MICROFINANCE PAPER WRAP-UP: “Using Subsidies for Inclusive Insurance: Lessons from Agriculture and Health;” by Ruth Vargas Hill, Gissele Gajate-Garrido, Caroline Phily, and Aparna Dalal; Published by International Labour Organization

“Using Subsidies for Inclusive Insurance: Lessons from Agriculture and Health;” by Ruth Vargas Hill, Gissele Gajate-Garrido, Caroline Phily, and Aparna Dalal; published by International Labour Organization; January 2014; 55 pages; available at http://www.microinsurancefacility.org/publications/mp29

This report was published by the Microinsurance Innovation Facility, a nonprofit research institution housed within the UN’s International Labour Organization (ILO) that promotes the development of insurance products and risk-mitigation markets in developing economies. The publication analyzes the results of nine case studies of subsidized insurance schemes to explore the dynamics of using public subsidies to support inclusive insurance products and services in the healthcare and agriculture sectors in developing countries.

Insurance, according to the authors, lies at the intersection of governments’ efforts to promote financial inclusion and social protection; as such, well-developed insurance markets can contribute to a number of health and farm policy objectives, including promoting economic development, access to health care, food security and the development of agricultural systems adapted to the challenges of climate change. The authors argue that health insurance schemes are essential in promoting equitable access to basic health care coverage and promoting the general well-being and productivity of a society. Agricultural insurance schemes can smooth the effects on income of variations in supply and demand, volatile input prices and climate-related externalities that are inherent in the sector. Increased stability in the agro-food industry can boost not only food security, but also improve the livelihoods of rural farmers, who often make up a considerable portion of the labor force in developing countries.

Having offered a public policy-based rationale for the use of subsidies, the authors provide guidance for the development of “smart” subsidies to maximize social benefits while minimizing market distortions. These subsidies should be tailored to a specific social concern or a market failure; account for negative impacts on market efficiencies and incentive structures; include a long-term financing plan; and delineate a clear exit strategy. Furthermore, a system of monitoring and evaluation should be in place to track performance and offer timely and insightful feedback.

After defining the potential structure of the subsidy, the authors offer two categories of recommendations for implementing insurance schemes, based on their anticipated ultimate effect: 1) overcoming market inefficiencies and 2) promoting equitable coverage. The authors suggest that universal mandatory insurance can be effective at addressing common market distortions such as adverse selection and asymmetric information. Furthermore, investment in publicly funded care can help alleviate some of the complications of externalities in health care markets such as communicable diseases. Price incentives and insurance literacy programs can play a crucial role as well, as long as they incentivize purchasing insurance within a short time frame. Finally, the development of robust information systems, start-up cost recovery mechanisms and reinsurance can further encourage the development of a functional insurance market.

To promote equitable coverage, the authors argue that governments accepting donor financing for subsidies must have a long-term plan for additional financing to offset the short-term nature of donor funds. The use of cross-subsidies – the practice of using revenues collected from wealthier, less-risky individuals in order to reduce premium prices for more risky individuals – for insurance schemes can be effective under certain conditions, such as having a large and diverse risk pool and a significant portion of the labor force working in the formal sector. The authors underscore the need to have well targeted, actuarially determined premiums, and they suggest that proportional premium subsidies are more effective than premium caps in agricultural insurance schemes because they encourage the procurements of information about the riskiness of the underlying crops. The authors also recommend that governments and donors go beyond merely providing financing mechanisms to supporting capacity building through targeted communication campaigns and user-friendly registration processes as well as by creating a conducive environment for investment in technology and information systems.

By A’kos Szebeni, Research Associate

About Microinsurance Innovation Facility

The Microinsurance Innovation Facility is a program conducted by the International Labor Organization (ILO), an agency of the United Nations. The facility was founded in 2008 with support from the Bill & Melinda Gates Foundation, a charitable organization. The facility attempts to increase access to insurance for the poor by providing grants to organizations that develop innovations in microinsurance. The facility prioritizes insurance related to agriculture, health, life and property. Its grantees include CARE Foundation, Microfinance Opportunities, Protecta, and Freedom from Hunger.

Sources and Additional Resources:

International Labour Organization, “Using Subsidies for Inclusive Insurance: Lessons from Agriculture and Health,” http://www.microinsurancefacility.org/publications/mp29

MicroCapital, February 26, 2014, “Inclusix Index of Financial Inclusion in India; Obstacles to Access in Microinsurance; Microfinance in Kenya,” https://www.microcapital.org/microfinance-publication-round-up-inclusix-index-of-financial-inclusion-in-india-obstacles-to-access-in-microinsurance-microfinance-in-kenya/

MicroCapital, January 28, 2014, “Funding Trends for Inclusive Finance; Developments in Agricultural Microinsurance; Financial Inclusion in South Africa: Survey Results,” https://www.microcapital.org/microfinance-publication-round-up-funding-trends-for-inclusive-finance-developments-in-agricultural-microinsurance-financial-inclusion-in-south-africa-survey-results/

MicroCapital, January 15, 2014, “African Centre for Catastrophe Risks Hosts “International Congress on Insurance and Reinsurance of Agricultural Risks”, January 29 – 31, 2014, Marrakech, Morocco,” https://www.microcapital.org/microfinance-event-african-centre-for-catastrophe-risks-hosts-international-congress-on-insurance-and-reinsurance-of-agricultural-risks-january-29-31-2014-marrakech-mo/

MicroCapital, December 13, 2013. “‘Doing the Math’ – Women’s Health Microinsurance in Guatemala, Studying Aseguradora Rural’s VivoSegura Microinsurance in Quetzaltenango,” by Derek Poulton and Barbara Magnoni, Published by The MicroInsurance Centre,” https://www.microcapital.org/microfinance-paper-wrap-up-doing-the-math-womens-health-microinsurance-in-guatemala-studying-aseguradora-rurals-vivosegura-microinsurance-in-quetzaltenango/

MicroCapital, October 29, 2013, “Lessons Learned from Morocco’s Microcredit Crisis; Using Microinsurance to Promote Universal Coverage; Remittances and Post-Conflict Economic Growth,” https://www.microcapital.org/microfinance-publication-round-up-lessons-learned-from-moroccos-microcredit-crisis-using-microinsurance-to-promote-universal-coverage-remittances-and-post-conflict-economic-growth/

MicroCapital Universe Profile, Microinsurance Innovation Facility, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=International+Labour+Organization%E2%80%99s+%28ILO%29+Microinsurance+Innovation+Facility

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