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.
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 being productive citizens to starving people with no hope for the future.
Microinsurance was designed to solve exactly this problem. Insurance in developing economies is reserved for the rich, who can afford expensive premiums and have stable employment and income. This 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.
Just like regular insurance, microinsurance covers a range of different sectors including health insurance, property insurance, funeral and life insurance. In many senses, microinsurance is like any other insurance but has a few special features:
1. Simplicity: The terms of microinsurance policies are very simple and easy to understand, ensuring people with limited education can understand them. For example, the health insurance could be that whenever a family member is admitted into hospital, the insurance pays $200, with little to no exceptions or exclusions. Such a policy is easy to explain verbally to policyholder and the whole policy document can be as short as one page.
2. Accessibility: Given that most target customers live in rural areas where most insurance companies do not have offices or representation, 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 local 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.
3. Affordability: The premiums for microinsurance are by design affordable, sometimes equivalent to a few cents per week. Since the terms of the microinsurance policy is uncomplicated and millions of people can sign up quickly and easily, microinsurance can be priced in such a way that even the 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 people 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 they can use the right financial product for the right financial risk.