Micro-insurance (Part I)
Cedric Stephens, Contributor
Question: One of my friends spoke with me about micro-insurance a few weeks ago. I am not too sure that he properly explained it. What do you know about the subject? Is it something that should be considered for local consumers? How does it work?
A.L., Morant Bay PO, St Thomas.
HELPLINE: There was a scurry of activity on the local scene on micro-insurance during the last 12 months.
A leading local insurance company launched three new products last October. That was followed by two workshops hosted by the Financial Services Commission in association with the Multilateral Investment Fund, an arm of the Inter-American Development Bank.
Since insurance companies are regulated by the state, it is reasonable to conclude from the involvement of these two heavyweights that the sale and distribution of micro-insurance products is an activity that is approved by the Government of Jamaica (GOJ), unlike the operations of CashPlus, Olint and other schemes which took place outside of the laws.
The Micro-insurance Innovation Facility, part of the United Nations' International Labour Office (ILO), published in its 2013 report, which was devoted entirely to micro insurance, some of the major milestones that were reached during the previous five years.
They included many of the global movers and shakers in the insurance industry. This also lends legitimacy to micro insurance.
'Micro-insurance' according to the ILO, "is a mechanism to protect poor people against risk - example accident, illness, death in the family, and natural disasters - in exchange for payments tailored to their needs, income, and level of risk. It is aimed primarily at the developing world's low-income workers, especially those in the informal economy who tend to be underserved by mainstream commercial and social insurance schemes".
Note that this source is independent of the insurance industry.
The GOJ plays many roles in our economy. One of those jobs is to act as an insurance company from time to time. This involves the distribution of resources to those persons who suffer losses or face other hardships.
The state has become increasingly unable to meet those expectations. Debt repayment charges and employee costs represent more than half of government revenues.
Citizens are being asked to shoulder more of the burden. The recent hike in JUTC fares is one example.
The GOJ is quietly divesting its social insurance function. This is the space that private providers of micro-insurance products are seeking to occupy.
Many persons in Jamaica have a negative view about insurance and insurance companies. In addition, they are often unaware of the many risks that they face as individuals and are ignorant about the level of hazards that exist in this society.
The ILO report identifies some of these risks. It says: "Micro insurance allows policyholders to recover and rebuild after a crisis. It can mean avoiding difficult, often devastating risk coping measures such as putting children to work, eating less food, or selling productive assets (like land). It promotes resilience including reducing hunger and child mortality, and improving maternal health.
"The benefits of micro-insurance go beyond financial help as it can:
Reduce risk: Insurance can play a critical role in reducing risk, since insurers have an incentive to prevent risks from occurring.
Stimulate productivity and asset accumulation: The working poor invest more in their livelihoods, and get higher returns, if they are protected by insurance. They can also build savings through a long-term life insurance policy.
Deliver tangible benefits: Insurance with tangible benefits, such as a hot line for medical advice or health camps that provide vaccinations and mosquito nets, can make a huge difference in the lives of millions."
The micro-insurance sector has changed dramatically in recent years, with encouraging results in many countries around the globe. The ILO says that "micro-insurance covers half a billion risks, up from 135 million in 2009, largely due to collaboration with national governments, but also because of more active interest by commercial insurers."
In 2011, some 33 of the world's 50 largest insurance companies offered micro-insurance, up from just seven six years earlier.
Other developments, according to the same source include:
New delivery channels: Growth is partly attributed to the emergence of alternative delivery channels - including retailers, utility and cell phone companies, cooperatives, and labour unions - which provide new access points to reach the low-income market.
Demonstrated business case: Micro-insurance can be profitable under certain circumstances. Group insurance schemes are generally viable, as are products that are bundled with other services - example loans, mobile phone minutes or fertiliser. It is more difficult for voluntary insurance to generate a surplus, particularly when covering health and agricultural risks.
Impact: Research has demonstrated the positive impact of insurance on the lives of the poor and, more broadly, in their communities. For instance, health insurance can reduce out-of-pocket expenditure and increase use of health services.
Property insurance, on the other hand, allows entrepreneurs to take more risk and invest more in their businesses.
In part II of this article, I will take a detailed look at the three micro-insurance products that were launched last year.
Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: email@example.com