Health Insurance: The Top Priority of Microinsurance Customers

By Asma Azmi,

Microfinance Focus, July 1, 2010: Microinsurance is increasingly being viewed as an instrument of freeing poor people from the shackles of poverty. By insuring against unanticipated risks like illnesses, accidents, crop failure and climatic catastrophes, it can enable accumulation of assets for productive purposes and wealth creation. Yet Microinsurance Centre data show that only 78 million people were covered by microinsurance in the world’s 100 poorest countries as of 2006 – a tiny part of the emerging market. Given the huge untapped market, development organizations and commercial insurers are entering the space to explore its potential.

Allianz Group, one of the leading Microinsurance providers has yesterday published a report ’Learning to insure the poor – The Allianz Microinsurance Report 2010‘, based on the demand studies for Microinsurance it conducted in collaboration with the German development agency, GTZ and the United Nations Development Programme (UNDP). The studies were based in India, Indonesia and Laos and gauged the kinds of risks faced by low income households, their strategies to cope up with these risks and the possible insurance products that can meet their requirements.

The report findings suggest that low-income people are above all concerned with the risk of health problems, followed by death and property loss. A CARE study reflecting the risk profile of over a thousand households in Tamil Nadu shows that health crises had occurred, on average, more than once in every household. All other events were much less frequent. 13 percent reported the birth of child and 12 percent marriage, occasions that require lump sums of money. Accidents, death, and loss of livestock happened in around five percent of households. In Bangladesh and India, roughly half of the families had major health crises during the year. And in South Africa, about 80 percent of the families had to contribute substantially to funeral costs, largely due to HIV/AIDS. So families were thinking a lot about risks.

Only 10 percent of Indians have some form of health insurance, and most of it is inadequate, according to the World Bank. More than 70 percent of all health expenditure is paid out-of-pocket. Hospitalization emerged as one of the major concern as it happens suddenly, and in most cases the effected need cash to get service. If they don’t have cash, they end up selling the family cow in East Africa or the rice paddy in Cambodia. They do whatever it takes. When the crisis is over, they return from the hospital and do not have productive assets anymore and end up in a financial catastrophe.

The studies documented a post Tsunami scenario where effected households were ready to pay for insurance and named health insurance as their first priority, followed by maternity benefits, old age pensions and disability assistance. Life insurance being already prevalent in the region was not much in demand. Monthly contribution was the preferred payment option and the families expressed comfort in paying via self-help groups, especially for health insurance, followed by post offices and banks.

Studies in villages found that health care costs were responsible for over half of all cases of decline into poverty. R. Devaprakash, Project Director at CARE, observes: “It is health risk and the consequent expenditure that impoverish the poor. It drains their income and burdens them with debt to informal moneylenders at exorbitant rates of interest.” The high cost of medical care also keeps people from seeking help. Low-income people use health services less frequently, and they rely more heavily on untrained health practitioners providing low quality service.

Demand and Supply Mismatch

Although health insurance tops the priority list of poor people, it is life insurance or credit insurance that they are most likely to be offered. The mismatch between supply and demand can be attributed to the relative complexity of these products. Health insurance is much more difficult to provide than life, accidental death and disability insurance. Issues of adverse selection and moral hazard occur more frequently. Claims are also harder to assess and fraud more difficult to control.

Across India, self-help groups have used mutual health insurance to face up to this risk. A growing number of self-help groups also dedicate part of the money they collect to mutual health insurance. Members then pay health expenses out of this common fund. But mutual insurance has one major drawback: risks are shared only within a small group. Large claims easily exceed the resources of the fund. This severely limits coverage and in many cases, local schemes have gone bankrupt.

Barriers to Microinsurance Growth

Insurance policies have a high level of complexities and are cost intensive to be financed with small amounts of money and marketed in rural regions. The Microinsurance market is posed with challenges like risks assessment in the absence of sufficient data, customization of products according to the diverse needs of customers while standardizing for cost efficiency, client education and creation of a sustainable market.

Efficient delivery channel is one of the greatest barriers for Microinsurance products and leveraging the existing network of MFIs and CBOs is identified as a way to overcome this barrier in the report. MFIs can get insurance out in large numbers using existing marketing, training, and servicing channels. But MFIs are limiting as well and other delivery channels such as retail outlets, post offices or electronic mechanisms also need to be explored.

Low levels of insurance literacy is also a major hindrance as currently poor households are mostly using informal risk hedging mechanisms and need to be educated about the benefits of using formal risks transfer products. Realms of general risk communication, risk management capability-building, and information about specific insurance products need to be delved into before designing a Microinsurance product.

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