Principles

The basic principles that microinsurance providers should follow are the universal principles of insurance and risk management:

• It is only possible to insure future, random risks that do not depend on one policyholder only.
• Such events should concern a large enough group of individuals. Actually, the essential role of the insurer is to mutualise the risks, in other words to make a group of individuals that is big enough for the rule of greater numbers to apply and is exposed to identical risks.
• The maximum loss caused by the incident must be limited.
• The damage and its likelihood to happen must be measurable. Setting insurance premiums is based on the assessment of how high the expected losses can be and how likely they are to occur.
• The amount of the insurance premium must be compatible with the policy holders’ and capacity to contribute and the viability of their business. Usually, making a policy an attractive product depends on the cost of the premium, which should be lower than the benefits offered by the policy.
• The legal and regulatory framework must be well understood if a microinsurance product is to be offered.
• The insurance provider must be capable of analysing and limiting the main risks he/she covers: fraud, moral and anti-selection risks.

Source: Text based on Dossier thématique Micro-assurance ©2007, www.lamicrofinance.org