The slow process of increasing income and building assets characterizes the road out of poverty. In the precarious world of the poor, a shock such as illness, death of a loved one, fire or theft can rapidly erase hard won gains and make the escape from poverty harder to achieve.
Vulnerability for the poor is an everyday reality. In the words of one microfinance client, “Life for the poor is one long risk.” To cope with shocks, poor people use many different risk management strategies. They draw on informal group-based and self-insurance mechanisms such as borrowing, saving, and drawing down productive and non-productive assets.
Microinsurance products provide protection to low income people against specific perils in exchange for premium payments proportionate to the likelihood and cost of the risk involved. Microinsurance reaches a clientele that is different from that served by insurers. They have fewer assets, their incomes are lower, and their income flows often fluctuate considerably throughout the year. While the shocks that the poor experience may be the same as conventional insurance clients, they are more vulnerable because they have fewer reserves to draw upon. A majority find themselves in a reactive mode, responding after a crisis.
For microinsurance to succeed, products and services need to respond to the needs of low-income segments. Learning from its clients, FMFB-P has worked with various insurance companies to design microinsurance products, which are appropriate in terms of coverage, timeliness, accessibility and affordability. Arriving at the appropriate design requires understanding both the demand for and the supply of microinsurance – formal and informal.