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Providing insurance to low-income households: Part 1: a primer on insurance principles and products

Topic :

This paper has been written primarily for managers and directors of microfinance institutions that either offer insurance or plan to develop an insurance product for low-income households. It suggests that the provision of insurance might create a win-win situation where clients experience a reduction in vulnerability to risk and MFIs benefit from an improved bottom line. Key points are:

  • insurance is a promising response to risks which cause losses that are beyond the means of the poorest and pools the risks faced by low-income households,
  • in the drive for sustainability or profitability, MFIs are diversifying their lines of financial products and insurance has the potential to improve profitability by reducing loan losses and replacing clients’ need to draw down savings for emergencies,
  • MFIs can benefit from an additional source of capital for lending or fee-based income as agents.

 

The paper is divided into three main sections:

  1. The first chapter examines risks faced by low-income households, e.g., life cycle needs, death, property, health,disability and mas, covariant risks. A framework is developed which classifies the risks on the basis of degree of uncertainty and relative size of loss.
  2. The second chapter reviews potential risk management strategies, including informal individual and group based coping strategies and formal credit, savings and insurance products.
  3. The third chapter looks at insurance from the provider’s perspective, including matching supply and demand and the different types of insurance products.

The paper concludes that insurance involves pooling risk over a number of participant groups and is not like a savings product. Insurance may be secondary to saving enough money to protect from economic shocks and is most appropriate for uncertain and expensive losses. Developing insurance products should involve experts.

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