The failure of a low-value crop in a poor region can devastate families and communities. The cost of a funeral can mean a family goes hungry. Microinsurance can reduce the impact of events such as these. Notwithstanding the challenges that microinsurance presents, it has experienced massive growth in recent years and there is a lot of commitment to it from the global insurance community.
WHAT IS MICROINSURANCE?
Microinsurance is by no means a new phenomenon and has existed in different economies in various forms for some time.
A briefing note published by the Munich Re Foundation states that "a product is generally defined as microinsurance if it is modest in premium and coverage and meets the following four criteria:
- Target population: The product targets the lower-income segment of the population, those who so far have been excluded from mainstream insurance offerings.
- Business line: Microinsurance can be found in all business lines, including life, accident and disability, health, property, agriculture (crop and livestock).
- Sales: Microinsurance may be supplied by various stakeholders and through a variety of channel types.
- Affordability: The premium amount is commensurate with the income level of the low-income sector."
Microinsurance protects low-income people by insuring against a specific risk (or risks) common to individuals or communities in developing countries. In that way, the prefix "micro" does not refer to the scope or subject of the risk. Rather, it refers to the size of the premiums and potential pay-outs relative to those of the "regular" insurance policies often found in the more developed world.
WHY IS MICROINSURANCE RELEVANT?
Many low-income people in developing countries do not have access to adequate risk-management tools. They are therefore vulnerable to fall back – or fall deeper – into poverty when such uninsured risks eventuate. However, if these risks have been insured against, the potentially significant detriment to the individual, their family and the wider community will be reduced and could even be eliminated altogether.
Microinsurance is therefore vital to the protection of lowincome people in developing countries where more common commercial insurance is not appropriate, as it would be uncommercial for an insurer to offer the cover and unaffordable for a consumer to purchase it.
WHAT ARE THE DISTRIBUTION/DELIVERY CHANNELS?
Because microinsurance is designed to cover individuals over a vast geographic area, it is presented with issues in two phases of the insurance policy: inception and claims.
As outlined above, microinsurance is generally most needed in the poorest of areas. These are the areas with limited infrastructure for education, transport and telecommunications. Accordingly, microinsurers find it difficult to reach potential consumers to issue policies. Yet, even where they can, the consumers often lack an understanding of the concept of insurance and are reluctant to take out a policy. Other policyholders find it difficult to make a claim as they are unable to communicate their claim to the insurer. Some jurisdictions also require "wet signatures" for an insurance contract to be recognised. This can frustrate the process as consumers are required to physically travel to the insurer (or vice versa) to sign a policy or make a claim.
WHAT ARE THE BENEFITS OF MICROINSURANCE?
The presence of uninsured risks may mean that low-income people produce and/or consume in a less efficient manner. This could stifle income, productivity and/or standards of living on a wider – perhaps national – scale. Microinsurance makes it possible for low-income people to produce and/or consume more efficiently by enabling them to take more (calculated and appropriate) risks.
For example, without microinsurance, farmers may elect to grow crops that are more drought-resistant but have much lower yields in good seasons. However, if those farmers were insured against a bad harvest, they would be in a better position to grow crops that have high yields in good years and bad yields in years of drought. The spreading of risk by virtue of microinsurance would thereby promote greater potential returns; not only for the producing individual and their community but also for the economy as a whole, thanks to the increased production and sustainable consumption.
A CASE STUDY – FUNERAL MICROINSURANCE IN SOUTH AFRICA
Of all product offerings, funeral microinsurance seems to be one of the most common. In some ways, this is not surprising. The actuarial/underwriting issues are relatively straightforward and, unfortunately, a market clearly exists for it in poorer economies.
In South Africa, funeral microinsurance is provided by both independent insurers who are aligned with a single funeral parlour and larger insurers who are aligned with numerous funeral parlours through agencies or intermediaries.
However, one of the keys to its market prevalence has been the ability of insurers to engage directly with the community via existing funeral parlours, rather than creating their own capital-intensive operations, which would most likely be met with scepticism and resistance from community members. Similarly, funeral microinsurance in South Africa is often written on the basis that benefits will be paid "in kind" (such as mortuary, transport and/or catering services), rather than in the form of a cash payment. This has also helped generate acceptance of the concept within the community, as the benefits go directly to the community and help to stimulate the local economy.
WHAT ARE THE ISSUES CURRENTLY FACINg MICROINSURANCE?
Although the reach of microinsurance has expanded significantly, it remains unavailable to hundreds of millions of people. It needs massive expansion. The Munich Re Foundation states that it "requires the commercial insurance industry and professional mutual insurers".
Most low-income people manage risk through more traditional or informal mechanisms. This may include borrowing from family or specialist loan organisations (at times at a prohibitively high interest rate), self-insurance or simple risk avoidance. However, despite the theory that such traditional or informal mechanisms are less effective at managing risk, especially in contrast to the more "modern" and "appropriate" method of microinsurance, microinsurance initiatives have had limited global success to date.
Where it has been made available, microinsurance has been hindered by various factors, including a lack of actuarial data, a lack of understanding of insurance principles, slow pay-out processes, low pay-out rates, inappropriate product design, obstacles associated with regional regulation, a mistrust of insurers, a lack of consumer protection or a general resistance by individuals to part with what little resources they have to secure a benefit that may never materialise.
The sheer geographic spread and cultural divergence of the issues facing the microinsurance industry means that the current issues will not be fixed overnight.
WHAT IS DLA PIPER DOING?
Throughout 2012, DLA Piper engaged with various international pro bono partners and clients in order to understand the issues that they are currently facing in relation to microinsurance.
As part of this exercise, in November 2012 DLA Piper Consultant, Michael Gill attended the 2012 Microinsurance Conference in Dar Es Salaam, Tanzania. That conference provided a forum for over 400 participants and experts on microinsurance to meet and exchange ideas and experiences, as well as discuss the challenges to implementing microinsurance initiatives globally. Michael met with a number of those experts to discuss how DLA Piper can best contribute to such microinsurance initiatives, including by partnering with various organisations.
DLA Piper is therefore continuing to engage in this growing global industry and is committed to partnering with other organisations in order to promote the livelihood and wellbeing of people in developing countries, particularly in the Asia Pacific region. In many ways, the effective implementation and penetration of microinsurance is vital to such development.
© DLA Piper
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