What is Microinsurance?

Everyday millions of poor communities across the world make difficult decisions when it comes to healthcare. Forgoing immediate medical treatment can result in longer and more disruptive illnesses in the future. At the same time, expenses associated with drugs and frequent hospital visits can quickly add up placing a household in almost perpetual debt. Worse still, a sudden illness can cause a household to permanently lose its most productive member, depleting years of savings overnight. Protecting the poor against these health-related uncertainties is a priority in the fight against poverty.

Microinsurance is a risk transfer device characterized by low premiums and low coverage limits, and designed for low-income people not served by typical social or commercial insurance schemes. As a relatively new field, there are still various definitions of microinsurance. The section below reviews the primary definitions around, culminating with the definition used by the MIA.

Definitions of microinsurance

   1. Microinsurance is insurance with low premiums and low caps / coverage. In this definition, “micro” refers to the small financial transaction that each insurance policy generates. The Microinsurance Regulations, issued in 2005 by the Indian Insurance Regulatory and Development Authority (IRDA), for example, adopted this definition in explaining “microinsurance products” as those within defined (low) minimum and maximum caps. The IRDA’s characterization of microinsurance by the product features is further complemented by their definition for microinsurance agents, those appointed by and acting for an insurer, for distribution of microinsurance products (and only those products).

   2. Microinsurance is a financial arrangement to protect low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved (Churchill, 2006) The author of this definition adds that microinsurance does not refer to: (i) the size of the risk-carrier (some are small and even informal, others very large companies); (ii) the scope of the risk (the risks themselves are by no means “micro” to the households that experience them); (iii) the delivery channel: it can be delivered through a variety of different channels, including small community-based schemes, credit unions or other types of microfinance institutions, but also by enormous multinational insurance companies, etc.

   3. Microinsurance is synonymous to community-based financing arrangements (Preker et al, 2002), including community health funds, mutual health organizations, rural health insurance, revolving drugs funds, and community involvement in user-fee management. Most community financing schemes have evolved in the context of severe economic constraints, political instability, and lack of good governance. The common feature within all, is the active involvement of the community in revenue collection, pooling, resource allocation and, frequently, service provision.

   4. Microinsurance is the use of insurance as an economic instrument at the “micro” (i.e. smaller than national) level of society (Dror & Jacquier, 1999). This definition integrates the above approaches into one comprehensive conceptual framework. It was first published in 1999, pre-dating the other three approaches, and has been noted to be the first recorded use of the term “micro-insurance”. Under this definition, decisions in microinsurance are made within each unit, (rather than far away, at the level of governments, companies, NGOs that offer support in operations, etc.).

Insurance functions on the concept of risk pooling, and likewise, regardless of its small unit size and its activities at the level of single communities, so does micro-insurance. Microinsurance links multiple small units into larger structures, creating networks that enhance both insurance functions (through broader risk pools) and support structures for improved governance (i.e. training, data banks, research facilities, access to reinsurance etc.). This mechanism is conceived as an autonomous enterprise, independent of permanent external financial lifelines, and its main objective is to pool both risks and resources of whole groups for the purpose of providing financial protection to all members against the financial consequences of mutually determined risks.

The last definition therefore, includes the critical features of the previous three:

1. transactions are low-cost (and reflect members’ willingness to pay);
2. clients are essentially low-net-worth (but not necessarily uniformly poor);
3. communities are involved in the important phases of the process (such as package design and rationing of benefits); and
4. the essential role of the network of microinsurance units is to enhance risk management of the members of the entire pool of microinsurance units over and above what each can do when operating as a stand-alone entity.