Microinsurance

Microinsurance Meaning

Microinsurance is a protection designed to serve low-income individuals and families needing more conventional insurance policies. Microinsurance companies offer coverage for risks such as life, health, or crop insurance. They are sold at lower costs than typical insurance policies to ensure financial protection is provided to people who otherwise would not have access to it.

The target population for such insurance schemes comprises individuals or families ignored or overlooked by social and commercial insurance schemes and those previously without access to insurance schemes. These policies are curated for the low-income group who survive on less than $4 a day. Insurance agents, microfinance lenders, non-governmental organizations, and community groups comprise to make the microinsurance market.

• Microinsurance is tailor-made protection for the low-income section of society, for whom traditional insurance is simply unaffordable.
• These insurance schemes or policies are provided through community-based programs or NGOs to ensure enough guidance, and the plans are curated, keeping the local community's needs in mind.
• Most developing countries such as the Philippines, Pakistan, India, and others have heavily relied on microinsurance policies, especially disaster management.
• Microinsurance involves the section of society that one overlooks or ignores. Moreover, these individuals contribute to economic growth through guidance at community centers or NGOs.

Microinsurance Explained

Microinsurance policies are tailor-made protection policies that help low-income individuals and families to prepare for specific risks at much lower prices than typical insurance policies. In addition, microinsurance policies are often designed to be more flexible, with more affordable premiums and lower minimum coverage amounts.

A significant difference from traditional insurance policies is that microinsurance is offered through community-based organizations, such as NGOs or microfinance institutions, as it allows better accessibility and affordability. Moreover, through specific community-based institutions, the ability to customize insurance products according to the particular needs and circumstances of the local community can be more effortless. As a result, these insurance policies are widespread in developing countries where a large section of the population can benefit from insurance at a micro level.

Microinsurance ensures support and protection to the section of society usually ignored or overlooked due to the costly traditional insurance policies. These coverages include health expenses, protection against natural disasters, or during loss of income due to illness or injury. It can also facilitate individuals’ and families’ access to credit, other financial services, and savings options that would only be possible to procure with insurance.

Due to the strong roots formed at community-based programs, the insured individual stands to get better advice about investing and saving opportunities that otherwise would not be accessible to them.

Types

Let us discuss the different types of microinsurance through the points below:

• Health Microinsurance: This insurance covers health-related expenses such as medical treatment and hospitalization. It is especially beneficial for the low-income section of society as they might not be able to afford the costs of unexpected medical expenses.
• Life Microinsurance: This type of microinsurance protects in the event of disability or death. It is designed to provide financial protection for dependents and may also cover the costs of funerals.
• Natural Disasters: These micro insurances protect from damages caused by floods, storms, earthquakes, or other natural disasters.
• Non-Natural Disasters: Non-natural disasters include fire, theft, and liability. Microinsurance for non-natural disasters covers damage caused due to these factors.
• Crop Microinsurance: This insurance is curated especially for small farmers and provides coverage for them in the event of crop damage due to natural calamities or other factors.

Examples

Let us understand the concept better with the help of a couple of examples:

Example #1

Based out of New Jersey, Alex earns a living based on the daily wage received from the odd jobs done for the people in the neighborhood. Since only some of those odd jobs include cleaning roofs and electrical jobs, the risk of injury and accident is very much possible.

As Alex could not afford a traditional insurance policy, one of their clients advised Alex to get a health microinsurance to support their expenses in case of an injury or accident at work.

A couple of months later, Alex suffered a fall from the ladder while fixing an electrical lining. But, again, the microinsurance helped them pay the medical and overnight hospitalization costs.

Example #2

Developing countries, especially disaster-prone ones, have formulated systems and structures to support disaster management activities. The Philippines, for example, has been historically prone to storms, typhoons, and floods. Since 2010, the policies have made it compulsory for the low-income section of society to have insurance from a microinsurance company as it is more affordable, requires smaller premiums, and has a short settlement period.

As an outgrowth of these policies, thousands of citizens benefited during Typhoon Haiyan in 2013. The total microinsurance claims settled during this disaster were estimated to be around $12 million.

Importance

Let us discuss the importance of microinsurance briefly through the points below:

• Inclusiveness: Microinsurance includes a section of society that is often looked down upon or ignored regarding protection and financial stability. However, protecting them during turbulent times is a step in the right direction.
• Sense Of Security: Low-income individuals or families find it challenging to accommodate the excess expenditure of a medical emergency, illness, injury, or disruption in their source of income. Microinsurance reassures them and provides a sense of security that otherwise would have been inaccessible.
• Economic Growth: Most microinsurance policies are issued through community-based programs where advice and consultation are provided along with insurance. This helps low-income persons to attain financial stability or even growth and contribute to the economy.
• Affordability: The cost of premiums is not a hindrance to protecting oneself from a probable event in the future. On the contrary, this allows individuals and families to avail protection through low premiums and small upfront deposits.
• Fast Claims: Microinsurance policies or schemes have a typical window of 2-3 days within which the settlement process is completed. This helps the low-income section of society to avail claims promptly and not after the event or circumstance has already burnt a hole in their pockets.

Difference Between Microinsurance And Microfinance

Microinsurance is a subset of microfinance. However, some factors show stark differences in their fundamentals, application, and processes. Let us understand their differences through the table below:

Basis	Microinsurance	Microfinance
Function	Microinsurance is the protection provided to low-income individuals or families to protect against unforeseen circumstances in the future.	Microfinance is a service provided to unemployed or low-income individuals or families who do not have access to savings schemes or financial services.
Institution	It is usually provided through community-based programs or NGOs to ensure the scheme or policy is tailor-made for the need of the local community.	Commercial banks, Cooperative banks, credit unions, and NGOs provide microfinance.
Guidance	Since it is provided through community-based programs, persons seeking insurance are advised or counseled on their options regarding savings and investments.	The guidance and advice factor depends on the place of acquiring microfinance. For example, commercial bank employees might need more time to counsel, while NGO volunteers might take the time to guide.
Costs	Microinsurance is affordable as the premium rates are minimal, and the claiming process is quick.	A few microfinance loans can levy interest rates upwards of 30%, and it has also been noticed that microfinance does not increase the net income of individuals despite the influx of funds.

Frequently Asked Questions (FAQs)

Recommended Articles

This has been a guide to Microinsurance and its meaning. We explain it in detail with its types, examples, importance, and comparison with microfinance. You can learn more about financing from the following articles –

• Microcredit
• Professional Liability Insurance
• Variable life Insurance