Mansingbhai and Champaben are rearing a family in a world of risk. Living a marginal existence  in their Gujarati village in western India, they frequently worry about what tomorrow may bring. Gujarat is one of India’s wealthier states, but even so, poverty is endemic. It is a place where tragedy is not unknown - in 2001, an earthquake killed 30,000 Gujaratis and left half a million people homeless.
 

Disasters such as drought, death, and illness would push Mansingbhai and Champaben into even deeper poverty.

If their children fall ill, how would they pay for medicine? Should their only cow die, how would they manage with the significant loss of income?

With meager savings, their recovery from natural disasters or personal tragedies would be a struggle at best. Mansingbhai and Champaben are not alone.

Sudden crises have devastating effects on the livelihoods of millions upon millions of people worldwide who live in poverty, undoing in an instant hard-won progress that may have taken years to achieve. Those who do not have access to insurance that can protect them and their assets - the overwhelming majority of poor people in developing countries - face tremendous challenges in recovering from an unanticipated crisis and as a result, are even more vulnerable when the next one occurs.

Recognising this, many local communities try to help themselves. After the community-based Self-Employed Women’s Association (SEWA) began offering insurance policies in Mansingbhai and Champaben’s village, the villagers became better able to manage and mitigate their risks. By paying into a comprehensive insurance plan covering accidental and natural death, sickness, and property loss, they began to share many of the most devastating risks they faced.

Now when the villagers or their children need medical attention, they can visit the local doctor without paying large fees. The insurance gave them peace of mind and optimism for the future.

“SEWA is like a mother and father,” Champaben says.

Mansingbhai and Champaben’s story indicates that new insurance products make life better for the poor. Their experience and those of others like them are moving the issue of insurance for the poor beyond the traditional informal sphere and are attracting the interest of both private and public-sector actors.
 

For generations, the poor have engaged in various types of risk pooling and informal insurance schemes to reduce the risks they face. Traditional burial societies, known as idir, have helped many of Ethiopia’s poor to share the financial “shock” when an unexpected event occurs. Faced with a death or illness, contributors to an idir are eligible for assistance, ranging from coverage of funeral expenses to cash payouts and loans.
 

“In effect, idir are life - and in some localities, health - insurance providers, safeguarding their members from losing everything they own,” says John Hoddinott, the deputy director of IFPRI’s Food Consumption and Nutrition Division and the coauthor of a paper on collective action and vulnerability in Ethiopia’s rural burial societies.

Ethiopia’s idir and similar institutions in developing countries have helped to lay the foundation for the emergence of more formal types of insurance, which are increasingly being used to help the world’s poor mitigate and manage risks.
 

Although pro-poor insurance programmes are increasing in scope and number, a great deal of the developing world still lacks access to any type of insurance. According to a recent study by the MicroInsurance Centre, 23 of the poorest 100 countries have no formal insurance targeted at the poor. In the other 77 countries, insurance is far from universal; less than eight per cent of the poor in the Americas, less than three per cent of the poor in Asia, and only 0.3pc of the poor in Africa are covered. The very few poor people who do have insurance receive it through community-based organisations (CBOs), mutual insurers, nongovernmental organisations, or commercial insurers.

Owned and managed by their members, CBOs such as the Self-Employed Women’s Association typically operate in small villages and offer only a few products, particularly assistance with funeral expenses. Despite their documented success in assisting their members, CBOs do face some limitations. Lacking professional staff and regulatory oversight, they typically require significant outside input to handle more complex products like health insurance.
 

Because they do operate locally, CBOs are also vulnerable to the risk that a large number of their clients could face the same crisis at the same time. CBOs cover fewer than one million poor people worldwide.
 

Like the CBOs, mutual insurers are non-profit, member-based organizations, often owned by credit unions or cooperatives that operate in close proximity to their clients. Unlike CBOs, however, mutual insurers are professionally managed and typically regulated. Approximately 2.5 million poor people globally are covered by mutual insurers.

Non-governmental organisations (NGOs) are also key providers of insurance, especially in health, and are managed by development organisations, trade unions, federations, and microfinance institutions. Given these organisations’ flexible structure and their ability to closely engage with poor clients, they are more able than other types of insurers to tackle and effectively deliver complex types of products, such as health insurance. However, NGOs involved in insurance provision are generally unregulated and have less professional expertise than commercial insurers. Nearly 10 million poor people globally are covered by insurance products under the direction of NGOs.

Commercial insurers are for-profit companies that are closely regulated. Despite their status as relative newcomers in the field, these insurers cover almost 38 million poor people across the developing world. They primarily focus on life, death, and disability insurance - products that are generally inexpensive to deliver and manage, and therefore more likely to return a profit. The entry of commercial insurers into developing countries is in part driven by the possibility “that today’s low-income client may be tomorrow’s middle-class client,” according to Michael J. McCord, president of the MicroInsurance Centre.

He says that insurance provision by commercial insurers is projected to grow by well over 100pc during the next five years.

Risky Business?
 

This growth in insurance provision is significant, because for a long time, insuring poor people was considered to be a risky venture. Until recently, the financial resources of the poor were seen to be too limited to qualify for formal financial services such as savings accounts and credit. In much the same way, the poor have generally been viewed as too great a risk for formal insurance protection.

However, this is changing rapidly. Governments, donors, NGO’s, and the private sector increasingly recognise that insurance products can work for the poor, if they are designed with the poor in mind. That means looking at innovative ways to provide cost-effective insurance while keeping operating costs low.
 

“Microinsurance” has emerged to highlight this idea. According to the Consultative Group to Assist the Poor (CGAP) - a consortium of public and private development agencies working to expand access to financial services for the poor - microinsurance is simply the provision of insurance to low-income households.

“During the last several years, people have gone from asking ‘What is microinsurance?’ to actively seeking it out,” says McCord.

This is a result of what he calls the “demonstration effect” - the success that some of the first few commercial insurance companies experienced in developing countries. He was one of these early entrants, working with the international insurance company, American Insurance Group (AIG), in Uganda, to design and implement a group accident insurance program as well as introduce a health insurance program for microbusiness clients.
 

McCord says, “If we develop the right products to match the needs and livelihoods of poor people, they will benefit from them.”
 

Of the insurance that is currently available to the poor, the most sought-after products are in the areas of health, life, and agriculture.

Each year, approximately 100 million people become impoverished for simply falling ill. Without health insurance, a poor family can pay more than 100pc of its income on healthcare. And when a sick person remains out of work, the household can also suffer a significant loss of income.

It is therefore not surprising that there is high demand for health insurance among the poor. Recent surveys of poor people in 11 developing countries found that they reported health care financing as their greatest concern, followed by death.
 

However, health insurance is one of the most complex types of insurance to provide and sustain. Many providers, such as CBOs, face major risks in covering the costs of delivering health care coverage. For example, the lack of previous service to a community - and the detailed knowledge of the health risks faced by those people - prevents the providers from being able to accurately predict the patterns of illness that allow them to set health insurance premiums that are both profitable and affordable.
 

The Self-Employed Women’s Association (SEWA), for example, experienced difficulty covering its costs.

“Community-based health insurance programs can be very effective in delivering health coverage and protecting households from catastrophic health expenses, provided they are affordable and geared to the needs of the poor,” says Abay Asfaw, a former postdoctoral fellow at IFPRI now with the World Bank. “Beyond improving the health of the poor, these programmes can promote greater work productivity and help break the cycle of poverty from one generation to the next.”

Life insurance is a relatively low-risk product that is widely available to the poor. Many of the obstacles that impede efficient delivery of insurance to the poor do not affect the less complex delivery of life insurance. Whereas health insurance is largely dependent on infrastructure like clinics and hospitals, life insurance is not. When a death occurs in a household, the provider can compensate the insured household for its loss in a timely fashion.

In 2003, the Indira Kranti Patham (IKP) programme, a joint undertaking of the World Bank and the state government of Andhra Pradesh, India, began its innovative work in insurance provision for the poor by offering life insurance coverage for death and disability. It brought together both CBOs and commercial insurance providers to leverage their unique capabilities - CBOs provide low-cost and community-friendly administrative support, such as payment collection and claims processing, while the commercial insurer takes on the financial risk.
 

A unique component of the programme is that it builds upon numerous pre-existing “self-help groups,” which work together to request price quotes from various commercial insurers in order to determine which one offers the best price with the best terms.

More than 2.5 million poor people are currently enrolled in this insurance programme, which is en route to becoming one of the largest insurance programs for the poor in the world.
 

“The success of the IKP model in Andhra Pradesh offers an opportunity for the poor to access ‘formal’ markets to manage their risks, and in the process brings about financial inclusion of the poor,” says Vijaysekar Kalavakonda, a senior insurance specialist at the World Bank.
 

Agriculture is one of the most important sources of income for poor people, but is also one of the riskiest. Without enough rain, crops wither and die. Too much rain and floods wipe out an entire harvest. Interest in finding the right insurance to protect poor farmers from such losses has understandably been strong, but generally the products that have resulted have been costly and unsuccessful.
 

In the 1950s and 1960s, many developing countries introduced crop insurance initiatives to compensate farmers for their losses. However, the high costs of managing these insurance schemes, in addition to difficulties compensating farmers in a timely manner and incidences of corruption and political interference, made them unsustainable and many were eventually ended.

During the past several years, however, an innovative new tool known as weather index insurance has emerged that can provide farmers with coverage based on observable weather events, rather than on crop losses.
 

“Index insurance offers a more viable approach to agricultural insurance for most farmers,” says Peter Hazell, a visiting professor at Imperial College-London. “Take drought coverage, for instance, which pays out only if the rainfall measured in a given area falls below an agreed minimum. This kind of insurance is more affordable and accessible to all kinds of rural people, including the poor.”

Weather index insurance compensates farmers for income they may lose as a result of a catastrophe, enabling them to stay economically afloat during times of crisis. Coverage can be provided by the private sector with little or no government subsidies, and is easy to market and sell through banks, input suppliers, farm cooperatives and microfinance organisations. And unlike most agricultural insurance programmes, weather index insurance avoids moral hazard and adverse selection problems.

In 2003, this thinking was put into practice when ICICI Lombard General Insurance Company, the BASIX microfinance bank, and the World Bank teamed up to develop weather index insurance for small and marginal farmers in Mahaboobnagar District, one of the poorest areas in India. As the developing world’s first weather index insurance initiative, the programme compensated small and marginal farmers in one area when there was too little rain, and compensated farmers in other areas when there was too much. These polices were offered through the BASIX distribution network. During the 2006 monsoon season alone, nearly 2,500 Indian farmers benefited from having such policies.
 

“Since offering weather index insurance, farmers across India have gained an additional risk management tool,” says D. Sattaiah, vice president of insurance and human resources at BASIX. “Our goal is to extend this type of innovative coverage to as many farmers as possible.”

However, there are some challenges to this new insurance tool. It only pays out when an insured weather event occurs and this may not always reflect the production losses experienced by individual farmers. Limiting the insurance to catastrophic events, such as severe droughts, reduces this problem and makes the insurance more attractive to individual farmers. Additionally, the insurer incurs significant losses when an insured weather event occurs because it must pay all insured farmers in a region. To handle these losses, the insurer needs access to large financial reserves or reinsurance.
 

“One of the most important factors driving index insurance today is the growth of new international financial mechanisms like catastrophe or “cat” bonds for helping insurers pool these kinds of risks internationally,” explains Hazell. “This approach offers an intriguing way of linking world financiers and poor people in an effective partnership that is beneficial to both.”
 

Future Challenges
 

Despite the successes so far in expanding insurance to the world’s poor, there are a number of emerging challenges that must be addressed to render it more efficient and effective.

Improving the way in which insurance is delivered is one of these major challenges. Given their close proximity to the poor, it is not surprising that CBOs, NGOs, and mutual insurance groups provide the largest potential channels through which the poor can access insurance. Leveraging their structure as a group could be advantageous in reducing the costs of the premiums that members pay.

“Better information technology and more decentralized rural communities are helping to reduce the transaction costs of providing insurance to the poor,” says IFPRI’s Director General Joachim von Braun, who led a pro-poor health insurance research programme in the late 1990s. “As a result, various actors, from microfinance organisations to the private sector, are utilising their unique structures to make delivery of insurance a reality.”

The use of technology, such as mobile communication, can also reduce operating costs, lower premium payments, and generally better inform the poor about the potential benefits of insurance. In India, ICICI Prudential uses kiosks in rural Indian villages to sell life insurance, while mobile phones are used in South Africa and the Philippines.

Tailoring insurance products to meet the needs of the poor is critical, and as more and more people become insurance policyholders, this will become increasingly demand-driven. Surveys have found that poor people expressed interest in coverage that goes beyond burial expenses to providing financial assistance to the household when the principal breadwinner dies. Another area of interest is access to hospitalisation - not just outpatient care - without the need for a large out-of-pocket payment.

The public sector has an important role to play in addressing these future challenges as well. Weather index insurance, for example, may reduce the risks faced by poor farmers, but it also requires a significant investment in information - remote sensing technology, such as weather stations; data gathering and processing capabilities; substantial computer processing power for data manipulation and real-time satellite analysis; and extensive geographic information databases.

“Developing countries generally lack the conditions to enable the delivery of sustainable agricultural insurance services,” says Mark Wenner, a senior financial specialist at the Inter-American Development Bank. “The public sector in these countries can, however, help create the right conditions for agricultural insurance, and especially weather index insurance, by starting to invest in information and regulatory infrastructure.”
 

Regulation is yet another way in which the public sector can facilitate the growth of insurance, while protecting the poor at the same time. Without the regulation of insurance products, the poor essentially take on even greater risk, namely, the risk of relying on an insurer that may not function in a financially sustainable way. Very little regulation of insurance currently exists in developing countries, with some notable exceptions.

The Philippines have regulations in place that oversee mutual benefit associations, and in 2002, India decreed that all new insurers entering its market must sell a minimum percentage or premium value of their insurance policies to targeted rural areas of the country. As a result, insurers in India developed a range of innovative new products and delivery channels specifically for the rural poor, a market that they would have been slow to enter without such government intervention.

Before the Self-Employed Women’s Association (SEWA) began offering insurance in villages like Mansingbhai and Champaben’s, the poor found ways to share risk and cope with life’s unexpected events.

“Risk is nothing new to the poor,” says Hoddinott. “What is new for them is having access to affordable insurance that can more efficiently mitigate those risks.”

The challenge now is to ensure the viability of these innovative insurance programmes and make them more widely available to the poor.