Microinsurance: Profitable, philanthropic… or both?
By Brian Liu
As Ani mentioned in his post, our second class examined microinsurance as a mechanism of providing risk management to the impoverished. Very simply, microinsurance is an insurance product with low premiums, low coverage, and very simplified policies – in other words, insurance for the poor, the illiterate, and those who have no concept of idea of insurance.
To help us illustrate microinsurance at work in the real world, we had David Sattherwaite from Oxfam America participate as a guest speaker. Sattherwaite is part of Oxfam’s HARITA (Horn of Africa Risk Transfer for Adaptation) project, a collaboration between Oxfam, Swiss Re (the world’s second largest reinsurer), and the Rockerfeller Foundation. The project, which began with one village in Ethiopia last year but has plans to scale up to five surrounding villages this year, is designed to protect farmers from the effects of climate change “through risk reduction, risk transfer, and risk taking.”
These farmers essentially grow a crop called teff (similar to quinoa), a robust grain that forms a key source of food for the region – not only for its inhabitants but to feed the animals they own. If you take a look at the audio slideshow here, you can a better idea of the circumstances these people are facing and the objectives Oxfam is trying to reach by providing this weather index-based insurance, whereby insurance policies are exercised if the region doesn’t experience a preset amount of rain. Farmers who opted to participate had the option of paying for the insurance by cash or by labor.
But this whole issue of payment, both in terms of receiving premiums and delivering payouts, raises some very interesting questions. One question pondered whether a business model for microinsurance actually exists, or whether these relatively new schemes merely fulfill a philanthropic agenda. Without discussing the specifics of the arrangement, Mr. Sattherwaite reassured us that microinsurance, at least in the HARITA project, fulfilled both – a philanthropy and profitability. Existing literature also suggests that a key benefit for insurers and reinsurers in the micro market is a first-mover advantage into regions that are and will continue to experience the biggest amount of growth in the coming decades; in other words, brand-building for the next generation of mainstream clients.
Another important question that was raised was how participants are expected to handle the windfall payment in the event that the insurance package is exercised, especially for those at the very bottom of the pyramid for whom savings and investment is a foreign concept. This question was left unanswered, as Oxfam is still trying to figure it out; education is most certainly a part of the equation and the package that Oxfam provides.
Beyond Oxfam and Ethiopia, these questions are common across regions and insurance-types (life, illness, disasters, etc.), and will be important for at least two of our Finnovations teams to understand as we begin tackling our projects with Allianz in Indonesia: the first dealing specifically trying to understand how an disaster insurance program for the poor would be feasible for a private insurance company, and the second project on how simple informal savings programs compare with micro-life insurance for the bottom of the pyramid.
The overarching question remains: Is microinsurance the best use of development/social resources? Jump in with your thoughts.
