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Access to finance: the role of microinsurance

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Bernd Balkenhol and Craig Churchill. Social Finance Programme. ILO. The Social Finance Program ... Insurance? ... between insurance and microinsurance? ... – PowerPoint PPT presentation

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Title: Access to finance: the role of microinsurance


1
Access to finance the role of micro-insurance
  • WSBI-World Bank Conference
  • Brussels, 28 to 29 October 2004
  • Bernd Balkenhol and Craig Churchill
  • Social Finance Programme
  • ILO

2
Access matters
  • Gives people the ability to expand options
  • Allows consumption smoothing
  • Protects people against external shocks
  • The right to have access?

3
Barriers to access
  • Infrastructure
  • Subsistence economy
  • Low population density
  • Illiteracy
  • Poverty
  • Gender
  • Financial repression
  • Inefficient suppliers
  • Collateral

4
Access to what sort of finance?
  • To manage a micro-enterprise?
  • Or
  • To manage risk?
  • Or
  • To do both?

5
When is what financial service appropriate?
  • Magnitude of the possible loss?
  • Scope for risk spreading?
  • Probability of risk occurring

6
Degree of Uncertainty (if, when, how often)
Highly Uncertain
Certain
Flexible Savings and Credit
Life Cycle Events
Small
Property
Health
Death
Insurance
Relative Loss / Cost
Disability
Mass, Co-variant
Flexible Savings / Partial protection
Very Large
7
Insurance???
  • risk pooling mechanism combines the resources of
    the many to compensate for the losses of the few
  • premiums for the average loss suffered by the
    group rather than the actual cost incurred
  • risk pooling benefits the few who suffered the
    loss, while the many basically receive peace of
    mind in exchange for their premium payments

8
What are the differences between insurance and
microinsurance?
  • Relevant to the risks of the low-income market
  • Affordable premiums in small amounts
  • Small benefit amounts
  • Simple rules, minimum exclusions and conditions
  • Fast payment of benefits
  • Strategies to overcome the wariness of customers
    (e.g., client education, minimise claim
    rejections)
  • Build on existing informal coping mechanism and
    social capital
  • Different attitude help people to manage risks

9
Contingencies …
  • Credit life insurance
  • Life insurance
  • Health insurance
  • Fire and other property related insurance

10
Why makes micro-insurance special in the context
of access?
  • Opens up access to other financial services
    (credit life)
  • Corresponds to financial needs of all working
    poor in the informal economy, entrepreneurs or
    not
  • Substitute for social protection

11
Determinants of demand
  • Education and information
  • Incidence of risk
  • Incidence of fraud in the past
  • Socio-cultural taboos
  • Income levels and the affordability of premiums

12
Supply determinants transaction costs
  • Selling policies
  • collecting premiums
  • preventing premium lapses
  • verifying claims
  • making payouts

13
Controlling TC by linking insurance to credit
Example AIG in East Africa
  • Pays 800 for the accidental death
  • of the borrower
  • Pays 400 for the accidental death of spouse
  • Pays 200 for the accidental death
  • of dependents
  • Premium 0.5 of loan amount
  • Term 4 months

14
Controlling TC by twinning savings to insurance
COLUMNA in Guatemala
  • Pays clients family 1-2 times the balance in
    their savings account at the time of death
  • Size of benefit varies based on clients age
  • Premiums paid by reducing the interest rate on
    savings
  • COLUMNA, a cooperative insurer manages product
    manufacturing, local cooperatives handle
    distribution
  • Advantages simple to manage, low transaction
    costs, stimulates savings

15
Facilitating access some models
  • Partnership model MFI as agent of commercial
    insurance company
  • partnership with a local utility company
  • life insurance through affiliated grocery stores

16
Contextual factors affecting access entry points
  • Regulation
  • - Minimum capital requirements
  • - Documentation requirements
  • Re-insurance
  • - Broadens the risk pool and enables insurers
    to withstand catastrophic losses caused by
    covariant shocks
  • - Allows technical assistance to MI

17
Current ILO research
  • Adverse selection, moral hazard, fraud and
    over-usage
  • Appropriate regulation
  • Understanding insurance vs. savings
  • Re-insurance options
  • Reducing transactions costs

18
Thank you
  • Social Finance Programme
  • ILO
  • www.ilo.org/socialfinance
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