Magazine article International Trade Forum

Using Insurance to Drive Trade

Magazine article International Trade Forum

Using Insurance to Drive Trade

Article excerpt

The poor are more vulnerable to risks and economic shocks than the rest of the population. They are also the least able to cope when a crisis occurs. Development efforts tend to focus on strategies to boost incomes, build assets and create jobs, but it is important to recognize that gains can be quickly lost when households at risk experience difficulties. Poor households can easily lose any gains they may have made in improving their lot in life if they experience illness, a death in the family or other crises, and they may be worse off than they were before. In this context, microinsurance, the provision of insurance to low-income people, is one development tool that can aid poor entrepreneurs in the informal economy to manage risks, reduce vulnerability and sustain productivity. However, there are challenges both on the demand and supply sides that must be tackled by innovative insurers and their delivery partners if they are to serve the market effectively.

Protecting income-generating assets

When asked what kinds of insurance they would like to be more widely available, small entrepreneurs in the developing world commonly mention the need to protect their productive assets, such as tools, sewing machines and livestock. They also see theft, fire and natural disasters as serious threats to their business and, de facto, to their capacity to provide for their families as owners of small- and medium sized enterprises (SMEs) are often critical to households in covering food, school fees, medical expenses, rent and electricity costs.

Some microinsurance products are specifically designed to protect the assets of SMEs, such as property or livestock, and to contribute to investments in productive activities. For example, property insurance can insure a small manufacturer's inventory and productive assets, such as machines and a shop. Weather index insurance enables farmers to access credit for agricultural inputs because without protection banks are more cautious about lending. Disaster insurance is an emerging product for SMEs vulnerable to floods, droughts or other catastrophic events. As well as paying for an outstanding loan and helping entrepreneurs with their immediate needs, disaster cover can help entrepreneurs resume work quickly through a new loan.

Fonkoze is Haiti's largest microfinance institution, with branches across the country serving 55,000 borrowers and 25,000 savers. It developed Kore W, an insurance product that protects small entrepreneurs against hurricanes, earthquakes, floods or destructive winds. The product is mandatory for all borrowers, who pay a premium of 3% of a loan's principal. If a natural disaster occurs, clients are eligible for a US$125 indemnity payout to meet emergency needs such as food, water and temporary shelter, cancellation of their loan with Fonkoze and a new loan as soon as they are ready. Kore W operates through MICRO, a mi croinsurance consortium based in Barbados. MiCRO is uniquely structured to provide parametric coverage through Swiss Re that is triggered when there are large-scale catastrophes.

Health issues can result in considerable out-of-pocket expenses for entrepreneurs for hospitalization and medical treatment, as well as losses due to physical incapacity to manage their businesses. SMEs tend to rely on informal protection mechanisms when entrepreneurs cannot work. For example, in their absence they may rely on a family member to manage the business and minimize productivity loss, but this may not be sufficient to maintain income at its usual level.

To mitigate productivity loss, MicroFund for Women in Jordan offers interesting cover: Caregiver is an affordable health insurance product that covers some of the critical costs borne by the clients of MicroFund for Women, mostly women entrepreneurs, in accessing public health care. Although every citizen has access to public facilities for primary health care in Jordan, background research by MicroFund for Women showed dissatisfaction with public health care, citing problems such as overcrowded environments, the absence of important medicines and a lack of professionalism among medical staff. …

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