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Microinsurance is a segment of the microfinance industry that designs and sells low-cost insurance products for a profit to individuals and businesses in low-income and poverty-stricken areas in developing regions around the world. To make these policies more cost effective, insurance providers attempt to sell them to groups of low-income families or businesses. This segment of microfinance supports microcredit, which is the practice of extending loans to families and businesses in poverty-stricken areas.
Microinsurance differs from microcredit in that its purpose is to offer poor communities protection that a business will continue or that a family will be taken care of in the event of an unexpected death or another catastrophic event. The purpose of microcredit is to help individuals establish those businesses or homes to begin with. Poor communities are usually unable to obtain insurance policies from more typical insurance methods. Products are sold to low-income areas in developing economies, including rural areas in India, Pakistan, South Africa, Ghana, and Kenya.
Clients of microinsurance are unable to meet standard account premiums. Instead, a microinsurance agency works with individuals to form a reasonable payment structure that they can manage and from which a provider can still reap profits. Even with insurance, a payout is unlikely to cover 100% of severe losses for the poor, although coupled with other forms of regional assistance, insurance can be more effective.
Volume is highly important to microinsurance providers. Since policies and premiums are so small, profits from individual customers are similarly small. For this reason, providers often team up with larger institutions, including microlending banks, community churches, and even cell-phone providers to reach a greater number of people, thereby enhancing income.
Microinsurance products are usually designed with risk-pooling instruments to help individuals, households, and businesses manage risk. Risk tools vary depending on whether the policy holder is a household or a business. They might include programs that assist with implementing community-wide sanitation services to better equip a region for a timely response to disease.
Without microinsurance, individuals in developing nations are without a financial safety net to protect themselves in the event of an unexpected trial. Any savings that might be accumulated over a period of time would be erased by a sudden death or illness without any support. With the protection of an insurance policy, however, poor people are given some peace of mind that there will be a payout from a microinsurance provider when disaster strikes, which allows them to focus on building a savings and to ultimately emerge from poverty.
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