Microinsurance: protecting low-income households against shocks
Illness, death, crop failure and livestock loss can push a family into poverty or force it to sell productive assets. Microinsurance offers protection designed for low-income people.
Common products
- Credit life insurance: pays off a borrower’s loan if they die. It is the most widespread product, but it mainly protects the lender.
- Health insurance: hospitalisation cover, often bundled with loans or offered through community schemes.
- Funeral insurance: very popular in southern Africa.
- Agricultural index insurance: pays out when a measurable index, such as rainfall or area yield, crosses a threshold. No farm-level loss assessment is needed.
- Property and livestock insurance.
Design principles
- Simple terms with few exclusions.
- Low, frequent premiums that match cash flows.
- Fast, easy claims: trust depends on seeing claims paid.
- Distribution partners such as MFIs, mobile networks, retailers and cooperatives, which keep costs down.
The demand puzzle
Take-up of voluntary microinsurance, especially index insurance, is often low even when it is heavily subsidised. Common explanations from research include:
- lack of trust in the insurer;
- basis risk, where the index does not match the farmer’s actual loss;
- liquidity constraints when premiums are due;
- limited understanding of insurance.
Bundling insurance with credit, or offering it on a mobile phone, has raised outreach. Critics note that bundled products may offer poor value to clients when claims ratios are low.
Measuring value
Look at the claims ratio, meaning claims paid as a share of premiums. A very low ratio suggests the product mostly benefits the insurer or distributor.