MICROFINANCE PAPER WRAP-UP: “Why People Do Not Buy Microinsurance and What Can We Do About It;” by Michal Matul, Aparna Dalal, Ombeline De Bock and Wouler Gelade; published by Microinsurance Innovation Facility

By Michal Matul, Aparna Dalal, Ombeline De Bock and Wouler Gelade, published by Microinsurance Innovation Facility, February 2013, 31 pages, available at: http://www.ilo.org/public/english/employment/mifacility/download/mpaper20_buy.pdf

This paper published by the Microinsurance Innovation Facility, a Switzerland-based initiative of the UN’s International Labour Organization, examines the “determinants of demand” for microinsurance products in the developing world and looks at why, despite its potential to mitigate risk, the demand for microinsurance is low. The paper also offers strategies for practitioners to increase demand for microinsurance products. The authors analyzed 30 qualitative and quantitative studies, including several case studies, and identified the following as the five primary determinants of microinsurance demand: client understanding of microinsurance, value proposition (and its perception), liquidity constraints, trust and the usage of other risk coping mechanisms. Strategies to address these determinants were assessed based on cost effectiveness, ability to promote first sales and effects on renewals.

The authors found that those with little understanding of microinsurance were less likely to renew an agreement. Although consumer education was found to increase knowledge, it did not correlate directly to increased demand. For example, the use of a radio campaign was found to be both cost effective and useful in increasing awareness. However, a noticeable increase in demand did not follow. More intensive consumer education programs, like training sessions and village meetings, were found to better stimulate initial enrolment than brochures or basic information sessions. However, comprehensive training programs are expensive. As such, the authors argued that intensive programs may be better implemented through government, donors or industry associations.

Products that are perceived to be of greater value to the client were found to offer greater returns to the provider. Proximity was found to be a factor for weather index insurance; the further away from a weather station, the lower the demand for index insurance. Demand for health microinsurance was linked directly to quality of health services. According to the authors, poor service in health centres was cited by clients as a major reason for not renewing an insurance policy.

The Microinsurance Innovation Facility developed a tool, PACE (Product, Access, Cost, Experience), to assist practitioners in improving client value proposition. PACE assesses: benefits, coverage and value-added services (Product); access to information, proximity and payment methods (Access); affordability and delivery costs (Cost); and claims procedures, processing times and customer care (Experience). For example, the SAJIDA Foundation, a Bangladesh-based NGO, employed the PACE tool to create an online claims process that sped up processing times. It was also more cost-effective than the organization’s prior claims processing system.

Liquidity constraints were cited as the main reason potential clients did not purchase microinsurance. The authors argue that practitioners can increase demand by providing alternative methods of paying premiums. Offering clients the option to pay when their level of funds are relatively high, such as following harvest season, can stimulate demand. Transaction costs were also found to affect demand. Making the enrolment process simple, and within close proximity, can increase demand. Offering price discounts was found to increase initial sales but did not increase long-term demand. Even with price discounts, a lack of trust in an insurer was found to limit demand. If price discounts are employed, practitioners should use the opportunity to build trust by focusing on the quality of the service so as to increase renewals.

The authors recommend a three-pronged approach when developing strategies to increase trust levels. First, providers can make their products seem more tangible by consistently communicating with their clients. A cost-effective way of doing so is through SMS (short message service, also known as text messaging). Next, potential clients stated that they trusted organizations where they held membership. By affiliating themselves with trusted authorities and sales agents, insurers can improve their chances of gaining clients. Lastly, many clients are influenced by their peers. Public celebration of individual claims was found to counter the effects of negative opinions.

Access to other risk coping mechanisms such as credit, savings and remittances was found to deter people from buying microinsurance products. Positioning microinsurance as a replacement for these services was found to be ineffective. However, the authors concluded that by coupling credit or savings options with insurance, practitioners could increase insurance penetration. For example, offering microinsurance to depositors who maintain a certain balance in their savings account boosts both savings and insurance. Finally, the authors found that behavioural factors, such as loss aversion and the effects of previous shocks, had negligible effects on demand. Given the complex nature of microinsurance, the authors recommend that insurers employ a comprehensive strategy in order to be both cost-effective and successful at stimulating short-term demand and renewal rates.

By Lena Phillips, Research Associate

About Microinsurance Innovation Facility
Launched in 2008 with a USD 34 million grant from the US-based Bill & Melinda Gates Foundation, the Microinsurance Innovation Facility (MIF) is housed at the International Labour Organization’s (ILO’s) Social Finance Programme. MIF’s goal is to increase the availability of insurance for low-income families in developing countries to help them overcome poverty. MIF provides grants to help organizations develop innovative microinsurance products, with an emphasis on agriculture, health, life and property insurance. MIF also provides technical assistance and advice. ILO is an agency of the United Nations and is located in Geneva, Switzerland.

Sources and Additional Resources:

“Why People Do Not Buy Microinsurance and What Can We Do About It,” by Michal Matul, Aparna Dalal, Ombeline De Bock and Wouler Gelade, Microinsurance Innovation Facility: February 2013, http://www.ilo.org/public/english/employment/mifacility/download/mpaper20_buy.pdf

MicroCapital.org Article, 8 April 2013: “MICROCAPITAL BRIEF: Opportunity International, MicroEnsure Launch Savings-Linked Education Insurance Program, EduSave, in Malawi,” https://www.microcapital.org/microcapital-brief-opportunity-international-microensure-launch-savings-linked-education-insurance-program-edusave-in-malawi/

MicroCapital.org Article, 23 February 2013: “MICROCAPITAL PAPER WRAP-UP: ‘Microinsurance Product Development for Microinsurance Providers’ published ”; published April 11th, 2012; https://www.microcapital.org/microfinance-paper-wrap-up-microinsurance-product-development-for-microinsurance-providers-by-michael-j-mccord-published-by-microfinance-centre-microinsurance-centre-internatio/

MicroCapital.org Article, 23 February 2013: “MICROCAPITAL PAPER WRAP-UP: The Debate on Outreach & Impact: What Do We Know and How Do We Know It”; published June 2011; https://www.microcapital.org/microfinance-paper-wrap-up-the-debate-on-outreach-impact-what-do-we-know-and-how-do-we-know-it-by-david-s-gibbons-published-by-global-microcredit-summit/

MicroCapital Universe Profile: Microinsurance Innovation Facility (MIF), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Microinsurance+Innovation+Facility+%28MIF%29

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