Microinsurance – A new instrument of development aid
People in developing countries who are exposed to particularly high risks of damage and loss due for example to fire, accidents or natural disasters often have no access to insurance coverage – despite the fact that they urgently need it. Microinsurance schemes aim to remedy this situation.
How can people in developing countries secure themselves against the inherent risks in life? This question has never been a priority area for development aid. In recent years, however, development efforts have been focusing more on provisions for securing the future of the poor and the poorest. One response to this issue is provided by microinsurance schemes, which firms like Cruzsalud in Venezuela and Microcare in Uganda are advocating. Insurers such as Allianz and Munich RE have also become active in this area internationally.
What are the goals of microinsurance?
Low-income households are exposed to potentially higher risks from accidents, illness or theft. Inhabitants of developing countries are often particularly hard hit by natural disasters and crop failures. At the same time, these people have hardly any means of compensating for damage and loss, and their modest savings are quickly used up when they fall ill, are robbed, or suffer other damages or loss. Thus, while the poor are the ones who need insurance the most, they not only lack the funding to pay for coverage, but are also unaware of the need for insurance and have no knowledge of how they can get it.
What is more, many traditional insurers reject the idea of accepting clients with very low incomes in regions such as Asia or Africa. Consequently, insurance products geared to poor segments of society are often not even offered – a problem that development aid needs to address.
Social protection: Advisory services from GIZ
The Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH supports efforts to establish microinsurance schemes and other social protection systems, advising all participating stakeholders such as governmental institutions and insurance providers. The aim is to improve the framework conditions in developing and emerging countries in ways that enable expansion of social protection systems to cover the entire population.
Microinsurance as a new form of social entrepreneurship
Microinsurance is aimed at remedying this situation, not only providing direct, local support for the poor, but also promoting insurers who actively engage in developing countries to tap segments of the population who have been ignored previously as clients. Microinsurance schemes represent a new form of social entrepreneurship that is currently developing rapidly, particularly in the field of sustainability.
Insurers active in this new sector have set their sights on various products, including health and life insurance schemes, and coverage against the death of livestock and crop failures – damages and losses that few traditional insurers will accept, but which count among the everyday existential risks in developing countries, especially in rural areas.
Simple modus operandi of microinsurance
The basic principle is similar to that of microloans as development aid, as is the underlying idea: the insured party pays a series of small contributions within a short period of time to an institution that specialises in microinsurance schemes; in many cases, these insurance policies form part of microcredit packages and are identified as such. In the event of a claim, the total insured amount is paid out.
It is important that information on microinsurance the product policies is formulated in very simple terms. The people insured under these schemes often have a low level of education, or may even be illiterate. This is why the advantages to them must be clearly recognisable, such as the benefits to their own health if they can obtain health and life insurance coverage for a few cents a month. Such insurance also covers loans taken out by the deceased so that bereaved families are not also confronted with financial difficulties.
Problem of access
Problems still remain because microinsurance schemes rarely succeed in reaching those people who actually need them. Estimates assume a success rate of only two percent. On one hand, advertising promoting microinsurance is provided by the insurers themselves, which experts say is insufficient. Government officials and the private sector in developing countries also need to get involved in communicating these opportunities. On the other, it is also important that more commercial insurers offer microinsurance products, since they reach significantly more people overall than NGOs and local projects.
Discussion within the community on microinsurance schemes