MR Microinsurance_2012_03_29.indd - International Labour ...

316 Insurance and the low-income market
scape of informal mechanisms, national security schemes and microinsurance
providers might make it necessary to fi nd a niche for a specifi c product. Th e next
section of this chapter compares various products at country level and illustrates
the importance of looking at a product in relation to its alternatives.
15.3 Setting benchmarks: Informal mechanisms and social security schemes
Informal mechanisms and social security schemes provide benchmarks to assess
the value of microinsurance in the context of other risk management options.
Low-income households use a multitude of informal mechanisms such as burial
societies, savings or self-help groups to manage life, health and property risks.
Th rough group risk-sharing mechanisms, households participate in an important
social function nested within well-defi ned communities that allow risk-pooling
without much fraud, moral hazard or adverse selection. However, as described by
Dercon (2005) and Morduch (1999), they have many weaknesses. Th ey can only
handle idiosyncratic risks, and not covariant risks that aff ect entire communities
(e.g. fl ooding). Th ey are best suited for small disbursements for frequent events.
Only well-structured groups, often managed by a remunerated committee, are
able to respond to larger losses, but these are rare and found mostly in urban areas.
Low-income households tend to patch various strategies together because
none can provide enough funds on their own to cover large losses. Households
compensate by participating in multiple group schemes, or, in the event of an
emergency, they deplete their savings, sell assets at low prices, or take one or
more small loans from moneylenders or MFIs. Th ese activities often involve high
costs (Cohen and Sebstad, 2005; Collins et al., 2009).
Th e PACE client value assessment in Kenya on the use of informal risk management
arrangements (see Box 15.6) confi rms that they off er partial cover at a
high price. Informal risk-sharing mechanisms in Kenya score low on product
benefi ts and cost, high on access, and medium on experience.
Box 15.6 Client value from informal risk-sharing mechanisms in Kenya
In Kenya, “welfare groups” of 20 to 60 members are a popular, self-managed way
to respond to life, and to a certain extent, health risks. Th ey are better organized in
urban areas, where members regularly contribute KES 200 to KES 400 (US$2.20 to
US$4.40) per month to receive a KES 20 000 to KES 50 000 (US$222 to US$555)
payout in the event of the death of the member or a family member. In the event of
major illness, members are requested to contribute ex-post from KES 100 to KES 500
(US$1.10 to to US$5.50), which results in lump sums of KES 5 000 to KES 30 000
(US$55 to US$333) to cover health bills. In rural areas the ex-ante collections are