Report - 13th International Microinsurance Conference, 7 - 9 November 2017, Lima, Peru

Plenary 1 - How does (micro)insurance matter for development?

By Pedro Pinheiro

The plenary takes a critical look at the role of insurance in development from the perspectives of two professors of economics, both of whom also have extensive practical experience in developing countries: one as the founder of a non-profit organisation promoting effective solutions to global poverty, and the other as the chief economist at a national aid agency leading intervention projects on rural poverty and communities vulnerable to natural disasters.

For the poor, insurance means avoiding the use of assets to recover from a financial shock or disaster and preventing a fall back into deeper poverty. But even before a shock occurs, there is a risk management role insurance can play to help the poor prepare for and deal with unforeseen perils.

By providing protection against risk and other threats to the status quo, insurance makes economic activity possible. With the security insurance provides, people, as entrepreneurs or even microentrepreneurs, can assume a degree of financial risk and invest in an enterprise or community, thus generating business. There is no doubt that insurance underpins development, whether at a macro or micro level. The question is how well it is able to perform that role in the current scheme of things. Specifically, that role can be examined against the backdrop of the UN’s latest sustain¬able development goals (SDGs). These are a new, universal set of goals, targets and indicators for UN member states to use to frame their agendas and policies over the years 2015 – 2030. The first two SDGs are: no poverty, and zero hunger. How does (micro)insurance figure in this macro agenda, with its potential of risk management and financial protection to unleash investment by the poor and low-income sections of the population?

Stefan Dercon, Professor of Economic Policy, University of Oxford, United Kingdom explaining why disaster preparedness is better than the post-disaster “begging bowl” approach. 
Left to Right: Stefan Dercon, Professor of Economic Policy, University of Oxford, United Kingdom explaining why disaster preparedness is better than the post-disaster “begging bowl” approach; Dean Karlan, Professor of Economics at Northwestern, United States; Glenn Harrison, C.V. Starr Chair of Risk Management & Insurance Director, CEAR – Georgia State University, United States.

Cover risk well to counter underinvestment in small-scale farms
Insurance can provide more than simply financial protection, especially for the poor. It promotes risk management which, even if not practised, at least makes people aware of the need for it.

Experiencing financial shocks makes people cautious about investing to improve their circumstances – which then delays escaping from poverty. Awareness of risk management, in addition to having insurance protec¬tion, provides an incentive to invest.

Some 75 % of the world’s poor depend largely on farming. Innovations for Poverty Action (IPA), dedicated to improving the lives of the world’s poor, believes investing to increase the productivity of small-scale farms is key to the well-being of farming families. An IPA intervention in northern Ghana found that risk, rather than lack of capital, is what drives underinvestment in agriculture.

This study of 1,406 households in 84 rural communities – conducted from 2008 to 2012 – divided the population into four groups: one received cash grants, a second received rainfall index insurance against drought and flood, a third received both, and the fourth (the control group) did not receive either. Farmers with insurance invested more in agricultural inputs than those with cash grants (see Figure 4).

However, the study also found that insurance take-up is highly influenced by trust and the recency bias. Take-up of insurance was considerably higher among farmers who also received a capital grant, but it was not higher among households who were wealthier. This suggests that farmers might not have been entirely confident that the promised insurance payouts would be made when trigger events occurred, and so they were more willing to take the risk of purchasing when they had been given extra cash. Similarly, individuals who were familiar with others who had received insurance payouts in previous years were significantly more likely to take up insurance themselves.

To promote trust, insurers must guarantee that claims processes are fast and effective, and that exclusions are clearly understood by the consumer.

It may help to make payouts more frequent – for example, by bundling insurance with a savings component. However, when automatic set-off mechanisms are put in place for payment of the loan, insurers should heed any built-in perverse incentives for the insured to sell loan proceeds at a lower price to third parties and then default on the loan.

Social networks in rural areas also come into play. Community extension agents, assigned to deliver timely messages about cultivation practices, were found to have a positive influence. With an educational or consultative component added, insurance has a nudging effect on practices which help manage risk. These components need to be simple and direct (such as “do this, do not do that”) – keeping in mind that there is not even a word for “insurance” in some local languages.

Also important to remember are the household dynamics and the roles of different members of the family in relation to the risk: whose income is affected, who owns the object at risk, whose assets are going to be sold in the case of a shock, who controls the premium, etc.? The answers will affect the targeting and success of an insurance product.

An insurance-like public system with better products
The second presentation made the point that one third of poverty is associated with adverse events. Loss of health and loss of assets are the two biggest risks the poor face, and (micro)insurance so far has not lived up to expectations. In terms of both impact and uptake, the effect of health insurance and weather index insurance schemes on the poorest is negligible. The question arises: are these products the right way to protect progress in global SDGs that leave no one behind? A focus on microinsurance products is, of course, important for insurance market’s development – but not as a tool to reach the poorest.

Additionally, in the event of natural disasters, the response to shocks after they occur has been dismal in both the developing and developed world, at the cost of many lives. This is due largely to a failure in implementing ex ante risk management instruments and poor decision-making at the time of the event, as well as to a reliance on the mediaeval financing instrument of a begging bowl. A cultural shift is needed, to proactive risk management at all levels of society, including: risk identification and ownership, risk reduction and preparedness, and financial planning.

With natural disasters on the rise, more and more countries should have an insurance-like system (such as FONDEN in Mexico and HSNP in Kenya) that is able to promote clear risk ownership and a fast, evidence-based decision-making process, with a coordinated, credible plan for post-disaster action agreed in advance, and a financing system on standby to implement the plan.

Arguably, (micro)insurance in its current mode as a market-based private system is falling short of alleviating poverty and helping meet SDGs. To matter most for development, it should evolve into an “insurance-like” public system (see Figure 5).

Lessons learnt

  • Most of the world’s poor are in rural areas and involved in farming. Increasing productivity of small-scale farms is key to raising farmer income and alleviating productivity. That means enabling farmers to invest in improved seeds and fertilizers.
  • Risk, rather than lack of money, is what keeps farmers from investing in improved inputs. Insurance offsetting the risk will counter underinvestment and persistent poverty.
  • Microinsurance is growing rapidly in low-income sectors, but has not spread much across the bottom of the pyramid among the poorest. For both health insurance and natural disaster protection – the two main risks the poor face – products on offer have had little impact or take-up among the poorest.
  • To contribute effectively to development, as envisioned in SGDs, insurance for the very poor needs to be a public policy, not a market development, concern. It should evolve into an insurance-like system that guarantees inclusion of the poorest, builds on informal systems, and improves consumer protection, product quality and risk reduction incentives.



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