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.
Our definition of client value: The value of microinsurance is potentially great, but cannot be assumed. Clients may benefit through financial value (life insurance may reduce the financial burden faced by surviving family members after a breadwinner’s death), expected value (property insurance may lead a small business owner to invest more in inventory because they know they will be protected if a flood or market fire occurs), or service quality value (through health insurance, they may have access to more or better care, improving health outcomes).
Our early findings: We conducted an extensive landscape review of academic and practitioner studies that address these value issues. We found that the existing literature provides only partial answers to the questions of when and how microinsurance may have value to clients and their families. We also found that studies have been concentrated in specific components of value and almost all studies look at health and agricultural insurance products, while life and accidental death and disability products make up the majority of microinsurance policies currently covering low-income people.
The following are some key lessons we learned from aggregating study information:
- Health microinsurance can increase utilization of both routine services such as preventive outpatient care and high-cost, low-frequency services such as surgery.
- Agricultural microinsurance can boost farmers’ business investment and incentivize them to make riskier but more profitable business decisions.
- There is evidence, though limited, of improved health outcomes and quality of care as a result of health microinsurance.
- Benefits of microinsurance appear in some cases to differ by income level, gender, urban/rural residence, and age, but studies often do not flesh out the differences between client segments clearly.
- There is mixed evidence regarding the ability of health microinsurance to reduce expenditures or protect income. However, studies often fail to clearly describe the cost of insurance policies or to distinguish between routine and catastrophic shocks.
- There is a large body of work examining the various risk-coping tools (such as savings, emergency loans, informal risk-sharing arrangements, and gifts) used by poor households, but little concrete analysis of the role these tools play as alternatives or complements to formal insurance products.
- Methodological difficulties result from the many variables at play, the presence of adverse selection, and the infrequency of many insured events. These have limited the questions and product types studied, as well as the robustness and generalizability of the findings of some studies.
In developing our definition and work plan, we have also drawn on insights from our field experience and from conversations with clients in framing the way we think about the role insurance plays in their lives. For instance, after a flood in Colombia, we spoke with small business owners who were covered by insurance to gain understanding of how the product impacted their ability to cope with the damage they suffered. Moving forward, MILK’s client value work will draw from the lessons learned from these conversations and from the landscape study, enhancing them with both original and collaborative research. MILK will partner closely with the ILO’s Microinsurance Innovation Facility, which has developed a client value assessment tool. MILK’s client value work with also be complemented by a business case review.
MILK’s client value landscape review is available here.
Michael J. McCord is MILK’s Project Director and the President of the MicroInsurance Centre, which has worked for over 10 years with insurers and delivery channels, through product development, research, and advocacy, to develop partnerships that result in low-income people around the world gaining access to quality microinsurance products. Emily Zimmerman is a Research Associate with MILK.