Featured

Marrying Microfinance with Microinsurance: Increasing Impact

The PSD blog talks about a BusinessWeek article on microinsurance in Mexico. Initial numbers seem to indicate that microinsurance policies are selling well. And it seems, microfinance is a good way to sell these policies.

“We are selling between 50,000 and 60,000 policies a week. We have insured 9 million Mexicans since Seguros Azteca was born three years ago,” said Honsberg, who expects to underwrite over 1 billion pesos ($92 million) in premiums this year.

“To date we have found that credit is the most important vehicle (to sell microinsurance) because it is the principal need of the people in these segments,” Seguros Banamex Commercial Director Hugo Aguilera said in an interview last month.

Microinsurance & Microfinance

Offering microinsurance to the poor seems a no-brainer. However, I find an even more compelling case for putting microinsurance and microfinance together.

First, serving the poor is largely about cost. The costs of distributing and administering micro loans, with high volumes but low transaction values, is extremely high. This explains the high interest rates charged by MFIs (between 20-30%). Sharing the distribution network between multiple service providers, such as microfinance and insurance, reduces at least part of the cost.

Interestingly, I recently learned of an Indian startup – FINO – doing something similar. It is deploying smart card infrastructure for MFI clients. To make the system economical, cards support not just microfinance, but also microinsurance and other services.

Another challenge in selling to the poor is their extreme vulnerability to their environment. Farmers are always at risk of loosing their entire crop, from too much or too little rain. Similarly, medical services place too high a financial burden on families, which they must repay at high interest rates.

It is not certain that individuals borrow from MFIs to start potentially profitable enterprises. However, even where they do the chances of success must be miniscule, given the vagaries of the environment in which the poor operate.

Microfinance seems to be about smoothing consumption and expenditure patterns. By protecting the poor from catastrophic loss, however, microinsurance by definition prevents customers from slipping into an abyss of poverty that they cannot hope to climb out of. At the very least, it maintains that consumption pattern. At best, it increases the chances of enterprises turning profitable.

Supporting Enterprise

Microfinance has not proven yet to be massively effective in eradicating poverty, as some proponents suggest. At best, it has established that the poor have the ability to pay small amounts over extended periods of time. In that sense, it is similar to Hindustan Lever selling shampoo in small packs. It is a highly profitable business, and should exist as such.

That is not to say that microfinance cannot have any poverty impact. One may argue that consumers are better off, as they now have an additional choice. However, if microfinance is to have a serious poverty impact, other things are needed, such as insuring loan investments. Even microinsurance can be strengthened by provision of weather and health services, as well as market information. It would reduce overall risk, while further helping the poor be more productive.

Could this be a classic case of symbiosis? The providers lower costs, and minimize their investments. The poor are better protected and in the best case, now have at least a fighting chance to look beyond the next monsoon cycle. Microfinance and microinsurance, together, can be important pieces of the ecosystem that benefit all players.

© 2007 The Discomfort Zone.