This post continues the conversation that was started here: Vulnerability, Markets, and Insurance in Ghana.

paper currency is vulnerable to being destroyed by fire, rats, water, wind, etc.

paper currency is vulnerable to being destroyed by fire, rats, water, wind, etc.

There is a particular event that occurred during my fieldwork in Uganda that is a reminder of how lower-income populations may be prone to natural as well as cultivated risks. We met a second-hand apparel trader who had been collecting her life-earnings in a small, black handbag at home. Since the distance to the nearest bank was almost 50 miles, a trip that would cost her both time and money, she decided to keep her money close at hand, in her own home. Unfortunately, rats got to her savings before she could, shredding almost a $150 in savings to tiny, unintelligible scraps. The bank was unable to ascertain exactly how much money she had in the first place, and therefore, could only return a smaller amount to her. At the time, we believed that access to formal savings facilities would prevent such incidents in the future, however there is some consideration that must be given to microinsurance options as well.

Poorer households may be particularly vulnerable to risk given their limited resources to moderate the adverse consequences, thereby aggravating their conditions of poverty. Development scholars and practitioners alike recognize the need to disburse microinsurance options in order to combat the persistence of poverty. But many challenges abound, not the least of which is the lack of suitable microinsurance products and services for lower income populations. Microinsurance providers struggle with the high transaction costs, limited information, and imperfect enforcement mechanisms. As is prevalent in financial inclusion ventures everywhere, eventually state-subsidized microinsurance services will remain to insure low-income individuals and households, and even then at a loss.

Of course, lower-income individuals and families may not always be willing to part with their limited resources at hand towards a payout that may or may not happen, especially in an environment that is often saturated with microcredit options that provide instant cash. One way that microinsurance companies have been overcoming this hurdle is by selling microinsurance products as an add-on to services that are in extensive use already. Selecting well-regarded institutions that can be co-branded with these microinsurance products is another way to build trust amongst new customers, as well as to ensure that recurring small payments protect lower income populations against risks without actually selling these products exclusively. One of the utilities that microinsurance products are being bundled with is the mobile phone service.

The mobile infrastructure, and mobile phones specifically, may be leveraged in various ways to deliver and support microinsurance options. A recent report by the GSM Association provides an exhaustive breakdown of how the mobile infrastructure can achieve this (Tellez, 2012). While the technology platform can be used to enroll new customers and submit electronic claims, the voice and SMS channels can be used for advertising the product, handling customer feedback, as well as distributing financial literacy information. The agent network becomes indispensable for handling any service points that require manual managing in the delivery of the microinsurance service, and also to cash-in/cash-out any premium payments and/or eventual settlements that may be made in mobile money. The report also indicates that the insurers may use the data on airtime and mobile money for modeling risk and pricing policies.

Microinsurance, in general, has been slow on the uptake with economists pointing to information asymmetries as a huge challenge. More practical challenges also include the lack of reliable data that impede the calculations of premium payments, the capacity to service small transactions, and the need for reinsuring (Morduch, 2006). Mobile microinsurance has seen even more limited implementations with very few live examples. Even then, most of these microinsurance products seek to insure against basic life and accident risks. For instance, MTN Ghana, in collaboration with Hollard Insurance, MicroEnsure, and MFS Africa, launched a life insurance product, mi-Life, in 2011 which is available on the USSD channel. mi-Life insures the MTN mobile money subscriber and next of kin. Premium payments are deducted from the subscriber’s mobile money wallet on a monthly basis, and the SMS notifications serve as receipts. Tigo Ghana also offers a life insurance product in partnership with Vanguard Life, Bima, and MicroEnsure called the Tigo Family Care Insurance. Tigo Family Care Insurance is a loyalty-based microinsurance product, unlike mi-Life that offers insurance through explicit premium payouts. The more a Tigo customer spends in a given month, the higher is his or her insurance cover that can go up to $550. Customers are informed of their current level of insurance coverage on a monthly basis. Easypaisa Pakistan’s Khushal, a mobile savings product that offers embedded life and accidental death insurance facility, is another example of a loyalty-based microinsurance service. An insured user’s coverage varies according to his or her average mobile account balance. The benefits go up to $10,000 for average account balances of $250 and above.

The only example of a mobile microisnurance service that goes beyond life and accidental death policies seems to be Kilimo Salama (“safe farming” in Swahili) that protects farmers in Kenya against the vagaries of the weather. Kilimo Salama is a partnership between UAP Insurance, Syngenta Foundation for Sustainable Agriculture, and Safaricom. Designated, independent rural retailers manually collect farmers’ premiums and transfer the accumulated amount to the insurance company via M-Pesa. However, the monitoring of rainfall (or the lack thereof) is done through automated weather stations. Payments are disbursed directly to farmers via M-Pesa if the monitoring data indicates an immediate payout, thereby eliminating the need for a formal “claims” process.