Swiss Re - Review 27 - July 2008 - (Page 17)

Stand-alone microinsurance still faces many obstacles which can be overcome by public-private partnerships. Successful partnerships require a strong commitment, openness for innovation and out-of-the box thinking. Michael Schwarz, Client Manager, Public Sector Business Development Microfinance describes the provision of financial services such as loans, savings, remittances or other financial products designed to meet the needs of poor people usually excluded from the conventional banking sector. An average loan payback ratio of around 98% is testimony to the fact that microfinance clients have become thoroughly bankable and that the business is very attractive for commercial players. Although it is still hard to come up with a reliable figure, various sources state that today more than 100 million people are already benefiting from microfinance products accross the world. One of the ancillary products from the microfinance spectrum that has been attracting increasing attention recently is microinsurance; here, the prefix “micro” refers to both the amount clients can afford as a premium and the indemnity provided by the insurer. One of the main reasons for the emergence of insurance products in microfinance has been the need among microfinance lenders (MFIs) to guard against possible borrower credit defaults as a result of death or sickness. By linking life insurance to the credit – often on a mandatory basis – MFIs had the assurance that the loan would be covered should the borrower die. In the world of microfinance, the borrower often is the sole income source for a whole household, and in case of death, the MFIs would have little chance of recovering the loan. Credit life products, therefore, still account for most of the microinsurance policies sold to date although all kinds of microinsurance products ranging from health to property can be found nowadays. Microinsurance at the crossroads While microinsurance is still in a nascent stage, it is hard to assess how demand will develop in the future. The chances are that microinsurance will not enjoy the same success as other microfinance products such as credits, remittance services or savings. Microinsurance not only faces the kinds of problems microfinance had in its early stages, such as building a wide network to achieve a critical mass of clients or establishing efficient administration and management systems. It also has to overcome additional hurdles: a lack of trust and insurance awareness among the population, the creation of affordable products and the control of moral hazard, fraud and antiselection. And if this were not enough, microinsurance providers often can’t simply sell their various products to the same group of people who take out microloans. Of course, there are overlaps regarding the target group, but microcredit and microinsurance clients are not automatically interchangeable. In contrast to the microloans that help poor people with start-up capital for their own businesses, that first key step out of poverty, microinsurance is primarily a tool employed to cope ex-ante with the negative impact of external shocks. Therefore microinsurance is largely a safety net for low income groups to avoid falling back into impoverishment, rather than a financial product for people who still strive to escape the poverty trap. Despite these challenges, many of the leading insurance and reinsurance companies have entered the market. Attracted by the huge number of potential customers they participate in various microinsurance projects all over the world, mainly in Asia and Latin America. Although the private insurance industry’s engagement in microinsurance is largely commercially driven, it generates benefits, not only for the buyers of such products, but also for the countries as a whole. The insurance sector, for example, plays a crucial role in economic development and much economic activity would not take place without it. Moreover, a reliable mechanism for risk transfer and insurance penetration are key prerequisites for prosperity and growth. A successful Swiss Re engagement To date, Swiss Re has been involved in a number of microinsurance initiatives and participated in microinsurance schemes in several countries including India, South Africa and Mexico. Most of the transactions cover life and agricultural and/or weather risks. In this connection, Swiss Re works closely with primary insurers and MFIs to develop and implement sustainable solutions by assisting in product development and sharing the risk in the most effective manner. Photo: STRDEL/AFP/Getty Images Portrait: Swiss Re Academy review 27

Table of Contents for the Digital Edition of Swiss Re - Review 27 - July 2008

Cover
Editorial
Contents
Swiss Re Academy – Assets and opportunities
On course – Looking back at courses held
Key topic – Focus on a business line
Forum – Ways of the world
Quiz – For the fun of it!
Mailbox – Post from far and wide

Swiss Re - Review 27 - July 2008

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