MR Microinsurance_2012_03_29.indd - International Labour ...

The potential of microinsurance for social protection
Fifth, as a supplement to social insurance: in all cases, the role of microinsurance
may also be to top up the benefits granted by social insurance schemes.
This option may sound similar to the previous option (microinsurance as a complement).
The difference is that in the former case, the presence of both microinsurance
and social insurance are crucial for each to have a significant positive
impact on the members. While here, microinsurance and social insurance simply
cover different risks or different effects of the same risk, microinsurance may, for
example, grant a supplementary pension to retirees. Or microinsurance may
cover specific illnesses such as cancer or HIV/AIDS if they are excluded from the
cover provided by commercial and social insurance schemes. However, their
treatment is often excluded on the grounds that it is exceptionally expensive, and
therefore cover might be too expensive for microinsurance. For example, a
microinsurance scheme in Jordan, exclusively covering the treatment of cancer,
has thus far attracted only middle- to high-income households, as low-income
people consider premiums too expensive (Loewe, 2001).
In the same way, microinsurance may provide protection against risks that are
currently not covered by social insurance, i.e. droughts, animal diseases, earthquakes,
floods, typhoons and crop pests. These risks are not among those that
international agencies, including the ILO, identify as the core household risks for
which governments should provide social protection for their citizens. As a
result, they are often neglected in social policy strategies, despite the fact that
they may constitute a more serious threat to many people than many of those
listed in the ILO’s Social Security (Minimum Standards) Convention, 1952 (No.
102). One reason is that it is possible to manage risks such as old age, work disability
or illness through financial pooling, even among rural communities, while
weather-related risks are covariant, i.e. they affect all the people in a given region
at the same point in time. In addition, it is perilous for an insurer to offer compensation
for harvest failure due to weather events (e.g. drought, a severe cold
spell or a flood) because the potential for moral hazard would be enormous: once
farmers have signed a contract for harvest insurance, they have less of an incentive
to ensure that their harvest remains good even when an extreme weather
event occurs. In addition, they may exaggerate the extent of a harvest failure, and
it would be difficult for insurers to detect such misreporting (Loewe, 2009b).
For this reason, many recently established weather insurance schemes are
index-based (see Chapters 4 and 11). They cover only one or two risks that may lead
to harvest failure, and compensation for insureds depends on an objective trigger
that is easy to monitor. Many are thus deficit and excess rainfall insurance schemes
rather than direct compensation for a farmer's actual loss in terms of harvest failure
or loss of assets. For example, under the deficit rainfall insurance offered by the
Horn of Africa Risk Transfer for Adaptation (HARITA) scheme in Ethiopia (see
Box 4.3), benefits are granted to all policyholders within a region if in any single
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