Micro-Insurance: A way out of poverty trap and a Risk Mitigation Mechanism? By Uchegbulam Ezechimere Obinna

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Micro Insurance protects poor people by providing low-cost insurance to mitigate their risk, it is defined by the International Association of Insurance Supervisors (IAIS) as protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved, it provides low premium and often tries to provide a reasonable coverage insurance policy for people with low income, the products of Micro-Insurance are designed with the objective of protecting poor people which are ignored by the traditional insurance products and big insurance companies that tend to focus more on middle to high income individuals and organizations, this creates ways for self-help groups and NGOs in order to act as insurance agents to market the micro insurance products. It facilitates pro-poor financing and social security development, and the mitigation of the effects of climate change and reduces the vulnerability of rural households and mitigate the jeopardy that seems to be a hindrance to their productivity and lives, it also provides assistance in the promotion of investment by securing the lending risk for agricultural investment.

Micro-Insurance and Traditional Insurance share same purpose: to make sure consumers- both individuals and businesses- transfer their risks and have access to needed security to live and expand their business; it is of great significance to divulge that poor households are prone to risks as a result of their low income, education, and their type of business which is often related to agriculture hence when faced with difficulties or when they are victims of disasters or ill-health they are left with little or no solution. Weak financial capability and illiteracy/ ignorance, misinformation, and lack of trust are the few reasons low-income households do not often subscribe to insurance programs, on the other hand, urban-based insurers do not offer products that serve rural low-income markets or products that they can afford, these factors bring a gap between the benefits of insurance and the low-income household, coupled with the fact that poor households or individuals are less educated and are not aware of risk mitigation mechanism.

Micro-Insurers and Health: Studies have demonstrated that insured persons had access to health facilities more often than uninsured persons, furthermore, policymakers spent less on health care for insured persons and in addition, extending health insurance to members of households could reduce child labor

Agriculture and Micro-Insurance: Agriculture is often attributed to be one of the activities of poor households in South countries, poverty reduction is related to the development of agricultural activities, these activities has a lot of risk i.e. health and Natural (climate), micro-insurance could mitigate such risk by providing a platform where households can mitigate such risk or be taken care of in situations of serious health problems, micro-insurance programs can also provide educational training on how to go about activities and provides psychological security to the poor people.  Take for example, effective crop insurance allows farmers to specialize in high-value crops, in can be said that having Micro-insurance would make poor people undertake risk ventures which can generate higher income, the certificate of insurance can also be used as a collateral or guarantee to access loans from a Micro-Finance institutions and with the guidance of the MFI and Insurance provider, the poor farmer can strategically increase his income and have more access to the market to sell his produce, furthermore, if the poor farmer falls sick, the Micro-Insurance provider (MIP) covers up the health fees and because of the exposure and  level of education of the MIP, the farmer will have access to better quality drugs and healthcare. Farmers face several hindrances that hold them back from investing, however, once there is insurance in place, smallholders will be able to improve their production

Insurable risks hinder many rural communities to prosper. Agricultural Micro-Insurance can stabilize rural communities and promote local development through providing protection or as a necessary condition for larger investments. In the first case, Farming households are prevented from suffering long-term impacts in the case of harvest failure.

According to CGAP Working Group on Micro-Insurance, Good and Bad Practices, Case Study No. 9, in 1997, American International Group (AIG) Uganda entered into an agreement with a microfinance institution (MFI), called FINCA Uganda, to offer insurance products to FINCA’s credit clients. The resulting personal accident product was one of the first success stories where a large insurance company proved that Micro-Insurance could be profitable in a low-income market, Six years after, most Ugandan MFIs were offering it to their clients and 1.6 million lives were covered in three countries. By 2003 the product was contributing 17% of the profits ($100,000) of AIG Uganda.

According to Cai et al (2014), Micro-Insurance might be important as Micro-Finance in increasing production and it can also support the effects of Micro-Finance by protecting the farmers from the inherent risk of entrepreneurial activities. Needless to say, Micro-Insurance providers also create jobs and increase the economic activities of the country.

In conclusion, Micro-Insurance has gone a long way in keeping poor people away from poverty trap and is an important tool for financial inclusion. It is one of the important tools for managing risk by poor and low-income group people. It offers a promising new way for poor people to manage risk and contribute to poverty alleviation and contributes in achieving Millennium Development Goals (MDGs), furthermore, there is a positive relationship between the development of the insurance industry and national economic development, however, the governments in LDCs and developing countries face several challenges such as a low know-how on the modalities of Micro-Insurance and weak institutions, as well as low financial literacy.

 

Having read this, what policies can you think can be put in place in developing countries to provide Micro-Insurance products and also encourage participants such as NGOs?

NB: Please Follow the below-listed references for more information

 

Sources

http://www.actuaries.org/MICROINSURANCE/Tallinn/Thorburn-AM.pdf

http://www.impactinsurance.org/about/facts-on-microinsurance

http://naicom.gov.ng/payload?id=e116268a-8902-4eda-8709-afb7c6dd7918

http://www.sas.upenn.edu/~hfang/publication/sow/restat-revise-5.pdf

https://www.allianz.com/v_1364402141000/media/responsibility/documents/Allianz_Microinsurance_Indonesia_Payung_Keluarga_Case_Study_on_Success_and_Lessons.pdf

Micro Insurance: a Spectacular View on Rural Development in India by Sanjeev Kumar Srivastaw

http://www.worldwidejournals.com/ijar/file.phpval=August_2013_1375511497_1c067_31.pdf

Presentation by Dr. Brigitte Klein, Financial Systems Development, German Development Cooperation (GTZ) and Federal Ministry for Economic Cooperation and Development (BMZ)

Agriculture, Microinsurance, and Rural Development A thematic paper by Silvia Müller, Gaby Ramm, and Roland Steinmann

The Emergence and Development of Agriculture Microinsurance A Discussion Paper By Thérèse Sandmark, Jean-Christophe Debar, and Clémence Tatin-Jaleran

4 thoughts on “Micro-Insurance: A way out of poverty trap and a Risk Mitigation Mechanism? By Uchegbulam Ezechimere Obinna

  1. Poverty alleviation constitutes a major item on the UN development goals of the millenium. Huge spendings and campaigns have been made to remove man from abject poverty but the syndrome persist. Improvements in GDP even makes it worse for most people especially in South East Asia and Sub Saharan Africa. The gap widens, sufferings increases. But where has all these billions spent on poverty reduction by the World Bank, IMF, international development cooperations ended? what impact have they had? what can the ordinary poor slump dweller in Nairobi- Kenya expect from such massive spendings to end poverty when his situation degenerates?
    With a bulk of the worlds poor living mostly in rural areas and slumps in urban areas, and involved mainly in farming, fishing and petty businesses, micro insurance may come as a remedy but this has often not been the case. Widespread flaws in its practice are witnessed worldwide with some of the problems listed above by the blogger. For some effective organisation and practice of micro insurance, some of the points below can be applied:
    -government should define policies that identify structure the practice of micro insurance
    -government should work with NGOs which directly deal with those in need as they understand the problems.
    -government should sponsor training of experts in rural development
    -coopration between the state and donor countries
    -nation wide sensitisation campaign for locals to know how to benefit from micro insurance
    -expansive development projects especially in rural and agric settlements so as to reduce the possibilities and shock of risk
    -introduction of contigency plans to deal with emergency cases

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  2. Some policies which I think can be put in place to achieve effective micro insurance are: Developing strong partnerships among governments, donor organizations, and private sector companies to ensure that social obligations are met and successful sector reforms and public investments achieved; Implement insurance awareness campaigns, which include financial literacy, among low-income population and implement micro-insurance awareness and capacity building among insurance company staffs and management; Develop and implement legal, regulatory, and supervisory frameworks that meet the International Association of Insurance Supervisors (IAIS) standards for inclusive insurance markets Invest in new product development and build market infrastructure that is invest in product development, and also develop alternative distribution and service delivery channels; Catalyze investments in micro-insurance providers and intermediaries. By putting some of these policies in place, micro insurance can be efficiently delivered in developing countries.

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  3. The two comments are well said. Government should combine all the policies mentioned above with the provision of employment opportunities that would enhance the living standard of the people especially those living in rural areas. Implementation of Micro Insurance awareness may not work where people are living in extreme poverty. It will be unfair for low income people who live from hand to mouth to contribute a certain sum of money regularly to secure their health when they can always result to the use of herbs and low priced drugs regardless of the implication.

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  4. I am in total unison with all the above propositions, hence would like to expatiate on the previous comments. Firstly the local governments would really have to carry out extensive insurance awareness campaigns if they want to stand the chance of transforming the anti-insurance standpoint of most people in the rural regions of LDCs especially the poorest of the poor. In my opinion this is key to the success of the proceeding actions listed above. From what I have experience and from what I know, many individuals from the rural communities in these societies are unable to comprehend the idea of deliberately contributing part of their hard earned income into the keep of someone, in preparation against a potential misfit in the future which has the probability of not happening. To them it doesn’t matter how big the probability is, that something bad will occur, they are willing to take their chances in the hope of being the ones to be spared from any bad future omen. This anti-insurance attitude comes mostly from cultural or religious beliefs. A study by Dr. Tom Rees an independent researcher, suggested that religious beliefs are more prominent in the poorer sections of a society, he suggests that in places without strong social safety nets to provide people with opportunities for upward mobility, people are more likely to rely on religion or their traditional beliefs for comfort and with these beliefs comes the hope of a better tomorrow. So they do not want to consciously prepare against future calamities which in itself is contradictory. Creating awareness coupled with cultural adequacy in the method of establishing these micro insurance schemes in the different societies (Leppert et al. 2012) will ensure the success of micro insurance. Lack of taking this into considerations will lead to more failures as has been seen in the past.

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