Small change

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Microinsurance can play an important part in helping people in poorer parts of the world become self sufficient. Richard Leftley looks at the role the industry can play in widening its impact

More than 2.4 billion people in the developing world live on less than $2 a day, and 97% of these currently have no access to formal insurance products. Furthermore, some 70% of the global poor live in rural areas, creating additional problems such as remoteness and lack of infrastructure for those seeking to address the situation.

Without insurance, the poor have no safety net to protect themselves against the devastating effects of financial risk. In Uganda, for example, funeral expenses can be equivalent to three or four month's income.

Microfinance is an effective way to fight poverty because it gives the poor access to financial services, including small loans, which empowers people to create or expand a small business and gives them a chance to work their way out of poverty. It can also be way for insurers to tackle the demand for corporate social responsibility programmes.

A range of products have been designed to meet the specific needs of the poor. These include life, property, health, and weather-indexed products. Global research conducted by Micro Insurance Agency shows that life, health and crop insurance is most in demand, and pioneering products are in continuous development to serve this need.

Micro crop insurance can act as an enabler of microcredit and a way for subsistence farmers to access farm inputs with lower risk, enabling them to increase yields and begin to move out of poverty.

To reach the scale necessary to have meaningful global or even national impact, indexed insurance products are a necessary first step. Typically, these are non-indemnity and parametric - not being linked to actual losses - rather being based on an objective measurable feature of an incident such as rainfall deficiency at the local weather station. The objective measurements reduce fraud opportunities and payments are triggered automatically, so there is no need for expensive loss verification infrastructure.

While there has been growing interest by insurance companies in poor rural areas, the key to successful implementation has been a concerted effort on the ground to bring together smallholder clients and insurance companies, and research and develop products that are appropriate, affordable, and sustainable. This also requires training for front office staff, financial education for clients and a high-performance system for back office operations.

Pilot scheme

The Micro Insurance Agency, in partnership with the World Bank Commodity Risk Management Group, has developed pioneering crop insurance in Malawi. Starting in the 2006-7 growing season, a pilot scheme involved 1800 ground nut and maize farmers at five weather stations. In 2007-8 this was extended to 425 tobacco farmers at two weather stations, and in 2008-9, 1500 to 2000 growing paprika and tobacco at eight weather stations.

Risk carriers for these projects are Swiss Re, Insurance Association Of Malawi, and local insurers. Historically, small-scale farmers have had difficulty obtaining loans they need to boost productivity. Agricultural lending in areas prone to drought has simply been viewed as too high risk, and few farmers can provide any form of collateral.

However, when a farmer has an insurance arrangement that will pay off part or all of a loan in the case of severe drought, lenders are becoming willing to provide loans. In Malawi, this has produced dramatic increases in yield, often above 200%. It has also enabled farmers to bring additional land under cultivation and diversify into a variety of cash crops as well as non-crop income streams.

A recent field survey based on face-to-face interviews with smallholder farmers demonstrated the reality of the economic and social impact of crop insurance coupled with agricultural lending. This anecdotal evidence showed that all the participants had experienced significant increases in yield and had brought additional land under cultivation. All had diversified into cash crops.

More than 60% were able to invest in oxen and carts, and several were planning to introduce irrigation. Half of them had opened savings accounts for the first time and increased schooling for their dependents. A number had also built new brick houses. All expressed a new confidence in the future.

One of the major barriers to scaling up existing micro crop insurance is the lack of underwriting capacity in local markets. With some notable exceptions, in developing countries local insurers are reluctant to take on agricultural risk. There are a number of reasons for this including a lack of actuarial experience and/or access to data to price products correctly, unfamiliarity with the unique risks faced by smallholder farmers or a lack of systems to manage a portfolio of numerous small policies.

Even so, experience shows that local underwriters are willing to enter the market as long as they are carrying none or only a small amount of risk, passing the rest to a willing reinsurer. There are reinsurers already actively providing microinsurance with various degrees of success.

Microinsurance is designed to be sustainable for participating insurance companies. Their involvement is intended to be on a commercial basis that will ultimately grow to meet global demand. With the 2.4 billion poor largely without access to formal insurance, no CSR programme will be able to dent this unserved market.

The role for those insurance companies that do have CSR programmes is more their active participation in the global debate on how microinsurance can play an important part in alleviating world poverty, financing pilot schemes, and taking a long-term view in respect of return on investment. However, the objective should be to empower the poor to protect themselves from risk as customers of a commercially sustainable business process.

- Richard Leftley is the president and chief executive officer of Micro Insurance Agency, a subsidiary of Opportunity International.

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