Access to Finance: Ideas and Evidence - Risk Management and Insurance

This note discusses why risk management is important as well as difficult for the poor, and how access to insurance is being expanded.

For commercial insurers, the pursuit of profitability makes serving the poor with current technologies a low commercial priority. Two new approaches, namely, partnership models and index-based insurance, are attempting to change this equation. The supply and demand of insurance, however, tends to be low in low-income communities. Some reasons include:

• Information problems make crop insurance a relatively less enticing product line for most commercial insurers;
• Moral hazard and adverse selection pose substantial barriers for insurers;
• Villages are, in many ways, not natural insurance groups, especially given the families and kinship groups that often extend geographically;
• Formal sector insurance is expensive as it includes taxes and administrative costs;
• Collecting small-sized premia from customers is a logistical challenge for commercial insurers.

Finally, the study emphasizes the urgency for insurers to identify new modes of marketing to enhance take-up of insurance and develop an improved array of insurance products.