Providing Risk Coverage through
Micro Insurance…

an umbrella for the poor

People in the informal economy and their families live and work in risky environments. They are highly vulnerable to numerous perils, including illness, accidental death and disability, loss of property due to theft or fire, agricultural losses and other natural & man-made disasters. The low income people are more vulnerable to risks than the rest of the population. Yet, they are the least able to cope when a crisis does occur. Poverty & vulnerability reinforce each other in a downward spiral. In this context, there is a great need to reduce the vulnerability to risks through insurance. By helping low- income house holds manage risk, micro insurance can assist them to maintain a sense of financial confidence even in the face of significant vulnerability.

Micro insurance is defined 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. It is same as regular insurance except that it clearly prescribed target of low- income people. Micro insurance is for persons ignored by mainstream commercial and social insurance schemes, persons who have not had access to appropriate products.

Around the world micro insurance is provided by formal insurers, micro finance institutions (MFIs), health institutions, agricultural and health cooperatives, traditional societies, and many other types of institutions. MFIs/ MFPs are perhaps in a unique position to provide micro insurance as they have extensive networks and are already offering financial services to poor clients.

There are different models to micro insurance –
1. Partner / Agent model: Here Insurers and MFIs team up to exploit each other’s comparative advantage. Insurers utilize MFIs efficient delivery mechanism that provides the sales and basic services to the clients. MFIs benefit from being able to provide insurance to their clients with no risk and limited administrative burden.

2. Community based insurance model: The policy holders are themselves the owners and managers of the insurance programme. This model is used mainly in health insurance. The members themselves design, develop, service & sell the products and they negotiate with external health care providers.

3. Full service insurance model: It is similar to the model followed by formal sector insurers, when provider is singly responsible for all aspects of products manufacturing, sales, and servicing and claims assessments. The insurers are wholly responsible for all insurance –related costs and losses, but they also retain all profits.

4. Provider model: the service provider and the insurer are the same. Like the community-based model, this model is also used mainly health services.

The design, delivery and management of micro insurance products have some unique complications. Particular challenges are the small premiums and benefits driven by the market’s limited resources and extreme cash flow constraints, which restrict the scope of underwriting, claims management and product complexity. These challenges require scale, innovation, efficiency, simplicity and intelligent risk management.

Moreover, some micro insurers have a more complex mandate than insurance companies. The financial and economic drivers of sound insurance may be supplemented by a development agenda, for example to expand access as widely as possible or to ensure inclusion of certain risks that might be commercially excluded. The non-commercial risks should be understood and managed.

In general product design must strike a balance between broad inclusion, appropriate benefits, low premium rates and sustainability. Products are to be customized to client’s needs and preferences.

For micro insurance to succeed large volumes of very small policies are required. The transaction costs associated with managing these can be extremely high, especially when seen in proportion to the sum assured. Significant innovations are required to minimize the transaction costs. Micro insurance is relatively easy if the target market is well organized group, significant challenges are faced when trying to serve unorganized individuals.

A major challenge in extending insurance to the poor is educating the market and overcoming its bias against insurance. Many are skeptical about paying premiums for an intangible product with future benefits that never be claimed and they are often not too trusting of insurance companies. Creating awareness about the value of insurance is time consuming and costly. But is the most important ingredient for people working in this sector.

Following a good response from the clients RGVN-CSP has embarked on micro insurance for its clients as a risk management measure by introducing JBY (Janashree Bima Yojana) & GI (General Insurance) with LICI & with BSLIC (Birla Sunlife Insurance Company) for covering accidental & natural death since January 2007. Following is the progress in micro insurance made by RGVN-CSP for providing the risk coverage of its clients.

A total of 24342 clients have been brought under insurance cover by RGVN-CSP as on December‘ 2007. RGVN-CSP has envisaged covering all its clients through micro insurance in the future days to come.

RGVN-CSP team
[Reference: Craig Churchill, Chair, Working group on Micro insurance International Labour Organization, Social Finance Programme, Employment Sector, Geneva, Switzerland]