Unit 4 Macro: Micro-insurance and development

Micro insurance is a growing sector within developing country finance. The number of people covered by micro-insurance has increased almost 6.5 fold in five years, reaching nearly 500 million worldwide, with China and India leading the charge. Micro-insurance attempts to protect poor people against risks arising from accidents, illness, a death in the family or the damage caused by natural disasters - in exchange for insurance premium payments tailored to their needs, income and level of risk.

Examples of micro-insurance include:

1. An Indian fertiliser company providing free insurance with each bag of fertiliser bought
2. Cattle insurance policies – small scale insurance policies that cover the death of animals due to accident, disease, foods, drought and other events
3. Life insurance and accident cover bundled with farmers or other business people buying new trucks
4. Pay-as-you-plant insurance for Kenyan farmers to insure inputs against drought and excess rain
5. In South Africa, HIV patients can get life insurance providing they sign up to regular medical check-ups and adherence to taking courses of freely available antiretroviral treatments

Benefits from effective and affordable micro-insurance projects

Risks and limitations of micro-insurance

Naturally there are problems with building insurance schemes for many of the world’s poorest communities – some are standard economic arguments:

1. Moral hazard – insured people and businesses may take less steps to protect themselves against risks because they know they have the safety net of insurance

2. Adverse selection – the highest risk agents will tend to be those who bid for insurance products increasing the pooled risks of insurance everyone

3. Asymmetric information – often times, those seeking insurance have more information about their conditions than agents selling the insurance

4. Inertia and information gaps – until recently, the vast majority of people in developing countries had no access at all to formal insurance schemes, and those that were available could not be afforded save for the wealthy few. Many need to be educated about the basics of insurance and the costs and benefits of getting involved.

A good case study of the expansion of micro-insurance is the success of the financial inclusion fund set up by Leapfrog backed by JP Morgan and the George Soros Foundation.

Micro insurance in action - Financial Times video