Tinaye Agere
Nixon S. Chekenya
THE term microinsurance is closely related to microfinance in form and real application. Microinsurance, otherwise known as insurance for low-income households, has been considered as the nest revolution in addressing the needs, risks and vulnerability of poor people.
The name microinsurance echoes the well-known microfinance programmes.
Both microinsurance and microfinance programmes have in common low-income households as clients with the goal of overcoming market imperfections often cited as a major cause of persisting poverty levels in the developing world.
Microinsurance is a more complex subject than microfinance in several ways.
First, it implies that an individual pays a regular premium for an unguaranteed payout. Second, it is often regarded as a set of individuals, as opposed to group-based, contracts in which a certain proportion of subscribers gain from compensation while others do not.
Third, microinsurance is heterogenous in nature in the sense that it concerns a wide range of risks and exposures and takes various forms.
Unlike formal insurance programmes, microinsurance demand and subscription is very low in Zimbabwe and most developing economies.
This is despite the argument that low-income households who would otherwise not be able to afford traditional insurance products can be reached by microinsurance schemes.
If properly crafted, microinsurance schemes have the potential to close down on financial and social exclusion, which persists in Zimbabwe and most developing economies.
Several factors account for the current low uptake and retention of microinsurance products, which include:
- Basic understanding of insurance
The biggest challenge for microinsurance companies is that they need to have their products properly understood by both potential and actual clients. Without that, demand for microinsurance schemes will remain low. A simple survey can show that the whole concept of insurance – spending money in return for an uncertain payout covering a hypothetical event – is not straightforward in many cases. This issue often manifests in cases where newly insured households demand to receive their premiums back in instances of no payouts.
- Building trust
Lack of trust in insurance contracts is one way in which insurance is increasingly becoming unattractive to risk-averse households. This mistrust usually stems from information asymmetry, which implies that the insured individual believes that they may not get a payout when need be. This interaction between trust and risk aversion in which trust is improved can enhance the demand for insurance products in terms of both initial uptake and renewal rates.
- Improving educational and financial awareness
Education and financial awareness matter in microcredit and microinsurance contracts. Better educated people may have a better understanding of microinsurance schemes. In lightof this, microinsurers may need to expend more resources in financial awareness campaigns and educate potential and actual clients about their microinsurance schemes. Increased financial education can stimulate demand by increasing financial literacy.
- Establishing efficient systems
It appears that people have no problem paying for systems that work. By leveraging on data analytics and artificial intelligence, microinsurance institutions can design products that meet the needs of households. Just like microfinance, microinsurance is not a standalone solution, it has to be part of a broader strategy for capacity building and empowerment in rural development. Efforts to create efficient, accessible and affordable microinsurance products are key to increasing the uptake and retention rate for microinsurance schemes that are sustainable and actuarially fair.
*Nixon Chekenya is a lead research fellow & teaching assistant at the Department of Agricultural & Applied Economics (W. Davis College of Agricultural Sciences & Natural Resources)
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