The insurance industry is an integral aspect of the World Economy, but is currently not reaching a significant portion of the population. Buying insurance for your Chevy Malibu, or health insurance for your family have become things most of us do naturally. The word “insurance,” however, has little meaning in a country that may be functioning with an underdeveloped economy.
Why is this? Well it would appear that those who provide these services (any insurance provider that you see in the commercials every day) have not seen the financial incentive to provide insurance in these areas, and therefore have not invested in the expertise that it would require to provide this service. It makes sense that it would be a difficult business venture to take on as a large insurance provider that currently functions in a developed economy like the United State due to the differing size and objects involved in the insurance policy. These two factors create the need for completely different underwriting policies, and the large general insurance companies do not currently have this expertise. I am not trying to bash these insurers, but just trying to point out the difficulty of moving into these smaller, less developed markets. It makes sense that writing a policy to cover a cow or a crop yield would take a different process than writing a automobile policy, but it is unfortunate that even if someone wanted to purchase an insurance policy covering their annual crop yield, there is not insurance readily available to someone like this.
This is where Microinsurance is beginning to step in. Various companies around the world, most notably Lloyds of London (which considers itself a specialty insurer), are beginning to provide micro policies to people, and businesses in underdeveloped nations and economies. These polices are often just a small fraction of a policy you might see for a car in the United States, but for someone in India who’s livelihood depends on the life/health of their only cow, a $500 policy payout if the cow gets sick and dies might mean the difference between their family having food and not.
The premiums associated with these policies are equally small, therefore, companies like Lloyds who are involved in this business are not currently viewing it as a major profit center, but rather as an area that has the potential to grow into one. The lack of insurance in developing nations has made it extremely difficult for businesses to remain stable, and for people to live, knowing their personal assets may not be secured. Insurance is one of those things in our lives that we don’t think about until it is there to catch us in a disaster. Microinsurance can provide this security to people and businesses in developing nations if large companies(like Lloyds) understand that if the effort is put in, it could turn into a lucrative market that also provides financial security in places that have never seen those two words placed next to each other before.
Excellent introductory post to what I’m sure would be a great series. I found that Armendariz and Morduch’s “Economics of Microfinance” (http://www.amazon.com/The-Economics-Microfinance-Beatriz-Armend%C3%A1riz/dp/0262513986) have a great review of the micro theory behind this (Chapters 5 and 6). It also has good coverage of the micro savings and micro credit markets. I don’t think it requires anything too intense in terms of the micro theory.
Do you have a link or article regarding the Lloyd’s story? A link or citation would be helpful. I’d be interested in reading it. Well done.
Thanks for the comment. I will definitely check that out. Microfinance is another interesting part of the “micro world.” Platforms such as Kiva.org are doing some interesting things with micro loans in developing nations.
Lloyds has links to a great deal of articles/research on microinsurance. They point out a lot of directions it can go, and what problems that it can solve.
A recent event where Microinsurance has had a major impact was Typhoon Haiyan in the Philippines in 2013. This was one of the worst typhoons ever recorded in the area, and microinsurance covered a some amount of the damages. Here is an link covering the impact of microinsurance after that storm.
It is inspiring to see how micro economics can contribute to improving the quality of life around the world, and in a sense, become much more effective than many forms of humanitarian aid currently employed across the globe. Your example of the meaning and importance of a cow to a poor family was very effective in making your point.