A Cautionary Note for Microfinance Institutions and Donors Considering Developing Microinsurance Products

Publication Date: Dec 2000
Published by: USAID - Microenterprise Best Practices (MBP) Project
Document Type: Paper

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There is increasing attention by microfinance institutions to develop microinsurance for the low-income market

The paper states that protecting poor clients from risks, reducing microfinance institutions (MFIs) loan defaults, and earning additional income for MFIs loan portfolio are some of the reasons for the flood of initiatives by MFIs to develop insurance products (microinsurance) for the low-income market. It highlights the reasons why most MFIs should not provide insurance themselves and identifies alternatives that are more appropriate for MFIs but still address clients? need for improved risk management. It discusses the potential market for microinsurance, how to respond to client demand through partnership, and insurer capabilities. It concludes that

• although the poor are highly vulnerable to a variety of risks, this vulnerability does not necessarily translate into a demand or need for insurance
• the vast majority of MFIs lack the expertise required to price products effectively, do not have the resources to support an insurance product, and are too small to achieve sufficient pooling of risk