Microinsurance helps protect low income people around the world against issues such as natural disasters, economic problems, illnesses and accidents. It’s a fast growing industry that provides tailored insurance to people primarily in developing countries. Everyone needs a safety net, and we’ve explained here how microinsurance is helping both developing economies and investors.
How microinsurance works
Imagine you own a small business selling coffee from a coffee cart. This business is your source of livelihood for your entire family – food, rent, education for your children and medical expenses. One day, a big storm completely destroys your coffee cart. The replacement cost is over three times your monthly earnings and far more than your savings. All of a sudden, you go from being able to work and take care of your family to being on the brink of starvation.
A lack of support
This is the reality for most people in developing countries. With no government support or basic insurance to cover unexpected events, they are always living on the edge of poverty – one disaster or accident away from going from productive citizens to starving people with no hope for the future.
The microinsurance solution
Microinsurance was designed to solve exactly this problem. Insurance in developing economies is reserved for people who can afford expensive premiums and have stable employment and income. Microinsurance is an insurance product designed for low income people (earning less than $10 a day) to protect them against unexpected events that threaten their livelihood.
What does microinsurance cover?
Just like regular insurance, microinsurance covers a range of different sectors, including:
- Health insurance
- Property insurance
- Funeral and life insurance
- Income protection
In many ways, microinsurance is similar to other kinds of insurance. Owing to the unique problems it seeks to address, there are few special features inherent to microinsurance policies.
The terms of microinsurance policies are very simple and easy to understand. This helps people with limited education or exposure to insurance understand what they are getting into.
For example, rather than having complex payment schemes, health insurance is much simpler. When a family member is admitted into hospital, the insurance might simply pay $200, with little to no exceptions or exclusions.
Such a policy is easy to explain verbally to the policyholder and the whole policy document can be as short as one page. With microinsurance, it’s better for all parties that policy be simple and easy to understand.
Most microinsurance customers live in rural areas. Unfortunately, many insurance companies do not have offices or representation in these areas. It’s simply not financially viable.
To solve this problem, microinsurance has to be distributed through non-traditional channels.
For example, microinsurance has used SMS based mobile services to provide insurance products while others have recruited local shop owners to be their representatives. Reaching as many people as possible is key to achieving the social impact objective of microinsurance and, more importantly, it leads to the most important feature of microinsurance: affordability.
The premiums for microinsurance are affordable by design, sometimes equivalent to a few cents per week. Since the terms of the microinsurance policy are uncomplicated, there’s the potential for millions of people to sign up quickly and easily.
Peace of mind for everyone
Microinsurance can be priced in such a way that even low income people can also enjoy the peace of mind that comes with having insurance and do not have to live in fear of slipping into poverty due to an expected life event.
Microinsurance has managed to expand the range of financial products available to low income people. In most developing economies, low income earners either do not have access to any financial services or have access to a savings bank account that is usually linked to a microloan account.
This meant that whenever there was an unexpected event, savings or loans from microfinance institutions were the only option. Now, instead of dipping into savings or sinking into crippling debt due to medical emergency, for example, they can take out an affordable health insurance policy.
Combined with the ability to save money or borrow money, microinsurance ensures that, just like the rest of us, low income people can use the right financial product for the right financial risk.
Dispelling the myths about microinsurance
While microinsurance is similar to traditional types of insurance, it’s important to understand that it is it’s own unique set of products and services.
1. Not just downscaled insurance
It’s tempting to look at microinsurance as just smaller insurance with less risks. Doing so fails to understand the unique aspects of the markets to which microinsurance is beneficial.
2. Policyholders can’t afford premiums
Though most Microinsurance policyholders are from developing countries, that doesn’t mean they can’t afford to pay premiums. In fact, without microinsurance, many will pay far more to manage their risk.
More than just insurance
Success of microinsurance for both policy holders and investors hinges on particular products, not downsized insurance templates. Christian Super is investing intelligently in microinsurance to help the developing world and make your money work better for you.