Micro-insurance: An innovation in protecting poor communities

Micro-insurance seeks to address the insurance dilemma for the poor whose risk coping mechanisms outside any form of insurance threaten to perpetually keep them in poverty. Despite its increasing appeal, micro-insurance is yet to achieve mass acceptance in the market due to the low levels of awareness and understanding of formal insurance. PHOTO BY MICHAEL KAKUMIRIZI

What you need to know:

If you are one of those people who think that it is a waste of time trying to insure the poor, then you are in for a surprise. In any case, they have very low incomes and no assets to write about. Micro-insurance seems to be one of the latest innovative ideas that promise to dispel that myth, Joseph Lutwama writes

The definition of micro-insurance has evolved over time, one of the latest versions is provided by the International Labour Organisation Micro-Insurance Innovation facility. It defines micro-insurance as a mechanism to protect poor people against risk (accident, illness, death in the family, natural disasters, and so on) in exchange for insurance premium payments tailored to their needs, income, and level of risk.

The state of insurance
According to the 2013 FinScope Survey, the most prevalent risks across all income levels are the risk of illness and death of a family member or relative. Five in every 10 adults face the risk of illness while two in every 10 adults face the risk of death of a family member or relative.

Despite facing these risks only two out of every 100 adults in Uganda have an insurance policy from a regulated insurance company. Formal insurance usage is highest among the wealthiest quartile where seven out of 100 adults have formal insurance. Formal insurance usage is weakest among the lowest wealth quartile where almost no one (0.6 per cent) out of 100 adults has formal insurance.

Though the formal insurance usage statistics for both the highest and lowest quartiles are nothing to write home about, it is clear from the data that the poorest are the hardest hit in the event risks come.

Formal vs informal insurance
When it comes to informal insurance the reverse is true, four out of every 10 adults have informal insurance. When the figures are disaggregated according to wealth quartiles, there are more adults in the lowest quartile who use informal insurance.

The predominance of informal insurance among adults across all the wealth quartiles is attributable to the ease with which one can join the informal insurance groups. Informal insurance groups are usually designed around a group of members making a commitment to share each other’s risks. For example, when one of the members falls sick, the others in the group make contributions towards medical expenses.

Informal insurance follows a model of risk sharing as opposed to the model of risk transfer followed by formal insurance.

Barriers to access to insurance
The most cited reasons why Ugandans do not use formal insurance are lack of awareness and the highest cost of formal insurance. Five out of 10 adults do not use formal insurance because they do not know about it and those who know it consider it expensive.

On the other hand, five out of 10 adults do not use informal insurance because members in the informal insurance groups do not pay their contributions or members keep pulling out of the group.

Alternative risk coping mechanisms
If a majority of adults in Uganda do not use formal insurance, how then do they manage their risks? The most prevalent risk coping mechanisms in the absence of formal insurance are sale of assets, borrowing from family and friends and seeking donations from well-wishers.

These mechanisms can only aggravate the vulnerability of one’s economic status especially if one is in the lowest wealth quartile. The asset of a poor person once sold is almost irreplaceable because their incomes are low. Therefore, when the poor sell their assets, they are more likely to get deeper into endless poverty.

The case for micro-insurance
Micro-insurance seeks to address the insurance dilemma for the poor whose risk coping mechanisms outside any form of insurance threaten to perpetually keep them in poverty. The micro-insurance network estimates that there are now 500 million micro-insurance clients in the developing world arising out of the increased interest of governments and insurance companies to increase access of the poor to formal insurance.

Asia leads the pack in the provision of micro-insurance with the continent accounting for 70 per cent of known micro-insurance schemes in the World. According to a 2015 report on the Landscape of Micro-Insurance in Africa, micro-insurance accounted for 1.1 per cent of the total insurance premiums in Africa in 2014.

Salient features
A product is generally defined as ‘micro-insurance’ if it is modest in premium and coverage. Micro-insurance can be found in all business lines, including life, accident and disability, health, property, and agriculture (crop and livestock).

Any risk relevant to low income households can be covered by micro-insurance. Any micro-insurance product will have the following basic features; relatively low premiums; defined and limited cover; short policy terms to limit risk; few, if any, exclusions; preference for group underwriting; simple and rapid claims processing while still controlling for fraud.

The most pervasive form of micro-insurance is credit-life which insures the value of the outstanding debt in the case of a policyholder’s death. For most poor households, especially in cultural contexts; funerals are important events; yet the cost of a funeral is prohibitive.

Despite the increasing appeal of micro-insurance, it is yet to achieve a critical mass in the market due to some of the following factors: The low levels of awareness and understanding of formal insurance and the limited knowledge and appreciation of the low-income market segment by formal insurance companies arising partly out of a lack of quality data on this segment.
The absence of comprehensive legal and regulatory framework for micro-insurance can also be a limiting factor to the development of micro-insurance.

Despite having the promise of solving the puzzle of increasing access of insurance to the poor, micro-insurance has not been successful as expected. Various research has been undertaken to understand the drivers for uptake of micro-insurance and one the most predominant drivers is a compelling value proposition.
Since the poor have a number of competing interests for their limited income, any micro-insurance product needs to offer value beyond insurance if it is to be attractive to this market segment.

Opinions expressed in this article do not necessarily reflect the official view of Financial Sector Deepening Uganda.