EXECUTIVE SUMMARY
The increasing maturation and sophistication of the microfinance
industry is producing some exciting trends. For various reasons,
not the least of which is growing competition,microfinance
institutions (MFIs) are learningmore about the needs and
demands of theirtarget market. One of the things MFIs are
hearing is that loans for microentrepreneursonly meet a small part
of the demand for financial services in low-income communities.
A microloanmay help a household to increase its income,
and may even help build some assets, but it does not reduce
the household’s vulnerability or exposure to risks Easilyavailable
savings services can go a long way toward addressing this
need, as householdsbuild a nest egg from which they can draw
down in case of emergency or to smooth cash flow imbalances.
But what happens when they are exposed to risks which cause losses that are beyond
their means? Insurance is a promising response to this customer need. Using insurance
products to pool the risks faced by low-income households, MFIs can reduce their
clients’ exposure to risk-induced losses and, potentially, improve these households’
ability to increase their incomes.
Another microfinance trend is the drive for sustainability or profitability, again perhaps in
the face of increasing competition, which is leading MFIs to diversify their line of
financial products. Insurance as a new financial product has the potential to improve
profitability by reducing loan losses and replacing clients’ need to draw down savings for
emergencies. If the institution offers insurance independently, it can also benefit from an
additional source of capital for lending; if it provides insurance in partnership with a
traditional insurer, it can generate fee-based income.
Thus in theory, the provision of insurance might create a win-win situation: clients
experience a reduction in vulnerability to risk and MFIs benefit from an improved bottom
line. But, there are many reasons why traditional insurers have largely ignored the lowincome
market. As with microcredit, there are obstacles to serving the low-income
market that require innovations in product design, delivery mechanisms, and even
marketing.
This document is written primarily for managers and directors of microfinance
institutions that either offer insurance or plan to develop an insurance product for lowincome
households. While it is premature to prepare a “how to” document, this paper
provides an introduction to the provision of insurance to the poor by adapting commonly
accepted insurance principles to the unique characteristics of this market. The
information in this document is derived primarily from available literature as well as
detailed discussions with industry experts. The main contributions of this document are
as follows:
Microenterprise Best Practices Development Alternatives, Inc.
§ A framework for thinking about providing insurance to low-income households,
including a summary of risks to which they are exposed and common risk-coping
mechanisms.
§ An initial definition of the appropriate role for insurance in low-income communities
relative to other financial services and relative to the risks prevalent in these
communities.
§ A clear description of the basic principles to be followed by any insurance provider.
§ A breakdown of the variety of potential insurance products that can be offered to lowincome
households, including an assessment of the complexity and challenges faced
by providers of each type of insurance.
§ A detailed summary of technical information to consider when developing and
implementing an insurance product.
§ A glossary of common insurance terms and recommended reading.
This paper introduces the broad range of topics that need to be considered in offering
insurance to low-income households. In essence, this paper provides a good foundation
and starting point for its target audience. The following stages of this project will build on
this foundation to develop a more in-depth understanding of this topic.
The next step, Part II, uses survey results on insurance products already developed by
MFIs to illustrate the obstacles to providing insurance to low-income households
identified in this paper. In addition, Part II will detail some of the innovations that microinsurance
providers have developed to overcome these challenges.
This document does not go so far as to answer whether the provision of insurance is a
win-win situation for both microfinance institutions and their clients. That answer will
have to come from the field, in Part II, from micro-insurance providers themselves.
In the meantime, three important points need to be emphasized up-front. First, there is a
need to clarify terminology. Insurance involves pooling risk over a large number of
similar units, such as households, persons or businesses. Some very important risk
management strategies are occasionally called insurance, but in fact they are not. A
targeted savings product for marriage or a dowry, for example, is a savings product, not
an insurance product.
Second, from the client’s perspective, for many risks, insurance is not the ideal solution.
If clients can save enough money to protect themselves from economic shocks, then this
is usually the most cost-effective approach. Insurance is most appropriate for uncertain
and expensive losses. Insurance involves exchanging the uncertain prospect of large
losses for the certainty of small, regular premium payments. In doing so, policyholders
pay for the losses incurred by others (through pooling risk) and for the costs and risks
assumed by the insurer.
The third point is that insurance products range from fairly straightforward to very
complex. Prospective micro-insurers should consider enlisting the input and even
participation of insurance experts, especially if they intend to offer something more
complicated than insurance for the outstanding balance of a loan.
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