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Micro insurance: A tool for Poverty alleviation &
management of Vulnerability in Bangladesh
j
Sazzad Hossain
29-Nov-12
zss
A Report on
Micro insurance: A tool for Poverty alleviation &
management of Vulnerability in Bangladesh
Submitted to:
Md. Jamil Sharif
Lecturer,
Dept. of A&SIS
University of Dhaka
Submitted by:
1. Arnab kumar Das (16-124)
2. Sazzad Hossain (16-128)
3. Abdullah Al-Mamun (16-151)
4.Nasimuzzaman Limon (16-176)
5.Md. Momen Al Islam (16-177)
6.Rafsan Mahbub Robin (16-178)
7.Kenny David Rema (16-178)
8.Md.Shafiqul Islam (16-181)
9.Rehanur Zaman (16-185)
Dept. of A&SIS
University of Dhaka
Date of submission: November 29, 2012
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
Page | 1
Table of Contents Abstract ...................................................................................................................................... 3
1.0 Introduction: ......................................................................................................................... 4
2.0 Literature Review: ............................................................................................................... 4
3.0 Definitions: .......................................................................................................................... 8
3.1 Microfinance: ................................................................................................................... 8
3.2 Micro insurance: ............................................................................................................... 8
3.3 Poverty: ............................................................................................................................ 9
3.4 Vulnerability: ................................................................................................................... 9
4.0 Micro insurance –a brief history: ....................................................................................... 10
5.0 Necessity of Micro insurance: ........................................................................................... 10
6.0 Major Risks faced by the micro insurance companies: ..................................................... 11
1. Credit Risk: ...................................................................................................................... 12
2. Liquidity or Maturity Risk: .............................................................................................. 12
3. Market Risk: ..................................................................................................................... 13
4. Operational Risk:.............................................................................................................. 13
5. Interest Risk: .................................................................................................................... 13
6. Foreign Exchange Risk: ................................................................................................... 13
7. Environmental risk: .......................................................................................................... 13
7.0 Major Risks Faced by the Poor: ......................................................................................... 14
a. Agricultural Risks: ........................................................................................................ 14
b. Health Insurance: .......................................................................................................... 17
c. Life or „life & credit‟ insurance: ................................................................................... 18
d. Life-cycle Risks: ........................................................................................................... 20
8.0 Delivery Mechanism : Micro-Insurance Models ............................................................... 21
a) The “Partner-Agent” model ............................................................................................. 21
b) The mutualised insurance and other community-based organisations model ................. 21
c) The “all-in-one insurance” model .................................................................................... 22
d) The “franchise” model ..................................................................................................... 22
e) The “supplier” model ....................................................................................................... 22
9.0 Emerging Challenges in Micro insurance: ......................................................................... 22
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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10.0 Differences between conventional insurance and micro insurance ................................. 23
11.0 Role of Micro insurance in Poverty Alleviation and management of Vulnerabilities:.... 26
Key Role of Micro insurance as a tool: ................................................................................ 28
12.0 Micro insurance products offered: ................................................................................... 29
a. Credit life insurance ...................................................................................................... 29
b. Term life or personal accident insurance ...................................................................... 29
c. Savings life insurance ................................................................................................... 29
d. Health insurance............................................................................................................ 29
e. Property insurance ........................................................................................................ 29
f. Agricultural insurance ................................................................................................... 30
13.0 Concluding Remarks:....................................................................................................... 30
14.0 Conclusion: ...................................................................................................................... 32
15.0 References: ....................................................................................................................... 33
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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Abstract
The poor section of the society is always neglected and oppressed. Few efforts have been
taken to reduce these discrepancies of the society. The poor have weak financial power and
few say or right in the ruling of them. As a result, they are very vulnerable to any kind of
disasters and perils. They have to bear the negative effects of these happenings and they
become more poor and vulnerable before they were. This vicious poverty cycle kill them
many times they dead. However, the micro insurance is a blessing to them in these respects.
It gives them confident, economic power, and solvency. As a requirement, it enables them to
save and work collectively. Consequently, micro insurance with its mechanisms, works as a
powerful tool to alleviate the poverty of the poor people and a great tool in managing the
vulnerabilities of the poorer section of the society.
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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1.0 Introduction:
The insurance service to the low-level income group of the society is called the micro
insurance. This is a part of the micro finance concept. The commercial insurance services are
mainly offered to the rich section of the society, but the micro insurance target the unserved
poor people who are an untapped market, basically a niche market of the insurance service.
This micro insurance is a great tool in alleviating poverty from the society in a very short
time with efficiency. Mainly, the strength of the scheme lies on the unitedness of the poor
people. The various techniques and issues are prevailing and those are utilized by the micro
insurance to upgrade the poor people.
The slow process of increasing income and building assets characterizes the road out of
poverty. In the precarious world of the poor, a shock such as illness, death of a loved one, fire
or theft can rapidly erase hard won gains and make the escape from poverty harder to
achieve.
Vulnerability for the poor is an everyday reality. In the words of one microfinance client in
the Philippines, “Life for the poor is one long risk.” To cope with shocks, poor people use
many different risk management strategies. They draw on informal group-based and self-
insurance mechanisms such as borrowing, saving, and drawing down productive and non-
productive assets.
A relatively new option for the working poor to manage risk is “micro insurance”. Micro
insurance is the protection of low income people against specific perils in exchange for
premium payments proportionate to the likelihood and cost of the risk involved. Micro
insurance reaches a clientele that is different from that served by insurers. They have fewer
assets, their incomes are lower, and their income flows often fluctuate considerably
throughout the year. While the shocks that the poor experience may be the same as
conventional insurance clients, they are more vulnerable because they have fewer reserves to
draw upon. A majority find themselves in a reactive mode, responding after a crisis.
2.0 Literature Review:
There have been many research works on the micro insurance. Also many more have been
done on the micro finance. The micro insurance is a tool to managing the poverty and the
vulnerabilities of the poor people. A detailed discussion in this respect has been done by Syed
M. Ahsan in his work “Micro insurance, Poverty & Vulnerability: A Concept Paper” (Syed
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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2009). He critically analyzed the issue from Bangladesh perspective. The increased focus on
risk and vulnerability in understanding and designing antipoverty policies motivated a series
of studies aimed at theoretically conceptualizing as well as measuring and addressing
household vulnerability empirically. This section begins with a brief review of available
approaches to conceptualize and measure vulnerability and then presents majors findings and
evidences in brief from relevant empirical literatures.
While there is a very rich literature on the appropriate measure of poverty1 and on methods
for creating aggregate summary statistic2, the literature that intends to present similar
summary measures of vulnerability is rather emerging. The current state of the theoretical
literature on vulnerability is a bit chaotic and can be described in the words of Hoddinott and
Quisumbing (2003) as a “let a hundred flowers bloom” phase of research with numerous
definitions and measures and seemingly no consensus on how to estimate vulnerability. A
number of competing measures have been proposed and the literature does not seem to be
settled yet on a conceptually sound as well as operationally suitable definition. Hoddinott and
Quisumbing (2003) and Ligon and Schechter (2004) provided an exhaustive list of methods
for estimating vulnerability to poverty surveying all the existing literatures and reviewed
strengths and weaknesses of each of them. According to Hoddinott and Quisumbing (2003)
measures of vulnerability to poverty can be classified into three broad categories: a)
Vulnerability as Expected Poverty (VEP), i.e., the probability that an individual or household
will fall below or remain on the poverty line (Chaudhuri, 2002; Christiaensen and Subbarao,
2001; Pritchett, Suryahadi and Sumarto, 2000), b) Vulnerability as Low Expected Utility
(VEU), i.e., the distance between the utility that would be achieved by an appropriately
chosen level of consumption with certainty and the expected utility of the household given its
uncertain prospect (Ligon and Schechter, 2002, 2003), and c) Vulnerability as Uninsured
Exposure to Risk (VER), i.e., measures of the cost, in terms of consumption, of exposure to
uninsured risk as inferred by the proportion of observed change in consumption attributable
to past shocks (Tesliuc and Lindert 2004).
However, the above measures are generally not comparable as noted by Ligon and Schechter
(2004; p. 01) –
1 Deaton (1997); Ravallion (1993)
2 Atkinson (1987); Foster (1984); Lipton and Ravallion (1995) and for a review of literature, Ravallion (1993)
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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“Unfortunately, because there’s considerable variety in the definition of vulnerability, in the
estimators employed, and in the datasets used in example applications, the comparisons
among approaches detailed in Hoddinott and Quisumbing (2003) are often comparisons
between apples and oranges; one can’t easily evaluate the practical merits of various
definitions of vulnerability, the value of different estimators, or the power of different tests.”
Ligon and Shcechter (2004) then conduct Monte Carlo experiments designed to explore the
performance of different vulnerability indicators‟ proposed in the economic literatures, under
different assumptions about the underlying economic environment. They find that when the
environment is stationary and consumption is measured without measurement error, the best
estimates are the ones proposed by Chaudhuri (2002). If the vulnerability measure is risk-
sensitive, but consumption is measured with error the estimates proposed by Ligon and
Schechter (2003) generally performs best. However, when the distribution of consumption is
non-stationary and there is measurement error, all estimates perform poorly. But since
measurement error is a reality and to assess whether the distribution is non-stationary,
relatively long time series are needed, which is a rarity in practice, particularly for most of the
developing countries.
Another problem with the above measures is the conceptual inadequacy. As Hoogeveen
(2004) noted, there are conceptual problems, using a measure based on the variability of
consumption (or another outcome indicator), rather than an ex-ante measure that takes into
account the cost of taking risk reducing measures. They suggested that using a measure of
consumption variability still depends exclusively of past observation and to avoid such
problem some kind of ex-ante augmented poverty line can be used that is based of ex-ante
monetary cost of risks or uncertainty. Gunning and Elbers (2003) attempt to deal with this
aspect by constructing a stochastic, structural dynamic model of a household‟s inter-temporal
consumption and saving‟s decisions. In the process, they present yet another measure of
vulnerability that is theoretically well defined, but practically hard to implement. What all
these imply is that a methodologically sound and practically applicable measure of
vulnerability may still be some way away even though literature in this field is growing very
fast.
Regardless of how vulnerability is perceived, it has always been a dynamic concept where
one needs to estimate ex-ante what happens in the future. While calibrating individual‟s
(household‟s) poverty level is relatively straight forward, measuring an individual‟s
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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vulnerability requires information on the possible states of the world in the future and the
probability distribution of their occurrences. Information on different future states of the
world becomes more complicated as we move further away from the present. Clearly these
depend on the quality and nature of data that are available and accordingly most of the
empirical literatures are crafted to the strengths of the available data. The part of literature on
vulnerability which estimates impacts of shocks on household welfare has also data-driven
limitations. Available data, particularly the household surveys (or even most of the panels),
have either limited information on idiosyncratic or covariate shocks or no information at all
(Gunther and Harttgen, 2009). As a consequence, most of these studies have only been able
to focus on the impact of selected shocks on household‟s wellbeing (Dercon and Krishnan,
2000a; Gertler and Gruber, 2002; Glewwe and Hall, 1998; Kocher, 1995; Paxson, 1992;
Nielson 2008; Sen, 2003; Gaiha and Imai, 2004; Quisumbing, 2007).
The early strands of literature defines vulnerability as the ability and the extent to which
consumption is protected against income fluctuation due to idiosyncratic or covariate shocks
and measured by the observed changes in consumption over time (e.g. Townsend, 1994;
Udry, 1995; Glewwe and Hall, 1998; Dercon and Krishnan, 2000a; Jalan and Ravallion,
1998; Morduch, 2003). Their particular interest was not to identify who are vulnerable and
correlates of vulnerable; nonetheless, these studies do provide valuable insights about
households‟ behavioural responses in the face of adversaries and complement overall
understanding of poverty dynamics and vulnerability. A brief review of these literatures
would not be out of context in this sense and is in order. In his seminal work, Townsend
(1994) using a pooled cross sectional data for the period 1975-1984 from the International
Crops Research Institute of the Semi-Arid Tropics (ICRISAT), tests the full risk sharing
hypothesis in three poor and high risk villages in Southern India and rejected the hypothesis
of full insurance in the sample. However, the overall effect of income on consumption is
surprisingly low, with the highest coefficient value being 0.14, suggesting the existence of a
significant degree of insurance against idiosyncratic shocks at the village level. His results
also hint at important differences in terms of access to insurance by land ownership. Landless
and small farmers, also the poorest in the sample, are less protected from this type of event.
Paxson (1992) conducted a study to examine whether farmers in some regions of Thailand
used savings to smooth consumption. Her findings indicate that these households were able
to save and dis-save to stabilize consumption in response to unpredictable changes in income.
Nevertheless, although her estimates of marginal propensity to save out of transitory shocks
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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to income are very high (ranging from 0.73 to 0.83) and suggest an important amount of
consumption smoothing, they are not supportive of full insurance.
3.0 Definitions:
3.1 Microfinance:
Microfinance is the provision of financial services such as loans, savings, insurance, and
training to people living in poverty. The microfinance is provided to that section of the
society which is not served in the traditional financing system or services. The two main
mechanisms for the delivery of financial services to such clients are (1) relationship-based
banking for individual entrepreneurs and small businesses; and (2) group-based models,
where several entrepreneurs come together to apply for loans and other services as a group.
Microfinance services are provided by three types of sources:
formal institutions, such as rural banks and cooperatives;
semiformal institutions, such as nongovernment organizations; and
informal sources such as money lenders and shopkeepers.
Institutional microfinance is defined to include microfinance services provided by both
formal and semiformal institutions. Microfinance institutions are defined as institutions
whose major business is the provision of microfinance services (Asian Development Bank
2000).
3.2 Micro insurance:
Basically the risk protection or risk sharing system of the low-income, poor people who are
not served by the commercial insurance system is termed as micro insurance in practice. The
draft paper prepared by the Consultative Group to Assist the Poor (CGAP) working group on
micro-insurance defines micro-insurance as “the protection of low income households against
specific perils in exchange for premium payments proportionate to the likelihood and cost of
the risk involved.” The paper deliberates on the key roles to be played by all stakeholders –
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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insurers, regulator and the Government. The working group also agrees that the cost of such
cover should be affordable.
3.3 Poverty:
Poverty is the deprivation of food, shelter, money and clothing that occurs when people
cannot satisfy their basic needs. Poverty can be understood simply as a lack of money, or
more broadly in terms of barriers to everyday life (Jonathan & Shahidur 2009).
Absolute poverty or destitution refers to the state of severe deprivation of basic human needs,
which commonly includes food, water, sanitation, clothing, shelter, health care, education
and information. Relative poverty is defined contextually as economic inequality in the
location or society in which people live (The World Bank 2011) (Instituto Nacional de
Estadistica 2009). For most of history poverty had been mostly accepted as inevitable as
traditional modes of production were insufficient to give an entire population a comfortable
standard of living. After the industrial revolution, mass production in factories made wealth
increasingly more inexpensive and accessible. Of more importance is the modernization of
agriculture, such as fertilizers, in order to provide enough yield to feed the population (Baker
& Dugger 2009). People who practice asceticism intentionally live in economic poverty so
as to attain spiritual wealth.
3.4 Vulnerability:
Vulnerability refers to the inability to withstand the effects of a hostile environment. A
window of vulnerability is a time frame within which defensive measures are reduced,
compromised or lacking. In relation to hazards and disasters, vulnerability is a concept that
links the relationship that people have with their environment to social forces and institutions
and the cultural values that sustain and contest them. “The concept of vulnerability expresses
the multidimensionality of disasters by focusing attention on the totality of relationships in a
given social situation which constitute a condition that, in combination with environmental
forces, produces a disaster” (Bankoff etal. 2004).
It's also the extent to which changes could harm a system, or to which the community can be
affected by the impact of a hazard. Vulnerabilities can be social, cognitive or military.
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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4.0 Micro insurance –a brief history:
It has not been possible to determine when, where and by whom the term "microinsurance"
first was used. What is certain is that the term appeared in print in three publications
published in 1999:
Micro-Insurance: Extending Health Insurance to the Excluded, by David Dror and
Christian Jacquier, ILO, 1999
Synthesis of Case Studies of Micro Insurance and Other Forms of Extending Social
Protection in Health in Latin America and the Caribbean, ILO-STEP, 1999
Providing Insurance to Low-Income Households: Part 1: A Primer on Insurance
Principles and Products, by Warren Brown and Craig Churchill, USAID, 1999
These authors and other founding members of the Micro insurance Network recall that:
o The term "micro insurance" was derived from a natural development from the
older term "microfinance";
o The term "micro insurance" was first used within the ILO and UNCTAD in
Geneva in the mid-1990‟s and in some academic circles in the early 1990‟s.
The word "micro insurance" is used most common in the development environment to
specify that one is talking about "insurance for the poor". Within the financial inclusion
debate and the insurance industry, one prefers to use "insurance", insurance for a specific
target audience. The Micro insurance Network uses the term "micro insurance" as it is a
practical working title.
5.0 Necessity of Micro insurance:
To meet up the insurance necessity among the poor people of our society, micro insurance is
a big tool to ensure their safety against the odds and perils. Low-income households are
particularly vulnerable to risk and negative external shocks (e.g., natural disaster; illness/
death of main breadwinner) due to their low asset bases. In the absence of functioning
insurance markets, poor people in developing countries have created a number of formal and
informal instruments to manage such risk. These include risk-pooling schemes (e.g., funeral
and burial societies); income support (e.g., credit arrangements; transfers), and consumption
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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smoothing arrangements (e.g., savings; grain banks) (Bhattamishra & C. B. 2008). However,
such informal and formal approaches offer limited protection, low returns for households, and
are prone to breakdown during emergencies. Community-based risk management schemes
also rely heavily on personal relations between participants, limiting scalability and
geographic spread. Even formal support programs such as food-for-work may be
exclusionary, as in the case of female-headed households often left out of such work
programs as they face difficulty making the required labor contribution.
Formal insurance instruments can offer superior risk management alternatives, provided poor
households can access these services. Without insurance, low-income households forego
higher-return livelihood strategies for lower-risk avenues that reduce risk. Insurance products
assume such risk thus reducing household efficiency losses and protecting assets so that the
poor can escape poverty traps. Insurance instruments pool the risks of individuals of a similar
risk class, and transfer it to a larger and more diverse group of market participants through
the „hedging‟ process. Traditional forms of insurance, however, have often been beyond the
reach of poor persons. Innovations in micro insurance aim to increase outreach and coverage
across lower income tiers (Marc & Anne T. 2008).
Micro insurance is a powerful tool for:
Protecting the poor and their assets from negative external shocks
Compensating the effects of covariate shocks (e.g., natural disasters)
Addressing gender-specific vulnerabilities
Freeing up household capital for investment in small enterprise
Helping households avoid poverty traps
Expanding informal insurance schemes and social protection
6.0 Major Risks faced by the micro insurance companies:
The seven main areas of institutional-level risks facing MFIs are in the areas of:
1) Credit Risk
2) Liquidity risk
3) Market risk
4) Operational risk
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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5) Interest risk,
6) Foreign exchange risk, and
7) Environment Compliance & Regulatory risk
1. Credit Risk:
Credit risk refers to the risk of default or non-payment by clients on their loans. Additional
factors that relate more to the microfinance sector are:
Loans are often provided without collateral, or use non-traditional collateral, and so
there may be a danger greater than for other financial institutions. This may require
specific mitigation techniques such as larger loan provisioning or immediate follow-
up on delinquency loans.
Limited sector variation (e.g. loans are largely agricultural, perhaps even to only
amongst clients with few crops), limited geographic spread (e.g. loans are provided
in a few districts only), or specific targeting (e.g. to a specific minority) can increase
the portfolio risk to the microfinance institution. These concentrations are often
referred to as covariant risk.
2. Liquidity or Maturity Risk:
This refers primarily to the holding of appropriate cash balance levels and deposit
mobilization, and is mainly a cash-flow planning, monitoring and management issue. The
reasons for this risk arising includes:-
seasonality (given the cyclical nature of the local economy); the difficulty in
obtaining contingent credit lines;
poor cash-flow forecasting, and related management (such as with inadequate
monitoring of cash flows and in ensuring matching terms);
a lack of investment strategies or investment avenues during periods with surplus
funds; and
inadequate deposit mobilization (due mainly to difficulties getting savings and time
deposit accounts), often due to weak marketing and product development.
Skills development and training in relevant areas is seen as a key area of support need for
microfinance institutions in this area.
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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This risk area is also referred to as “maturity risk” simply as the ability to meet maturing
obligations (Current Assets > Current Liabilities).
3. Market Risk:
Market risk refers to the risk of loss owing to changes in market rates and prices on
investments by the microfinance institution. This risk is limited to those institutions who
invest in equities, fixed-interest instruments, or commodities.
4. Operational Risk:
It refers to failures in the operation of the microfinance institution, hence the name, and
includes breakdown of information systems, poor governance, risk of loss due to inadequate
or failed internal processes and systems, external events, and human error. Management risk
– largely the risk of depending on a few individuals, and fraud are also considered
components of operational risk.
5. Interest Risk:
Interest rate risk is the primary measure of market risk on an MFI‟s loan portfolio. It is the
risk that an unfavourable change in interest rates might have on the MFI‟s earnings, based on
gaps that exist in the matching of its interest rates on its loan portfolio assets and funding
liabilities (e.g. when long-terms loans are funded by short-term deposits). This is a particular
problem when the microfinance institution is not able
to adjust interest rates on loans they have issued against the interest paid on fixed term
deposits. There is a natural tendency for microfinance institution clients to want to commit to
fixed deposits of as short a term as possible to have access to their funds, and to secure as
long a term as possible over debt to lower repayment amounts. Interest risk is faced by most
microfinance institutions that mobilize deposits.
6. Foreign Exchange Risk:
Foreign exchange (FX) risk arises most often for microfinance institutions who borrow in a
foreign currency to lend in local currency. FX risk then occurs when there is a currency
mismatch in the MFI‟s assets and liabilities, that exposes it to FX rate fluctuations, that could
cause either losses or gains.
7. Environmental risk:
This covers a range of other risks facing microfinance institutions, including:
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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New industry risk: this relates to the risks of trying out new and innovative financing
techniques with clients new to credit and savings;
Subsidy dependence risk: this is the dependence risk donor-funded microfinance
institutions have on subsidies without which they not be sustainable;
Transitioning risks: many microfinance institutions were established for social rather
than financial purposes, and as these institutions transform into regulated and
sustainable institutions a range of organisational culture, performance, management,
and governance issues often arise; and
Compliance & Regulatory risk: the risks associated with regulation
7.0 Major Risks Faced by the Poor:
The risks that are mainly faced by the poor people can be categorized as follows:
a. Agricultural Risks:
Of all risks, agricultural risks (e.g., crop failure, inadequate rainfall and loss of
livestock) are the most pervasive and inflict longer-term consequence on household
consumption fluctuations. This is also an area where micro insurance products have
made the least progress, especially in South Asia. Issues of moral hazard and adverse
selection prove formidable obstacles in the design of viable contracts. (Ahsan 1985)
has examined the elements of a likely feasible crop insurance contract, which
analytically calls for separate contracts for each homogeneous agro-climatic zone, and
is thus contingent upon wide participation representative of the agro-climatic
variations obtaining in the county (Ahsan, A. & N. John 1982). In such a scheme the
indemnity is triggered by the zonal crop outcome, and not the individual experience,
which mitigates to a large extent the issue of moral hazard, but adverse selection
would still remain a major concern. Hence for any scheme to be viable would require
widespread participation for each climatic zone, and there be sufficient number
climatic zones for the aggregate risk to be well spread. The latter calls for a national
coverage in order to maximize the climatic variations; however, in view of the agro-
climatic variations encountered in a country, such coverage may still be inadequate to
permit significant risk-pooling. In spite of general inadequacy of standard (i.e., not
weather-indexed type) crop insurance in less developed countries, an ambitious
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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National Agriculture Insurance Scheme (NAIS) was launched in India about 8 year
ago. NAIS also embraced the area approach that has been cited above. Arbitrarily
setting premiums below expected loss, allowing limited variation in premium
structure in view of the risk class of the insured, adverse selection (both at the state
level, as well as allowing non-loanees to voluntarily seek coverage within a state), and
above all, public sector management are cited to be the key reasons for its poor
performance (Ifft, 2001).
The area approach, even though it eliminates moral hazard greatly, appears to leave farmers
unsatisfied as variability within the agro-climatic zone can be rather substantial. Many view
the performance of the NAIS scheme as unsatisfactory as was the case with its predecessor,
the Comprehensive Crop Insurance Scheme (CCIS), 1985-1999, both of which had followed
the area approach. Only 16 states (as opposed to 22 under CCIS) are participating in NAIS
with both Punjab and Haryana being conspicuously absent, which is symptomatic of adverse
selection at the regional level.
Weather insurance has major advantages over crop insurance (even of the homogenous
agro-climatic variety as proposed above) in that informational asymmetries between the
insurer and the insured are greatly minimized, and the occurrence of the insured event (e.g.,
rainfall) is easily verifiable.3 An even greater benefit is that it would be of relevance to non-
agriculturists (e.g., day-labourers), whose livelihoods are also dependent on climate whether
in agriculture or beyond (Morduch, 2001). However, the difficulty that remains in crop
cultivation is that the soil quality and cropping pattern may also differ within a homogeneous
climatic zone, which would disappear in the event of rainfall insurance, a clear advantage.
Here too one would require participation of all climatic zones and wide participation for the
aggregate risks to fall to manageable proportions, and hence as above, only national insurers
may viably offer coverage. The necessity of MFI/NGO intermediation remains just as
important as it was deemed to be the case for crop insurance analyzed above, the absence of
which in the Indian schemes such as CCIS and NAIS may have contributed to their
weaknesses. Access to re-insurance would also emerge as a priority concern in these types of
situations. There is a further re-distributional element to consider in the case both rainfall
(weather) insurance or crop insurance. As (Morduch 2004) has aptly pointed out, there arises
an asymmetry between the welfare of the insured and the non-insured in the event of
indemnity payments and their impact on local market prices, which would not be relevant in
the absence of any crop/climate insurance. In particular, cash indemnity payout is likely to
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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lead to an increase in the price level (at least for grains), which can be partly mitigated by
distribution in kind. The latter is however not feasible in many situations. A priori, it would
seem that the number of potential beneficiaries is more numerous under weather insurance
than under crop insurance. However in view of the worsening of welfare on the part of the
non-insured net consumers, the distributional issues would require careful evaluation in the
particular context.
There are several well-known pilot schemes underway on weather, particularly rainfall,
insurance. In 2003 ICICI Lombard (backed up Swiss Re) launched an ambitious scheme
targeted at low-income farmers in Andhra Pradesh, India, which is sold through BASIX, an
MFI. To date 200,000 farmers in 130 locations have been covered. The scheme insures
against deficit, excess and unseasonal rainfall, high relative humidity, excessively high and
low temperatures, prolonged dry spell, as well as a combination of these risks. The indemnity
structure is based on relevant indexes, where different indexes represent various estimated
losses. Preliminary analysis of a 2004 survey carried out by ICRISAT and World Bank has
been done by Gine, et al, 2007. The above study reveals that insurance uptake is high among
the wealthier farmers, and, low among those credit-constrained, which fits the authors‟
analytical set-up and is suggestive of the role of credit in promoting insurance, even though
the premiums were rather low at about $5-6 per member. However the authors were at a loss
to explain why more risk-averse farmers were more reluctant to purchase insurance, with the
tentative conclusion being the unfamiliarity with the product itself and also a lack of „trust‟
(i.e., not being in prior contact with the MFI in question). However in view of the potential,
an urgent research task would be to further analyze the performance of such policies and
explore replicability with suitable re-engineering in different contexts.
Key Findings:
The area approach entails a further ex-post equity issue in that dissimilar benefits are enjoyed
by the insured in the event of a loss. (Ifft 2001) suggests that if subsidies were offered to
private companies they would feel encouraged to enter crop/weather insurance as elsewhere.
However to reap full benefits of reforms, she suggests dismantling the distortions due to
government control over both input and output prices. She also proposes that another
alternative to insurance would be to leave farmers to manage own risk, while the state invests
in infrastructure and research, and if necessary offer lump-sum transfers to farmers which are
unrelated to the crop grown or the acreage under cultivation.
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b. Health Insurance:
Health is a critical factor in determining long-term living standards in the absence of
significant savings or public pension schemes, and hence the provision of meaningful health
coverage would be an important risk-mitigation element in the lives of the poor. Here the
necessity of micro insurance is further predicated by the fact that in most developing
countries access to public health care is limited and generally of low quality. At the same
time workers of the informal sector and rural areas account for a majority of the workforce
who lack access to quality health care. Thus even from a public sector perspective,
subsidizing micro-health insurance systems would appear to offer an interesting alternative
for addressing the problem of the financing of health care in general. Yet, a review of the
existing systems in many countries of Asia and Africa suggests a low uptake of health
insurance by the poor. Demand may not be the bottleneck as Dror et al (2007) found that
even the very poor were willing to pay between one and two percent (median being tk. 560)
of annual household income in premium, rather high figures in view of actual rates in force in
typical contracts. The most common reason cited by field level workers is that the products
are ill designed to be of appeal to the public. Most writers on the topic agree that a workable
insurance scheme in this context (i) must encourage primary preventive care (covering
doctor‟s fees, tests and prescribed drugs), (ii) in the therapeutic area, it may cover only major
risks (i.e., thus minimizing moral hazard), (iii) make provision for an emergency fund to deal
with occasional premium delinquency due to identifiable aggravated incidents on the part of
the insured, (iv) secure re-insurance, (v) must provide health education, and (vi) it must be
affordable. Micro insurance Academy (MIA) also suggests adding two more criteria: (vii)
extend coverage to communities rather than individuals, which achieves within group risk
pooling, and guards against adverse selection; (viii) the plan (i.e., the benefits & premium) be
tailored to meet the needs of the community in question (e.g. using MIA‟s decision tool,
Choosing Health Plans Altogether, CHAT).
This is one area where a suitable regulatory framework specifying which elements of
coverage an insurer may offer would be an important point of departure. In effect the product
design and its inherent flexibility would still be up to the insurer to devise, but each has to
respect the guidelines as those set out, for example, in the Indian context by IRDA, though
the latter is not without shortcomings (Dror, 2007). Absent such regulatory control, private
insurers may only offer coverage that is a priori profitable and does not achieve much
socially necessary risk-shifting (i.e., „cherry picking‟). There are many pilot type micro health
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insurance schemes in operation all around the world, where India offers a large variety of
experiments, but few are judged to be offering high quality coverage or are deemed to be of
long-term viability unaided (e.g., Dror, 2007). Grameen Kalyan, in Bangladesh, has launched
micro health insurance since the late 1990s and presently covers half a million people. Its
premium is about two US dollars per year and it operates about 33 clinics in ten districts in
Bangladesh, and plays both the roles of insurer and of direct service provider. It uses a
strategy of serving the community at large and of charging higher rates for the less poor.
However, the program is still in the early stages with a limited geographic coverage, a limited
range of products, and does not have external linkage for re-insurance. The premium income
is reported to cover about 92% of the direct cost of the health program. A major challenge in
providing meaningful health policies in rural Bangladesh appears to be the shortage of
qualified personnel, and the consequent risk of discontinuity of service provision. In any case,
a full evaluation of its performance and the scope of replicability would be a high priority.4
c. Life or ‘life & credit’ insurance:
Life policies (or their variants) are conceptually easier to design among rural insurance
products. Given the absence of moral hazard, and presumed demand for it, actuarially fair
contracts should be the norm given a degree of competition. Indeed some form of life
insurance, typically bundled with microcredit, is generally available in most countries. The
challenge however is to widen the access to non-borrowers, and to set the level of indemnity
payment on death to a meaningful figure (e.g., a multiple of the average loan) under local
conditions. A priori, it would seem that the relatively small amount of money involved (both
for premium and maximum indemnity) would entail significant administrative expense if not
mediated through a microfinance institution (MFI) or a local NGO, i.e., by adopting the
partner-agent model.5 The existing case studies offer a mixed picture, which suggests that
greater care is needed in the delivery and design of the contract, financing, and re-insurance
aspects even in the case of life or life-cum-credit policies, originally believed to be easier to
practice than crop or health insurance. CARD MBA, in the Philippines, insures 600,000
people. It is a mutual benefit association created by an MFI, whose premium range is 1.5% of
the loan value per year. CARD MBA offers three credit life insurance products: a loan
redemption fund, a life insurance product that covers the member (usually female), her
spouse and three dependent children under the age of 21 (or if she is single, the member and
her parents), and finally a provident fund. The MFI almost went bankrupt because it did not
have appropriate knowledge in offering insurance.
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In Bangladesh, while about half of all MFIs offer some form of insurance, the typical life
policies are of the credit protection type, thus offering limited protection to the insured
borrowers in their struggles to escape poverty (Khalily et al, 2008). Another common feature
of the prevalent schemes is the ad-hoc setting of premium and indemnity structure, which
frequently leads to borrower ambivalence as to the value of the products, and at the same
time, poses significant challenge especially to the smaller MFIs in the financial viability of
their plans. The 2008 survey cited above also notes that most insurers use the premium
revenue as a sort of „revolving loanable fund‟ rather than investing it prudently for dedicated
use and in building plan sustainability.
Delta Life, a commercial insurer is a bit of an exception to the rule. While it experimented
with the Grameen Bank in jointly offering a saving-cum-life policy for Grameen borrowers, it
is now offering its own insurance policies to both rural and urban poor with its own delivery
channels, which were fashioned in light of the ties with the Grameen Bank in late 80s/early
90s. It offers about 37% of all „life plus‟ policies in the country. Another critical feature of
the Delta‟s scheme is that it offers a relatively long-term coverage (10 to 15 years) while the
typical MFI plan lasts only the tenure of the loan, which can itself be a source of volatility.
Yasiru, in Sri Lanka, started off by insures 9,000 people. It offers a mixed bag of life,
accident and funeral insurance, and its premium range is USD 1.20-18.00 per year. Though it
first started as an in-house insurance service in a federation of NGOs called ACCDC, today it
has eight active partners with around 60,000 members. It has received funding, technical
assistance and a reinsurance agreement from the Rabobank Group and its reinsurance
company, N. V. Interpolis. It was agreed that donor support would cease from 2005 to
encourage independence, but there is some concern that Yasiru might face problems in such
an eventuality as the solvency issue is far from assured.
Key Findings:
What can we say about the contours of a „best-practice‟ model? To recapitulate some points
raised above, we note the following:
(i) The risks covered ought to include all events that seriously undermine future earning
potential, namely, death and LT disability of the insured & spouse, and possibly that of other
earning members of the insured‟s family.
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(ii) Coverage to be made available to borrowers and non-borrowers alike.
(iii) The coverage, ideally an endowment type plan, ought to be subject to choice (but
allowable range to include say up to 5 years‟ earnings).
(iv) Length of coverage to be decoupled from loan tenure, if relevant.
(v) Actuarial calculus ought to be fully embraced in setting premiums.
(vi)If MFIs serve as insurer, the insurance arm ought to be separated and placed under
independent management.
(vii) Multiple modalities to be explored: For example, direct provision by insurer (e.g., Delta
& large MFIs) as well as partner-agent provision (not yet in evidence in Bangladesh) should
both be expored.
d. Life-cycle Risks:
Old-Age Security is often recognized that savings is the most common object that one can
resort to in times of crisis and calamity where the very poor do badly. Not only they have
little to save, there are not many user-friendly saving instruments that would be of appeal to
the poor. „Whole life‟ policies may address part of the answer, but typically these become
attractive when started early in life and premium contribution goes on for a long time. None
of the latter pre-conditions may necessarily apply to the typical worker we have in mind here.
The literature does suggest innovative projects underway in various parts of the world and the
task here would be to put together these ideas and evaluate their scope and practicality, and
develop a pilot scheme for experimentation and testing. The product should go beyond saving
for the immediate future, but mainly for eventual retirement with a simple (and optional)
annuity package built-in. It would be ideal to offer programs that are of appeal to the younger
generation engaged in manufacturing such as the readymade- garments (RMG) industry,
weaving, leather industry, other urban and rural day labourers, domestic help providers and
the like. Unless the scale of activity is very large, maximum possible guarantee return would
not be available to these low-income savers, which would require vigilant regulatory and
prudential oversight.
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8.0 Delivery Mechanism : Micro-Insurance Models
A key concern in the pricing of an insurance product is the element of cost of acquisition and
its delivery. Obviously, the delivery costs have to be contained to keep the cost of insurance
sufficiently low to attract the poor and to incentivise the insurer to venture into this segment
viewing it as a genuine market opportunity.
There are five major models of insurance coverage for the poor:
a) The “Partner-Agent” model
In this model, the MFI would have the function of a dealing agent, thus enabling the insurer
to reach a market where it would not intervene directly on its own because of the lack of
profitability.
From a client perspective, clients can access an insurance product which is managed by a
professional and thus benefit from a better “return on investment” than with an informal
means of insurance.
This model is based on the collaboration between a partner agency (usually a formal
insurance company) and a dealing agent that provides services to low-income clients. The
company (the partner) feeds the financial resources, sets the premiums, monitors the
insurance claims and ensures that legal obligations are observed. The agent ensures that the
risks, resources and knowledge are transferred and shared rationally between the formal and
informal sectors.
b) The mutualised insurance and other community-based organisations
model
Credit and savings cooperatives often offer borrower's insurance contracts that cover the
balance of a loan to be paid back. Moreover, they offer savings in the form of life insurance,
to stimulate saving habits. Some also sell Housing, Funeral, Invalidity and Disease insurance,
and even Accident policies, yet more rarely. These products come in addition to mainstream
credit and savings services.
In the countries of Sub-Saharan Africa, many mutualised health insurances have also been
created on the basis of a voluntary membership. In exchange for the premiums they send to a
fund, policyholders are entitled to certain benefits. The community has an important role in
designing and managing the programme.
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c) The “all-in-one insurance” model
Different organisations - MFIs, insurance companies, etc. – can also sell their policies
directly to the poor through agents who are paid on a salary or sales commissions basis, or
both. India‟s Tata AIG or Bangladesh‟s Delta-Life develop micro insurance using this model
of direct sale.
d) The “franchise” model
In this model, the professional insurer franchises his/her license, assigning part of his/her
capital to the licensee through a reinsurance treaty, as the case may be; the licensee (an MFI,
generally), on his part, is in charge of designing the product, setting the prices as well as
handling the losses and gains.
e) The “supplier” model
This model applies to health insurance specifically, it implies that the insurer provides all or
part of the health-care services. His/her interest is that he/she remains in control of the health
care offer which is a crucial element for client faithfulness.
9.0 Emerging Challenges in Micro insurance:
In a paper entitled "Visions of the Future of Micro insurance, And Thoughts on Getting
There", which was published by USAID in 2008, micro insurance experts identified four
general challenges to further the development of micro insurance (Michael 2008):
Coordination of knowledge of activities to allow all parties to maximize
effectiveness.
Improving products and processes that recognize the needs of low-income families
and satisfy their needs with value.
Innovation in processes that can be replaced or augmented by technology.
Careful development of regulation that effectively balances the need for consumer
protection with the flexibility needed to develop and service a massive market.
(source)
Four years down the line, here are some of the developments that aim to overcome these
challenges:
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1. The launch in 2009 and then formalisation in 2012 of the Microinsurance Network, a
multi-stakeholder platform that promotes the development and delivery of effective insurance
services for low-income people by encouraging shared learning and facilitating knowledge
generation and dissemination, directly links to the first challenge of coordinating activities to
maximise effectiveness. The Network drives collaborations through its 15 working groups,
and with over 60 institutional members, it is the most representative body in the sector.
2. There are numerous examples of products and processes being improved to reflect clients
needs better. However, the launch of the ILO‟s Microinsurance Innovation Facility in 2008,
which has offered over 40 grants to innovative projects, best represents this focus to improve
products around the world. In addition to this, a number of tools have been developed to
measure the value and performance of the insurance services, including the Facility‟s PACE
tool, MILK‟s Client Math papers, and the Network‟s financial and social performance
indicators.
3. The importance of technology in microinsurance is clear. Technology can not only reduce
costs, but it can also increase outreach to the scales necessary for sustainability. The mobile
phone, for example, is revolutionising products and outreach, and with programmes such as
the agricultural insurance product Kilimo Salama in Kenya and MicroEnsure/Tigo health
insurance product in Ghana, this „revolution‟ is bound to continue.
4. As regards to regulation, the launch of the Access to Insurance Initiative in 2009, a
programme that supports the implementation of sound regulatory and supervisory
frameworks, was a significant step towards developing regulations that balance the need for
consumer protection and the flexibility needed to service the low-income market.
10.0 Differences between conventional insurance and micro
insurance
Microinsurance products are targeted at low income populations and differ from conventional
insurance as shown in this matrix adapted from (McCord & Churchill 2005).
Conventional Microinsurance Microinsurance
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Insurance* (Commercial model: Partner-
Agent) (Nonprofit model: Mutual)
Premium collected in
cash or mostly from
deductions in bank
account
For credit, life and loans
that are tied to index-based
insurance, premiums are
usually collected at source,
i.e. deducted from the loan
associated with another
transaction such as loan
repayment or asset
purchase.
Premiums for other types of
insurance (e.g. health) are
usually collected in cash,
sometimes through irregular
cash flows, but more often
through single premium
payments.
Premium often collected in
cash or even in kind (e.g.
milk in the care of dairy
cooperatives etc.).
Collection modes often
respond to market‟s
irregular cash flows, and
payments can entail
frequent but partial
premium payments.
Sold by licensed
intermediaries.
Often sold by licensed or
unlicensed intermediaries.
The roles of shareholders,
administrators and clients
are unified in this
model. As such, the group
can design its own
products, and agents are
not required.
This means that agent fees
(commission) can be
converted into more value
for money for the group.
Agents and brokers are
responsible for sales and
services. Direct sales are
also common.
Agents manage entire
customer relationship,
sometimes including
premium collection.
Microinsurance is usually
directly sold to MFIs and
more rarely to groups.
Targeted generally at
wealthy or middle class
clients in emerging
markets.
Targeted at low-income
persons.
Targeted at low-income
persons.
Corporate clients are
familiar with insurance.
Individual clients in the
informal sector are less
familiar with insurance in
emerging markets.
Market is often unfamiliar
with insurance and requires
specific efforts in
explaining the value of
insurance to clients
(“consumer education”).
By involving clients in
product design and process
of administering the after-
sale relationship (claims
and dispute resolution),
this model may achieve
both enhanced awareness
and higher willingness to
pay for package.
Screening requirements Screening requirements are Where the affiliation unit
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may be applied for certain
types of insurance, e.g. a
medical examination
might be required for
term life insurance.
kept to a minimum; usually
limited to a declaration of
good health.
to insurance is the group
rather than an individual,
there are no screening
requirements.
This model offers trade-off
of covering a broader range
of (pre-existing) conditions
in return for group
affiliation. Local
information is used to
control moral hazard and
reduce adverse selection.
Large sums insured. Small sums insured. Small sums insured.
Priced based on
individual risk rating (e.g.
age/specific risk
assessment).
Community or group
pricing, based on national
data/estimates or
comparisons to risk rated
schemes; in case of
individual pricing often
higher premium due to risk
level of policyholders and
lack of competition on
supply side.
Premiums based on
community-rating derived
from local information and
conditions.
Limited eligibility with
standard exclusions.
Complex policy
document.
Limited eligibility with
standard exclusions.
Simple, easy to understand
policy document.
The group defines its own
package, reducing or
eliminating the need for
complex legal
documentation.
Tends to opt for more
inclusive and holistic
packages.
Market data available,
and consequently
accurate actuarial
expertise.
Little or unavailable market
data.
Little or unavailable
market data.
Claims process may be
difficult for
policyholders.
Claims process is simple
while still controlling for
fraud. In reality,
transactions that are
business-to-business do not
concern the clients. In
transactions between
insurance and client, the
Claims process should be
simple and managed by the
group at the lowest
possible level to reduce
reimbursement delays and
leverage local information
to control for moral hazard
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process often takes a long
time.
and fraud.
* Not applicable for large group insurance.
11.0 Role of Micro insurance in Poverty Alleviation and management
of Vulnerabilities:
Poor people live and work in risky environments, vulnerable to illness, accidental death and
disability, loss of property due to theft or fire, agricultural losses, and natural and man-made
disasters. Not only can exposure to these risks result in substantial financial losses, but
vulnerable households suffer from the ongoing uncertainty about whether and when a loss
might occur. The poor are less likely to take advantage of income-generating opportunities
that might reduce poverty because of this perpetual apprehension. Although there is little
evidence-based knowledge of the impact of insurance on poverty reduction, micro insurance
can help reduce the vulnerability that poor households face and as a consequence, enable the
poor to improve their lives.
Government efforts through the provisions of micro-finance opportunities to small and
medium businesses is a step in the right direction in addressing poverty amongst its growing
population though not sufficient, therefore, adequate insurance is needed to protect these
credit lines offered by micro-finance institutions and banks otherwise beneficiaries of such
facilities could as well go back to poverty. Small businesses are also exposed to such risks as
health, fire, burglary, death and family responsibilities which are capable of eroding
businesses or assets acquired over time.
Every society has risks that should be avoided and low income people are always vulnerable
to them. Low income people are more exposed to such risks than the rest of the population
and most times cannot deal very well with the crises.
These categories of citizens therefore need insurance more than anyone else because they
lack fallback positions whenever there is a loss. Small businesses take loans from micro-
finance institutions and whenever there is sickness or accident and they are hospitalized the
next thing will be to use such loans collected to pay for hospital bills and return to poverty
once again.
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Poverty and vulnerability reinforce one another forming an ever-growing downward spiral,
not only the exposure to risks results in substantial financial losses but vulnerable families
suffer the continued uncertainties about when and how loss may occur. Due to this perpetual
concern, poor people are less likely to take advantage of income generation opportunities
which may reduce poverty. The majority try to manage their risks and deal with the
consequences. Saving money, Esusu, working extra time on other activities and asking for
loans from friends or relations constitute some of the strategies used to avoid financial loss
which is inefficient and exacerbates poverty.
Such informal protection methods do not resist unforeseen serial cases before they are able to
rise again from an adverse situation, a new unforeseen event may occur with more power
throwing them back to stage one again.
Micro-insurance therefore provides cushion against such vulnerability by offering micro-
health, life, and property insurances.
It is a commonly accepted key strategy therefore to enhance sustainable economic
development and alleviate poverty by making financial systems more inclusive by improving
access to savings, credit and insurance.
It is noteworthy to observe that some insurers like AIG life in Uganda, Coco life in the
Philippines or the Brazilian insurance industry have all entered this new venture with
promising results. However, some commercial insures and Policy makers still tend to believe
that providing insurance cover to the poor is the responsibilities of the state and in practical
terms it is impossible to insure poor people on a cost covering basis. They suspect that poor
households either cannot pay for their insurances or the informality of their living situation
makes them unattractive as clients because they do not have formal employment, have ID
cards and are illiterate.
It should however be mentioned that many state run schemes of social protection in
developing countries have failed as they are poorly run, for those targeted do not benefit
while those who can afford them are the ones who access these benefits. Also, public social
security schemes where available are delivered through formal sector employer which does
not reach the unorganized workers both employed and self-employed in the informal
economy.
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On the other hand however, insurers are beginning to notice the vast markets of low-income
households but numerous obstacles need to be overcome if micro-insurance is to be offered
efficiently and effectively in terms of distribution system, products development and
capacities.
The poor people are vulnerable to any kind of disasters than the rich people. Since they do
not have any kind of protection and risk management system to cover the losses caused by
various elements such as natural calamities, fire events, eradication from their living places if
it is a slum or such type of habitants, any kind of illness and so on. They are very prone to be
affected severely by these events.
Key Role of Micro insurance as a tool:
As a tool to alleviate the poverty and a management tool to protect the vulnerabilities of the
poor people micro insurance acts as a magic or Aladdin’s Magic Lamp. The poor people are
forced to be united to gain the facilities of the micro insurance. They are taught to be united
to face and cope up with their financial and non-financial issues. The regular savings
requirement enables them to be self-dependent and self-reliant. They are taught to be
confident amidst many problems in their life.
The poor are generally exploited by the upper section of the society. By the micro insurance
schemes, they are united and by the collective effort they are ensured against different perils.
Thus, the poorness of the poor can be easily alleviated from the grass root level. They are
very vulnerable to the calamities of the nature and the society as well. As they are getting the
economic freedom they can also get rid of this problem. As a result, micro insurance is a
great tool in managing the vulnerabilities and poverty of the poor people of the society of the
developing counties like Bangladesh and so many.
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12.0 Micro insurance products offered:
The major micro insurance products offered to the poor people are:
a. Credit life insurance
This is the most common and ensures the “debt dies with the debtor.” It is actually
used to protect lenders, not the families, from the death of their clients and is often
offered directly by MFIs
b. Term life or personal accident insurance
Term life or personal accident insurance is often offered alongside credit life
insurance to cover the family if a borrower dies.
c. Savings life insurance
This is often used to stimulate savings. Poor people are encouraged to save a certain
portion of their daily income and deposit it to the insurance company. After a certain
period and if they face any trouble, this money is given to them to cope up with the
situations.
d. Health insurance
This is probably the product in greatest demand among poor and low-income
households; however, it is also the most complex risk to cover due to higher
information asymmetries between the insurer and insured. These information
asymmetries lead to potential higher risks of moral hazard and adverse selection,
which have so far proven tricky for commercial insurers. As a result, many often
write-off health as an area where it is difficult to provide microinsurance on a viable
basis, and prefer to focus on the simpler products described above. However,
organizations following the mutual model can leverage local information and peer
pressure to address moral hazard issues, and by affiliating “en-bloc” can greatly
reduce the risk of adverse selection.
e. Property insurance
Property insurance is nearly always linked to a loan and may help a borrower continue
repaying his or her loan only if something happens to the property (usually livestock).
In some cases, replacement of the property is also covered. Endowment policies
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combine long-term savings and insurance with emergency loans against the savings
balance. In this case, the premium payments accumulate value.
f. Agricultural insurance
Agricultural insurance is particularly tricky, and little evidence exists of viable
programs. The problem is that insured farmers are less likely to pursue sound
practices and therefore are more likely to lose their crops. It is difficult to calculate the
probability of loss because so many factors can influence crop yields. At the same
time, premiums that farmers can afford are not usually sufficient to cover claims and
administrative costs. Recent innovations that link insurance to rainfall and other
weather conditions are promising, because they may be more measurable, objective,
and viable.
13.0 Concluding Remarks:
Bangladesh is one of the most important developing countries in the world. However, people
here are lagging behind in most of the statuses of life in comparison to others. The standard
of living is quite miserable. Roughly, half of almost one hundred seventy million people are
illiterate. The rate of people under the range of poverty line is even higher. They fight with
poverty every day. They are destitute from many necessary amenities of life. They are highly
eligible for the scope of micro insurance.
Micro-insurance can serve the interests of poor populations with risk-pooling to manage
unpredictable employment, flows of income, and catastrophic events by providing post
disaster liquidity to poor households and thus can help to secure livelihoods and facilitate
mischance recovery and reconstruction. To ensure that micro-insurance safeguards the assets
and interests of the poor, micro- insurance initiatives must exercise professional management,
product development, management information systems, and re-insurance.
A major challenge is assuring the financial sustainability of micro insurance providers, while
at the same time providing affordable premiums to poor and high-risk communities. To meet
this challenge many may be afraid to come forward and shift responsibilities away to national
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or international community of solidarity for the poor or something like this to starting up
micro insurance operations.
But the fact is, the commercial viability of various micro insurance schemes are threatened in
Bangladesh in the context of both low supply due to the inherent risky nature of this business,
low insurance demand and low willingness to pay due to a lack of financial income of the
residents.
For a country like Bangladesh, micro credit providers and micro insurer should work
together. Micro-credit providers have greater access to the client base, better infrastructural
facilities all over Bangladesh, a greater degree of trust and reliability among the clients and
pre-existing information on client portfolios. Here, Potential insurance clients, the poorer
section of community who all are comparatively less educated, have psychologically strong
preference for public provision of micro insurance indicating a higher degree of trust in the
public sector relative to the private sector. In order to meet both the demand and supply
criterion assessed through the current condition, a partnership of public sector and the micro-
credit providers seems the most suitable institutional set-up in the context of Bangladesh as it
will ensure both higher insurance take up and lower administrative cost of operation.
To design appropriate micro insurance and micro insurance programs for different cases,
further researches should be carried out to quantify the impact of specific types of micro
insurance for specified events on out-of-pocket expenses, incidence of poverty and poverty
gap, inter-generational transfer of poverty and household acknowledgement status regarding
all these.
If micro insurance is to become a welfare-enhancing instrument, an equally challenging
prerequisite is its propensity to reduce the unacceptably high human and economic impacts of
different disastrous events on the poor. If the insurance schemes are embedded within a
strong risk management framework, the vulnerability will certainly decrease. However, there
is a lack of direct links and incentives on the part of current micro insurance programs
available to reduce the direct losses in our country. This finding is not unique to any
developing country insurance, but it flags a more general concern about linking risk financing
to risk reduction. Skeptics rightly warn that insurance may conversely present disincentives
to taking proactive risk-reduction measures. Different schemes may offer possible exceptions.
Nonetheless, the challenge of linking insurance to prevention underlines the importance of
Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh
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integrating micro insurance into risk-management programs that combine regulatory and
citizen oversight to assure incentives and effective regulations.
In Bangladesh, Insurance Development & Regulatory Authority (IDRA) is the main
regulatory body of the insurance companies. They are responsible for promoting and
encouraging sound development of the insurance industry in our country. They advise the
government on all the matters related to the development of insurance industry. As micro
insurance can be a highly lucrative sector of insurance in Bangladesh due to its massive
potential clients, IDRA should take necessary steps for the advancement of this sector. With
them, non-government private insurance companies have to come forward to take the
advantages from this sector. With all our combined efforts, we can use micro insurance as a
instrument to alleviate poverty and make betterment of the vulnerable people of Bangladesh.
14.0 Conclusion:
The micro insurance is as described above is a great tool to the alleviation of poverty and in
the management of vulnerabilities of the poor. The conclusions of the paper point to the
importance of the design and delivery of this new product based on a market analysis of the
potential customers‟ preferences as well as their existing insurance landscapes. This demand-
led approach differs markedly from micro insurance product develop date. Most micro
insurance products currently on offer appear to be primarily supply-led, designed as
downsized products of commercial companies.
Context is also key to the effectiveness of any micro insurance products. At the client level
we identified the lack of understanding of insurance. Client education is a prerequisite for any
adoption of such innovative financial products. The client‟s financial landscape has already
been mentioned. On the shock side, we need to take account of not just the initial shocks but
the capacity of the client to cope with the secondary shock effects: the payment of school fees
to keep children in school, the shortfall in cash to pay for food when the principle
breadwinner is sick or has died.
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