It might sound tedious for some, that now there seems to be an eternal list of micro products and microinsurance is one of them. However, we should remember that the more micro the products, the closer we get to serving those with the fewest resources. Of course, whether these products are needed or wanted is another topic, but I believe there is no harm in giving access to these products to see if the target audience will actually benefit from them or not.
Last Wednesday I attended a talk on microinsurance, arranged by Microfinance Without Borders with the Microfinance UK Club at Allen & Overy.
This presentation was an insightful introduction to microinsurance, especially because of the contribution given by experts in the audience; from research institutions, microfinance institutions (MFIs) and public entities. Firstly, it helped identify the different agents involved in microinsurance, which Dr.Santamaria laid out to be the regulators, financial analysts, insurers, academics, donors, MFIs and the poor people.
Every one of these agents has different objectives and interests and the questions that they may raise are; “How can we assess the risk?”. “How to make the client pay first to then possibly have the benefit later?”. “How would the poor react to the different options?”. “How to convince them to pay more on top of their loan?” and so on. Microinsurance is yet another costly service with high risk, which the target audience is not accustomed to and, as a result it is a novice idea not only as product but as an ideology.
Microfinance Without Borders explained how to offer microinsurance through an MFI, which is not necessarily a partnership that one takes for granted. However, throughout the presentation it became clear why it makes sense for MFIs to offer the product. The main reason is because MFIs already have a vast database of their clients’ records, such as their Credit Bureau records, personal details and references.
Consequently, much of the risk, or type of product to offer, can be determined by data that already exists. Secondly, unlike the US presidential debate about Obama care versus private insurance companies, the kind of people you may offer microinsurance to may not trust either the insurance companies or the government. It is true that the microfinance sector is gaining a rather gloomy reputation, but those who are happy with their loans will trust a product much more which is offered by their MFI then the government, which commonly will not have extended welfare schemes that reach out to them, or the insurance companies with whom they have never dealt before.
These products should be allocated where there exists a relationship of trust and, in fact, we shouldn’t forget that the highest risk in all these operations is thrust on them, the clients, and not the institutions.
A very good point a credit risk manager made, is the difference in cycles between microcredit and microinsurance. Microcredit is short-term and for this, the return is easier for one to understand and see. However, most insurance products have a much longer cycle and for this it shouldn’t be taken for granted that a client of a MFI will want to invest in microinsurance.
The general preconception is that they live hand to mouth and, but it is somewhat ironic to believe that they may have extra money to spend on insurance. As a matter of fact, this difference in cycle is also a matter of mentality. How do we convince people to invest long-term in preventing something that may not happen?
It was generally agreed that microinsurance is better suited for those who have a certain cushion above the poverty line. Also, the hand-to-mouth image of the poor was corrected to a certain extent as we reminded ourselves of the heightened interest in microsavings and in fact, many cheered at the idea of combining microinsurance products with microsaving.
Those who are saving with MFIs have already started the habit of putting aside some money for a future cause and they are more prone to be interested in insurance. Lastly, microinsurance will be more appealing if it is designed to show how it would cover a definite or an immediate need. For example, in West Africa, it is popular for people to save up for funerals.
Alternatively, those who have an agricultural business, may see the value in protecting their crops, although agricultural insurance as a whole seems to not have had much success in developed countries. Lastly, for those MFIs who are offering micromortgages and credits to improve housing, the clients may be more concerned about making sure that the property they are investing in is not at risk of being crushed by natural disasters.
So, to summarise: microinsurance as a product still has a long way to go, although several governments and organisations have already gone through some tests. I believe the biggest challenge in microinsurance is the need to involve additional agents in the model, since it is no longer a bilateral relationship between the financial intermediary and the client, but at least a triangular agreement between the client, financial intermediary and the insurance provider.
Especially, with a product like insurance, where people need to be convinced of its purpose, the more agents are involved, the harder the task is. Many innovative microinsurance projects have been proposed recently, so it will be exciting to see which projects get signed off and to see who emerges as the strongest players in this field.