When tragedy strikes, the disadvantaged are usually the ones with less tools to face the situation, just like what happened to the victims of the Mocoa landslide (Colombia), or those of the Coastal El Niño Phenomenon (Peru). When risks take the form of climatic events, their impact is greater on the lives of vulnerable people, an impact exacerbated by their lack of access to insurance.
Microinsurance is a financial product that offers protection to vulnerable and low-income households. When uninsured, their only option to deal with unforeseen events are informal mechanisms, ie: accumulating savings and assets for their posterior use and sale, taking loans, or sacrificing the family members’ wellbeing by allotting less expenditure in food, education and leisure.
At present, the microinsurance sector is faced with important constraints like the scarce market information, in addition to the lack of knowledge about the potential clients. A study published by the MicroInsurance Network reveals that the total microinsurance coverage ration in Latinamerican and the Caribbean region, where the BBVA Microfinance Foundation (BBVAMF) operates, is 7.89%. The countries with the highest coverage are Mexico (15%), Colombia (14%), Ecuador (12.1%), Peru (10%) and Chile (7%). For the sector, this reflects the need for a more responsible distribution of the product, to meet the existing demand.
As an important part of the Productive Finance model, the Foundation follows two complementary lines of action regarding microinsurance: promoting development through products that are adapted to vulnerable clients and fostering an “insurance culture”.
Promoting development through customized products
Access to microinsurance is more difficult in developing countries, where markets are inefficient or right away inexistent for low-income people. BBVAMF, in its mission to promote development among vulnerable populations, offers microinsurance products that are customized according to the entrepreneur’s needs. For this to be possible, the Foundation is directly involved in creating the specific products conceived for low-income entrepreneurs. The end result is a product that considers the economic situation of the insured and their payment capacity. Furthermore, the said product is also adequated to the needs and interests of the potential clients in terms of coverage, duration, and the design of all processes associated to it (like enrollment or claims management).
On the whole, 49% of credit clients are enrolled in a valid insurance product (as of 31st december, 2016). Below are the voluntary microinsurance products offered by the BBVAMF’s entities*:
Bancamía
87% with voluntary microinsurance
Life insurance: a life, accident and death insurance that covers the insured or the family group.
Damage insurance: covers material damages related to the productive unit, caused by unforeseen events (fire, explosion, flood, earthquake, hurricane, hail, etc...)
Financiera Confianza
42% with voluntary microinsurance
Multi-risk insurance: covers material damages affecting the business' working capital, caused by fire, explosion, work strikes, malicious destruction, vandalism and environmental risks.
Installment protection:covers the loan installments or dues that the client wouldn't be able to pay due to temporary incapacity, up to a maximum of 4 installments.
Banco Adopem
26% with voluntary microinsurance
Microinsurance: a life and accident insurance that covers the main assured and the spouse
Fondo Esperanza
4% with voluntary microinsurance
My Family Secured:a life and accident insurance
Emprende Microfinanzas
38% with voluntary microinsurance
Family Protection Insurance:a life and accident insurance
*31.12.2016 data
Fostering awareness about the importance of insurance products
One of the sector’s most pressing challenges relates to the lack of “insurance culture”, especially among the vulnerable segments of the population. Some of the barriers that hinder this lack of awareness are the insufficiency of products that cater to their specific needs, scarce information about insurance products, inadequate knowledge about their own situation which makes them underestimate the possible risks, and lastly, the lack of trust towards insurance companies.
This is why the BBVAMF entities foster an “insurance culture” in the countries where they are present. They focus their efforts in training microfinance officers, given that they’re the ones in charge of delivering microinsurance products to entrepreneurs. An important part of their preparation as officers takes this into account: they study the different types of existing insurance, their functionality and the specific vocabulary so they could clearly and efficiently transmit the information to clients.
In Fondo Esperanza, for instance, officers make use of the Village Bank meetings to impart a learning session about microinsurance. Through a role-playing game, the entrepreneurs discover the difference between an insured business and an uninsured one. This way, the officers succeed in making clients understand how a microinsurance could help them manage risks that could affect their lives and those of their family members.
In Bancamía, explanatory leaflets and brochures are handed out to any potential client, where the product’s distinct vocabulary has been adapted to be more understandable for people with less technical knowledge.
The complementary nature of financial instruments
Vulnerable segments of the population need to comprehensively manage and mitigate risks and this requires the complementary action of various tools such as savings, credit and insurance. While savings and credit guarantee the availability of resources for future and present use, insurance protects the said resources which households depend on.
Far from being a panacea, microinsurance has been proven to be an effective tool that helps household enterprises become more resilient in facing shocks and unforeseen changes. This allows entrepreneurs and their family members achieve greater financial stability which undoubtedly improves their lives.