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.
One less “burdensome” mechanism that we have focused on is the ability to tap into resources of friends and family, in the form of gifts and loans (See MILK Brief #29). Migrants in particular appear to be a good source of support. In many ways migrants are insurance, and we explore this with the MILK Project. They make more money and send money home frequently. However, our findings suggest that help from migrant family members may not be as common as we think, and may not be as useful as we expect.
With the MILK Project, we interviewed people who suffered financial shocks, including health shocks, property losses and deaths of loved ones, in 16 studies worldwide. Some were insured and some were not. Of the more than 1,000 people we spoke with, only 26% received remittances on a regular basis, and only 23% of these used remittances to finance their shock. That’s 59 out of 1,000 people. Additionally, this “insurance” of friends and family abroad is not at all sufficient to cover the cost of the shock. For the small group of people who did use remittances to cover shocks, migrant financing covered only 33% of the total needed.
The results varied somewhat by shock. In the case of a death of a loved one, migrant financing was still limited but played a larger role- 22% used remittances, which covered 18% of total financing. In the case of flood damage, only 6% used remittances; for inpatient health, only 7% did; and a meager 3% used remittances to fund outpatient health.
So the question is, why are remittances, which total over $500 billion each year, not being used more to help people cope with shocks? One reason may be the vulnerabilityof migrants themselves. For low-income migrants who send all of their excess income home each month, not much might be left over to send a lump sum in an emergency. When the emergency (such as heavy rains or health problems) threatens to be frequent, the migrant may be concerned about setting a precedent, or just unable to handle the frequency of need.
EA Consultants has also studied immigrants in their host countries, where we have found many groups to be unbanked, and to have relatively small amounts of savings. When we asked low-income Mexican immigrants in New York City what they would do if they had an unexpected $1,000 financial shock, 36% said they would turn to friends and family. Only 13% said they would use savings. Interestingly, none said they would discontinue sending money home as a strategy, even when prompted.
Immigrants are an important asset to their families, but they are a vulnerable asset and efforts to strengthen their financial access in their host country, including to insurance products, may offer a good way to reduce this vulnerability, and in turn, allow them to become a more stable “insurance” policy for families back home.
Barbara Magnoni is the president of EA Consultants, a development consulting firm dedicated to supporting initiatives that facilitate access to finance, markets and social protection.