Viewing all posts with tag: Insurance  

High Touch or Low Touch: How to Reach New Microinsurance Customers?

How can we extend financial products and services, like microinsurance, to low-income consumers at scale? In theory, “low touch” sales and services can reach large numbers of people at low cost.  But so far, attempts to enroll new customers without active sales efforts have largely failed. As a result, “high touch” sales and distribution channels are seen as necessary to convince low-income consumers to purchase financial products, especially unfamiliar and complex ones such as microinsurance.  But these high touch channels may incur costs that the small premium revenues struggle to cover. 

Is it too soon to dismiss low touch methods? Can a balance be struck that provides the information, support, and “touch” level that encourages clients to buy, while keeping distribution costs in check?

Read More  

Deflating the Promise of Using Remittances to Cope with Financial Shocks

Over the past three years, I have been working on the Microinsurance Learning and Knowledge (MILK) Project, focusing on one specific question: Do clients obtain value from microinsurance? As the project comes to an end, I feel more and more that this is only one of the many questions that we should be asking as we think about how low-income people cope with risk and financial shocks.  Insurance is one of many coping strategies; it is not always the quickest, the easiest, or the most accessible. But it is an important complement, and in some cases, can take the “bite” out of some of more difficult strategies such as selling assets, borrowing at high interest rates or drying up savings . . . 

Read More  

Samantha Duncan on the Books and Papers that Influenced her Thinking on Insurance

FAI asked Samantha Duncan to tell us about the research papers and books that have influenced how she thinks about insurance. This is what she told us:

My thinking on insurance has evolved and been influenced by personal experiences, but also some books and papers. I am a practitioner at heart, and my earliest thinking came from spending time inside the homes of poor people across Latin America and Asia; getting to know them, their families, and how they live their lives. However, there have also been a number of research papers and books that have had a tremendous impact on my thinking and work. I’ve outlined some of the ideas that have deeply resonated with me below.

Insight 1: The risks poor people face are debilitating. There is a cycle of poverty . . . 

Read More  

Knowing is Half the Battle: Unpacking Financial Literacy

The opening of the new Affordable Care Act health insurance marketplaces presents millions of Americans with a complicated financial decision. How do they value insurance? The marketplaces will primarily serve people who are not employed full time or are in low-wage jobs—and are therefore likely to be juggling tight finances already. What is the cost of paying down debt more slowly to buy insurance? The obvious intervention to help people make better financial decisions when faced with complex options is financial literacy.

Unfortunately, the evidence on financial literacy is pretty dismal. David McKenzie’s study of a voluntary financial literacy program in Mexico that finds no effect is pretty representative. Earlier this year, author Helaine Olen wrote that financial literacy is “a bunch of hooey,” Jason Zweig at The Wall Street Journal cited educational programs that actually make people worse off financially, and FINRA released a study showing that financial literacy among Americans has weakened since 2009.

While financial literacy levels are linked to better financial decisions, study after study shows that financial literacy courses are ineffective . . . 

Read More  

From Responsible Finance to Suitable Finance: Financial Engineering for Low-Income Households

This post is written by Bindu Ananth and Amit Shah. Bindu Ananth is President of the IFMR Trust and Amit Shah is Head of  Business Intelligence at IFMR Rural Finance. They co-edited the recently published book “Financial Engineering for Low-Income Households.”

Five years ago when we set up the KGFS model of financial institutions in remote-rural India, we wanted to make a fundamental shift in the way financial services were offered to households. We wanted the organising principle to be suitability, i.e., how do we make sure that every single customer receives the portfolio of financial services that is most suitable given her needs and preferences? This is essentially what wealth managers are supposed to do for ultra-rich individuals but we wanted to do it for clients with a mean income of USD 1000 per year through staff with twelve years of formal education . . . 

Read More  

A Terrific Reference—or Primer—on Microinsurance Take-up

Take-up of formal microinsurance products remain low around the world, typically ranging from 0 to 30-40 percent depending on the type of product and the conditions of the offer. A growing literature is testing various determinants of take-up, although little has been done to step back and consider what we have learned as a whole.

That’s a problem because the issues are complicated and multi-layered. There’s a high probability of being misled by any particular finding from the research when designing new products.

Michal Matul, Aparna Dalal, Ombeline De Bock and Wouter Gelade have done a huge service to the sector, then, in a new paper presented at the Third European Research Conference on Microfinance, held June 10-12 in Norway. Their paper is a must-read for anybody interested in microinsurance, particularly in understanding and overcoming the puzzle of low take-up for both first sales and renewals of purchases. The latter has been little considered, yet renewal rates tend to be even lower than first-sale rates . . . 

Read More  

Informal Insurance, Basis Risk and the Demand for Microinsurance

The literature on microinsurance is growing. A series of studies have been published in recent years that look at determinants of (generally low) take-up of microinsurance products, particularly index insurance products. Some work is also being done looking at the impact of offering insurance to farmers.

At the Third European conference on microfinance, held June 10-12 in Norway, Mark Rosenzweig shared some interesting results on the take-up of rainfall microinsurance in India, and its impact on risk-taking. He particularly addresses two important determinants of take-up and impact that have so far received limited attention: basis risk (that is, the risk for a client that the insurance may not pay out when he or she experiences an actual loss due to the possible difference in rainfall at the weather station and on his or her plot), and the complementarity of formal microinsurance with informal insurance mechanisms . . . 

Read More  

Measuring (and Missing) Financial Inclusion

The fastest growing part of the financial inclusion movement isn’t a product or even a standard, it’s data and measurement. And if there’s something experts are increasingly agreeing on, it’s that it is illusory to try to define financial inclusion in any precise, universal way. John Gitau says he’s confused, and so am I. How do you measure financial inclusion?

It’s true that you might not be able to measure financial inclusion itself, but you can still measure things that indicate either actual, or the potential for, progress. Such indicatorsare what we can measure, and they are very useful as long we don’t confuse them with actual measurement of financial inclusion.

There are two broad types of indicators which can be applied to fuzzy concepts like our cherished financial inclusion . . . 

Read More  

Update: Another paper on microinsurance and why insuring against risk matters

We wrote a post a few months ago about a paper  that looks at how microinsurance affects decision-making. Specifically, the paper analyzed whether insuring farmers in Andhra Pradesh, India, against rainfall-related risks (too much or too little) affected their investment and production decisions. Another recent paper by Karlan, Osei, Osei-Akoto & Udry uses a similar approach and found similar results in northern Ghana.

In this experiment, farmers in northern Ghana were randomly assigned to receive cash grants, subsidized rainfall index insurance or simply offered the option to purchase insurance at actuarially fair rates. As in the Andhra Pradesh study, the authors find strong responses to investment to the subsidized rainfall insurance. When provided with insurance against one of  the main risks they face, farmers find the resources to increase expenditures on their farms. Interestingly, they only found small effects of cash grants.

Karlan, et. al. also discuss the demand for rainfall insurance. They point out that take-up rates on rainfall insurance are low, which seems counterintuitive given that we know risk discourages investment, and investment often has large returns. To understand the demand for rainfall insurance, we have to keep in mind the various factors that drive demand. Of course, price is important but trust and experience matter as well. Demand is sensitive to whether farmers trust that payouts will be made. They found that demand for insurance increased after a farmer or someone in his network received a payout.

The study provides additional evidence that households are managing their finances by avoiding risks. In other words, they are smoothing their income by avoiding investments that could pay off but could go very sour. Reducing this risk-avoiding income smoothing through insurance seems to work well—if households can be convinced that the risk of the insurance (that an unfamiliar and relatively expensive product is reliable and worth the short-term cash cost) is less than the risk of the status quo.

What's Next? Connecting Finance and Health

Focusing on financial access can sometimes obscure the rationale for doing so.  We don’t really care about access to finance for its own sake. The point of providing quality financial services to poor households is to give them an easier, more stable path to prosperity. But what are the pitfalls and slippery spots on that path that we hope to ameliorate?

It seems that financing health care is one of the biggest obstacles that poor households face. Take Joseph, a farmer from the Kenyan Rift Valley Province. When his three-year old daughter inhaled a piece of corn she began struggling to breathe. Joseph had no cash at the time, so he waited before visiting a doctor, hoping she would get better.  But after three days, symptoms became so serious that Joseph had to take his daughter to the hospital for emergency care. The only way Joseph could accumulate the sums necessary to pay the bill was to sell his land. When I met him two years later, it seemed unlikely that Joseph would ever be able to buy it back. Selling the land had pushed the household into extreme poverty . . . 

Read More  

What’s next for KGFS?

What’s next in financial access in 2013? Bindu Ananth and Deepti George say a focus on measuring and improving quality.

It has been over four years since we started KGFS, an attempt to provide a complete suite of financial services to financially excluded low-income households in India. Our journey began in the village of Karambayyam in Thanjavur, Tamil Nadu. In that village of 3200 households that has no other formal financial institution, the KGFS branch and its three wealth managers have enrolled 2030 households and created a customised financial well-being report for each of them. Following up on these reports has resulted in the sale of 4966 insurance policies, 300 pension policies and credit disbursements of USD 2mn with no losses for this single branch. Mid-line results from an impact evaluation being conducted by Rohini Pande and Erica Field suggest that the presence of a KGFS branch has a significant impact on reducing the stock of informal, expensive debt. Over the last four years, we have built five independently managed KGFS institutions in five  distinct regions of the country. These institutions together comprise a total network of 170 branches and are now serving about 300,000 households. The first of these institutions, with 68 branches in Thanjavur district of Tamil Nadu, turned profitable within four years of inception . . . 

Read More  

Barriers and Constraints to Risk Management and Savings

Whether the result of variable incomes, liquidity constraints or reduced access to formal financial services, poor households face unique financial constraints that undermine their ability to effectively guard against risk and accumulate meaningful savings. There’s been a lot of research into these questions in the last few years. Two important papers, “Barriers to Household Risk Management: Evidence from India” and “Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya,” circulating for a few years have finally been published this month in the American Economic Journal: Applied Economics. Now that they’re “official” it’s worth revisiting them . . . 

Read More  

What’s Next? David Mckenzie on Risk Isn’t Just for Farmers, but isn’t all bad either

One of the big changes observed in discussions over microfinance in the past few years has been increasing emphasis on discussing microfinance, rather than just microcredit. In practice this has meant a lot of discussion about microsavings, with advocates pointing to studies showing greater impacts from offering savings accounts than from offering loans.

But finance is about much more than just savings and loans. As emphasized in Portfolios of the Poor, one of the issues with living on $2 a day is that incomes for the poor are incredibly volatile, so that the $2 a day average masks days of nothing and days of higher incomes. Building up precautionary savings offers one way to help smooth these shocks, while credit provides another. But some of the shocks experienced by the poor are large enough when they occur that they wipe out savings and leave people in a position where they will struggle to either obtain loans or be able to repay them straight away . . . 

Read More  

Marketing Matters: Increasing Microinsurance Coverage Beyond Lowering Prices

Poor households in developing countries face large and varied risks. Many agriculture-dependent households, for example, are at risk of drought- or flood-induced crop failures or livestock deaths. The death of a family member often implies having to fund expensive burial ceremonies, and if the deceased was the household’s primary earner, replacing her/his stream of income is an even bigger problem. A short “Client Math” survey by the Microinsurance Learning and Knowledge (MILK) project of Compartamos borrowers in Mexico, for instance, shows that funeral costs alone (including the costs of the funeral itself as well as connected costs such as food and drink, but excluding lost wages) typically amount to half of a family’s annual income (my calculations from data described in Poulton and Magnoni 2012). Similar figures have been reported from around the world.

Poor families have imperfect tools to manage these risks. They rely on self-insurance, traditional risk-sharing arrangements, informal insurance networks, and/or credit and savings. These strategies, however, are inflexible and/or expensive, and do not provide enough protection . . . 

Read More  

New Paper Highlight: How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment (Shawn Cole, Xavier Giné and James Vickery)

Intuitively, insurance should be highly appealing to poor households for two reasons—they face a lot of risks, and have few resources to effectively deal with negative shocks. But microinsurance hasn’t taken off. That leads to two main questions: Does microinsurance provide the benefits that we theoretically think it does? And if so, how do we overcome the barriers that are preventing people from buying insurance?  Of course, the answer to the second is quite dependent on the answer to the first.

A new paper by Cole, Giné and Vickery presented at Innovations for Poverty Action’s recent Impact and Policy Conference in Bangkok tries to uncover some answers on the real world impact of microinsurance not just in terms of protection from an actual shock. One possible benefit of microinsurance is that it allows poor households to make different choices because they have to worry less about the impact of a shock . . . 

Read More  

Microinsurance: A Review of the Literature

In most of the developing world, the poor are disproportionately vulnerable to risk. Whether these risks come in the form of the death of a family member, severe illness, the loss of an asset such as livestock, or a natural disaster, these events have a particularly debilitating affect on the poor who are less able to financially absorb and recover from such shocks.

Increasingly, providing the poor with access to reliable and reasonably priced insurance instruments has become viewed as an integral component of inclusive financial sectors. This type of insurance is commonly referred to as microinsurance and is defined as “the protection of low-income people against specific perils in exchange for regular monetary payments (premiums) proportionate to the likelihood and cost of the risk involved.” ("Protecting the Poor: A Microinsurance Compendium " 2006, Churchill, C.)

The field of microinsurance is still relatively new and in its infancy stage . . . 

Read More  

Is there a business case for microinsurance?

When Dr. Martin Hintz of Allianz asked industry stakeholders gathered in Manila in November 2010 for the 6th Munich Re Foundation and Microinsurance Network Annual Microinsurance Conference if their microinsurance programs were profitable only a handful of the hundreds of practitioners in the audience raised their hands. 

Why were there so few positive responses? Microinsurance is widely assumed to have great potential to be profitable for insurers and delivery channels, but we know little about when a business case actually exists. Like microcredit, microinsurance is often seen as an opportunity to tap into a large new market at the base of the pyramid. Under what circumstances can the unique and often costly challenges faced by microinsurance in product design, marketing, delivery, and claims administration be overcome? The MILK project is attempting to answer these questions.and help gain a better understanding of when and how a business case for microinsurance exists for insurers and delivery channels.. 

Read More  

Does microinsurance provide value to clients and their families?

This post is the first of a two-part series by Michael J. McCord, Project Director of MILK and the President of the MicroInsurance Centre, and Emily Zimmerman, a Research Associate at MILK. Part 2 will cover address the business case for microinsurance.

Do clients really benefit from microinsurance? Microinsurance, a younger sibling of microcredit is in a relatively nascent phase, yet it has caught the attention of governments, donors, practitioners and even investors worldwide with promises of helping people manage risks and reduce the financial burden when a shock occurs. However, poor people have been using a wide variety of both formal (such as credit, savings, and cash transfers) and informal (burial groups, family and community networks) tools to cope with risk for ages. The Microinsurance Learning and Knowledge (MILK) project seeks to understand what, if anything, microinsurance adds to these other tools. Our first step in this process consisted of clearly defining value and conducting a landscape review of existing studies that have asked questions about value. The process showed that we actually know quite little about the value microinsurance has for poor clients. Over the next three years, MILK will implement original and collaborative research to begin to fill the many gaps that remain in our understanding of value . . . 

Read More  

How do Women Weather Economic Shocks?

A new paper from the World Bank explores what we know about how women weather economic shocks. Here’s the main result:

In the past, women from low-income households have typically entered the labor force, while women from high-income households have often exited the labor market in response to economic crises. Evidence also suggests that women defer fertility during economic crises and that child schooling and child survival are adversely affected, mainly in low-income countries, with girls suffering more adverse health effects than boys.

Papers like this can go a long way toward providing the foundation for the case for insurance. It has nothing to do with insurance per see—just about the inability to cope with risk . . . 

Read More  
Top of Blog