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What risks do poor people face and how do they protect themselves?
What is micro-insurance? Basic insurance principles What are the difficulties in providing insurance to poor people?
Examples
Heavy rainfall, landslides, earthquakes, floods, drought Illness, injury, accidents, disability, epidemics Birth, maternity, old age, family break, death Unemployment, business failure, technological or trade related shocks Crime, domestic violence, riots
Idiosyncratic Risks - Risky events that are individual or household specific - Narrow geographical or social spread Covariate Risks - Risky events that affect many households simultaneously - larger geographical or social spread
Preparation
Coping
Two variables for classifying the risks: - the degree of uncertainty (time and frequency) - the relative size of the loss (one time or ongoing) Efficacy of savings, credit and insurance as risk management tool based on the typology of risks classified by these two variables
What is microinsurance
insurance refers to a financial service that uses risk-pooling to provide compensation to individuals or groups that are adversely affected by a specified risk or event. Risk-pooling involves collecting large groups (or pools) of individuals or groups to share the losses resulting from the occurrence of a risky event. Persons affected by a negative event benefit from the contributions of the many others that are not affected and, as a result, they receive compensation that is greater than the amount they have invested in the insurance policy. Thus, products that allow an affected individual to receive only up to the amount they have contributed are considered as savings products, not insurance.
What is microinsurance
The micro- portion of the definition refers to the subset of insurance products that are designed to be beneficial to and affordable for low-income individuals or groups
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5 Losses should not be covariant (catastrophic) 6 Chance of loss is calculable 7 Premiums are economically affordable
Distribution Channels
Requires a distribution system that can handle small financial transactions efficiently in convenient locations, and engender trust
Regulated by Insurance Regulatory and Development Authority (IRDA) India Obligations of Insurers to Rural Social Sectors 2002 - A quota system, which compels insurers to sell a percentage of their policies to low income and rural clients
Quota for Rural clients: - Life insurers must sell 7 % of total policies by number (not value) in the first year with increasing amounts up to 16 % in year 5. - With general insurance, 2 % of gross premium income must come from rural areas in the first year, 3 % in year 2, and 5 % thereafter.
Provider Model The service provider and the insurer are the same, i.e., hospitals or doctors offer policies to individuals or groups
Agents act as intermediaries between an insurance company and its market. The MFI acts as the agent, marketing and selling the product to its existing clientele through the distribution network it has already established for its other financial services. The insurance provider acts as the partner, providing the actuarial, financial, and claims-processing expertise, as well as the capital required for initial investments and reserves as required by law.
Partner-Agent Model
Partner Agent
Product Sales Product Manufacturing Product Servicing Service Provider
Policy holder
Limited Initial Capital Investment and Low Variable Costs. Compliance with Legal and Regulatory Requirements. Potential for Stable Revenue Stream Learning the Business
Access to New Markets Access to Clientele with Strong Financial Records. Lower Transaction Costs for Serving a New Market. Regulatory Compliance.