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

Protecting the 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 microinsurance products for the low-income market. However, most MFIs are not suitably equipped to provide insurance: the vast majority of MFIs lack the expertise required to price products effectively, do not have the resources (both human and financial) to support an insurance product, and are too small to achieve sufficient pooling of risk. 

The paper highlights 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 also discusses the potential market for microinsurance, how to respond to client demand through partnerships, and insurer capabilities.