Micro Insurance: A Critical Need For India’s Poor

Micro Insurance

Finance is the cementing force that holds all the pieces of our life together. It enables money to be in the right place, at the right time, and for the right situation. To borrow and save is to move money from the future to the present or from the present to the future. To insure is to move money from a “good” situation to a one that is “bad”.

Ideal financial societies are those that provide safe and convenient ways of managing these simple monetary affairs. We have still a long way to go to make this world poverty-free. One of the key strategies for eliminating poverty is to equip the poor with the right financial tools.

Access to the right options at a critical juncture can determine whether a poor household will be able to exploit an opportunity to move out of poverty or absorb a shock without being pushed deeper into debt. People in the low-income group live on the edge, in constant fear of a catastrophe or tragedy. They live in a risky environment, vulnerable to numerous risks and economic shocks such as loss of jobs, loss of property due to theft or fire, crop failure, the death of a breadwinner, and unexpected catastrophes.

Although poor households often have informal means to manage risks, such strategies provide inadequate protection. Insurance is a major safeguard for the low-income group. They need insurance more than wealthier people because they have no cushion and they are more vulnerable to many of the risks. Studies on the impact of micro and inexpensive insurance policies targeted at the poor have shown they can improve healthcare outcomes, help withstand income shocks in vulnerable households, and raise school attendance rates.

In the developed world, insurance is a part of life. However, its coverage has been patchy and woefully inadequate in the developing world. More than 80 per cent of India’s poor are not covered in any way. However, what was a luxury that enabled the poor to secure their gains and plan for the future with confidence has now become a reality on account of several innovative models developed by institutions. The entire micro-insurance segment is growing and is now worth about 15 per cent of the worldwide insurance industry. India is now a major site of a rapidly growing micro-insurance revolution.

Micro insurance is a developed segment in both India and the Philippines, with proper policies and regulations in place. India accounted for 65 per cent of Asia’s micro-insurance market, according to the Munich Re and GIZ report, with some 37 million poor families availing of the benefits provided by the Rashtriya Swasthya Bima Yojana or the national health insurance initiative ~ the flagship programme of the government for health insurance.

Micro-insurance, by definition, envisages the protection of low-income people against debt traps that often imperil their livelihood and even their lives. Ordinary life risks could completely wipe out a family’s entire savings .Poverty and vulnerability reinforce each other in a downward spiral. Often, the trigger for poverty is illness. Illnesses are a severe risk and can eat away most of the hard-earned savings in low income communities. The net result is bankruptcy. The poor prefer health insurance to life insurance. As they say, “we die once but go to the doctor many times each year”. According to the Union health ministry, 25 per cent of the people admitted to hospital were driven to penury by hospital costs, not to forget the cost of missed work.

Microinsurance can help low income households protect their fragile livelihoods and lives against inevitable risks and disasters of both the natural and manmade varieties. Without access to insurance or risk mitigation tools   or adequate social security services, poor people are extremely vulnerable and ill-equipped to meet shocks that life inevitably brings. To cope with such emergencies, microinsurance can help families avoid desperate measures such as incurring debts or selling assets or abandoning children or taking them out of school. By managing risks and avoiding debt, those who have micro-insurance policies are in a position to protect the wealth they accumulate, generate more income, and can even get a fair chance to rescue themselves and their families out of the mire of poverty. Insurance can provide the low-income group with a greater protection against health, property, disability and death risk.

The cost of insuring against an unforeseen development is considerably lower than self-insuring through savings, and is small relative to a household budget. Governments, donors, and other development actors  engaged in combating poverty and designing social protectin measures need to have insurance as one of the weapons in their arsenal. The key challenge for microinsurance is the high costs of administering the same. The poor by and large live off the banking grid. Families are scattered across the countryside, making physical access difficult and the transaction costs of issuing millions of small policies through service agents are too high.

The global revolution in mobile communications, along with rapid advances in digital payment systems, is creating opportunities to connect poor households to affordable and reliable financial tools through mobile phones, and other digital interfaces. Micro-insurance can piggyback on the exploding reach of cellphone banking and the infrastructure created by microcredit institutions. This can make them more cost effective.

For the poor to reap the real benefits of micro-insurance, the insurance companies need to function with a sense of responsibility. Because of the lack of proper awareness and failure of institutions to properly guide them, people buy insurance policies without proper planning and give up midway because they don’t have money to pay the premium. Aggressively pushing out products without properly assessing the consistency in income streams of the buyers for servicing their policies can mean moa harm to the poor.. The customers end up losing heavily as penalties are very harsh. Uninformed clients and unscrupulous providers can make for a very bad combination. the most important determinants  for a financial product to seek enrolment of the poor is  how far the providers engender trust..The greatest challenge for micro-insurance schemes is to strike the right balance between adequate protection and affordability to deliver real value to the insured.

Micro-insurance is certainly a way to end the cycle of poverty, indeed to provide the safety net that families need. If the poor know that they are covered, they’re more likely to invest in expanding businesses, diversifying their crops, or sending their children to school, without fear of losing their savings if something were to happen. The whole capacity to take risks changes.

Thus from just being a safety net, micro-insurance provides benefits that earlier generations could never imagine – hope in the future.

Moin Qazi is the author of the bestselling book, Village Diary of a Heretic Banker .He has worked in the development finance sector for almost four decades .He can be reached at [email protected]

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