The sustainable way to end cycles of poverty

Andrew Kuper

This article was published in Living Ethics: issue 80 winter 2010

Microinsurance is a small insurance policy that can be sold to a poor or low-income person in an emerging market, writes Dr Andrew Kuper.

In countries like India or the Philippines, or South Africa or Kenya, many people can now buy microinsurance products from local organisations – it may be their church, their microfinance institution, a retail chain or even a mobile phone network. But many millions more still do not have access to this essential financial service.

There’s of course a strong demand for very low-cost insurance to cover important areas: for example, in the event of someone’s death, their family will be able to pay off their loans, pay for a funeral and have some resources to keep going. If someone falls ill, they will be able to pay to go to hospital. If someone wants to plant a crop where there’s a risk involved, they can obtain crop insurance that makes that risk manageable and that investment worthwhile – sometimes tripling family income.

So instead of a poor person lying awake at night, worrying they will lose everything in the event of some unexpected event, microinsurance means they’ll be protected. Instead of limiting worthwhile investments in the future, in case the money is needed as a cushion sooner, people can take action and create businesses to lift themselves out of poverty.

So we need to reframe our thinking about ending poverty in an important way: We tend to think that disadvantaged people just subsist day-to-day, when in fact the poor often actually save and steadily accumulate assets. They’re managing little bits of money and often, things may get better and better. Then they get to a point where they start to climb out of poverty – until some bad event happens, something unexpected.

The problem is that many poor people don’t have a safety net. So when the unexpected happens, they can fall deeper into poverty because they’re in hock to the money-lender. Or they have to burn through all their savings to pay for the hospital visit. Or they simply don’t have the resources now to buy the new seeds, to plant a new crop when the last one failed. So the poor don’t recover from shocks: that is actually one of the central causes of ongoing mass poverty.

Microinsurance changes the opportunity horizon and enables people fundamentally – it brings safety nets and enablers to low-income people.

This kind of insurance obviously differs from the kind of insurance people might buy in affluent communities. One of the significant developments in the field in the last few years has been an increasing sense of what poor and low-income people really need. A huge benefit of the market-based approach is that instead of saying: “Aren’t we generous? We’re going to go give these people charity, we’re going to give them insurance”, we are asking: “What will these people buy? What protective and enabling tools do they really want and use?”

The poor are very careful in the use of their money because they have such a limited amount. So with microinsurance, you’ve got to be very sure you’re going to offer something that’s quality and relevant and affordable. Otherwise, people simply won’t buy it voluntarily on an ongoing basis.

One of the interesting things that I’ve heard from microinsurance providers is that that they are waiting for the moment when they process the first claims. If they can pay out those first few claims swiftly and well, word gets out around the community that this insurer is actually providing value. That’s when a business can achieve the volumes of tens of thousands or even millions of people picking up and buying this product. Otherwise it’s just never going to happen. And of course, on a policy that people pay $2 or $3 or $4 for, you’re making maybe $1 or 50-cents per policy. So you’ve got to sell a lot of those policies. It’s a really high-volume business if you’re going to generate any sort of sustainable enterprise. But if you reach millions of people, it can be highly profitable and have profound impact.

One of the central aspects a microinsurance company has to have in place is a social metrics and tracking system, something that says: “Are these products relevant, quality and affordable? Are they providing people with real value? For example, is the pay-out swift and adequate? How well are we doing in serving these customers?”

At LeapFrog, we invest in companies that provide microinsurance in Asia and Africa. We insist that our investee companies focus on both financial and social returns. Our aim through our portfolio companies is to reach 25 million vulnerable people, with this life-changing financial service.

What microfinance and microinsurance show us is that poor people do manage money and can manage it well. They are engaged in lots of transactions at any one time – they’ve borrowed from here, they’ve promised to pay there, they’ve taken out a small policy here. But typically they’re operating in less efficient markets with few high-quality financial tools.

Microinsurance recognises the financial capabilities and possibilities of the poor and vulnerable. It offers them a better set of financial tools that enable them to help themselves get out of poverty. It can be provided profitably and at scale, giving people who are currently excluded from the economy basically the same shake as the rest of us.