Risks

A disease, the death of a member of the household (whether he/she brings in the most income), an accident, a natural disaster can put a whole family in serious difficulties.  For a family who invests in economic activities by taking out a microcredit, a minor incident can result in a disaster when not able to pay back debts.

Low income households have to come up with multiple strategies to cope with those risks:

• Diversifying their activities, assets, sources of income;
• Informal self-help, investing in different socio-economic and/or identity-based (tontines) networks;
• Emigrating, when based on strategy and not on exclusion;
• On a longer term, providing their children with education (cross-generation strategy);
• Saving, which allows for self welfare to cope with future expenses, predicted or not;
• Emergency credit, which helps to cope with an occasional difficulty.

Although those risk-management methods may be necessary, they also are limited. Studies have shown that, in India for instance, loans and self-help by donations only cover 2 to 3 % of a family's loss.

A situation of serious crisis which requires expenses that are much higher than the savings can definitely impact on a family – forcing it to over-indebtedness or to sell part of the means of production – and sometimes a credit can even jeopardize a number of years of savings. In this case, referring informally to close or far relatives as well as calling upon the family’s savings often turns out to be inadequate or insufficient.

Insurance products can help to cope with this crisis and thus prove to be a relevant complementary tool.

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