MR Microinsurance_2012_03_29.indd - International Labour ...

50 Emerging issues
schemes (in a broadly similar way to social insurance schemes) are financed by
their members’ contributions and are intended to mitigate the impact of any
possible future downturns in a member’s income and any unexpected rise in his/
her essential expenditure. Thus, they are not a suitable instrument for people
who have difficulty meeting their most basic daily needs, let alone making provision
for future social needs. The extreme poor can only be safeguarded through
transfers financed by tax revenue.
In addition – again, unlike tax-transfer schemes and also unlike social insurance
systems – microinsurance schemes cannot (and are not meant to) redistribute
funds from rich members of society to the poor. This weakness is explained
by the fact that enrolment in a microinsurance scheme is typically restricted to
low-income households. If a microinsurance scheme used contributions made by
rich members to cross-subsidize the benefits provided to poor members, it would
be attractive only to the poor.
Secondly, many households lack the opportunity to join a microinsurance
scheme because no such scheme operates in their vicinity. Microinsurance
schemes contribute in a way to equality and social justice: they provide people
with low and fluctuating income, who often cannot access other kinds of social
protection instruments, with the opportunity to mitigate their risks as well.
However, today microinsurance schemes cover only a limited portion of the
population in their respective countries. Indeed, many experts believe that
microinsurance will never reach a majority of the population, even under the
most optimistic of assumptions (Roth et al., 2007).
Governments and donors may support the expansion of microinsurance by
providing advice and promoting the creation of sound basic conditions. However,
the fairness of providing financial subsidies to these schemes should be carefully
considered, as they would favour the clients of the schemes at the expense of
households who do not even have a chance to join. Subsidies are problematic
because microinsurance customers are often not from the lowest income strata –
for example, because the very poor cannot afford even the premiums payable
under microinsurance schemes. However, government budgets in developing
countries are normally mainly financed from indirect taxes, which are borne by
all segments of the population, including the very poor. As a result, the subsidization
of microinsurance makes the very poor co-finance the benefits of households
who are less poor than they are. Replacing indirect taxes with direct taxes
would improve the situation, but many countries face administrative difficulties
in collecting direct taxes.
Things look different if a large majority of the population, including the very
poor, has physical access to a microinsurance scheme and if only the premiums of
the poorest are subsidized. In this case, subsidies can be an instrument of progressive
redistribution and eliminate concern about equity.