managing risk.pdf

Managing Risk and Creating Value with Microfinance53In microfinance, governments, donors, and microbusinesses share one objective: to build productive assets andsmooth consumption so that low-income producers and their families can live better. Donors, governments,and millions of households have invested heavily during the past two decades to create productive assets, andvery little has been done to protect them. Unpredictable shocks—hurricanes, earthquakes, and illnesses, amongothers—affect the most vulnerable businesses and their assets disproportionately. Thus, there is growing interestin developing a menu of risk mitigation products, known collectively as microinsurance. Those products canreduce the economic damage of unanticipated events and can protect low-income households, microbusinesses,and the financial institutions that serve them. This chapter defines microinsurance and discusses the developmentof microinsurance products and markets, including examples from Latin America. 1Insurance Products and Low-Income ClientsInsurance comes in a variety of products; it offers different levels of coverage and is provided by a variety ofinstitutions. The key elements of insurance are payment of a premium, risk pooling, and reimbursement ofloss. The insured person, household, group, or business pays a premium in exchange for coverage. Risk poolingenables economies of scale to provide coverage of such events or risks. Insurance reimburses an individual,household, group, or company for some or all of a financial loss that is linked to an unpredictable event or risk.There are four groups of insurance products: (1) life, (2) disability, (3) health, and (4) property. Table 4.1 listsexamples of coverage that each group can provide. Life insurance is one of the most popular; it includes funerals,pensions, endowments, education, and credit (to cover an outstanding loan in the event of the borrower’sdeath. Disability insurance can include partial or total coverage and may offer payments for temporary orpermanent disability. Some disability products cover dismemberment, while others include coverage of creditcommitments. Health insurance can cover hospitalization, outpatient services, optical and dental services, andspecific diseases. Finally, property insurance can cover loss from fire, theft, accident, or natural disaster.Table 4.1 Types of InsuranceTypeLifeDisabilityHealthPropertyExamplesCredit , educaon, pension, funeral, and endowmentsPermanent and temporary disability; total and paral dismemberment; and debt coveragedue to disabilityHospitalizaon; out-paent, opcal, surgical, and dental services; and specific diseasesFire, the, agriculture, flood, drought, and pricesSource: Adapted by authors from McCord (2007c).Design of the Product for Low-Income MarketsMicroinsurance offers an insurance product especially designed for low-income clients—households andmicrobusinesses. As a match to the cashflow needs of the client, microinsurance products are simple tounderstand, arrive in a package with other products, and have a low premium. Because most clients have neverused insurance, providers typically offer client education as an integral part of the insurance package. Theeducation effort describes the plan’s premium, coverage, deductions, claims processing, and payment.1. This chapter is based on the February 2007 dialogue with Michael McCord (MicroInsurance Centre LLC), Carlos Arce (WorldBank), and Héctor Rivas (Financiera FINSOL). Ramanathan Coimbatore also contributed to this chapter.