Piecing Together Partial Solutions: Financial Tools to Cope with Shocks

This paper provides insight into the role of various financial tools in the wake of a financial shock: a family member’s death, property damage, or a healthcare need. It aims to understand the cost of these shocks and, for those who are insured, the role that microinsurance plays as a part of the financial toolbox used to cover these shocks. The end-objective of the paper is to understand the added value that a tool which can be used to manage financial shocks may have over its alternatives. It also sheds light on where and how insurance fits into the financial toolbox of low-income households. The research is based on the ‘Client Math’ methodology developed by Microinsurance Learning and Knowledge (MILK) to understand the costs of an insurable shock and how those costs are financed by both insured and uninsured people. The paper covers the following sections in detail:

• Discussion on the method of Client Math;
• Overview of the costs of various shocks and the financial tools used by insured and uninsured respondents;
• Availability and burden of financing;
• Discussion on eight different tools utilized to offset financial shocks: income/cash on hand, spending cuts, gifts and donations, informal borrowing, formal borrowing, savings, asset sales, and insurance;
• Determinants of the use of a particular tool and the implications for product design.