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Microinsurance

Last Updated 7/28/17

Issue: Microinsurance is an important tool for protecting the health and livelihoods of under-served low-income populations in emerging markets and developing countries. It provides a means by which the poor can insure their crops, livestock and other property from the risks associated with natural disasters, floods, droughts, fires, etc. The poor are more vulnerable to these risks than the rest of the population and can be hit hard by sudden adverse events that have not been contemplated and addressed with insurance.

Overview: The International Association of Insurance Supervisors (IAIS) defines microinsurance as “the protection of low-income people against specific perils in exchange for regular premium payments appropriate to the likelihood and cost of the risk involved.”  According to the IAIS, the term refers to servicing a specific income segment in the emerging market jurisdictions where the insurance markets are not well developed.  Low-income people in developing countries have little access to health services and are more likely to live in riskier environments with a greater likelihood of illnesses, accidents and thefts. They are exposed to a variety of significant risks to their wealth and life; but often have inadequate informal tools to manage them.

In essence, microinsurance operates the same as conventional insurance except that it is targeted at low-income households, specifically the working poor who have few or no financial reserves and incomes that fluctuate considerably. The most significant difference between conventional insurance and microinsurance is the size of the premium and the insured amount. Premiums and/or coverage limits are typically low and paid in sporadic installments because of the irregular income streams of the insureds. In addition, microinsurance policies are generally written in simple language so they can be easily understood as this market tends to have limited education and financial literacy.

Microinsurance is not confined to any specific product or product line or a specific provider type. It covers a wide variety of risks—basically any risk insurable and appropriate in terms of affordability and accessibility to low-income households. Microinsurers have increasingly turned to innovation to tailor products to accommodate the needs of their low income target market. Credit-life and funeral (burial) products are reportedly the most common types of microinsurance.

Microinsurance can be delivered through a variety of institutional channels, including licensed insurers, health care providers, community-based organizations, microfinance institutions and non-governmental organizations, access to microinsurance products remains low in most developing countries. Many businesses and organizations are actively engaged in microinsurance and they often join forces in innovative ways to deliver services. A 2011 study by the Microinsurance Network found that the majority of the top 50 commercial insurance companies are involved in microinsurance. The study also found that India, China, Brazil and South Africa are top markets for microinsurance.

Status: Many emerging markets are widening the reach of insurance services to those segments of the population that have remained underserved. Microinsurers continue to explore ways to significantly increase the number of low-income households that have access to insurance. According to a Munich Re Foundation 2012 report, the number of microinsurance schemes worldwide has increased substantially over the past five years and now reaches an estimated 500 million people worldwide.

In 2007, the IAIS issued an Issues in Regulation and Supervision of Microinsurance paper which explained the current state of microinsurance; its important role in developing inclusive financial systems particularly in emerging markets; and why it needs to be regulated and supervised along professional lines. The goal of the paper was to assist insurance supervisors to draw up an integrated framework for the development of microinsurance through favorable policies, legal and regulatory adaptations and sector-wide institutional capacity building.