How do the Poor Deal with Risk?
This briefing note describes the formal and informal risk management tools used by the poor in India, Bangladesh and South Africa as illustrated in the financial diaries presented in the paper titled Portfolios of the Poor: How the World’s Poor Live on $2 a Day.
The note states that coping with irregular incomes and financial emergencies is a fundamental challenge for the poor. The financial diaries reveal that illness is the most common cause of financial emergencies in India and Bangladesh, whereas funerals caused such emergencies in over 81% of the households studied in South Africa. The poor use a combination of formal and informal credit, savings and insurance to mitigate risk. Funeral insurance, for instance, is popular among the poor in South Africa.
The note suggests some solutions to help the poor manage risk better. These include:
- Partial insurance coverage, which is cheaper than full coverage, and addresses specific issues;
- Customized product design with more convenient repayment options;
- Insurance coverage attached to savings and loan products.
