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Microinsurance: Can the Cinderella of Financial Inclusion Join the Global Ball?

Microinsurance is often considered the Cinderella of the microfinancing world. Like the namesake of the protagonist of the fairytale written long back, the microinsurance industry is overlooked and often looked down upon by peers mainly because it is viewed as unnecessary and often looked upon with suspicions. 

Now, some issues with the industry might be blown out of proportion, but it cannot be denied there are issues with industries. Unfortunately, there hasn’t been a godmother like a fairytale to wave a wand and make all the problems disappear. But recently, there have been developments, and experts say there will be light at the end of the tunnel. So is it finally time for Cinderella to join the golden ball of the Financial inclusion fraternity? Let us discuss this. 

Microinsurance | Introduction and How Does it Work?

Microinsurance

Microinsurance is the insurance coverage provided to people who are poverty-stricken or economically marginalized. Microinsurance offers coverage and protection of low-value assets and compensates for medical emergencies, injury, or death. As a branch of the microfinance industry, microinsurance predominantly targets poor households with little to no stable income. 

Microinsurance is most prevalent in developing countries where the insurance market is exclusive and highly exploitative. Like regular insurance, microinsurance provides coverage and protection from various risks. These risks both included both property and health risks. Other risks include the threat to livestock, which might hinder someone’s income. Microinsurance also provides crop insurance, insurance from theft and damage by fire, life insurance, death insurance, insurance of disability, and natural calamity insurance. 

Like traditional insurance, microinsurance works on the foundation of the concept of risk pooling. It is applicable regardless of its small unit amount and the level of the population it targeted upon. Microinsurance consolidates all the smaller insurance units to create an interconnected system of risk pools to make insurance function and support the whole structure. Microinsurance has been a helping tool for the financial inclusion of refugees in Al Majmoua in Lebanon.

Types of Microinsurance

Microinsurance is categorized based on delivery. Currently, delivering microfinance is a difficult challenge. However, numerous models exist that differ in the organization, institution, service provider, or any combination of the above. Taking into consideration of multiple parameters, microinsurance can be divided into four ways:

Partner-Agent Model

The collaboration of the microfinance institution and the insurance companies is called the partner-agent model. The model is gaining traction among governmental organizations, economists, and financial experts. They believe that the partner-agent model or PAM is appropriate for expanding the network of microfinance to the low-income community. Low-income countries are incredibly vulnerable to economic collapse and property damage due to natural calamities such as floods, fire, droughts, pandemics, and damage to agriculture. 

Natural disasters are responsible for 42% of all agricultural damage and other economic losses globally. A hundred million people are discouraged from economic participation due to natural disasters or medical emergencies. This microinsurance delivery system efficiently delivers assistance to low-income families without wasteful spending. PAM practice is a set of organizations with the workforce to handle the shared objective with microfinancing and insurance companies. 

Theoretically, the partner-agent model has five objectives: 

  • Collaborative product designing concerning the partnership of the insurance and microfinance companies. 
  • Sharing business information and deals between partner companies.
  • Integrating the partner companies’ core competencies, resources, and infrastructure.
  • Exchange of expertise and knowledge between partner companies.
  • Complying with the contractual agreements and obligations. 

Full-Service Model

A full-service model is the microinsurance model, which takes care of everything from design to delivery. That includes working with real estate agents, healthcare providers, and experts. One of the best examples is the Self-Employed Women’s Association, where the full-service model was applied fully fledged. 

Self-employed Women Association, or SEWA, was an organization to address the problems of poor working-class women, especially in the informal economy, and helps women control their financial lives through digital financial services. Women working in the informal labor market comprise 94 percent of the female labor force. These women are exploited and underpaid. More often than not, these women have to work in inhuman conditions that are detrimental to their physical and mental health. 

Initially, SEWA’s sole purpose was to get women to leverage in the labor market–for better pay, improvement in working conditions, and gain economic and social security. SEWA’s goal was to make it economically sustainable and self-reliant. However, later self-empowering Women Association shifted its focus to insurance to protect women from financial vulnerabilities. 

In the early 1980s, SEWA incorporated a health literacy program into its service. In the mid-1980s, they started to provide healthcare services directly with highly skilled staff. The organization set up pharmacies and medicine shops to help women cope with exorbitant medicine prices. SEWA later negotiated with insurance companies regarding the payment of the premiums. They also negotiated with a life insurance corporation to dole death insurance to the members in the mid-1980s. Full-service insurance model is better than Allianz launches sharia compliant mobile loan service

Provider-Driven Model

In this type of microinsurance, the healthcare provider or the medical institution provides the insurance in exchange for a premium. Health providers are frequently legally obligated to provide health insurance to the public or workers working for them. Health providers also give health insurance under social obligation or to achieve social objectives. The medical institution enabled the design of the microinsurance, and the insurance subsidizes the healthcare costs of the user. In this microinsurance model, the healthcare provider has to manage and operate the structure and day-to-day operations. 

One of the most significant advantages of the provider model is that since the healthcare provider and insurance provider is the same, the administrative and bureaucratic hurdles are minimized. There are also incentives for the healthcare provider to create an insurance policy for the patient. This creates a permanent income stream even when the patient uses the institution’s medical services. The system is flexible, and the partnership becomes fruitful when the system adapts to changes better. 

However, the premium can get expensive, and the insurance contracts can be non-negotiable. The medical institution can update laws and regulations without the approval of the insurance members. The provider model was beneficial during microfinance and the economic toll of ebola.

Community-Based/Mutual Model

Community-based model is the type of microinsurance that provides health insurance targeted at low-income communities and overarchingly makes the community its essential foundation. This community-themed health insurance is voluntary and involves the targeted community collecting funds for the community members to offset the cost of the community’s medical care. 

Despite having such hopes for this microinsurance model,  the impact of community-based health insurance has been relatively moderate. Recent studies have concluded that community-based health insurance doesn’t benefit the poor, rather, they are objectively excluded from these programs. Moreover, community-based health insurance has low participation rates. 

There is an argument that community-based health insurance leads to a universal health care system. Still, research has indicated the chance is low and often leaches funds that could have been used for universal health care. Community-based health insurance is not a healthy and reliable source of funds. Instead, the financial protection provided to those with involuntary medical insurance has far better chances of getting the requisite funds. These funds help in gathering funds required for universal health coverage. 

In countries where community-based health insurance exists, the government could use the community-based health insurance system’s positive results to improve local governance. Many governments have passed policies to merge the existing schemes of community-based health insurance and permanent, substantial insurance and consolidated single health scheme. Without community-based health insurance, countries can move towards national healthcare coverage. 

History of Microinsurance 

History of Microinsurance

Microinsurance or financially inclusive insurance receives polarising reactions depending on who you ask. Some believe that microinsurance has reached its peak and tipping point, but some believe the benefit of microinsurance or its commercial sustainability has not been proven yet. There has been success for the last couple of years, but there has been more failure. One of the most grueling examples where the microinsurance companies in Pakistan have gone bankrupt and driven out of business. Researchers have also found little to no impact on the lives of the people they are a part of. 

However, microinsurance is far cheaper than its traditional counterparts. According to the 2017 Annual Report, microinsurance contributes to emerging markets, holding 80 percent of the global population. As per the global map of microinsurance, over 290 million people hold insurance from at least one microinsurance company. 

But microinsurance wasn’t always this redundant idealogy. Microinsurance is the offshoot of the microfinance project, a brainchild of the Nobel Prize-winning economist and banker Mohammed Yunus. The project turned out to be successful in helping out millions of poverty-stricken communities in Africa and Asia. 

There are various types of microinsurance programs. Some microinsurance is based on the trigger model, which initiates automatic payout based on specific parameters. Parameters consider the observable and perceivable characteristics as well as statistical ones. 

Overview of Digital Financial Service

Microinsurance or financially inclusive insurance receives polarising reactions depending on who you ask. Some believe that microinsurance has reached its peak and tipping point, but some believe the benefit of microinsurance or its commercial sustainability has not been proven yet. 

According to the 2017 Annual Report, microinsurance contributes to emerging markets, holding 80 percent of the global population. According to the global map of microinsurance, over 290 million people hold insurance from at least one microinsurance company. However, microinsurance penetration will increase in the long run with digital infrastructure. 

Digital Financial Services and the Potential for Scale in Microinsurance

Offline transactions over the years have compounded costs and have to go through massive infrastructural hurdles to generate profit and sustainability. So, there has been a tendency to shift the entire banking system digitized for the convenience of the people and to penetrate regions lacking the essential physical infrastructure. 

However, this requires a host of other infrastructures for the service to work efficiently. Furthermore, digital financial service has been theorized to connect the client and financial service providers through an able and competent digital interface. 

As a part of this initiative, financial experts and industry leaders are considering digitization’s impact on microfinance and microinsurance. Digitization could impact logistics, scale, distribution, and a robust and efficient value chain. The term digital microinsurance was coined to incorporate the broader role of the digital interface to support microinsurance’s functions and day-to-day operations. 

The Rise of Digital Microinsurance

The first example of digital microinsurance appeared in India in 1997 under Telcassurance. But the whole industry would not take shape until  2006 to 2008. The model began to spread to other developing countries, with nations like India, Bangladesh, Thailand, South Africa, and the Philippines leading the charge. 

By the end of the first decade of the century, digital microinsurance had expanded and provided new services in South Africa now and then. The services were making their headway to Ghana and Kenya. This trend of increasing digitization of the microfinance industry could staggeringly increase, with 13 models in 2012, 16 in 2013, and 14 in 2014, respectively. 

Recent data suggests that most digital microinsurance services (almost 60 percent of the models) have been launched in Africa. Africa has issues with infrastructure and logistic management. So the insurers have taken the alternative route and used the development of digital technology in the continent. 

Digitization has lowered costs and removed bureaucratic hurdles for insurers to do business. Digitization also reduces costs for companies to meet the growing demand for these services. Such situations have given birth to sprinters– the enterprises which have succeeded quickly. However, most of these sprinters have achieved high success due to access to a cheaper labor market and took advantage of loose regulations to bypass bureaucracy. 

A Strategy for a Digital Age

The verdict is clear that insurers who have expanded their services through digital innovation and developed management practices and culture have far better chances. However, as of now, relatively few incumbents have managed to perform satisfactorily to expand and scale to take advantage of the growing need. They have to devise a better comprehensive strategy for growing and scaling. 

The microinsurance market is saturated with multiple competitors approaching you from different directions. Hence, discerning the appropriate opportunity is essential. Such an opportunity is necessary to move forward with ideas of disruption. 

Although disruption is quintessential for scalability, scaling in an industry with a competitive landscape can be hard. The building blocks of making a digital strategy include understanding where your weakness lies, diagnosing how your company used to make money in the first place, and getting accurate projections of where your company is headed. But that won’t be enough.

A prerequisite digital strategy also makes room for skepticism and preventive measures against cyber threats like digital hacking. However, multiple techs in the fraternity cannot be monitored easily. Digital technology can serve people better by not selling products or services they are unwilling to buy. Digital technology also has the power to bolster supply, ease the chain of logistical flow, and reduce the cost of such supply. 

According to the 2017 Annual Report, microinsurance contributes to emerging markets, holding 80 percent of the global population. According to the global map of microinsurance, over 290 million people hold insurance from at least one microinsurance company. 

Recent data suggests that most digital microinsurance services (almost 60 percent of the models) have been launched in Africa. Africa has issues with infrastructure and logistic management. 

So the insurers have taken the alternative route and used the development of digital technology in the continent. Africa has issues with infrastructure and logistic management. So the insurers have taken the alternative route and used the development of digital technology in the continent. Digitization has lowered costs and removed bureaucratic hurdles for insurers to do business. Digitization also reduces costs for companies to meet the growing demand for these services.

Age of Innovation

Digital technology is disrupting all the old ideas of the status quo and wiping out entire conceptual ideas regarding distribution, supply, etc., into irrelevancy. However, the same wave of innovation has eluded the microfinance industry for a long time. 

A centralized bureaucratic system heavily controls the insurance industry, which puts regulations and red tape in the way of innovation. The incumbents feel strangled and unable to move with many innovative tactics. However, microfinance hasn’t received much support, according to many surveys.

Some believe that microinsurance has reached its peak and tipping point, but some believe the benefit of microinsurance or its commercial sustainability has not been proven yet. Currently, relatively few incumbents have performed satisfactorily to expand and scale to take advantage of the growing need. They have to devise a better comprehensive strategy for growing and scaling. 

According to the co-founder of Caribou Honig, it’s hard for the incumbent giants to shift gears and go in a new direction. They have massive structures and thus have to contend with legacy issues. 

Digital infrastructure has enabled companies to build a global supply chain, outsource labor and create a complex chain of manufactured products. Digital logistics have also enabled them to sell their services anywhere globally. 

There always be the risk of data theft and manipulation, but the digital economy can solve many more problems than it can create. 

Frequently Asked Questions (FAQs)

Q1. What is an example of microinsurance?

A few of the microinsurance are: 

  • Cattle Insurance
  • Crop insurance
  • Theft insurance
  • Fire insurance

Q2. How many types of microinsurance are there?

Microinsurance can be categorized into four types based on their delivery model. They are:

  • A partner-agent model where the insurance companies and microfinance institutions partner to deliver the insurance. The model is gaining traction among governmental organizations, economists, and financial experts. They believe that the partner-agent model or PAM is appropriate for expanding the network of microfinance to the low-income community.
  • A full-service model where the microfinance institutions take responsibility for everyday operations and the operations model. That includes working with real estate agents, healthcare providers, and experts. One of the best examples is the Self-Employed Women’s Association, where the full-service model was applied fully fledged.
  • A provider-driven model is where the healthcare provider or the medical institution provides the insurance in exchange for a premium. Health providers are frequently legally obligated to provide health insurance to the public or workers working for them.
  • A community-based model where the insurance and financial guarantee are doled out from the funds gathered by community pooling. This community-themed health insurance is voluntary and involves the targeted community collecting funds for the community members to offset the cost of the community’s medical care. 

Q3. How can digital innovation develop microinsurance? 

Digital innovation is the key to disrupting an industry that is highly saturated. Insurers who have expanded their services through digital innovation and developed management practices and cultures have far better chances. However, relatively few incumbents have managed to perform satisfactorily to expand and scale to take advantage of the growing need. Offline transactions over the years have compounded in costs and have to go through massive infrastructural hurdles to generate profit and sustainability. 

So, there has been a tendency to shift the entire banking system digitized for the convenience of the people and to penetrate regions lacking the essential physical infrastructure. A digital strategy also makes room for skepticism and preventive measures against cyber threats like digital hacking. However, the authorities cannot monitor multiple techs in the fraternity easily. 

Digital technology can serve people better by not selling products or services they are unwilling to buy. Digital infrastructure help build a global supply chain, outsource labor, and create a complex manufactured product chain. Digital logistics have also enabled them to sell their services anywhere globally. 

Conclusion

Microinsurance has its advantages. An offshoot of the microfinancing industry, it is targeted at the poor and poverty-stricken communities to give them a financial standing and uplift them from poverty. However, microinsurance was always a divisive topic. Some believe that microinsurance has reached its peak and tipping point, but some believe the benefit of microinsurance or its commercial sustainability has not been proven yet. There has been success for the last couple of years, but there has been more failure. 

Despite this, the concept benefited majorly in emerging markets and developing countries. According to the 2017 Annual Report, microinsurance contributes to emerging markets, holding 80 percent of the global population. According to the global map of microinsurance, over 290 million people hold insurance from at least one microinsurance company. 

Recent data suggests that most digital microinsurance services (almost 60 percent of the models) have been launched in Africa. Microinsurance might have its faults, but it has lowered the cost of transactions and impeded the cost of banking. 

Author Profile

Elizabeth Jones
Elizabeth Jones is one of our editorial team’s leading authors on credit card offers, services & more. With over two decades of experience in the consumer credit industry and as a nationally recognized credit expert, Elizabeth provides in-depth analysis of both traditional & alternative forms of credit. Elizabeth regularly appears on many major media outlets including NBC Nightly News, Fox Business Network, CNBC & Yahoo! Finance. She is also a frequent contributor to Forbes Magazine. As a highly appreciated author for our exclusive Editorial Team, Elizabeth strives to provide readers with a trustworthy advice on how to manage their credit accounts while staying informed on the latest offers in the marketplace.

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