Framework
By Elfren Sicangco Cruz
Micro-insurance, especially combined with micro-financing, is a major
developmental tool for poverty alleviation because the poor, who are
vulnerable to fall back into poverty in times of hardship such as when a
breadwinner dies or natural disasters destroy their property, are given
access to financial protection schemes.
The overwhelming majority of people in developing countries live in a
state of poverty. The main hindrances to escaping this cycle of poverty
include economic crisis, natural disasters and social shocks. Unlike the
rich, the poor are not able to cope with serious illnesses, death of
livestock, loss of property, droughts, crop failures, job layoffs and
especially death of breadwinners.
Many development efforts, like micro financing, offer possible means of
alleviating poverty. This is a method of helping the poor, especially in
rural areas, by giving loans with minimum collaterals and other terms.
Unfortunately, the risks confronting the poor have greater financial
impact and occur with greater frequency than the same type of risk for
the rich. Also, the vulnerability of poor people is exacerbated each
time they incur a loss, creating a vicious cycle that prevents any
lasting improvements in their human and economic welfare.
In a 2007 paper presented by Professor Mamun of Bangladesh, he says:
"Crises are recurrent in the lives of the poor. Such crises -- personal,
social, or natural -- often involve high expenditures ad drive poor
families deeper into poverty. Most common crises are accidents, sudden
hospitalization and death of a bread earner, and loss of crops or
assets. Expenses incurred during such crises are met either by borrowing
from moneylenders, sales or mortgaging of assets or by drawing on scarce
saving resulting into a simultaneous reduction in income and saving, and
an increase in debt and expenditure. Each crises leaves a poor family
weaker and more vulnerable. Traditional micro-finance schemes do not
address such vulnerabilities and the necessity of risk reduction for the
ultra poor. The informal coping mechanisms offer limited protection and
are less available to poorer households and break down when most needed.
Formal financial services can offer greater benefits at lower cost than
informal mechanisms; but, there is vulnerability to risk is reducing
effectiveness and financial performance of micro-credit."
UN Secretary General Kofi Annan, following the adoption of 2005 as the
International Year of Microcredit, said: "The stark reality is that most
poor people in the world still lack access to sustainable financial
services, whether it is savings, credit or insurance. The great
challenge before us is to address the constraints that exclude people
from full participation in the financial sector... Together, we can and
must build inclusive financial sectors that help people improve lives."
Fortunately, for low-income peoples not traditionally covered by
traditional insurance, financial protection schemes that reduce
vulnerability to unexpected and catastrophic life shocks have been made
available. This method is referred to as micro-insurance which can cover
loss or injury to health, property, crop, weather, and life or similar
risks to the poor.
The Micro Insurance Academy in New Delhi, India offers a definition:
"There is no single and simple definition of micro-insurance today... We
apply a broad definition of micro-insurance, out of which the definition
of insurance is the simpler part: Insurance is the provision of
financial protection contingent on the occurrence of a predefined risk
in exchange for an ex-ante premium payment. Insurance functions through
pooling the risk of various insured and diversifying their risk over
larger numbers. Following this definition, social assistance programs
(such as targeted cash transfers) and fully subsidized insurance schemes
are not included...."
The definition for micro-insurance is the following:
• Insurance for low-income people
• Insurance with small benefits
• Insurance involving low levels of premiums
with:
--Simple, easy understood contracts
--Few if any exclusions
--Simple claim process while still controlling for fraud
--"New collection" modes
--Multi-task intermediaries
--Often community or group pricing.
In the Philippines, a working definition of micro-insurance has been
drafted with the following features:
• Simple product design that clearly identifies the face amount,
benefits and terms of the insurance uniformly applied to the clients.
• Amount of premiums and contributions of the insurance coverage to be
paid by an individual, computed on a daily basis, does not exceed 2% of
the current nominal daily minimum wage rate for the non-agricultural
workers in Metro Manila as determined by the Department of Labor and
Employment,
• Maximum amount of life insurance coverage is not more than 200 times
the daily minimum wage rate for non-agricultural workers in Metro Manila.
• Policy contract is easily understood by the client or member.
• Straightforward and uncomplicated documentation requirements.
• Frequent collection of premium or contribution that coincides with the
cash flow of the insured.
• Fast and timely payment of insurance claims.
Not only does micro-insurance assist families, in times of crises, from
falling back into poverty but also makes it possible for the poor to
take more risks. For example when farmers are insured against bad
harvests resulting from drought, they can grow crops which give high
yields in good years and bad yields in year of drought. Without
insurance they will be inclined to do the opposite since they have to
safeguard a minimum level of incomes. Crops will be grown which are more
drought resistant but which have much lower yield in good weather.
Micro-insurance, combined with micro-financing, provide the incentive
for the poor to become entrepreneurs by staring livelihood projects and
small businesses.
Giving access to all forms of micro-insurance will be an effective way
of improving the lives of the poor and also become a tool for economic
development.
Dr. Elfren S. Cruz is a professor of Strategic Management at the MBA
Program, Ramon V. Del Rosario College of Business, De La Salle
University. Please send comments or questions to elfrencruz@gmail.com
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