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The Poor Need Insurance Too

Inés Benítez

VALLADOLID, Spain, Nov 15 2011 (IPS) - Poor families are well aware of the devastating effects of unforeseen expenses on their lives. Microinsurance, a recent microfinance tool, has the potential to limit their vulnerability and combat poverty, experts say.

The traditional insurance industry is not very innovative, says Isabel Cruz. Credit: Inés Benítez/IPS

The traditional insurance industry is not very innovative, says Isabel Cruz. Credit: Inés Benítez/IPS

The death of a family member, a health problem or an accident can give rise to sudden costs that the poor find hard to face, as they tend not to have available savings and are thus forced to sell off their belongings, their home or the goods they depend on for their living to meet their obligations.

“Microinsurance is a very powerful approach that generates substantial social impacts,” María Jesús Pérez, the head of research and innovation at the Spanish anti-poverty foundation CODESPA, told IPS at the Global Microcredit Summit running Nov. 14-17 in Valladolid, in north-central Spain.

This type of insurance is similar to traditional insurance policies available on the market, but is adapted to the spending power of people with low incomes, Pérez said.

In the Dominican Republic, CODESPA and its local partner the ADOPEM Bank have developed a “very successful three-in-one” microinsurance policy that covers life insurance, disability and funeral expenses, Pérez said. Health and agricultural insurance are now also being offered.

The microinsurance policy, which has been taken out by over 2,000 people in the Caribbean nation, provides nearly 1,000 euros (1,375 dollars) of cover and can be acquired by a single annual payment.

“Dominicans pay four euros (5.5 dollars) a year, the cost of two sodas, for life insurance worth 1,000 euros,” said Pérez.

More than 2,000 delegates from nearly 100 countries are taking part in the Microcredit Summit.

Paloma Pérez, a Spanish volunteer who spent two months in the Dominican Republic, said the three-in-one microinsurance product was in great demand, as it is low-cost and covers essential needs, although she said there is “competition from informal insurance arrangements.”

Microinsurance should be very low cost, with policies issued quickly and easily, and they should offer adequate cover, without administrative red tape hampering access.

“One of the aspects valued by poor families is speed in receiving insurance pay-outs,” said Pérez, who stressed the importance of building trust in the service.

In her view, the challenges are to convince insurance companies that it is feasible to develop profitable microinsurance with social goals, and to encourage people to buy the policies.

Microfinance has a longer track record and is more widely known than microinsurance, which is still relatively new.

According to the latest State of the Microcredit Summit Campaign Report, published Nov. 10, over the last 13 years the number of extremely poor families with a microloan has grown more than 18-fold, from 7.6 million in 1997 to 137.5 million in 2010.

Assuming an average of five persons per family, these 137.5 million microloans benefited more than 687 million family members, which is greater than the combined populations of the European Union and Russia.

In contrast, some 150 million people worldwide have access to microinsurance, Isabel Cruz, head of the Latin American and Caribbean Forum on Rural Finance (FOROLACFR), told IPS.

Microinsurance is less widespread, partly because the insurance industry is “very traditional” and not very innovative, and because of a lack of understanding on the part of potential beneficiaries, said Cruz.

“Poor people don’t know what microinsurance is, and they need to have the concept introduced gradually by other mechanisms, with the help of financial education,” said Cruz. This requires insurance companies to change the way they operate, and “they aren’t too willing to change.”

Another reason for the slower growth of microinsurance is the lack of channels for delivering it to the population, because until now this has always been done through microfinance. But in Cruz’s view, microloans do not always “understand the poor,” and they also “link insurance to loan protection, instead of shoring people up against risks.”

Cruz, who is from Mexico, said “microinsurance does not just mean small insurance policies; an entire new institutional architecture of insurance companies is needed, as well as concepts such as microinsurance networks.”

Moreover, “regulators don’t always understand microinsurance, because the turnover is smaller than for traditional insurance.”

In her view, specific professional architectures are needed to make microinsurance attractive to customers. “Insurance must be given value; instead of being sold just as a financial product, it must be given value that is appreciated by the customer. And legal reforms are also needed.”

In Brazil, for instance, the “very innovative” concepts of licensed microinsurers, social brokers and microinsurance correspondents have been created.

Most microinsurance worldwide is life and funeral insurance; catastrophe and crop microinsurance is less well developed, although according to Cruz, “they are much more important.”

Estela Cañas, head of the Small and Micro-Business Management Centre at the José Simeón Cañas Central American University, in El Salvador, told IPS that “microinsurance growth is essential.”

The high level of violence against ordinary citizens in El Salvador makes life microinsurance policies crucial, and natural disaster insurance is also important, she said.

In Honduras, COMIXMUL (Mixed Cooperative of United Women), a savings and loan cooperative, has 21,500 borrowers who are served by 13 offices around the country, its coordinator Magda López told IPS.

As well as having access to specific microinsurance, the women members make a small monthly payment for each loan, and a solidarity fund pays out death benefits and health insurance for members, she said.

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