12th April 2012
Small premiums cover big risks
The rich who write off a Bentley in a crash can afford a new car. They may have other cars in the garage. But they can afford comprehensive cover so an insurer will pick up the bill for the damages.
The poor who write off a 15 year old fifth hand runabout don't have the cash to replace it. They won't have other vehicles. They can't afford comprehensive cover so no insurer will pay for the damages. In the UK and elsewhere, those who relatively suffer the worst losses from fires, theft, vandalism, car crashes and natural disasters are the poor.
That's just one dilemma behind insurance. A second is that policies designed for the better off are often the same as those offered to the less well off – although often at a higher cost per unit of cover.
Microinsurance goes macro
But there is an answer that is increasingly prevalent in poorer parts of the world and which might apply to the less well off in the first world. Microinsurance is the less well known protection counterpart to microfinance. Microinsurance aims to protect poor people against risks – such as accidents, illnesses, death in the family, natural disasters and property losses – with insurance specific to the needs of a local population or community at affordable prices. There are investment opportunities – both in providing the cover itself and because having cover against the unexpected is a vital component in economic growth.
The number of microinsurance schemes worldwide, and the population covered has increased substantially over the past five years and now reaches an estimated 500 million people worldwide, according to the Microinsurance Innovation Facility of the International Labour Organization and the Munich Re Foundation.
The policies covered just 78 million in 2007, nearly doubling to 135 million in 2009, and more than trebling to reach almost 500 million people today. According to a new report from the ILO, growth will continue – if not at that breakneck rate.
While the essential factor behind microinsurance is community – in terms of product design, pricing, premium collection and even claims handling – major insurers have a substantial role to play. And it could be one capable of replication for the non-insured in the developed world.
According to the report, some 35 of the world's 50 biggest insurance companies have either created low cost, low value cover or have embraced microinsurance itself. So there is plenty of risk carrying capacity and substantial investment.
The report shows that Asia – especially China and India – is spearheading the trend, covering roughly 80 per cent of the market. It is estimated that 60 percent of people around the world who are covered by microinsurance live in India. Latin America accounts for 15 percent of the market and Africa 5 percent.
Asia leads the field
The report says: "There are many reasons why Asia is ahead of the game: large and dense populations, interest from public and private insurers, proper distribution channels and active government support are some examples."
Some claim that insurance protection allows policyholders to make progress by taking sensible risks. Allowing people to bounce back from crop failures and other natural disasters can be a substantial engine of economic progress.
But not even its keenest advocates believe that microinsurance is likely to break the cycle of poverty by itself. Instead they see it as a valuable tool in the poverty alleviation and development toolkit when coupled with social protection, risk prevention and mitigation, and supplemented by other risk-managing financial services such as savings and emergency loans.
However microinsurance, has its critics in the same way that microfinance has its doubters. Although they accept the community aspect where villages, for instance take out cover for their whole population, can help overcome the costs disbenefit of collecting many small sums from many people, they point out the concept has grown so rapidly that it might not have been properly tested through an entire economic and claims cycle.
Moral hazard and adverse selection
They are also concerned that having insurance will produce "moral hazard", the phenomenon whereby someone who is insured will take bigger risks – someone might drive more erratically or leave doors unlocked – and that there will be "adverse selection" where someone who knows they are likely to claim will buy cover while someone unlikely to claim will not.
Cost of collection, adverse selection, and moral hazard are some of the reasons UK insurers have given – as well as increasing regulation – for pulling out of offering low value insurances to the less well off. This has left the belongings of many poor families vulnerable to fire and other disasters – dependent on handouts and inadequate state help when the worst happens.
Replicating microinsurance for more developed areas could help. But in the UK, there are also local authority projects to help social tenants – this example comes from Scotland.
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