Micro-insurance: The Next Revolution?

The poor have limited access to formal insurance services. Appropriate insurance services are scarce, as are institutions to deliver them. This paper suggests principles for designing and implementing products that expand access to insurance services in rural areas and discusses a broad range of innovative practices for the sustainability of micro insurance.

The paper reviews the challenges in the microinsurance sector, namely:

• Need for reinsurance since risks are sizeable and there is scarcity of established large players;
• Information asymmetry with regard to availability of historic data to base the client's premium calculations;
• High transaction costs associated with small transactions, highly segmented markets, and the provision of services to dispersed rural populations involved in risky economic activities.

To address these constraints, the author calls for public action, for:

• Encouraging reinsurers to develop products and protocols to deal with micro-products;
• Collecting reliable demographic data and agricultural trends to deal with information asymmetry;
• Supporting pilot studies for examining ways to cut transaction costs.

The paper concludes that microinsurance has the potential to improve the plight of the poor, provided the design of the products and services are in tune with the specific needs of the clients.