By Amaka Abayomi
Operators in the microfinance sector have been urged to reduce the level of poverty in the country through the development of the micro_insurance products that would help low income earners mitigate risks and give them hope.
Micro_insurance are insurance products designed to be beneficial and affordable to low_income individuals or groups which can help improve their quality of life by allowing them to better manage potential problems while empowering them to be more proactive as to the future.
It is also a financial tool that helps low_income households mitigate risk and plan for the future. It enables them to cope with unpredictable and irregular incomes, while also preparing them for financial emergencies that threaten their livelihood.
Speaking to microfinance operators recently, an international financial expert and Director, Microfinance without Borders, Mr. Mosleh U. Ahmed, said the emergence of micro_insurance is an important development within the field of microfinance and challenges the widely held belief of the ‘non-insurability’ of the poor.
According to Ahmed, “micro_insurance is an aspect of insurance that caters for the needs of low income earners such as petty traders, peasant farmers, commercial motorcyclists, hair dressers, shoe menders, among others. These people need to be covered and protected by this aspect of insurance. Unfortunately, not much has been done to create awareness for the area of business.”
Continuing, Ahmed said micro_insurance is the combination of micro_savings, microfinance and micro_credit. “Micro_insurance is not charity, doesn’t prevent risk, is not provided by only small insurance companies, neither is it a ‘magic bullet’ and a cure for all problems of the poor people. But micro_insurance is a risk management tool and loss protection mechanism.
“Micro_insurance are simple, easily understood contracts that require little underwriting. Though the claim process is simple with innovative premium collection and policy delivery models, it still gives room for fraud control.”
On micro_insurance basics, Ahmed said the micro_insurance business model is ‘social’ business where solving social problems is motivating the business instead of maximizing profits.
“It is a contract to prevent low income people from facing severe financial problems when faced with unexpected risks events. Its products typically have a low return on equity and in exchange for insurance protection; the low_income people pay a small premium.
“Risk pooling is important because it brings together resources from a large number of people to share in the losses of a few. In case of an MFI, the cost to the insured is the average loss experienced by its ‘risk pool’. In case of an insurance company, the cost to the insured is the premium calculated actuarially for its ‘risk pool’.”Micro-insurance helps people to move out of poverty and protect the gains they make through microfinance.” He listed the different micro_insurance models to include Community-Based Model which are owned and managed by members; Insurer/Limited Provider Model; Insurer/Full Provider Model, where the MFI is the insurer and owns healthcare clinics; Bundled Insurance Package; Partnership Model; Full Insurer Model; and PPP Model.
He listed the different micro_insurance products to include life/endowment/credit life; health/critical illness; group personal accident; unemployment; crop/weather; property/livestock/assets; funeral insurance; bundled insurance package; rural insurance schemes; and flood insurance.
Commenting on the World Bank/GIZ Microinsurance Survey conducted in Lagos and Kano, Ahmed said the objectives were to identify the potential micro_insurance clients’ socioeconomic status, perception and understanding of insurance risks, risk mitigation measures, income and expenditure patterns, affordability of insurance premiums, constraints on access to micro_insurance services, and delivery channels.
“Quantitative and qualitative survey was carried out by Centre for Microenterprise Development (CMD) on 604 urban households in Lagos State and 405 rural households in Kano State.
“Of the 35.7% employed people in Lagos, 29.4% had permanent jobs while 6.3% had temporary jobs. In Kano, 30.9 were permanently employed while 7.2% had temporary jobs.
“53% of the sample population in Lagos State that are self employed, 41.3% was involved in trade activities, 5.7% in skilled labour, 2.4% in agriculture, 3.4% in services, 0.6% in livestock and 0.4 in manufacturing.
“Kano State had 57.4% of its sample population self employed. 36.5% was into trade activities, 6.2 in skilled labour, 9.3% in agriculture, 2.6% in services, 2.3% in livestock and 0.5% in manufacturing.”
Poverty level scoring showed that Kano State had 2.0% extremely poor people, 44.4% poor people, 52.4% vulnerable poor people and 1.2% vulnerable non_poor people, while Lagos had 13.4% poor people, 66/6 vulnerable poor people and 20% vulnerable non_poor sample people.
On which concept product to buy, 73.2% of Lagos respondents preferred health product, 25.8% property, 29.1% life and 22.5% funeral products.
69.6% of Kano respondents chose health products, 31.4% property, life products had 14.6% while funeral products had 7.2%.
Explaining the major challenges hindering the growth of micro_insurance design and delivery, Ahmed called for the need for large volume of micro_insurance products because while microfinance model based on micro lending can survive with a few clients, the same cannot be said for insurance offers in a micro scale.
“The issue of trust between the micro_insurer and client is another challenge because unlike the case in credit, where the micro_entrepreneur borrows the money and takes up the responsibility of returning it, insurance reverses the responsibility of risk.
“Highly personalized products are needed because each group or community faces different kinds of risks that need to be insured and knowing these minor distinctions is vital to the adoption of any insurance product.
“Since insurance isn’t a very popular financial service in many developing economies and that is why many fail to appreciate the importance of transferring risk. While the upper and middle class would venture only so far as to sign up for car insurance, the idea of a steady cash outflow to recover from something that may or may not occur, simply evades the poor, who are already hard up on cash.