Insurance as a Microfinance Product

This technical note describes the parameters of microinsurance in the range of risk management products and tools typically used by microfinance clients. The paper discusses:

• Risk management in low-income households:
  • Describes the types of risks that these households face - life-cycle, death, property, health, disability, mass/covariant risks;
• The means by which poor households cope with risks:
  • Informal, individual risk coping strategies,
  • Informal, group-based strategies,
  • Formal, group-based strategies;
• Insurance as a superior alternative for some kinds of risk such as property, death, health and disability;
• Types of insurance:
  • Term life insurance,
  • Permanent life insurance,
  • Endowment life insurance,
  • Life savings insurance;
• Lessons learnt by MFIs concerning different kinds of insurance;
• Basic insurance principles such as:
  • Having a large number of policy holders,
  • Insuring for specific risks only,
  • Establishing controls on moral hazard,
  • Adverse selection, achieving a balance between high-risk and low-risk policy holders;
• Areas where MFI designed and managed programs run into difficulty due to lack of internal resources, skills and infrastructure needed to manage insurance products profitably.

The paper concludes by advocating the development of micro insurance products through MFI partnerships with licensed insurers. It argues that in an MFI-insurer partnership, each partner is able to provide the expertise and services it knows best, and for which it already has the necessary resources.