> Posted by Barbara Magnoni, President, EA Consultants and Client Value Project Manager, MicroInsurance Centre MicroInsurance Learning and Knowledge (MILK) Project
The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. This blog series spotlights financial inclusion efforts around the globe, shares insights from the FI2020 consultative process, and highlights findings from “Mapping the Invisible Market.”
Is there a business case for microinsurance? Does it provide value for clients?
We began the MILK Project by mapping existing research on these two questions. We were surprised to see that very few studies were on life microinsurance, particularly because life products are the most commonly sold type of microinsurance. A well-known study also suggests that the poor are very concerned about the financial risks of death, nearly as much as they are about health events.
Given that life microinsurance is both common and potentially greatly needed, why was there so little research on this topic? Life insurance is difficult to study because in any group, only a few deaths will occur in a given span of time, making it a very infrequent and random event. The policy world has also, perhaps, been skeptical about its value. Life microinsurance lacks the glamour of the promise of microcredit and the clear social good of savings. While health and agricultural microinsurance products are often developed with donor support as part of larger investments in health services, infrastructure, or agricultural inputs, life microinsurance is more often commercially driven.
We too began our research on the value for clients of life microinsurance with healthy skepticism, asking whether there really is financial value for clients from these products and if so, whether clients perceive them as valuable. Two years into our project, our results are promising, and even to ourselves, surprising.
Our first study analyzed a voluntary, cashless funeral product offered by MAPFRE in Colombia, which upon a client’s death, provides an in-kind benefit: a standard funeral package through one of several affiliated funeral homes. Using MILK’s “Client Math” methodology, we interviewed family members of insured and uninsured people who had recently died to gain insight into what the costs associated with the death were, how they were financed, and the role that the insurance product played. We found that the coverage was critical to helping families cope with the cost of the death. It covered most of their financing needs and allowed them to avoid relying on burdensome strategies such as reducing consumption or depleting savings. This was largely due to the fact that their financing need ($520) was far lower than that of the uninsured ($2,500) due to the in-kind benefit beneficiaries could access immediately. Additionally, the support of a family assistant in navigating paperwork and other requirements added value by reducing days of missed work to plan the funeral and by making the process of planning and paying for the funeral more seamless.
Similarly, our “Client Math” study of a cash product offered to clients of Banco Compartamos in Mexico found encouraging evidence of value. Beneficiaries were able to borrow from friends and family knowing that an insurance payout was forthcoming, while the uninsured turned to more costly formal loans and reduced savings to cover the cost of the funeral. This finding is mirrored in our study of a funeral and life microinsurance product in the Philippines. In this case, the cover did not actually provide benefits in the short term due to long claims payment periods. Thus beneficiaries still had to strategize sourcing of funds as if they had no funeral insurance. However, even when the insurance claims were paid late they helped some beneficiaries get back on their feet after the loss of a breadwinner by allowing them to invest proceeds in a business or cover short-term household expenses. Further, the insurance does not seem to have created an incentive to spend more on the funeral than beneficiaries otherwise would have (the “bigger box” phenomenon that some skeptics raise).
These studies provide encouraging evidence of value, suggesting that life microinsurance can play an important role in alleviating the financial strain from a death. But what of all those people who do not “use” the insurance because, thankfully, they don’t die? Do they get any value? To address this question, we conducted a randomized control trial in Mexico with Banco Compartamos clients to see whether clients themselves perceived value in this product. A randomly chosen group of clients was told that they would no longer receive a free basic insurance package, while another randomly selected group kept its free coverage. When clients lost access to the free insurance, many compensated by voluntarily purchasing coverage. In focus groups, they emphasized the peace of mind that insurance brings. Clients’ reaction to losing free coverage is a powerful indication that they see value in the product, despite the fact that most are unlikely to “use” it. Of course, Compartamos clients were familiar with this product from prior loan cycles when it was offered for free. Many were aware of the product’s reliability, and had seen examples of claims being paid and used, which helped to develop understanding and trust of the product. In future studies, we will start to analyze the process of gaining familiarity with insurance, and to what extent clients become active buyers of insurance products as they gain familiarity with them.
So far, our work suggests that if insurers keep their end of the bargain, life microinsurance can contribute to both their perceived and actual financial security. We encourage you to look through our work and offer your thoughts on our findings to date.
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Barbara Magnoni is President of EA Consultants and Client Value Project Manager for the MicroInsurance Centre’s MicroInsurance Learning and Knowledge (MILK) Project.
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