How to protect themselves from unforeseen circumstances is a major challenge to the poor in building assets and wealth. Acumen Fund has been exploring health insurance products, which are critical given that health costs can eat up more than 30% of an average person’s income in the developing world. Our investee, Kashf already provides - indeed, insists that its borrowers take life and disaster insurance as part of their lending contracts. The UN World Food Program (WFP) has announced an insurance program for humanitarian emergencies that would enable poor farmers some degree of protection in situations of drought and other natural disasters. Key to how the program functions is not only who pays and on what basis risk is calculated and priced, but also how quickly farmers can be reimbursed for losses. Quick response is one of the main concerns of relief organizations, which must move within the first 24 hours of disaster for maximum effectiveness. However, this is a separate need from reimbursing farmers themselves for longer-term rehabilitation of their farms and main sources of income.
Acumen Fund is very interested in identifying the best and most effective market-driven systems for insuring the very poor in large numbers and over a significant period of time.
This is a very interesting topic. And I think there is a lot to be learned from the likes of the Muhammad Yunus’ of the world and a bore hole committee in Mzimba, Malawi where I served as a Peace Corps volunteer.
Reply to Steve BrownKazomba village has two village bore holes that were drilled as separate development projects over the last decade. The problem with many wells that are drilled and contain many parts in a pumping system is that u-seals bust, foot valves wear and tear, rods rust and children like to play on the bore hole and might break the handle or manage to stuff stones down the bore hole causing an end to a nice little source of clean water. The costs of replacing these parts and of finding an expert to come and take the bore hole apart are enormous for these villagers.
What the Kazomba bore hole committee decided to do is establish a viable committee whose job it was to collect a small amount from each family using the bore hole every month in order to replace parts that were bound to break in the future or needed immediate replacement. Families were able to pay in kind (maize) if money was not available. The difference in a bore hole breaking and financial shocks to a family related to health costs, droughts or funeral expenses is that no clean water affected everyone equally. No matter what the income is for each household, if there is no clean water, there is no clean water.
Droughts and medical expenses on the other hand, affect different households more or less based on the wealth (assets and income) of the household. Of course there are intra-household disparities also but we’ll concentrate on the household level for now.
One similarity between a bore hole and these other expenses is peoples’ willingness to pay differs across households. Some people will go to the open well or stream before paying a monthly fee to maintain a bore hole. I imagine the same holds for medical expenses where people would be more inclined to visit the traditional healer before paying for medical insurance that guarantees access to professional care. The tricky part then is in providing equal access to all when there is a difference in the willingness to pay.
This is where leadership, groupthink and reputation collatarel come into the potential solution. The mechanisms associated with Yunus’ microfinance idea can be applied in the same manner to disaster and health insurance. Village commitees are able to assess the willingness to pay situation and find solutions to these problems before any outside agent could. Paying in kind to a committee for instance would amount to real cash after sale to add to a balance that could be paid to a insurance provider. What we might call the social fabric of a community is essential in managing such an insurance scheme. People must feel there is something at stake!! If non-participation is easy and the costs of participation outweigh the benefits of the former, this type of project would be difficult to implement.
Again, this is an interesting topic that I feel deserves great discussion and anecdotes if we are to enable ourselves to develop the right kind of thinking on this issue of insurance for the poor. Fostering thinking from the poor on how such a scheme would best benefit them is crucial. Foreshadowing the incentives that may result from such a project is also critical to measuring the results of this sort of project. Therein lies a sustainable enterprise that could insure the very poor in large numbers and over a significant period of time.
This is indeed quite interesting and relevant to the work that most microfinance organizations might undertake in developing countries. In Pakistan, where I come from, the basic infrastructure is lacking to a certain degree. Even in the larger urban areas, the penetration of insurance products remains limited as outlined in this State Bank of Pakistan report. Perhaps something that organizations such as Acumen could try doing is to set up such an insurance venture drawing on their expertise and global outreach in the process. Pakistan is nearing towards the development of a derivatives market as outlined in this study. OTC derivatives are already in use locally. With Acumen’s ability to tap the intl. financial markets initially, the venture might just become a reality. Some added initiatives that might lead to a lower claims to premium figure might be the provision of integrated learning initiatives to the potential recipients of the microfinance funding. This might include some training related to better packaging, marketing and price negotiation skills to the eventual clients. Not only would this be a social incentive but would boost the potential profitability of any proposed microfinance ventures.
Reply to Ali SufyanIncidentally, the Postal Life insurance, as mentioned in the state bank study above, has the benefit of a widespread coverage, which if interested with agency functions in the disbursements of claims and collections of premiums could result in substantial cost savings in areas where setting up a proper branch for Acumen’s Pakistan affiliate may not be economically feasible. Hope these options might be explored further!
You are doing great work. This and the micro loan programs will hopefully provide a level playing field to people of all nations.
Reply to Dennis