A scientist’s view on microinsurance

Richard D. Phillips is the Chair of the Risk Management and Insurance Department at Georgia State University and also the C. V. Starr Professor of Risk Management and Insurance. He is currently the co-editor of the Journal of Risk and Insurance, which will publish a special edition on microinsurance by the end of 2010. The papers selected for this special edition were presented during the 5th International Microinsurance Conference in Dakar, Senegal.

1. How did you get interested in/get into microinsurance?
   
Although I’ve been studying insurance markets for close to twenty years, my initial interest in microinsurance only dates back to 2006. At that time, I was invited to give a speech to Chinese insurance regulators about the demutualisations that had taken place in the U.S. and Europe during the late 1990s and early 2000s. The Chinese wanted to understand the phenomenon and if it had any relevance for the continuing development of their own market. As part of that speech I discussed the role of mutuals and cooperative organisations in the history of insurance and suggested that we may see history repeat itself again, given the importance of this organisational form in the developing market for microinsurance today.

2.You know the existing literature on microinsurance. What is your opinion about the quality?
    
Currently, there is very little academic work focused specifically on microinsurance. The work that does exist either comes from the development-economics or the public-health literatures. There is also an interesting strand of research that investigates the informal mechanisms that families and villages use to share risk, that largely comes from sociologists, anthropologists and a few economists. Thus, there are academic papers relevant to microinsurance but precious few are specifically focused on the topic. On microinsurance itself, the work to date is largely written up as case studies or as anecdotal stories. Thus, there is a clear need for more rigorous and long-term research that will allow us to better understand these markets and how we can more efficiently bring the gift of insurance to a wider range of people. This is why I am so thrilled about the partnership between the organisers of the 5th Microinsurance Conference and the Journal of Risk and Insurance. My hope is that we will raise awareness and understanding among both scientists and insurance practitioners operating in the for-profit world in a way that leads to positive impact on people’s lives.

3. Can you give an example of lessons that can be transferred or up-scaled?
     
Many questions and findings related to microinsurance may also be relevant for developed markets. For example, it is well documented in many first-world markets that insurance penetration rates are lower than theory would otherwise predict. For example, why do 45 million Americans choose to not purchase health insurance even though it is widely available in what is presumably a competitive market place? Perhaps understanding why the poor in India do not voluntarily purchase insurance will yield insights into the same question in the United States and elsewhere. 
       
A second possibility for “up-scaling lessons learned” may be around distribution of the insurance product itself. A large issue in the microinsurance world is how to distribute and underwrite insurance in a way that is inexpensive and effective in areas where information is difficult to acquire and transmit. If a firm discovers a way to overcome these difficulties and become profitable, who’s to say that the experience will not be applicable elsewhere?

4. Frankly, can microinsurance really reduce poverty?
  
In theory – clearly yes. The poor are extremely vulnerable to risk and their exposure is also quite high. In addition, the marginal increase in a person’s well-being due to increases in their wealth is very high when they are poor. Finally, we know the informal schemes the poor traditionally use to share risk are not nearly as efficient as a well-functioning insurance market can be. Thus, the promise of microinsurance is compelling and consumers should see real and tangible economic benefits by forming and engaging in insurance markets. Unfortunately, the empirical results investigating the impact of these schemes to date are inconclusive at best. That said, the market for microinsurance is only in its formative stage and it will take time for these markets to mature. In addition, measuring the impact of insurance also takes time, as research needs to show that households with insurance outperform those without. If the risk the household faces is a one-in-ten-year event, it may take close to ten years to fully demonstrate the value of insurance. Thus, we need to be patient. Industry needs to do the work necessary to bring these markets online, and researchers need to establish the infrastructure to critically evaluate these markets as they continue to grow.

5. Where, do you think, will we be in ten years’ time?
    
My hope is that history will be a good guide. In the 18th and 19th centuries, thousands of insurance schemes were successfully developed and implemented in communities and factories all across Europe and North America. Today, we would call these schemes microinsurance – historically they had names like “fraternal insurance”, “sickness benefit societies”, or in Britain insurance was offered by “friendly societies”. Over time these cooperative-based strategies demonstrated their value and households and workers began to trust them, such that the organisations could merge to eventually form some of the insurance companies we see operating around the world today. Thus, a precise forecast is not possible, but I think there is a good chance we will see a globally functioning market for microinsurance that leads to more stable consumption streams, higher growth rates in per-capita income and higher health-status indicators for households. If history is any guide, the future looks bright.

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