provide clients with adequate tools they can use to manage their risky lives, MFIs can offer accessible savings (where legal) and emergency loans. To complete the tool chest in partnership with regulated insurers, they can also provide access to microinsurance products that respond specifically to their clients' needs. In subsequent articles, we will consider such issues as: different types of microinsurance, understanding demand, marketing, the product development cycle as it pertains to microinsurance, different delivery models, and lessons learned from some microinsurance products that have matured. (Michael J. McCord, mjmccord@bellsouth.net, www.microinsurancecentre.org)
Working Group on Microinsurance. "Preliminary Donor Guidelines for Supporting Microinsurance." October 2003.
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Although savings and emergency credit are important tools that can assist low-income people in managing their financial crises, often they are unavailable, insufficient, or untimely. MFI management watch their clients grow and improve their household incomes through credit and become families that can put a bit aside in savings for future needs. As important as they are, however, these two legs of the financial security platform are not enough to keep clients from falling back into poverty when a financial crisis strikes. To complete the set of financial tools that can provide a financially stable platform for low-income families and from which further growth and stability are by-products, low-income people need access to well-designed and managed microinsurance.