Providing Insurance to Low-Income Households: Part 1: A Primer on Insurance Principles and Products

This paper has been written primarily for managers and directors of MFIs that either offer insurance or plan to develop an insurance product for low-income households. It sees that the provision of insurance might create a win-win situation where clients experience a reduction in vulnerability to risk and MFIs benefit from an improved bottom line:

• Insurance is a promising response to risks which cause losses that are beyond the means of the poorest and pools the risks faced by low-income households;
• In the drive for sustainability or profitability, MFIs are diversifying their lines of financial products and insurance has the potential to improve profitability by reducing loan losses and replacing clients' need to draw down savings for emergencies;
• MFIs can benefit from an additional source of capital for lending or fee-based income as agents.

However, there are obstacles to serving the low-income market that require innovations in product design, delivery mechanisms, and marketing. The document offers six components towards an analysis of microinsurance:

• Framework for thinking about providing insurance to low-income households including a summary of risks to which they are exposed and common risk-coping mechanisms;
• Initial definition of the appropriate role for insurance in low-income communities relative to other financial services and relative to the risks prevalent in these communities;
• Clear description of the basic principles to be followed by any insurance provider;
• a breakdown of the variety of potential insurance products including an assessment of the complexity and challenges faced by providers of each type of insurance;
• Detailed summary of technical information to consider when developing and implementing an insurance product;
• Glossary of common insurance terms and recommended reading.

It concludes with three points that clarify the insurance field:

• Insurance involves pooling risk over a number of participant groups and it is not, like dowry and marriage 'insurance', a savings product;
• Insurance may be secondary to saving enough money to protect from economic shocks and is most appropriate for uncertain and expensive losses;
• Insurance products range from fairly straightforward to very complex and should involve experts.