Reading time: 3 – 4 minutes

Time.com recently posted an interesting article on insurance for people in the developing world – a.k.a. microinsurance – and why it has been hard to get any meaningful penetration. You might be wondering why gaining traction with an insurance product designed for the world’s poor has been hard. “Why wouldn’t the poor want an insurance product that meets their needs and is financially attainable? Their lives are very risky so it would make a lot of sense for them to insure themselves.” Well, it turns out that, once again, what may work in the first world doesn’t always work the same way in the third world (we learned this from Portfolios of the Poor).

Trust is one of the main reasons why microinsurance has not yet begun to grow like people thought it would. The Time article references a quote by Xavier Giné, a World Bank economist in Malawi, that shows the inherent difference between microcredit, which is growing like wildfire, and microinsurance, which is not nearly growing as fast:

“When we think about credit, lenders need to trust the borrower. But in insurance, it’s the exact opposite. You have to trust that the insurance company will pay the claim.”

That comparison really struck me because it is so simple and yet so true. In the third world people still have a hard time believing that someone will pay them if they run into hard times and, unfortunately, this fear is warranted. According to the Time article, insurers didn’t pay off for the insured in Bangladesh in the 1990s (this was one of the earliest attempts at microinsurance). However, trust is not the only issue the poor have with microinsurance.

In the book Portfolios of the Poor, which I reviewed back on September 8th, other issues with microinsurance are suggested and explored. From the Time article:

“…being poor is not without complications, and that’s part of what makes a loan attractive. Sure, microcredit is typically meant to help build a business, but cash is fungible–if there’s no money for dinner one night, a line of credit, whatever its intent, solves the problem. Not so for insurance, which asks people to decide in advance which of the many risks they face they should hedge.

Plus, even without formal insurance, most people already have some version of a safety net: friends, family and–in truly catastrophic situations–government.”

Robert Morduch, one of the authors of Portfolios of the Poor also adds a bit of wisdom:

“The challenge for insurance is to beat those other mechanisms [i.e. friends, family and government], not to beat nothing.”

Well said. Financiers looking to serve the third world need to remember that they are competing against the status quo and they need to take that status quo, whatever it may be, seriously. They also need to design products that are far better than current alternatives, not just incrementally better.

I have no doubt that MFIs, and others working in the field of microfinance, will figure out how to design microinsurance products that work well. However, we should not expect to see the same outstanding growth trend we saw in microcredit manifest itself in the adoption of microinsurance.