Three major categories of financial products can help an individual or a family to manage risk (or an “incident” in the insurance jargon):
- Savings accounts, from which clients may withdraw a sum to cope with economic problems;
- Emergency loans;
- Insurance products.
Compared to savings and credits, the relevance of a complementary insurance product depends on two factors: Substantiality and likelihood of the incident
- If the potential damage (e.g. loss of funds for a family) is substantial, but has a low likelihood, insurance is undoubtedly an adequate answer. Indeed, the principle of mutualising (putting in common) risks between many people helps to provide for an insurance product that comes with appropriate and possibly much higher compensations.
- On the contrary, if the damage is low, savings or emergency loans can be better fitting in this situation (Brown and Churchill, 1999). This is the same when the risk is a planned event (birth, tuition fees, dowry) that the family can predict.
Therefore, it is not always useful, let alone necessary, for an MFI to develop insurance products in addition to its savings and credit services to enable its clients to manage risks. Microinsurance can protect individuals, households or micro-entrepreneurs efficiently in case of major hazards. It can also encourage investments in riskier yet more lucrative activities.
Source: Text based on Dossier thématique Micro-assurance ©2007, www.lamicrofinance.org