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Microinsurance Explained

Around the world, approximately 3 billion people survive on less than $2 a day. While Americans make more than that, there are about 47.5 million Americans who live in poverty, which is defined as earning less than $22,811 a year for a family of four, according to the U.S. Census Bureau. When it comes to obtaining insurance for these low-income families, it’s sometimes difficult to afford the typical insurance policy and accompanying payments.

When people are living at or below the poverty line, the specters of injury, property damage or death of the family’s “breadwinner” could mean bankruptcy and potentially homelessness for many of these individuals. That’s where microinsurance comes in.

What Is Microinsurance?

Microinsurance is a type of insurance that is designed to provide low-income individuals insurance coverage and “protect them against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved,” according to the IRDA, India’s Insurance Regulatory and Development Authority. The International Labour Organization states that the number of people who use microinsurance has surged over the past five years and now there are “an estimated 500 million worldwide.”

Most low-income households typically don’t have any sort of savings. Microinsurance is tailored specifically for those lower-valued assets and offers compensation for illness, injury or death. When dealing with lower-income families, illness, injury or death of a loved one can ruin someone’s financial stability forever. A policyholder of microinsurance will have their payments tailored to their financial situations, and their premiums are typically lower than those with “regular” insurance.

What Does Microinsurance Cover?

Like regular insurance, microinsurance policies can be offered for a wide variety of risks. These risks include health risks, such as illness, injury or death, as well as property risks, such as damage and loss.

There are both personal and business/commercial insurance policies available that will protect people against almost any peril that has the potential to wipe them out financially. These perils include such things as theft and fire. There are also policies available to protect farmers who make their livelihoods from crops, livestock and cattle. Microinsurance policies are also available for health care coverage, term life insurance and disability insurance. Some microinsurance policies will also protect clients in the event of a natural disaster, such as a tornado, hurricane, earthquake or flood.

How Does it Work?

According to a New York Times article, some microinsurance companies have somewhat of a strange business model, but one that works. Insurance company AllLife was established specifically to help individuals who are H.I.V.-positive, as well as those who are diabetics. AllLife requires its policyholders to regularly visit their health care providers and take all medications that are prescribed to them correctly. The company also works directly with its policyholders’ health care providers to follow up and make sure they’re following directions. AllLife staff members consistently follow up with their policyholders and, according to the article, “clients average a 15-percent improvement” in their immune systems “six months after purchasing their insurance.” The article suggests it may be because the policyholders view their disease a bit differently after being insured.

There are other various methods and models available when working with a microinsurance policy. The partner agent model forms a partnership between a microinsurance partner and an agent (insurance companies) and, in some cases, a third-party health care provider. The full service model puts the microinsurance provider in charge of everything, including the design and delivery of products to the clients and working with external health care providers to provide the services. With the provider-driven model, the health care provider is in charge and responsible for all operations, delivery, design and service. Under the community-based/mutual model, policyholders or clients are in charge, managing and owning the operations and working with external health care providers to offer services. Agencies can also partner with a company like Allianz, which offers microinsurance in more than 10 countries.

Where Is Microinsurance Typically Used?

Microinsurance is typically seen in countries with an informal economy, and it has made significant inroads in developing countries like Mali and Bangladesh. However, it’s also available right here in America, where there is a “formal economy.” In addition to the United States, Mali and Bangladesh, other countries served include India, Malaysia, Columbia and several African countries (which is where AllLife offers insurance to H.I.V.-positive individuals). According to The International Labour Organization, Asia as a whole is a “microinsurance powerhouse.” With such a large population, 80 percent of the microinsurance market is in China and India, with 60 percent of those individuals coming from India.

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