Microinsurance for low-income people

History of insurance industry of Bangladesh traces its ancestry to the British-India and Pakistan regimes. After the independence of Bangladesh, the insurance industry was nationalised. Later on, the Insurance Corporations Act (ICA) was amended and the process of denationalisation was started for promoting the private sector insurance companies. Presently, 62 insurance companies are operating in the country, of which 44 deal with general insurance and the remaining 18 life insurance. Two state-owned corporations Sadharan Bima Corporation (SBC) and Jibon Bima Corporation (JBC), along with some private sector companies, are dominating the insurance market. The gross premium of life insurance business has been growing considerably over the years even though insurance penetration rate in Bangladesh is the second lowest in the South Asian region.
Microinsurance is a new concept where the premium is set in such a fashion so that the low-income people can afford to pay it and get the benefit of insurance services. Micro-insurance has been receiving attention as an inclusive financial service for the poor and low-income people. Many developing and under-developed countries are in the practice of microinsurance. Some countries, such as Brazil, Peru, India and the Philippines have incorporated microinsurance in their regulations.
The importance of microinsurane for the low-income people is seriously considered for many reasons. In Bangladesh, shocks stemming from death, illness, fire, theft, livestock loss, crop loss etc., often cause severe setbacks that dramatically reduce the assets and income of poor households and gradually reduce consumption. To cushion the shocks, the poorer households are often forced to sell their assets or borrow at unsustainable terms. Many of the affected people are unable to cope with the shocks and become more vulnerable. Microinsurance services for the poor are deemed to be a sustainable solution to protect them from these perils.
In Bangladesh, the NGO-MFIs are involved in microinsurance mainly in credit life or debt insurance to protect the microcredit borrowers from the indebtedness in case of the borrower's or primary earner's death. Many initiatives are taken in health insurance for the low-income people. All these initiatives may be called quasi-insurance, which are not actuarial-based. Agricultural insurance may be considered as microinsurance since small and marginal farmers are involved in farming activities in Bangladesh. Crop and livestock insurance started in 1978 by SBC and eventually collapsed in 1992 incurring huge loss.
The government of Bangladesh, in order to create employment as well as provide tools for the poor to protect themselves, established Palli Karma-Sahayak Foundation (PKSF). PKSF has started a project titled "Developing Inclusive Insurance Sector Project" (DIISP) with the financial assistance from the Japan Fund for Poverty Reduction (JFPR) and administered by the Asian Development Bank (ADB) in 2010. Under this project, PKSF has conducted a nationally representative survey to understand the risk patterns of the poor and their coping strategy to face the perils. A draft guideline has also been prepared under this project. The draft guideline especially focuses on policyholder's right and protection along with the assets-liabilities management of the insurer. An international level actuary has developed poor-friendly insurance services under this project.
PKSF started actuarial based credit life and livestock insurance very recently. Under the livestock insurance services, only cattle (which are fattened for the Eid-ul-Azha purpose) are insured in the pilot phase of this project. Fourteen microfinance institutions that are the Partner Organisations (POs) of PKSF are involved in piloting the livestock insurance. These POs have disbursed BDT 2.12 billion credits to their members for beef fattening in last festival. Using this loan, a total of 1,24,669 cattlehead  were purchased and insured. During the insured period, 408 cattle died and insurance claims worth BDT 7.69 million were met.
One of the unique features of the livestock insurance programme is that POs of PKSF provide veterinary services to the poor farmers with a view to creating awareness on cattle rearing management and vaccination, which has significantly reduced the mortality rate of the cattle. PKSF is preparing to start health insurance for the poor in some selected areas where paramedic services will be introduced initially for creating awareness on health hazards and prevention. Insurance companies usually transfer their risk to the reinsurance company. In absence of reinsurance mechanism, PKSF creates a Covariant Risk Fund (CRF) to protect the MFIs and their policyholders in case of any disaster taking place.
Microinsurance business has many challenges. One of the main challenges is to make it affordable and sustainable. Operating cost of running microinsurance is very high which discourages the formal sector insurance companies to engage in microinsurance business. Cost-effective delivery mechanism can solve this problem. In this context, NGO-MFIs, which are providing the financial services to the doorsteps of the poor all over the country, can come forward to render insurance services at a reasonable cost. Again, these NGO-MFIs have some institutional problems such as lack of skilled manpower, internal governance along with regulatory drawback. The recently passed Insurance Act 2010 has no specific provision for regulation of microinsurance business. The government is, however, preparing a National Insurance Policy where provision of insurance for the low-income people has been given special emphasis.
Bangladesh is a highly disaster-prone country. Many individuals and institutions are trying to incorporate insurance in human induced climate change events to protect the vulnerable people. We should not forget that insurance could only address the insurable risks. If there is a chance of perpetual risk, insurance may not be a viable solution. In that case, we may incorporate insurance with broader social protection or safety net programmes of the country. Many insurance companies at home and abroad have been trying to join in microinsurance with the motive of high profit. We need to be aware of these organisations.
The writer is General Manager, PKSF.  [email protected]