Think Obamacare – on a whole new level.

by Mihir Khubchandani

If you ask someone for the definition of microfinance, typically the answer you would get is “small loans that are given to people with low incomes, with no collateral involved”. While this is the true definition of microcredit, the realm of social entrepreneurship related to microfinance is much broader. As of late, one of the newest buzz-words about social financing is microinsurance. Just like Obamacare intends to offer affordable healthcare to all, microinsurance is insurance designed to be affordable to all with low monthly fees and small coverage values. Yet it appears that this might be one of the most valuable steps towards developing the financial services sector for low-income communities, and could be very important in bringing about change in these states. 

A women’s microinsurance group in India. Photo courtesy of Forbes

A women’s microinsurance group in India. Photo courtesy of Forbes

Microinsurance works in a very similar way to your standard insurance schemes. Customers purchase insurance products, and pay the fees on a monthly or periodic basis. The amount collected is stored in a ‘pool’ by the insurance company, to be used as and when a customer makes a claim. The key difference is that the amount of premium to be paid is much lower. For instance, the minimum monthly fee for South African microinsurance organization AllLife is just $15. This gives rise to one of the main characteristics of microinsurance: it reaches those who are typically neglected by traditional insurance.

Those who would purchase these microinsurance schemes have certain other traits that make this type of insurance be specially tailored to them. Firstly, these people are typically seen to have higher vulnerability, due to poorer living conditions and the high risk environment in which they live and work. Further, the typical microinsurance buyer does not have substantial financial knowledge, and is likely not to trust institutions with handling their money as they may have been misled in the past.

However, perhaps the most significant characteristic is that whilst the small repayment amounts seem meaningless to us the repayments represent a significant amount to the typical microinsurance client. For instance, consider a low-income farmer (the typical target of microinsurance), who is able to produce enough every week to sustain his family for just that period. However, if there is any shock to the yield of his farm, such as a drought, a riot, or even heavy rains in the week, the farm will not produce enough and the family would have to go hungry. The same applies to health insurance – if the farmer is ill just for one week, his family will struggle to eat. As such, in situations where people make less money, they tend to rely on it heavily to get by. As such, even a small change in income has profound impact on their wellbeing. If the farmer were to have insurance, in the event of a shock, the reclaimable payment would be enough to sustain the family, at least for some period of time – to him, this is significant, valuable enough to warrant considering schemes such as life-insurance, property insurance, or old age insurance (some of the most commonly purchased schemes, according to a World Bank report on rural Ghana in 2008).

Microinsurance customers are very vulnerable to external shocks. Even low value insurance is thus significant in abetting the risks of such shocks. Photo courtesy of Oracle ThinkQuest

Microinsurance customers are very vulnerable to external shocks. Even low value insurance is thus significant in abetting the risks of such shocks. Photo courtesy of Oracle ThinkQuest

It is almost intuitive that the benefits of this are profound. At a surface level, such insurance allows the buyer to take more risks. This translates to being able to send the children of the family to school rather than having to work on the lands, as insurance removes the risk of a poor yield. Or, in the same vein, farmers can widen the variety of crops they grow, so as to be able to sell different products – and once again, the risk of a crop failure is insured. Furthering this idea of agricultural insurance, the provision of such services means that the reliance on GMOs for improved crop yield is reduced, thus improving the quality of produce for others in the community or even for trade.

Microinsurance and its reach do not stop there. In a situation where living conditions are poor with minimal hygiene and sanitation, the risk of falling ill is high. The typical low-income earner would not be able to afford even basic medical care. Health insurance helps enable such people to reach out and obtain such services, at least on a basic level. AllLife, for example, offers insurance to HIV/AIDS and diabetes patients at a minimal cost, despite preexisting conditions. In this way, basic statistics of life expectation and longevity increase for the nation as a whole. On a level closer to the ground though, the provision of simple healthcare enhances quality of life, and improves livelihood at what we often consider the most fundamental level.

Whilst all this sounds great, there are several difficulties with implementing microinsurance, which is still in its teething phase. Firstly, it is very difficult for insurers to be able to meet the tender balance of charging an amount that is affordable yet significant enough to cover the great risks the typical customer faces. Aside from this, the lack of financial awareness on the side of the buyers means that customers will be slow to purchase this product. Lastly, there is the issue of distributing the funds when a claim is made. Many of the clients to a microinsurance firm live in regions that are not easily accessible, and therefore sending money to them in a secure manner is a challenge. Several organizations have adopted methods to pay ‘in kind’, through phone credits or other such avenues of repayment.

In spite of these difficulties that plague microinsurance, I firmly believe that this is an avenue that definitely offers a lot of potential in helping nations develop. The great benefits of enabling clients to take risks in terms of crop production, providing healthcare at a basic level to those who often need it most, and the increased lifestyle flexibility with the ability to send children to school are amongst the many valuable benefits of such services that truly empower those of lower incomes. It appears to me that this is a project and realm of development that has not been explored to its fullest, and some support behind such schemes would certainly ensure empowerment and an improvement of lifestyle for those in need.

*Disclaimer: The views represented here are the opinions of the individual blog author and do not represent the views of Oikocredit USA.

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