1 MIRCOINSURANCE and RISK MANAGEMENT the Goal of Social
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CHAPTER - 1 MIRCOINSURANCE AND RISK MANAGEMENT The goal of social protection of governments and the discovery of business proposition in marketing insurance products by private players has led to the growth in the insurance business and evolution of various types of insurance covers. The insurance sector acts as a mobiliser of savings, a financial intermediary and a promoter of investment activities. For some time, insurance was limited to some risks and some groups of society, ignoring the needs of the more vulnerable groups- the poor. Uninsured risk leaves many poor households more vulnerable to the losses arising from negative shocks. State-provided social security measures are inadequate to cover all kinds of household risks. Microinsurance has been seen as one of the major risk managing tools for the poor and low income groups and a potential market for business. Experiences across countries in the world, show that microinsurance has potential to reduce household risk impacts. In view of this, there is widespread interest in analyzing how microinsurance plays a meaningful role in household risk management and how effective insurers are in reaching and serving the needy poor. DEFINITION OF MICROINSURANCE According to Churchill,(2006) microinsurance is about providing insurance coverage to poor households that have been largely excluded from coverage by commercial insurance providers. These include individuals who are ignored by traditional commercial and social insurance schemes, typically from low-income households, who work in the informal economy, have irregular cash flows. It is an insurance that (i) operates by risk-pooling (ii) financed through regular premiums and (iii) tailored to the poor who would otherwise not be able to take out insurance. Craig Thorburn, (2007) defines microinsurance as the insurance targeting those that are ignored by mainstream commercial insurance and social insurance schemes. That is persons who do not have access to benefits, often because they are not part of 1 the formal sector or have no access to benefits normally provided through formal employment. According to the Consultative Group to Assist the Poor (CGAP) a working group on microinsurance appointed by Government of India defined the term as “the protection of low income households against specific perils in exchange for premium payments proportionate to the likelihood and cost of the risk involved.” (Roth, et.al 2005) NEED FOR MICROINSURANCE The need for microinsurance is obvious as there is poverty across the globe and the poor face a variety of risks. Poverty across Globe The need for paying attention to poor arises owing to the prevalence of poverty across the globe. Despite the efforts put forth by governments and the international organisations, poverty continues to be a formidable problem across the globe. The following descriptions lend support to this view: How many? The United Nations Food and Agriculture Organization estimates that nearly 870 million people, or one in eight people in the world, were suffering from chronic under nourishment in 2010-2012. Where are they? Almost all the hungry people, 852 million, live in developing countries, representing 15 percent of the population of developing countries. There are 16 million people undernourished in developed countries (FAO, 2012a). Are they increasing? Developed regions also saw the number of hungry rise, from 13 million in 2004-2006 to 16 million in 2010-2012, reversing a steady decrease in previous years from 20 million in 1990-1992 (FAO, 2012b). The number of hungry grew in Africa over the period, from 175 million to 239 million, with nearly 20 million added in the last few years. Nearly one in four are hungry. And in sub-Saharan Africa, the modest progress achieved in recent years up to 2007 was reversed, with hunger rising 2 percent per year, since then. Are they not decreasing with development of nations? The number of undernourished people decreased nearly 30 percent in Asia and the Pacific, from 2 739 million to 563 million, largely due to socio-economic progress in many countries in the region. The prevalence of undernourishment in the region decreased from 23.7 percent to 13.9 percent. Latin America and the Caribbean also made progress, falling from 65 million hungry in 1990-1992 to 49 million in 2010-2012, while the prevalence of undernourishment dipped from 14.6 percent to 8.3 percent. But the rate of progress has slowed recently. Given that poverty is a significant factor, there is a need to understand the risks faced by the poor and take measures to mitigate them or help poor cope with them. Risks of Poor Risk is ever present in the lives of the poor because most of them live in insecure conditions. Low-income individuals, households, and businesses are susceptible to the most common risks associated with their well-being, such as death, illness, injury, natural disasters, and economic. We can classify these risks as follows: (World Bank, 2000) Individual or family related risks, which affect a single person or his or her family. Mass risks, which affect all the people living in one area. Individual risks can be further classified as follows: Life cycle risks, which include Risks related to mortality, Risks related to longevity and Risks related to health and disability. Economic risks, the risks relate to earnings and property (i) Life cycle risks There are three major classes of risks associated with the life cycle: the risks associated with a premature death; the risks associated with long life (old age, longevity); and the risks associated with our well-being (health risks, disabilities, loss of earning capacity, and unemployment). Most of these risks are related to physical well-being of individuals. However, the last one may be related to external economic parameters, like unemployment. Due to increase in life expectancy, old-age risks are becoming the dominant focus. 3 These risks may have adverse impact on a family both psychologically and economically. For example, the death of a single bread-winner will leave the middle and lower income families in a miserable state. Health risks are uncertain. The incidence of life threatening heart attack, cancer etc. will place heavy financial burden on families. Uncertain health risks include accidents occurring at hazardous working places. Longevity of life brings new problems like unemployment and ill health. Financial risk of a premature death is mainly borne by the dependents of the deceased person because they relied on the income stream generated by the deceased. The risk of old age is mainly borne by the person whose life is being assessed—that is, there is a need to guarantee the livelihood of that person (ii). Economic risks Economic risks include those related to earnings and property. This risk includes unemployment, failure of income generating source, price fluctuations and property loss. Unemployment - Labour market risks include unemployment, falling wages, and having to take up precarious and low-quality jobs in the informal sector as a result of macroeconomic crises or policy reform. Failure of income generating source – For example, farmers face crop failure. Weather-related uncertainties (mainly rainfall), plant disease, and pests create harvest risk for all farmers; technologies for reducing such risks (irrigation, pesticides, disease-resistant varieties) are less available in poor areas. Price fluctuations- Fluctuations in food prices are a related risk. Since poor households spend a large part of their income on food, even small price increases can severely affect food intake. Households that meet their food needs through subsistence agriculture are less vulnerable than households that have to buy all their food. 4 DRIVERS OF MICROINSURANCE The efficacy of microinsurance in protecting the poor and worldwide concern for development through inclusive goals and commitment to social welfare are considered as the prime movers of microinsurance design and delivery across the globe. Efficacy of microinsurance Risk management of low income people often depends on informal means like using savings, selling assets or borrowing at high rates of interest. The concept of insurance is introduced to help them in a more formal way. Risks affecting households can be mitigated by providing insurance suitable for products. Insurance is the ability to transfer risks to another party in a predictable and organized way in order for individuals to live their lives with more certainty. The risks are pooled over a large number of people, for instance, an entire community, by collecting premiums from each household. By the pool, it reduces the cost per person for protection. Also it ensures protection to many against the designated risk. Development goals One of the main Millennium Development Goals (MDGs) set by the United Nations Development Programme is to eradicate extreme poverty and hunger by the year 2015 as a response to the world's main development challenges (UNDP, 2005). Given this goal, how can it be achieved? If government, MFIs, insurers and others are serious about combating poverty, their focus area should be the provision of microinsurance. Workers in the informal economy and their families live and work in risky environments, vulnerable to numerous perils, including illness, accidental death and disability, loss of property due to theft or fire, agricultural losses, and disasters, both the natural and man-made (Monique Cohen & Jennefer Sebstad, 2006 ). The poor are more vulnerable to many of these risks than the rest of the population, and yet they are the least able to cope when a crisis does occur, due to financial instability. They need insurance cover to protect their interests. 5 Social Protection goals Social protection, defined by the International Labour Organization, is “the protection which society provides for its members through a series of public measures,” including the compensation of loss of income resulting from unforeseen and unavoidable circumstances, healthcare, and benefits for families.