Sunanda Creagh

Krustin bin Juri lost everything when floodwaters swept through his home and shop on the banks of the Ciliwung River two years ago. He is now covered by microinsurance. (Photo: Dadang Tri, Reuters)

Microinsurance Offers Peace Of Mind to the Poor, at a Price

Jakarta. Slum-dweller Krustin bin Juri lost everything when floodwaters swept through his home and shop on the banks of Jakarta’s filthy Ciliwung River two years ago.

But when the next flood hits, and it will because Jakarta sees frequent floods in the rainy season, bin Juri may have a modicum of protection thanks to a low-cost insurance policy that he purchased this month.

He is among millions of the world’s poor who are covered for natural disasters by cheap insurance, or microinsurance, as commercial firms recognize that insuring the poor is not just good public relations but also profitable.

“Interest in microinsurance has been exploding throughout the world,” said Craig Thorburn, a senior insurance specialist at the World Bank who has developed microinsurance programs. He also advises countries on insurance market development.

“New projects and proposals are being developed in more and more countries. Government policy makers are reviewing their regulations and the microinsurance sector does not appear to have been slowed by the crisis.”

Microinsurance began as a form of charity in the 1990s, when the International Labor Organization began experimenting with super-cheap insurance policies, said Michael McCord, president of the US-based MicroInsurance Center, who recently discussed the topic with officials at Bank Indonesia.

McCord said he developed an entirely commercial microinsurance product in 1995 backed by insurer AIG, with a view to selling it through a microfinance institute in Uganda.

“This example showed that commercial microinsurance is possible and became the demonstration model that helped other commercial insurers recognize the low-income market as viable,” he said.

Within a decade, AIG’s Ugandan business covered about 1.6 million lives, and microinsurance premiums accounted for nearly 17 percent of its Ugandan unit’s profit.

Today, a $1,000 life insurance policy sells for just $1 a year in Uganda, McCord said, making it affordable to the poor.

He estimates that about 135 million low-income people worldwide are now covered by cheap insurance, up from 78 million two years ago.

Investors are seeing potential in what could be a multibillion dollar industry. The Leapfrog Financial Inclusion Fund announced last week that it had raised $44 million for what it said was the world’s first microinsurance fund.

“The world desperately needs market-based solutions to poverty that draw in major financial investors by offering fair but competitive returns,” said Andrew Kuper, president and founder of LeapFrog, a Luxembourg-based fund.

“Microinsurance is both profitable and scalable,” he was quoted as saying on the fund’s Web site. The fund will invest in India, Pakistan, South Africa, Ghana and Kenya, he said.

Some governments have taken a more active role in promoting such insurance schemes to the poor. For example, in India it is compulsory for insurance firms to offer a microinsurance product, though the results have been mixed.

In practice, only about a third of India’s insurance firms offer such products, said Rupalee Ruchismita, founder of the Center for Insurance and Risk Management in India, which works with insurers and microfinance firms to develop livestock, health, weather and catastrophe insurance plans.

“Most insurance firms are doing it simply to meet targets or to be in the good books of the regulators, and their argument is that it is very difficult to reach the intended audience,” she said.

Residents in Manggarai pay Rp 50,000 ($4.88) for a flood “cash card” that can be cashed in for Rp 250,000 if floodwater levels rise to or above 9.5 meters at the Manggarai sluice gate, which is 2 meters above normal levels.

So far only 50 policies have been sold, partly because the insurance only covers the very worst floods, not the recurrent knee-high flooding that can still ruin homes and possessions.

“People say 950 centimeters is too high and it’s unlikely to happen. Also, the payout, they said, is too small,” said Francis Purwanta, a spokesman for Munich Re’s local partner, Asuransi Wahana Tata, which sells the policies, pays out claims, and is then reimbursed by Munich Re.

“So we try to explain that it has happened before, at least three times in five years,” said Purwanta.

The idea of making a profit off the very poorest members of society is also controversial. Yet supporters say it is necessary if insurance companies are to back such policies.

“Companies can and should make profits of the low-income market. This is the only way we will get commercial insurers in the market,” said McCord, who added that non-profit organizations working alone rarely had the technical expertise to calculate the risks and then design an effective insurance program.

“A commercial approach is what’s needed here, across the board. But what helps a lot is using institutions that people trust to deliver the product.”

However, some critics, such as Wardah Hafidz, from non-governmental organization Urban Poor Consortium, suggest that governments are evading their responsibilities by expecting poor people to take out private insurance policies.

“The government should be giving protection from disasters to these people instead of assisting private business to target poor people to sell them their products,” she said.



Reuters

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