Scaling up microinsurance

Submitted by Sukaina Bharwani 25th March 2011 19:17

Sustainability of Microinsurance schemes

The nature of microinsurance raises questions as to the sustainability of the schemes currently on offer. By their nature microinsurance premiums are low cost, and many protect against covariate risks in a limited geographic area. This combination means that microinsurance schemes are vulnerable to financial stress and even failure if a large covariate risk occurs, as they may not have access to sufficient capital to settle the large number of simultaneous claims. The potential mechanisms for ensuring that microinsurance schemes are sustainable are explored below.

Public

External financial assistance is frequently given to microinsurers by governments or donors in order to reduce the cost of premiums to an affordable level for the poor to purchase [1] This is generally in the form of covering the administrative or design costs of the scheme, but may in some cases occur through direct subsidization of the premiums, for example in the Andrha Pradesh region of India Oxfam directly subsidises 50% of the premium costs . Governments may also subsidise the schemes in case of a large covariate risk occurring. Direct or indirect subsidies in this manner create a financial dependence on external assistance, and if the donor decides to reduce or stop the subsidy, the scheme may find itself in severe difficulty or having to raise premiums beyond the reach of its clientele [2]. Regulatory mechanisms, such as the Indian government’s requirement that all insurers conduct a set percentage of their work in the low-income sector, can also be conducive to the sustainability of schemes, by introducing private insurers into the market.

Private

Partnering with established insurance companies in a partner-agent model of delivery is seen as the most financially robust way of providing microinsurance. In this way the risk to the microinsurer is passed on to the commercial insurer, which has a much more diversified portfolio over which to spread the risk, and may purchase commercial reinsurance from a global reinsurer [3]. Commercial insurers are in a position to use their more expensive policies to cross-subsidize microinsurance premiums in order to make them affordable [4]. Obtaining reinsurance is the best way to ensure financial sustainability, as the risk is then transferred to the global capital markets, however most microinsurers do not currently have reinsurance. Transferring the risk of covariate events either to a commercial insurer, or to an international reinsurer, appears to be the best way to guarantee the future viability of microinsurance schemes, and needs to be explored further.

Public-Private

Designing and starting microinsurance schemes can be a very expensive process, so it may be that a limited amount of public assistance is needed in the start-up phase of projects to allow them to be viable. This assistance should be limited to the beginning of projects so that the issue of dependence mentioned above does not occur. Once a scheme is initiated, it may then partner with a commercial insurer to transfer the risk to achieve sustainability.

Expanding Microinsurance schemes

The other way to minimize risk to the microinsurer is for it to increase its client base to include a greater geographic range and a wider range income groups, for example including policies targeting more wealthy groups in society [5]. By diversifying the scheme geographically microinsurers can spread the risk across a greater pool of clients and decrease the risk of a covariate event striking all of the areas of its coverage at once. Including higher income groups in its portfolio will increase its income flow and allow the cross-subsidization of the premiums of poorer clients by the premiums of the richer clients.

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References

  1. ↑ Mechler, R., Linnerooth-Bayer, J. and Peppiat, D. (2006) Microinsurance for Natural Disaster Risks in Developing countries: Benefits, limitations and viability. ProVention Consortium.
  2. ↑ Linnerooth-Bayer, J. and Mechler, R. (2006) Insurance for assisting adaptation to climate change in developing countries: A proposed strategy. Climate Policy 6: 621-637
  3. ↑ Mechler, R., Linnerooth-Bayer, J. and Peppiat, D. (2006) Microinsurance for Natural Disaster Risks in Developing countries: Benefits, limitations and viability. ProVention Consortium.
  4. ↑ Churchill, C. (ed.) 2006 Protecting the poor: A microinsurance compendium. Geneva: ILO in association with MunichRe
  5. ↑ Mechler, R., Linnerooth-Bayer, J. and Peppiat, D. (2006) Microinsurance for Natural Disaster Risks in Developing countries: Benefits, limitations and viability. ProVention Consortium.