What is micro-insurance?

Written by Tamsin Hemingray on 05 July 2010

In the UK, we take for granted the concept of insurance to protect our lifestyles and preserve some of the comfort and certainties we have in our daily lives.

But for many people around the world, that’s not the case.

Historically, many people in developing countries have struggled to access affordable insurance that matched their needs.

But now technology, and the recognition that insurance is increasingly important in the face of climate change, is spurring renewed interest in finding systems that work.

The push for micro-insurance has begun.

What is micro-insurance?

Micro-insurance is cover with low premiums and low coverage limits, designed to be affordable to those who have traditionally been disenfranchised by mainstream products.

Micro-insurance policies often provide cover for life, crop failure, and health – important issues for all of us, but even more crucial for those whose ability to feed themselves and provide for their families can quickly mean the difference between life and death.

One of the main products – credit life – ensures that a policyholder’s death does not mean his family will be left with crippling debts for credit he took out.

The main difficulty is finding the right balance, so affordability still means sufficient protection for the poor.

India - Sights & Culture - Planting Rice Paddy 7

A new concept?

Not according to some experts, though the term itself is fairly new – first cropping up in print in 1999.

Prior to this it had been used during the 1990s as an extension of micro-finance – a term which refers to the provision of financial services to people on a low income, offering them access to credit, savings and fund transfers.

But according to the Micro Insurance Network, there have been examples of what we might call micro-insurance dating back to the 19^th Century.

Industrial life insurance – low cover life insurance – was being sold and weekly premiums collected door-to-door in the UK and the US towards the end of the 1800s.

And it is still in practice today, generally offering a very low death benefit (less than $1,000). Despite being aimed at people on a low income, industrial life insurance has attracted criticism, as the regular payments can lead to policyholders paying out over a number of years a sum far higher than the end value of the product.

Micro-overheads

To be useful and sustainable for both insurers and the insured, Micro Insurance Network says that a streamlined process is needed. This efficiency is important so the provider can keep down costs, and so the payment and claims process is simple – and affordable – for the policyholder.

Banks have often steered clear of customers with very limited income, as the cost of managing accounts is comparatively high. In a similar way, micro-insurance has struggled to break even.

But with new technologies allowing for increasingly easy and efficient administration of policies, costs are coming down. Some even believe micro-insurance could be profitable – even if that’s not the main reason for providing it.

In the field: the MicroEnsure approach

MicroEnsure, a subsidiary of not-for-profit organisation Opportunity International, claims to be the world’s first insurance broker for the poor. Based in Cheltenham, it works with a range of organisations such as rural banks, charities and those providing micro-finance, and believes the tide is turning.

Peter Lomas, MicroEnsure’s vice president of communications and media relations, says that health insurance is something the poor have not previously had access to.

“They pay one or two dollars a month and we make a very few cents on each policy.

“We are set up as a for-profit organisation, but we try not to make a huge profit – the objective is to be sustainable for our clients.”

While the people who use the service tend to live on very limited amounts of money, they are nevertheless economically active – a situation that micro-insurance seeks to stabilise and safeguard.

One of the more interesting ways in which micro-insurance can do this is through covering the crops farmers produce.

Last month, MicroEnsure launched its first weather index crop insurance in India, providing 4,000 smallholder rice farmers with protection against the extremes of drought and heavy rain.

The idea is to see the farmers in the Kolhapur district of Maharashtra through the primary growing season, which runs from June to October. And if this year’s pilot scheme is a success, it could be rolled out to a much larger number of farmers in 2010.

A striking feature of the scheme is its simplicity – instead of the policy-holders having to fill out a claim for their losses, an automated pay-out is triggered by readings at a weather station.

It’s an approach that’s also been used to protect 2,000 rice farmers in the Philippines.

Satellites track the progress of typhoons, and GPS locations are used to automatically make scaled payments to farmers depending on how close they are the centre of damage.

Peter hopes that crop insurance will not just provide farmers with greater security, but will enable them to develop their livelihoods – as insurance is often a pre-requisite for access to finance.

Micro-insurance – big future?

The early schemes are being watched carefully – the UN believes the approach could underpin adaptation to climate change in Africa, Asia and Latin America.

“It helps with diversity of crops and even allows farmers to diversify into other areas, like milling,” says Peter.

“And that helps enable a much more stable rural economy, so people don’t have to leave to go to the city.”

The key is keeping the running costs – and premiums – at a minimum. But with automated systems such as the typhoon alerts, and plans to use mobile phones to upload data direct from policyholders even in remote locations, the future for micro-insurance could be big.

The 5^th International Micro-insurance Conference will take place in Dakar in November.

Header image

by Flickr user m-louis.
Women planting rice

by Flickr user mackaysavage, Rice stripper-harvester by

IRRI Images, Typhoon satellite image Jeff Schmaltz/NASA.

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