The challenge of financial inclusion and microinsurance

In the developed world, people often have safety nets that allow them to mitigate—at least in part—the impact of unexpected events that can affect their potential for social advancement. Nevertheless, other protective and risk compensation instruments, such as those provided by the insurance industry, can be added to the aid and subsidies that the public sector makes available to companies and individuals.

In developing countries, however, these safety nets can be weak or simply non-existent. Those who work in the informal economy and encounter an unexpected shock arising from the materialization of one of the risks to which we are all exposed will face a loss of wealth and income that may affect their family and condemn them to a perpetuated situation of poverty. In this case, insurance can play a key role in the inclusion process by giving society’s lower-income groups access to products with which they can protect their lives, health and assets, by means of the savings and loss compensation processes implicit in insurance products.

Insurance is a mechanism that clearly facilitates social mobility by allowing individuals and families to overcome shocks that may affect their wealth and future income-generating capacities. Without the support of insurance, individual or family progress can be lost to certain adverse events. Therefore, the possibility of accessing insurance products may be the difference between individuals or families achieving the goal of social mobility, or remaining in a situation of economic vulnerability.

The latest report on financial inclusion in insurance, published by MAPFRE Economics, provides a conceptual and international analysis of how microinsurance (insurance aimed at the most economically vulnerable groups) can help increase the possibility of a broad segment of global society having access to higher levels of well-being. As the report explains, two factors have been influencing the development of microinsurance in recent years: the use of new technologies, and the willingness of governments to stimulate the growth of microinsurance as part of the design of public policies.

New technologies allow costs to be reduced, not only in terms of product purchasing and premium payments, but also in terms of product management and renewal and in the payment of the corresponding indemnification. Microinsurance must therefore have a simple design — the policy and its conditions must be straightforward and its content easy to understand; it must include clearly defined coverages and benefits; and indemnification must be paid almost immediately and with minimal documentation requirements. It is also essential to make policy adjustments that reduce the management and transaction costs of these products, thereby ensuring their accessibility and affordability.

Owing to its characteristics, developing microinsurance has greater potential in countries with significant low-income population segments. The Economist Intelligence Unit, with the support of the Inter-American Development Bank, among other institutions, publishes an annual report with indicators to assess the environment for financial inclusion in more than 50 countries. This translates into an index that takes five aspects into account: governance and policy support; stability and integrity; products and points of sale; consumer protection; and infrastructure.

The 2019 report concluded that the global environment for financial inclusion is improving, with Latin America being the leading region for financial inclusion in terms of infrastructure and regulation. As a result, four of the top five countries in the report’s ranking are Latin American countries — Colombia, Peru, Uruguay and Mexico. India comes in at fifth.

In short, as outlined in the MAPFRE Economics report, “inclusive insurance is one of the main tools for bridging the Insurance Protection Gap (IPG) in emerging economies, as it acts in two ways. In the short-term, it raises demand for insurance by bringing new segments of the population within the system of protection provided by insurance. In addition, inclusive insurance is also a means of financial education that will support the social and economic development of the population and ultimately increase the demand for insurance.”

Improving the population’s levels of well-being, especially in the developing world, is a major unresolved issue, and microinsurance undoubtedly constitutes a powerful tool for advancing this urgent objective of global society.