Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh

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Micro insurance: A tool for Poverty alleviation &

management of Vulnerability in Bangladesh

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Sazzad Hossain

29-Nov-12

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A Report on

Micro insurance: A tool for Poverty alleviation &

management of Vulnerability in Bangladesh

Submitted to:

Md. Jamil Sharif

Lecturer,

Dept. of A&SIS

University of Dhaka

Submitted by:

1. Arnab kumar Das (16-124)

2. Sazzad Hossain (16-128)

3. Abdullah Al-Mamun (16-151)

4.Nasimuzzaman Limon (16-176)

5.Md. Momen Al Islam (16-177)

6.Rafsan Mahbub Robin (16-178)

7.Kenny David Rema (16-178)

8.Md.Shafiqul Islam (16-181)

9.Rehanur Zaman (16-185)

Dept. of A&SIS

University of Dhaka

Date of submission: November 29, 2012

Micro insurance: A tool for Poverty alleviation & management of Vulnerability in Bangladesh

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Table of Contents Abstract ...................................................................................................................................... 3

1.0 Introduction: ......................................................................................................................... 4

2.0 Literature Review: ............................................................................................................... 4

3.0 Definitions: .......................................................................................................................... 8

3.1 Microfinance: ................................................................................................................... 8

3.2 Micro insurance: ............................................................................................................... 8

3.3 Poverty: ............................................................................................................................ 9

3.4 Vulnerability: ................................................................................................................... 9

4.0 Micro insurance –a brief history: ....................................................................................... 10

5.0 Necessity of Micro insurance: ........................................................................................... 10

6.0 Major Risks faced by the micro insurance companies: ..................................................... 11

1. Credit Risk: ...................................................................................................................... 12

2. Liquidity or Maturity Risk: .............................................................................................. 12

3. Market Risk: ..................................................................................................................... 13

4. Operational Risk:.............................................................................................................. 13

5. Interest Risk: .................................................................................................................... 13

6. Foreign Exchange Risk: ................................................................................................... 13

7. Environmental risk: .......................................................................................................... 13

7.0 Major Risks Faced by the Poor: ......................................................................................... 14

a. Agricultural Risks: ........................................................................................................ 14

b. Health Insurance: .......................................................................................................... 17

c. Life or „life & credit‟ insurance: ................................................................................... 18

d. Life-cycle Risks: ........................................................................................................... 20

8.0 Delivery Mechanism : Micro-Insurance Models ............................................................... 21

a) The “Partner-Agent” model ............................................................................................. 21

b) The mutualised insurance and other community-based organisations model ................. 21

c) The “all-in-one insurance” model .................................................................................... 22

d) The “franchise” model ..................................................................................................... 22

e) The “supplier” model ....................................................................................................... 22

9.0 Emerging Challenges in Micro insurance: ......................................................................... 22


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10.0 Differences between conventional insurance and micro insurance ................................. 23

11.0 Role of Micro insurance in Poverty Alleviation and management of Vulnerabilities:.... 26

Key Role of Micro insurance as a tool: ................................................................................ 28

12.0 Micro insurance products offered: ................................................................................... 29

a. Credit life insurance ...................................................................................................... 29

b. Term life or personal accident insurance ...................................................................... 29

c. Savings life insurance ................................................................................................... 29

d. Health insurance............................................................................................................ 29

e. Property insurance ........................................................................................................ 29

f. Agricultural insurance ................................................................................................... 30

13.0 Concluding Remarks:....................................................................................................... 30

14.0 Conclusion: ...................................................................................................................... 32

15.0 References: ....................................................................................................................... 33


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Abstract

The poor section of the society is always neglected and oppressed. Few efforts have been

taken to reduce these discrepancies of the society. The poor have weak financial power and

few say or right in the ruling of them. As a result, they are very vulnerable to any kind of

disasters and perils. They have to bear the negative effects of these happenings and they

become more poor and vulnerable before they were. This vicious poverty cycle kill them

many times they dead. However, the micro insurance is a blessing to them in these respects.

It gives them confident, economic power, and solvency. As a requirement, it enables them to

save and work collectively. Consequently, micro insurance with its mechanisms, works as a

powerful tool to alleviate the poverty of the poor people and a great tool in managing the

vulnerabilities of the poorer section of the society.


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1.0 Introduction:

The insurance service to the low-level income group of the society is called the micro

insurance. This is a part of the micro finance concept. The commercial insurance services are

mainly offered to the rich section of the society, but the micro insurance target the unserved

poor people who are an untapped market, basically a niche market of the insurance service.

This micro insurance is a great tool in alleviating poverty from the society in a very short

time with efficiency. Mainly, the strength of the scheme lies on the unitedness of the poor

people. The various techniques and issues are prevailing and those are utilized by the micro

insurance to upgrade the poor people.

The slow process of increasing income and building assets characterizes the road out of

poverty. In the precarious world of the poor, a shock such as illness, death of a loved one, fire

or theft can rapidly erase hard won gains and make the escape from poverty harder to

achieve.

Vulnerability for the poor is an everyday reality. In the words of one microfinance client in

the Philippines, “Life for the poor is one long risk.” To cope with shocks, poor people use

many different risk management strategies. They draw on informal group-based and self-

insurance mechanisms such as borrowing, saving, and drawing down productive and non-

productive assets.

A relatively new option for the working poor to manage risk is “micro insurance”. Micro

insurance is the protection of low income people against specific perils in exchange for

premium payments proportionate to the likelihood and cost of the risk involved. Micro

insurance reaches a clientele that is different from that served by insurers. They have fewer

assets, their incomes are lower, and their income flows often fluctuate considerably

throughout the year. While the shocks that the poor experience may be the same as

conventional insurance clients, they are more vulnerable because they have fewer reserves to

draw upon. A majority find themselves in a reactive mode, responding after a crisis.

2.0 Literature Review:

There have been many research works on the micro insurance. Also many more have been

done on the micro finance. The micro insurance is a tool to managing the poverty and the

vulnerabilities of the poor people. A detailed discussion in this respect has been done by Syed

M. Ahsan in his work “Micro insurance, Poverty & Vulnerability: A Concept Paper” (Syed


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2009). He critically analyzed the issue from Bangladesh perspective. The increased focus on

risk and vulnerability in understanding and designing antipoverty policies motivated a series

of studies aimed at theoretically conceptualizing as well as measuring and addressing

household vulnerability empirically. This section begins with a brief review of available

approaches to conceptualize and measure vulnerability and then presents majors findings and

evidences in brief from relevant empirical literatures.

While there is a very rich literature on the appropriate measure of poverty1 and on methods

for creating aggregate summary statistic2, the literature that intends to present similar

summary measures of vulnerability is rather emerging. The current state of the theoretical

literature on vulnerability is a bit chaotic and can be described in the words of Hoddinott and

Quisumbing (2003) as a “let a hundred flowers bloom” phase of research with numerous

definitions and measures and seemingly no consensus on how to estimate vulnerability. A

number of competing measures have been proposed and the literature does not seem to be

settled yet on a conceptually sound as well as operationally suitable definition. Hoddinott and

Quisumbing (2003) and Ligon and Schechter (2004) provided an exhaustive list of methods

for estimating vulnerability to poverty surveying all the existing literatures and reviewed

strengths and weaknesses of each of them. According to Hoddinott and Quisumbing (2003)

measures of vulnerability to poverty can be classified into three broad categories: a)

Vulnerability as Expected Poverty (VEP), i.e., the probability that an individual or household

will fall below or remain on the poverty line (Chaudhuri, 2002; Christiaensen and Subbarao,

2001; Pritchett, Suryahadi and Sumarto, 2000), b) Vulnerability as Low Expected Utility

(VEU), i.e., the distance between the utility that would be achieved by an appropriately

chosen level of consumption with certainty and the expected utility of the household given its

uncertain prospect (Ligon and Schechter, 2002, 2003), and c) Vulnerability as Uninsured

Exposure to Risk (VER), i.e., measures of the cost, in terms of consumption, of exposure to

uninsured risk as inferred by the proportion of observed change in consumption attributable

to past shocks (Tesliuc and Lindert 2004).

However, the above measures are generally not comparable as noted by Ligon and Schechter

(2004; p. 01) –

1 Deaton (1997); Ravallion (1993)

2 Atkinson (1987); Foster (1984); Lipton and Ravallion (1995) and for a review of literature, Ravallion (1993)


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“Unfortunately, because there’s considerable variety in the definition of vulnerability, in the

estimators employed, and in the datasets used in example applications, the comparisons

among approaches detailed in Hoddinott and Quisumbing (2003) are often comparisons

between apples and oranges; one can’t easily evaluate the practical merits of various

definitions of vulnerability, the value of different estimators, or the power of different tests.”

Ligon and Shcechter (2004) then conduct Monte Carlo experiments designed to explore the

performance of different vulnerability indicators‟ proposed in the economic literatures, under

different assumptions about the underlying economic environment. They find that when the

environment is stationary and consumption is measured without measurement error, the best

estimates are the ones proposed by Chaudhuri (2002). If the vulnerability measure is risk-

sensitive, but consumption is measured with error the estimates proposed by Ligon and

Schechter (2003) generally performs best. However, when the distribution of consumption is

non-stationary and there is measurement error, all estimates perform poorly. But since

measurement error is a reality and to assess whether the distribution is non-stationary,

relatively long time series are needed, which is a rarity in practice, particularly for most of the

developing countries.

Another problem with the above measures is the conceptual inadequacy. As Hoogeveen

(2004) noted, there are conceptual problems, using a measure based on the variability of

consumption (or another outcome indicator), rather than an ex-ante measure that takes into

account the cost of taking risk reducing measures. They suggested that using a measure of

consumption variability still depends exclusively of past observation and to avoid such

problem some kind of ex-ante augmented poverty line can be used that is based of ex-ante

monetary cost of risks or uncertainty. Gunning and Elbers (2003) attempt to deal with this

aspect by constructing a stochastic, structural dynamic model of a household‟s inter-temporal

consumption and saving‟s decisions. In the process, they present yet another measure of

vulnerability that is theoretically well defined, but practically hard to implement. What all

these imply is that a methodologically sound and practically applicable measure of

vulnerability may still be some way away even though literature in this field is growing very

fast.

Regardless of how vulnerability is perceived, it has always been a dynamic concept where

one needs to estimate ex-ante what happens in the future. While calibrating individual‟s

(household‟s) poverty level is relatively straight forward, measuring an individual‟s


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vulnerability requires information on the possible states of the world in the future and the

probability distribution of their occurrences. Information on different future states of the

world becomes more complicated as we move further away from the present. Clearly these

depend on the quality and nature of data that are available and accordingly most of the

empirical literatures are crafted to the strengths of the available data. The part of literature on

vulnerability which estimates impacts of shocks on household welfare has also data-driven

limitations. Available data, particularly the household surveys (or even most of the panels),

have either limited information on idiosyncratic or covariate shocks or no information at all

(Gunther and Harttgen, 2009). As a consequence, most of these studies have only been able

to focus on the impact of selected shocks on household‟s wellbeing (Dercon and Krishnan,

2000a; Gertler and Gruber, 2002; Glewwe and Hall, 1998; Kocher, 1995; Paxson, 1992;

Nielson 2008; Sen, 2003; Gaiha and Imai, 2004; Quisumbing, 2007).

The early strands of literature defines vulnerability as the ability and the extent to which

consumption is protected against income fluctuation due to idiosyncratic or covariate shocks

and measured by the observed changes in consumption over time (e.g. Townsend, 1994;

Udry, 1995; Glewwe and Hall, 1998; Dercon and Krishnan, 2000a; Jalan and Ravallion,

1998; Morduch, 2003). Their particular interest was not to identify who are vulnerable and

correlates of vulnerable; nonetheless, these studies do provide valuable insights about

households‟ behavioural responses in the face of adversaries and complement overall

understanding of poverty dynamics and vulnerability. A brief review of these literatures

would not be out of context in this sense and is in order. In his seminal work, Townsend

(1994) using a pooled cross sectional data for the period 1975-1984 from the International

Crops Research Institute of the Semi-Arid Tropics (ICRISAT), tests the full risk sharing

hypothesis in three poor and high risk villages in Southern India and rejected the hypothesis

of full insurance in the sample. However, the overall effect of income on consumption is

surprisingly low, with the highest coefficient value being 0.14, suggesting the existence of a

significant degree of insurance against idiosyncratic shocks at the village level. His results

also hint at important differences in terms of access to insurance by land ownership. Landless

and small farmers, also the poorest in the sample, are less protected from this type of event.

Paxson (1992) conducted a study to examine whether farmers in some regions of Thailand

used savings to smooth consumption. Her findings indicate that these households were able

to save and dis-save to stabilize consumption in response to unpredictable changes in income.

Nevertheless, although her estimates of marginal propensity to save out of transitory shocks


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to income are very high (ranging from 0.73 to 0.83) and suggest an important amount of

consumption smoothing, they are not supportive of full insurance.

3.0 Definitions:

3.1 Microfinance:

Microfinance is the provision of financial services such as loans, savings, insurance, and

training to people living in poverty. The microfinance is provided to that section of the

society which is not served in the traditional financing system or services. The two main

mechanisms for the delivery of financial services to such clients are (1) relationship-based

banking for individual entrepreneurs and small businesses; and (2) group-based models,

where several entrepreneurs come together to apply for loans and other services as a group.

Microfinance services are provided by three types of sources:

formal institutions, such as rural banks and cooperatives;

semiformal institutions, such as nongovernment organizations; and

informal sources such as money lenders and shopkeepers.

Institutional microfinance is defined to include microfinance services provided by both

formal and semiformal institutions. Microfinance institutions are defined as institutions

whose major business is the provision of microfinance services (Asian Development Bank

2000).

3.2 Micro insurance:

Basically the risk protection or risk sharing system of the low-income, poor people who are

not served by the commercial insurance system is termed as micro insurance in practice. The

draft paper prepared by the Consultative Group to Assist the Poor (CGAP) working group on

micro-insurance defines micro-insurance as “the protection of low income households against

specific perils in exchange for premium payments proportionate to the likelihood and cost of

the risk involved.” The paper deliberates on the key roles to be played by all stakeholders –


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insurers, regulator and the Government. The working group also agrees that the cost of such

cover should be affordable.

3.3 Poverty:

Poverty is the deprivation of food, shelter, money and clothing that occurs when people

cannot satisfy their basic needs. Poverty can be understood simply as a lack of money, or

more broadly in terms of barriers to everyday life (Jonathan & Shahidur 2009).

Absolute poverty or destitution refers to the state of severe deprivation of basic human needs,

which commonly includes food, water, sanitation, clothing, shelter, health care, education

and information. Relative poverty is defined contextually as economic inequality in the

location or society in which people live (The World Bank 2011) (Instituto Nacional de

Estadistica 2009). For most of history poverty had been mostly accepted as inevitable as

traditional modes of production were insufficient to give an entire population a comfortable

standard of living. After the industrial revolution, mass production in factories made wealth

increasingly more inexpensive and accessible. Of more importance is the modernization of

agriculture, such as fertilizers, in order to provide enough yield to feed the population (Baker

& Dugger 2009). People who practice asceticism intentionally live in economic poverty so

as to attain spiritual wealth.

3.4 Vulnerability:

Vulnerability refers to the inability to withstand the effects of a hostile environment. A

window of vulnerability is a time frame within which defensive measures are reduced,

compromised or lacking. In relation to hazards and disasters, vulnerability is a concept that

links the relationship that people have with their environment to social forces and institutions

and the cultural values that sustain and contest them. “The concept of vulnerability expresses

the multidimensionality of disasters by focusing attention on the totality of relationships in a

given social situation which constitute a condition that, in combination with environmental

forces, produces a disaster” (Bankoff etal. 2004).

It's also the extent to which changes could harm a system, or to which the community can be

affected by the impact of a hazard. Vulnerabilities can be social, cognitive or military.


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4.0 Micro insurance –a brief history:

It has not been possible to determine when, where and by whom the term "microinsurance"

first was used. What is certain is that the term appeared in print in three publications

published in 1999:

Micro-Insurance: Extending Health Insurance to the Excluded, by David Dror and

Christian Jacquier, ILO, 1999

Synthesis of Case Studies of Micro Insurance and Other Forms of Extending Social

Protection in Health in Latin America and the Caribbean, ILO-STEP, 1999

Providing Insurance to Low-Income Households: Part 1: A Primer on Insurance

Principles and Products, by Warren Brown and Craig Churchill, USAID, 1999

These authors and other founding members of the Micro insurance Network recall that:

o The term "micro insurance" was derived from a natural development from the

older term "microfinance";

o The term "micro insurance" was first used within the ILO and UNCTAD in

Geneva in the mid-1990‟s and in some academic circles in the early 1990‟s.

The word "micro insurance" is used most common in the development environment to

specify that one is talking about "insurance for the poor". Within the financial inclusion

debate and the insurance industry, one prefers to use "insurance", insurance for a specific

target audience. The Micro insurance Network uses the term "micro insurance" as it is a

practical working title.

5.0 Necessity of Micro insurance:

To meet up the insurance necessity among the poor people of our society, micro insurance is

a big tool to ensure their safety against the odds and perils. Low-income households are

particularly vulnerable to risk and negative external shocks (e.g., natural disaster; illness/

death of main breadwinner) due to their low asset bases. In the absence of functioning

insurance markets, poor people in developing countries have created a number of formal and

informal instruments to manage such risk. These include risk-pooling schemes (e.g., funeral

and burial societies); income support (e.g., credit arrangements; transfers), and consumption


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smoothing arrangements (e.g., savings; grain banks) (Bhattamishra & C. B. 2008). However,

such informal and formal approaches offer limited protection, low returns for households, and

are prone to breakdown during emergencies. Community-based risk management schemes

also rely heavily on personal relations between participants, limiting scalability and

geographic spread. Even formal support programs such as food-for-work may be

exclusionary, as in the case of female-headed households often left out of such work

programs as they face difficulty making the required labor contribution.

Formal insurance instruments can offer superior risk management alternatives, provided poor

households can access these services. Without insurance, low-income households forego

higher-return livelihood strategies for lower-risk avenues that reduce risk. Insurance products

assume such risk thus reducing household efficiency losses and protecting assets so that the

poor can escape poverty traps. Insurance instruments pool the risks of individuals of a similar

risk class, and transfer it to a larger and more diverse group of market participants through

the „hedging‟ process. Traditional forms of insurance, however, have often been beyond the

reach of poor persons. Innovations in micro insurance aim to increase outreach and coverage

across lower income tiers (Marc & Anne T. 2008).

Micro insurance is a powerful tool for:

Protecting the poor and their assets from negative external shocks

Compensating the effects of covariate shocks (e.g., natural disasters)

Addressing gender-specific vulnerabilities

Freeing up household capital for investment in small enterprise

Helping households avoid poverty traps

Expanding informal insurance schemes and social protection

6.0 Major Risks faced by the micro insurance companies:

The seven main areas of institutional-level risks facing MFIs are in the areas of:

1) Credit Risk

2) Liquidity risk

3) Market risk

4) Operational risk


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5) Interest risk,

6) Foreign exchange risk, and

7) Environment Compliance & Regulatory risk

1. Credit Risk:

Credit risk refers to the risk of default or non-payment by clients on their loans. Additional

factors that relate more to the microfinance sector are:

Loans are often provided without collateral, or use non-traditional collateral, and so

there may be a danger greater than for other financial institutions. This may require

specific mitigation techniques such as larger loan provisioning or immediate follow-

up on delinquency loans.

Limited sector variation (e.g. loans are largely agricultural, perhaps even to only

amongst clients with few crops), limited geographic spread (e.g. loans are provided

in a few districts only), or specific targeting (e.g. to a specific minority) can increase

the portfolio risk to the microfinance institution. These concentrations are often

referred to as covariant risk.

2. Liquidity or Maturity Risk:

This refers primarily to the holding of appropriate cash balance levels and deposit

mobilization, and is mainly a cash-flow planning, monitoring and management issue. The

reasons for this risk arising includes:-

seasonality (given the cyclical nature of the local economy); the difficulty in

obtaining contingent credit lines;

poor cash-flow forecasting, and related management (such as with inadequate

monitoring of cash flows and in ensuring matching terms);

a lack of investment strategies or investment avenues during periods with surplus

funds; and

inadequate deposit mobilization (due mainly to difficulties getting savings and time

deposit accounts), often due to weak marketing and product development.

Skills development and training in relevant areas is seen as a key area of support need for

microfinance institutions in this area.


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This risk area is also referred to as “maturity risk” simply as the ability to meet maturing

obligations (Current Assets > Current Liabilities).

3. Market Risk:

Market risk refers to the risk of loss owing to changes in market rates and prices on

investments by the microfinance institution. This risk is limited to those institutions who

invest in equities, fixed-interest instruments, or commodities.

4. Operational Risk:

It refers to failures in the operation of the microfinance institution, hence the name, and

includes breakdown of information systems, poor governance, risk of loss due to inadequate

or failed internal processes and systems, external events, and human error. Management risk

– largely the risk of depending on a few individuals, and fraud are also considered

components of operational risk.

5. Interest Risk:

Interest rate risk is the primary measure of market risk on an MFI‟s loan portfolio. It is the

risk that an unfavourable change in interest rates might have on the MFI‟s earnings, based on

gaps that exist in the matching of its interest rates on its loan portfolio assets and funding

liabilities (e.g. when long-terms loans are funded by short-term deposits). This is a particular

problem when the microfinance institution is not able

to adjust interest rates on loans they have issued against the interest paid on fixed term

deposits. There is a natural tendency for microfinance institution clients to want to commit to

fixed deposits of as short a term as possible to have access to their funds, and to secure as

long a term as possible over debt to lower repayment amounts. Interest risk is faced by most

microfinance institutions that mobilize deposits.

6. Foreign Exchange Risk:

Foreign exchange (FX) risk arises most often for microfinance institutions who borrow in a

foreign currency to lend in local currency. FX risk then occurs when there is a currency

mismatch in the MFI‟s assets and liabilities, that exposes it to FX rate fluctuations, that could

cause either losses or gains.

7. Environmental risk:

This covers a range of other risks facing microfinance institutions, including:


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New industry risk: this relates to the risks of trying out new and innovative financing

techniques with clients new to credit and savings;

Subsidy dependence risk: this is the dependence risk donor-funded microfinance

institutions have on subsidies without which they not be sustainable;

Transitioning risks: many microfinance institutions were established for social rather

than financial purposes, and as these institutions transform into regulated and

sustainable institutions a range of organisational culture, performance, management,

and governance issues often arise; and

Compliance & Regulatory risk: the risks associated with regulation

7.0 Major Risks Faced by the Poor:

The risks that are mainly faced by the poor people can be categorized as follows:

a. Agricultural Risks:

Of all risks, agricultural risks (e.g., crop failure, inadequate rainfall and loss of

livestock) are the most pervasive and inflict longer-term consequence on household

consumption fluctuations. This is also an area where micro insurance products have

made the least progress, especially in South Asia. Issues of moral hazard and adverse

selection prove formidable obstacles in the design of viable contracts. (Ahsan 1985)

has examined the elements of a likely feasible crop insurance contract, which

analytically calls for separate contracts for each homogeneous agro-climatic zone, and

is thus contingent upon wide participation representative of the agro-climatic

variations obtaining in the county (Ahsan, A. & N. John 1982). In such a scheme the

indemnity is triggered by the zonal crop outcome, and not the individual experience,

which mitigates to a large extent the issue of moral hazard, but adverse selection

would still remain a major concern. Hence for any scheme to be viable would require

widespread participation for each climatic zone, and there be sufficient number

climatic zones for the aggregate risk to be well spread. The latter calls for a national

coverage in order to maximize the climatic variations; however, in view of the agro-

climatic variations encountered in a country, such coverage may still be inadequate to

permit significant risk-pooling. In spite of general inadequacy of standard (i.e., not

weather-indexed type) crop insurance in less developed countries, an ambitious


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National Agriculture Insurance Scheme (NAIS) was launched in India about 8 year

ago. NAIS also embraced the area approach that has been cited above. Arbitrarily

setting premiums below expected loss, allowing limited variation in premium

structure in view of the risk class of the insured, adverse selection (both at the state

level, as well as allowing non-loanees to voluntarily seek coverage within a state), and

above all, public sector management are cited to be the key reasons for its poor

performance (Ifft, 2001).

The area approach, even though it eliminates moral hazard greatly, appears to leave farmers

unsatisfied as variability within the agro-climatic zone can be rather substantial. Many view

the performance of the NAIS scheme as unsatisfactory as was the case with its predecessor,

the Comprehensive Crop Insurance Scheme (CCIS), 1985-1999, both of which had followed

the area approach. Only 16 states (as opposed to 22 under CCIS) are participating in NAIS

with both Punjab and Haryana being conspicuously absent, which is symptomatic of adverse

selection at the regional level.

Weather insurance has major advantages over crop insurance (even of the homogenous

agro-climatic variety as proposed above) in that informational asymmetries between the

insurer and the insured are greatly minimized, and the occurrence of the insured event (e.g.,

rainfall) is easily verifiable.3 An even greater benefit is that it would be of relevance to non-

agriculturists (e.g., day-labourers), whose livelihoods are also dependent on climate whether

in agriculture or beyond (Morduch, 2001). However, the difficulty that remains in crop

cultivation is that the soil quality and cropping pattern may also differ within a homogeneous

climatic zone, which would disappear in the event of rainfall insurance, a clear advantage.

Here too one would require participation of all climatic zones and wide participation for the

aggregate risks to fall to manageable proportions, and hence as above, only national insurers

may viably offer coverage. The necessity of MFI/NGO intermediation remains just as

important as it was deemed to be the case for crop insurance analyzed above, the absence of

which in the Indian schemes such as CCIS and NAIS may have contributed to their

weaknesses. Access to re-insurance would also emerge as a priority concern in these types of

situations. There is a further re-distributional element to consider in the case both rainfall

(weather) insurance or crop insurance. As (Morduch 2004) has aptly pointed out, there arises

an asymmetry between the welfare of the insured and the non-insured in the event of

indemnity payments and their impact on local market prices, which would not be relevant in

the absence of any crop/climate insurance. In particular, cash indemnity payout is likely to


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lead to an increase in the price level (at least for grains), which can be partly mitigated by

distribution in kind. The latter is however not feasible in many situations. A priori, it would

seem that the number of potential beneficiaries is more numerous under weather insurance

than under crop insurance. However in view of the worsening of welfare on the part of the

non-insured net consumers, the distributional issues would require careful evaluation in the

particular context.

There are several well-known pilot schemes underway on weather, particularly rainfall,

insurance. In 2003 ICICI Lombard (backed up Swiss Re) launched an ambitious scheme

targeted at low-income farmers in Andhra Pradesh, India, which is sold through BASIX, an

MFI. To date 200,000 farmers in 130 locations have been covered. The scheme insures

against deficit, excess and unseasonal rainfall, high relative humidity, excessively high and

low temperatures, prolonged dry spell, as well as a combination of these risks. The indemnity

structure is based on relevant indexes, where different indexes represent various estimated

losses. Preliminary analysis of a 2004 survey carried out by ICRISAT and World Bank has

been done by Gine, et al, 2007. The above study reveals that insurance uptake is high among

the wealthier farmers, and, low among those credit-constrained, which fits the authors‟

analytical set-up and is suggestive of the role of credit in promoting insurance, even though

the premiums were rather low at about $5-6 per member. However the authors were at a loss

to explain why more risk-averse farmers were more reluctant to purchase insurance, with the

tentative conclusion being the unfamiliarity with the product itself and also a lack of „trust‟

(i.e., not being in prior contact with the MFI in question). However in view of the potential,

an urgent research task would be to further analyze the performance of such policies and

explore replicability with suitable re-engineering in different contexts.

Key Findings:

The area approach entails a further ex-post equity issue in that dissimilar benefits are enjoyed

by the insured in the event of a loss. (Ifft 2001) suggests that if subsidies were offered to

private companies they would feel encouraged to enter crop/weather insurance as elsewhere.

However to reap full benefits of reforms, she suggests dismantling the distortions due to

government control over both input and output prices. She also proposes that another

alternative to insurance would be to leave farmers to manage own risk, while the state invests

in infrastructure and research, and if necessary offer lump-sum transfers to farmers which are

unrelated to the crop grown or the acreage under cultivation.


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b. Health Insurance:

Health is a critical factor in determining long-term living standards in the absence of

significant savings or public pension schemes, and hence the provision of meaningful health

coverage would be an important risk-mitigation element in the lives of the poor. Here the

necessity of micro insurance is further predicated by the fact that in most developing

countries access to public health care is limited and generally of low quality. At the same

time workers of the informal sector and rural areas account for a majority of the workforce

who lack access to quality health care. Thus even from a public sector perspective,

subsidizing micro-health insurance systems would appear to offer an interesting alternative

for addressing the problem of the financing of health care in general. Yet, a review of the

existing systems in many countries of Asia and Africa suggests a low uptake of health

insurance by the poor. Demand may not be the bottleneck as Dror et al (2007) found that

even the very poor were willing to pay between one and two percent (median being tk. 560)

of annual household income in premium, rather high figures in view of actual rates in force in

typical contracts. The most common reason cited by field level workers is that the products

are ill designed to be of appeal to the public. Most writers on the topic agree that a workable

insurance scheme in this context (i) must encourage primary preventive care (covering

doctor‟s fees, tests and prescribed drugs), (ii) in the therapeutic area, it may cover only major

risks (i.e., thus minimizing moral hazard), (iii) make provision for an emergency fund to deal

with occasional premium delinquency due to identifiable aggravated incidents on the part of

the insured, (iv) secure re-insurance, (v) must provide health education, and (vi) it must be

affordable. Micro insurance Academy (MIA) also suggests adding two more criteria: (vii)

extend coverage to communities rather than individuals, which achieves within group risk

pooling, and guards against adverse selection; (viii) the plan (i.e., the benefits & premium) be

tailored to meet the needs of the community in question (e.g. using MIA‟s decision tool,

Choosing Health Plans Altogether, CHAT).

This is one area where a suitable regulatory framework specifying which elements of

coverage an insurer may offer would be an important point of departure. In effect the product

design and its inherent flexibility would still be up to the insurer to devise, but each has to

respect the guidelines as those set out, for example, in the Indian context by IRDA, though

the latter is not without shortcomings (Dror, 2007). Absent such regulatory control, private

insurers may only offer coverage that is a priori profitable and does not achieve much

socially necessary risk-shifting (i.e., „cherry picking‟). There are many pilot type micro health


Page | 18

insurance schemes in operation all around the world, where India offers a large variety of

experiments, but few are judged to be offering high quality coverage or are deemed to be of

long-term viability unaided (e.g., Dror, 2007). Grameen Kalyan, in Bangladesh, has launched

micro health insurance since the late 1990s and presently covers half a million people. Its

premium is about two US dollars per year and it operates about 33 clinics in ten districts in

Bangladesh, and plays both the roles of insurer and of direct service provider. It uses a

strategy of serving the community at large and of charging higher rates for the less poor.

However, the program is still in the early stages with a limited geographic coverage, a limited

range of products, and does not have external linkage for re-insurance. The premium income

is reported to cover about 92% of the direct cost of the health program. A major challenge in

providing meaningful health policies in rural Bangladesh appears to be the shortage of

qualified personnel, and the consequent risk of discontinuity of service provision. In any case,

a full evaluation of its performance and the scope of replicability would be a high priority.4

c. Life or ‘life & credit’ insurance:

Life policies (or their variants) are conceptually easier to design among rural insurance

products. Given the absence of moral hazard, and presumed demand for it, actuarially fair

contracts should be the norm given a degree of competition. Indeed some form of life

insurance, typically bundled with microcredit, is generally available in most countries. The

challenge however is to widen the access to non-borrowers, and to set the level of indemnity

payment on death to a meaningful figure (e.g., a multiple of the average loan) under local

conditions. A priori, it would seem that the relatively small amount of money involved (both

for premium and maximum indemnity) would entail significant administrative expense if not

mediated through a microfinance institution (MFI) or a local NGO, i.e., by adopting the

partner-agent model.5 The existing case studies offer a mixed picture, which suggests that

greater care is needed in the delivery and design of the contract, financing, and re-insurance

aspects even in the case of life or life-cum-credit policies, originally believed to be easier to

practice than crop or health insurance. CARD MBA, in the Philippines, insures 600,000

people. It is a mutual benefit association created by an MFI, whose premium range is 1.5% of

the loan value per year. CARD MBA offers three credit life insurance products: a loan

redemption fund, a life insurance product that covers the member (usually female), her

spouse and three dependent children under the age of 21 (or if she is single, the member and

her parents), and finally a provident fund. The MFI almost went bankrupt because it did not

have appropriate knowledge in offering insurance.


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In Bangladesh, while about half of all MFIs offer some form of insurance, the typical life

policies are of the credit protection type, thus offering limited protection to the insured

borrowers in their struggles to escape poverty (Khalily et al, 2008). Another common feature

of the prevalent schemes is the ad-hoc setting of premium and indemnity structure, which

frequently leads to borrower ambivalence as to the value of the products, and at the same

time, poses significant challenge especially to the smaller MFIs in the financial viability of

their plans. The 2008 survey cited above also notes that most insurers use the premium

revenue as a sort of „revolving loanable fund‟ rather than investing it prudently for dedicated

use and in building plan sustainability.

Delta Life, a commercial insurer is a bit of an exception to the rule. While it experimented

with the Grameen Bank in jointly offering a saving-cum-life policy for Grameen borrowers, it

is now offering its own insurance policies to both rural and urban poor with its own delivery

channels, which were fashioned in light of the ties with the Grameen Bank in late 80s/early

90s. It offers about 37% of all „life plus‟ policies in the country. Another critical feature of

the Delta‟s scheme is that it offers a relatively long-term coverage (10 to 15 years) while the

typical MFI plan lasts only the tenure of the loan, which can itself be a source of volatility.

Yasiru, in Sri Lanka, started off by insures 9,000 people. It offers a mixed bag of life,

accident and funeral insurance, and its premium range is USD 1.20-18.00 per year. Though it

first started as an in-house insurance service in a federation of NGOs called ACCDC, today it

has eight active partners with around 60,000 members. It has received funding, technical

assistance and a reinsurance agreement from the Rabobank Group and its reinsurance

company, N. V. Interpolis. It was agreed that donor support would cease from 2005 to

encourage independence, but there is some concern that Yasiru might face problems in such

an eventuality as the solvency issue is far from assured.

Key Findings:

What can we say about the contours of a „best-practice‟ model? To recapitulate some points

raised above, we note the following:

(i) The risks covered ought to include all events that seriously undermine future earning

potential, namely, death and LT disability of the insured & spouse, and possibly that of other

earning members of the insured‟s family.


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(ii) Coverage to be made available to borrowers and non-borrowers alike.

(iii) The coverage, ideally an endowment type plan, ought to be subject to choice (but

allowable range to include say up to 5 years‟ earnings).

(iv) Length of coverage to be decoupled from loan tenure, if relevant.

(v) Actuarial calculus ought to be fully embraced in setting premiums.

(vi)If MFIs serve as insurer, the insurance arm ought to be separated and placed under

independent management.

(vii) Multiple modalities to be explored: For example, direct provision by insurer (e.g., Delta

& large MFIs) as well as partner-agent provision (not yet in evidence in Bangladesh) should

both be expored.

d. Life-cycle Risks:

Old-Age Security is often recognized that savings is the most common object that one can

resort to in times of crisis and calamity where the very poor do badly. Not only they have

little to save, there are not many user-friendly saving instruments that would be of appeal to

the poor. „Whole life‟ policies may address part of the answer, but typically these become

attractive when started early in life and premium contribution goes on for a long time. None

of the latter pre-conditions may necessarily apply to the typical worker we have in mind here.

The literature does suggest innovative projects underway in various parts of the world and the

task here would be to put together these ideas and evaluate their scope and practicality, and

develop a pilot scheme for experimentation and testing. The product should go beyond saving

for the immediate future, but mainly for eventual retirement with a simple (and optional)

annuity package built-in. It would be ideal to offer programs that are of appeal to the younger

generation engaged in manufacturing such as the readymade- garments (RMG) industry,

weaving, leather industry, other urban and rural day labourers, domestic help providers and

the like. Unless the scale of activity is very large, maximum possible guarantee return would

not be available to these low-income savers, which would require vigilant regulatory and

prudential oversight.


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8.0 Delivery Mechanism : Micro-Insurance Models

A key concern in the pricing of an insurance product is the element of cost of acquisition and

its delivery. Obviously, the delivery costs have to be contained to keep the cost of insurance

sufficiently low to attract the poor and to incentivise the insurer to venture into this segment

viewing it as a genuine market opportunity.

There are five major models of insurance coverage for the poor:

a) The “Partner-Agent” model

In this model, the MFI would have the function of a dealing agent, thus enabling the insurer

to reach a market where it would not intervene directly on its own because of the lack of

profitability.

From a client perspective, clients can access an insurance product which is managed by a

professional and thus benefit from a better “return on investment” than with an informal

means of insurance.

This model is based on the collaboration between a partner agency (usually a formal

insurance company) and a dealing agent that provides services to low-income clients. The

company (the partner) feeds the financial resources, sets the premiums, monitors the

insurance claims and ensures that legal obligations are observed. The agent ensures that the

risks, resources and knowledge are transferred and shared rationally between the formal and

informal sectors.

b) The mutualised insurance and other community-based organisations

model

Credit and savings cooperatives often offer borrower's insurance contracts that cover the

balance of a loan to be paid back. Moreover, they offer savings in the form of life insurance,

to stimulate saving habits. Some also sell Housing, Funeral, Invalidity and Disease insurance,

and even Accident policies, yet more rarely. These products come in addition to mainstream

credit and savings services.

In the countries of Sub-Saharan Africa, many mutualised health insurances have also been

created on the basis of a voluntary membership. In exchange for the premiums they send to a

fund, policyholders are entitled to certain benefits. The community has an important role in

designing and managing the programme.


Page | 22

c) The “all-in-one insurance” model

Different organisations - MFIs, insurance companies, etc. – can also sell their policies

directly to the poor through agents who are paid on a salary or sales commissions basis, or

both. India‟s Tata AIG or Bangladesh‟s Delta-Life develop micro insurance using this model

of direct sale.

d) The “franchise” model

In this model, the professional insurer franchises his/her license, assigning part of his/her

capital to the licensee through a reinsurance treaty, as the case may be; the licensee (an MFI,

generally), on his part, is in charge of designing the product, setting the prices as well as

handling the losses and gains.

e) The “supplier” model

This model applies to health insurance specifically, it implies that the insurer provides all or

part of the health-care services. His/her interest is that he/she remains in control of the health

care offer which is a crucial element for client faithfulness.

9.0 Emerging Challenges in Micro insurance:

In a paper entitled "Visions of the Future of Micro insurance, And Thoughts on Getting

There", which was published by USAID in 2008, micro insurance experts identified four

general challenges to further the development of micro insurance (Michael 2008):

Coordination of knowledge of activities to allow all parties to maximize

effectiveness.

Improving products and processes that recognize the needs of low-income families

and satisfy their needs with value.

Innovation in processes that can be replaced or augmented by technology.

Careful development of regulation that effectively balances the need for consumer

protection with the flexibility needed to develop and service a massive market.

(source)

Four years down the line, here are some of the developments that aim to overcome these

challenges:


Page | 23

1. The launch in 2009 and then formalisation in 2012 of the Microinsurance Network, a

multi-stakeholder platform that promotes the development and delivery of effective insurance

services for low-income people by encouraging shared learning and facilitating knowledge

generation and dissemination, directly links to the first challenge of coordinating activities to

maximise effectiveness. The Network drives collaborations through its 15 working groups,

and with over 60 institutional members, it is the most representative body in the sector.

2. There are numerous examples of products and processes being improved to reflect clients

needs better. However, the launch of the ILO‟s Microinsurance Innovation Facility in 2008,

which has offered over 40 grants to innovative projects, best represents this focus to improve

products around the world. In addition to this, a number of tools have been developed to

measure the value and performance of the insurance services, including the Facility‟s PACE

tool, MILK‟s Client Math papers, and the Network‟s financial and social performance

indicators.

3. The importance of technology in microinsurance is clear. Technology can not only reduce

costs, but it can also increase outreach to the scales necessary for sustainability. The mobile

phone, for example, is revolutionising products and outreach, and with programmes such as

the agricultural insurance product Kilimo Salama in Kenya and MicroEnsure/Tigo health

insurance product in Ghana, this „revolution‟ is bound to continue.

4. As regards to regulation, the launch of the Access to Insurance Initiative in 2009, a

programme that supports the implementation of sound regulatory and supervisory

frameworks, was a significant step towards developing regulations that balance the need for

consumer protection and the flexibility needed to service the low-income market.

10.0 Differences between conventional insurance and micro

insurance

Microinsurance products are targeted at low income populations and differ from conventional

insurance as shown in this matrix adapted from (McCord & Churchill 2005).

Conventional Microinsurance Microinsurance


Page | 24

Insurance* (Commercial model: Partner-

Agent) (Nonprofit model: Mutual)

Premium collected in

cash or mostly from

deductions in bank

account

For credit, life and loans

that are tied to index-based

insurance, premiums are

usually collected at source,

i.e. deducted from the loan

associated with another

transaction such as loan

repayment or asset

purchase.

Premiums for other types of

insurance (e.g. health) are

usually collected in cash,

sometimes through irregular

cash flows, but more often

through single premium

payments.

Premium often collected in

cash or even in kind (e.g.

milk in the care of dairy

cooperatives etc.).

Collection modes often

respond to market‟s

irregular cash flows, and

payments can entail

frequent but partial

premium payments.

Sold by licensed

intermediaries.

Often sold by licensed or

unlicensed intermediaries.

The roles of shareholders,

administrators and clients

are unified in this

model. As such, the group

can design its own

products, and agents are

not required.

This means that agent fees

(commission) can be

converted into more value

for money for the group.

Agents and brokers are

responsible for sales and

services. Direct sales are

also common.

Agents manage entire

customer relationship,

sometimes including

premium collection.

Microinsurance is usually

directly sold to MFIs and

more rarely to groups.

Targeted generally at

wealthy or middle class

clients in emerging

markets.

Targeted at low-income

persons.

Targeted at low-income

persons.

Corporate clients are

familiar with insurance.

Individual clients in the

informal sector are less

familiar with insurance in

emerging markets.

Market is often unfamiliar

with insurance and requires

specific efforts in

explaining the value of

insurance to clients

(“consumer education”).

By involving clients in

product design and process

of administering the after-

sale relationship (claims

and dispute resolution),

this model may achieve

both enhanced awareness

and higher willingness to

pay for package.

Screening requirements Screening requirements are Where the affiliation unit


Page | 25

may be applied for certain

types of insurance, e.g. a

medical examination

might be required for

term life insurance.

kept to a minimum; usually

limited to a declaration of

good health.

to insurance is the group

rather than an individual,

there are no screening

requirements.

This model offers trade-off

of covering a broader range

of (pre-existing) conditions

in return for group

affiliation. Local

information is used to

control moral hazard and

reduce adverse selection.

Large sums insured. Small sums insured. Small sums insured.

Priced based on

individual risk rating (e.g.

age/specific risk

assessment).

Community or group

pricing, based on national

data/estimates or

comparisons to risk rated

schemes; in case of

individual pricing often

higher premium due to risk

level of policyholders and

lack of competition on

supply side.

Premiums based on

community-rating derived

from local information and

conditions.

Limited eligibility with

standard exclusions.

Complex policy

document.

Limited eligibility with

standard exclusions.

Simple, easy to understand

policy document.

The group defines its own

package, reducing or

eliminating the need for

complex legal

documentation.

Tends to opt for more

inclusive and holistic

packages.

Market data available,

and consequently

accurate actuarial

expertise.

Little or unavailable market

data.

Little or unavailable

market data.

Claims process may be

difficult for

policyholders.

Claims process is simple

while still controlling for

fraud. In reality,

transactions that are

business-to-business do not

concern the clients. In

transactions between

insurance and client, the

Claims process should be

simple and managed by the

group at the lowest

possible level to reduce

reimbursement delays and

leverage local information

to control for moral hazard


Page | 26

process often takes a long

time.

and fraud.

* Not applicable for large group insurance.

11.0 Role of Micro insurance in Poverty Alleviation and management

of Vulnerabilities:

Poor people live and work in risky environments, vulnerable to illness, accidental death and

disability, loss of property due to theft or fire, agricultural losses, and natural and man-made

disasters. Not only can exposure to these risks result in substantial financial losses, but

vulnerable households suffer from the ongoing uncertainty about whether and when a loss

might occur. The poor are less likely to take advantage of income-generating opportunities

that might reduce poverty because of this perpetual apprehension. Although there is little

evidence-based knowledge of the impact of insurance on poverty reduction, micro insurance

can help reduce the vulnerability that poor households face and as a consequence, enable the

poor to improve their lives.

Government efforts through the provisions of micro-finance opportunities to small and

medium businesses is a step in the right direction in addressing poverty amongst its growing

population though not sufficient, therefore, adequate insurance is needed to protect these

credit lines offered by micro-finance institutions and banks otherwise beneficiaries of such

facilities could as well go back to poverty. Small businesses are also exposed to such risks as

health, fire, burglary, death and family responsibilities which are capable of eroding

businesses or assets acquired over time.

Every society has risks that should be avoided and low income people are always vulnerable

to them. Low income people are more exposed to such risks than the rest of the population

and most times cannot deal very well with the crises.

These categories of citizens therefore need insurance more than anyone else because they

lack fallback positions whenever there is a loss. Small businesses take loans from micro-

finance institutions and whenever there is sickness or accident and they are hospitalized the

next thing will be to use such loans collected to pay for hospital bills and return to poverty

once again.


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Poverty and vulnerability reinforce one another forming an ever-growing downward spiral,

not only the exposure to risks results in substantial financial losses but vulnerable families

suffer the continued uncertainties about when and how loss may occur. Due to this perpetual

concern, poor people are less likely to take advantage of income generation opportunities

which may reduce poverty. The majority try to manage their risks and deal with the

consequences. Saving money, Esusu, working extra time on other activities and asking for

loans from friends or relations constitute some of the strategies used to avoid financial loss

which is inefficient and exacerbates poverty.

Such informal protection methods do not resist unforeseen serial cases before they are able to

rise again from an adverse situation, a new unforeseen event may occur with more power

throwing them back to stage one again.

Micro-insurance therefore provides cushion against such vulnerability by offering micro-

health, life, and property insurances.

It is a commonly accepted key strategy therefore to enhance sustainable economic

development and alleviate poverty by making financial systems more inclusive by improving

access to savings, credit and insurance.

It is noteworthy to observe that some insurers like AIG life in Uganda, Coco life in the

Philippines or the Brazilian insurance industry have all entered this new venture with

promising results. However, some commercial insures and Policy makers still tend to believe

that providing insurance cover to the poor is the responsibilities of the state and in practical

terms it is impossible to insure poor people on a cost covering basis. They suspect that poor

households either cannot pay for their insurances or the informality of their living situation

makes them unattractive as clients because they do not have formal employment, have ID

cards and are illiterate.

It should however be mentioned that many state run schemes of social protection in

developing countries have failed as they are poorly run, for those targeted do not benefit

while those who can afford them are the ones who access these benefits. Also, public social

security schemes where available are delivered through formal sector employer which does

not reach the unorganized workers both employed and self-employed in the informal

economy.


Page | 28

On the other hand however, insurers are beginning to notice the vast markets of low-income

households but numerous obstacles need to be overcome if micro-insurance is to be offered

efficiently and effectively in terms of distribution system, products development and

capacities.

The poor people are vulnerable to any kind of disasters than the rich people. Since they do

not have any kind of protection and risk management system to cover the losses caused by

various elements such as natural calamities, fire events, eradication from their living places if

it is a slum or such type of habitants, any kind of illness and so on. They are very prone to be

affected severely by these events.

Key Role of Micro insurance as a tool:

As a tool to alleviate the poverty and a management tool to protect the vulnerabilities of the

poor people micro insurance acts as a magic or Aladdin’s Magic Lamp. The poor people are

forced to be united to gain the facilities of the micro insurance. They are taught to be united

to face and cope up with their financial and non-financial issues. The regular savings

requirement enables them to be self-dependent and self-reliant. They are taught to be

confident amidst many problems in their life.

The poor are generally exploited by the upper section of the society. By the micro insurance

schemes, they are united and by the collective effort they are ensured against different perils.

Thus, the poorness of the poor can be easily alleviated from the grass root level. They are

very vulnerable to the calamities of the nature and the society as well. As they are getting the

economic freedom they can also get rid of this problem. As a result, micro insurance is a

great tool in managing the vulnerabilities and poverty of the poor people of the society of the

developing counties like Bangladesh and so many.


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12.0 Micro insurance products offered:

The major micro insurance products offered to the poor people are:

a. Credit life insurance

This is the most common and ensures the “debt dies with the debtor.” It is actually

used to protect lenders, not the families, from the death of their clients and is often

offered directly by MFIs

b. Term life or personal accident insurance

Term life or personal accident insurance is often offered alongside credit life

insurance to cover the family if a borrower dies.

c. Savings life insurance

This is often used to stimulate savings. Poor people are encouraged to save a certain

portion of their daily income and deposit it to the insurance company. After a certain

period and if they face any trouble, this money is given to them to cope up with the

situations.

d. Health insurance

This is probably the product in greatest demand among poor and low-income

households; however, it is also the most complex risk to cover due to higher

information asymmetries between the insurer and insured. These information

asymmetries lead to potential higher risks of moral hazard and adverse selection,

which have so far proven tricky for commercial insurers. As a result, many often

write-off health as an area where it is difficult to provide microinsurance on a viable

basis, and prefer to focus on the simpler products described above. However,

organizations following the mutual model can leverage local information and peer

pressure to address moral hazard issues, and by affiliating “en-bloc” can greatly

reduce the risk of adverse selection.

e. Property insurance

Property insurance is nearly always linked to a loan and may help a borrower continue

repaying his or her loan only if something happens to the property (usually livestock).

In some cases, replacement of the property is also covered. Endowment policies


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combine long-term savings and insurance with emergency loans against the savings

balance. In this case, the premium payments accumulate value.

f. Agricultural insurance

Agricultural insurance is particularly tricky, and little evidence exists of viable

programs. The problem is that insured farmers are less likely to pursue sound

practices and therefore are more likely to lose their crops. It is difficult to calculate the

probability of loss because so many factors can influence crop yields. At the same

time, premiums that farmers can afford are not usually sufficient to cover claims and

administrative costs. Recent innovations that link insurance to rainfall and other

weather conditions are promising, because they may be more measurable, objective,

and viable.

13.0 Concluding Remarks:

Bangladesh is one of the most important developing countries in the world. However, people

here are lagging behind in most of the statuses of life in comparison to others. The standard

of living is quite miserable. Roughly, half of almost one hundred seventy million people are

illiterate. The rate of people under the range of poverty line is even higher. They fight with

poverty every day. They are destitute from many necessary amenities of life. They are highly

eligible for the scope of micro insurance.

Micro-insurance can serve the interests of poor populations with risk-pooling to manage

unpredictable employment, flows of income, and catastrophic events by providing post

disaster liquidity to poor households and thus can help to secure livelihoods and facilitate

mischance recovery and reconstruction. To ensure that micro-insurance safeguards the assets

and interests of the poor, microinsurance initiatives must exercise professional management,

product development, management information systems, and re-insurance.

A major challenge is assuring the financial sustainability of micro insurance providers, while

at the same time providing affordable premiums to poor and high-risk communities. To meet

this challenge many may be afraid to come forward and shift responsibilities away to national


Page | 31

or international community of solidarity for the poor or something like this to starting up

micro insurance operations.

But the fact is, the commercial viability of various micro insurance schemes are threatened in

Bangladesh in the context of both low supply due to the inherent risky nature of this business,

low insurance demand and low willingness to pay due to a lack of financial income of the

residents.

For a country like Bangladesh, micro credit providers and micro insurer should work

together. Micro-credit providers have greater access to the client base, better infrastructural

facilities all over Bangladesh, a greater degree of trust and reliability among the clients and

pre-existing information on client portfolios. Here, Potential insurance clients, the poorer

section of community who all are comparatively less educated, have psychologically strong

preference for public provision of micro insurance indicating a higher degree of trust in the

public sector relative to the private sector. In order to meet both the demand and supply

criterion assessed through the current condition, a partnership of public sector and the micro-

credit providers seems the most suitable institutional set-up in the context of Bangladesh as it

will ensure both higher insurance take up and lower administrative cost of operation.

To design appropriate micro insurance and micro insurance programs for different cases,

further researches should be carried out to quantify the impact of specific types of micro

insurance for specified events on out-of-pocket expenses, incidence of poverty and poverty

gap, inter-generational transfer of poverty and household acknowledgement status regarding

all these.

If micro insurance is to become a welfare-enhancing instrument, an equally challenging

prerequisite is its propensity to reduce the unacceptably high human and economic impacts of

different disastrous events on the poor. If the insurance schemes are embedded within a

strong risk management framework, the vulnerability will certainly decrease. However, there

is a lack of direct links and incentives on the part of current micro insurance programs

available to reduce the direct losses in our country. This finding is not unique to any

developing country insurance, but it flags a more general concern about linking risk financing

to risk reduction. Skeptics rightly warn that insurance may conversely present disincentives

to taking proactive risk-reduction measures. Different schemes may offer possible exceptions.

Nonetheless, the challenge of linking insurance to prevention underlines the importance of


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integrating micro insurance into risk-management programs that combine regulatory and

citizen oversight to assure incentives and effective regulations.

In Bangladesh, Insurance Development & Regulatory Authority (IDRA) is the main

regulatory body of the insurance companies. They are responsible for promoting and

encouraging sound development of the insurance industry in our country. They advise the

government on all the matters related to the development of insurance industry. As micro

insurance can be a highly lucrative sector of insurance in Bangladesh due to its massive

potential clients, IDRA should take necessary steps for the advancement of this sector. With

them, non-government private insurance companies have to come forward to take the

advantages from this sector. With all our combined efforts, we can use micro insurance as a

instrument to alleviate poverty and make betterment of the vulnerable people of Bangladesh.

14.0 Conclusion:

The micro insurance is as described above is a great tool to the alleviation of poverty and in

the management of vulnerabilities of the poor. The conclusions of the paper point to the

importance of the design and delivery of this new product based on a market analysis of the

potential customers‟ preferences as well as their existing insurance landscapes. This demand-

led approach differs markedly from micro insurance product develop date. Most micro

insurance products currently on offer appear to be primarily supply-led, designed as

downsized products of commercial companies.

Context is also key to the effectiveness of any micro insurance products. At the client level

we identified the lack of understanding of insurance. Client education is a prerequisite for any

adoption of such innovative financial products. The client‟s financial landscape has already

been mentioned. On the shock side, we need to take account of not just the initial shocks but

the capacity of the client to cope with the secondary shock effects: the payment of school fees

to keep children in school, the shortfall in cash to pay for food when the principle

breadwinner is sick or has died.


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