Microinsurance: The World of "Barefoot Hedge Fund Managers"

MIHIR KHUBCHANDANI, DEFENSE AND DIPLOMACY CENTER 

When one typically thinks of insurance, it is seen as a costly investment, rarely seen as a program to help alleviate poverty in developing nations. However, this is exactly what microinsurance programs aim to do: offer accessible insurance with low monthly fees to help improve the lives of the poor. The potential benefits of widespread microinsurance programs are a good way of giving developing nations a bigger leg up.

Microinsurance, called a “barefoot hedge-fund” by Abhijit Bannerjee, works in a very similar way to traditional insurance. A customer purchases insurance and pays a premium on a monthly or periodic basis. The amount collected is stored in a “pool” by the insurance company, to be used when a customer makes a claim. The key difference in microinsurance is that the premium is much lower than in standard insurance policies. 

For instance, the lowest premium charged by the South African microinsurance organization AllLife is just $15 per month, a New York Times article explains. Such microinsurance programs are able to reach those who would not be able to afford traditional insurance. 

Microinsurance covers those who are generally seen as more vulnerable due to poorer living conditions and the high risk environment in which they live and work. The average customer targeted by microinsurance is a low-income farmer, who is able to produce just enough every week to provide food, shelter, and basic necessities. Droughts, plagues, or diseases can create shocks to farm yields, leading the farmer without enough income to support his or her family.  

If a farmer were to have insurance, the reclaimable payment would be enough to sustain a family in the event of a short-term shock. Microinsurance helps smooth out the risks faced by these poor entrepreneurs. 

As a result, microinsurance removes the cost attributed with a poor yield and allows the buyer to take more risks such as allowing subsistence farmers to send their children to school rather than having to work on the land or allowing those farmers to widen the variety of crops they grow and sell different products, potentially helping them earn higher profits.

This program extends beyond crop protection, also providing medical coverage to those in need. In developing nations where living conditions are poor, the typical low-income earner is not able to afford even basic medical care. In a similar way to traditional medical insurance, microinsurance programs allow patients to be reimbursed on some part of their healthcare expenses, enabling more people to obtain the professional medical services they need, rather than treating themselves in often inefficient or even dangerous manners. 

Implementation of microinsurance programs can be spurred by subsidies and grants to insurance providers, either by domestic governments or by foreign aid from governments and non-profit agencies. Such grants will allow insurance providers to lower the premiums charged, and will also enable them to reach in to more remote areas, ensuring many more can benefit from these programs. 

Still a relatively new concept, microinsurers are still looking to find the equilibrium between charging low premiums and accumulating sufficient funds to cover clients when needed. Further, a lack of financial literacy among typical microinsurance beneficiaries may also mean that customers will be slow to purchase coverage. 

Microinsurance programs offer great potential in helping nations develop. They enable clients to take risks in crop production, provide healthcare at a basic level to those who often need it most, and have enough lifestyle flexibility to send their own children to school. Microinsurance requires relatively small effort and comes at a low cost, making it a highly sustainable means of meeting many development goals in the coming years.

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