Protecting the poor

There’s general consent that the Philippines can offer market opportunities for microinsurance providers because millions of citizens are exposed to potential risks from natural disasters such as typhoons and earthquakes. The problem, however, lies with commercial insurers who continue to shy away from the lower-income segment, either because of their limited knowledge of this market or their inability to design insurance products for the poor.

Microinsurance is generally for people who are ignored by traditional commercial insurance providers. Typically low income, these people work in the informal economy and have irregular cash flows. As such, they are economically poorer than their formal sector counterparts due to the non-regularity of income, seasonal fluctuations in their earning capabilities, and their inability to cope with various risks that sometimes may be catastrophic. With incomes hovering around the poverty line, they have little or no savings and possess very limited capacity to access social services on a regular basis. All of these could be the reasons commercial insurance providers do not cater to the needs of the informal sector.

From a business point of view, large insurance companies may find this sector financially unattractive, as they have to deal with small insurance policies, large volume of transactions, and will have to operate in remote areas to service the poor. Given the lack of infrastructure in areas where most of the low-income households live, the costs to collect premium payments, file and process claims, register and renew membership, keep members informed and recruit new members necessarily increase.

The existing barriers to entry include high transaction costs, actuarial difficulties, aggregate risks, lack of information and a restrictive regulatory environment. An example of the latter is the huge capital requirement needed to put up an insurance entity. This induces insurance firms to target the big rather than the small clients to compensate for the cost of capitalization. The implication is the exclusion of a large segment of the Philippine population from insurance coverage.

For the longest time, the poor have been excluded from commercial insurance coverage due to various constraints. There’s a valid observation, however, that commercial insurance providers have not done much to reach out to sectors outside the formal economy. That’s because traditional insurance products were designed with the middle and high-income class in mind. Sadly, despite their great need for some form of social protection, the poor lack the capacity to access insurance products.

A study done by Gilberto M. Llanto, Joselito Almario and Marinella Gilda Llanto-Gamboa—“Micro-insurance in the Philippines: Policy and Regulatory Issues and Challenges”—said the low-income households’ demand for insurance has a corresponding “willingness-to-pay.” They are willing to pay the pure premium, which is equivalent to the probability of risks plus expected losses. It added: “But the real cost of insurance, which determines insurance supply, is equal to the pure premium plus transactions costs, extra costs associated with uncertainty, and profits for the insurers and reinsurers. The sum of all these items constitutes the actual premium. The price of insurance that is affordable to low-income households may be less than the cost at which commercial insurers are willing to supply insurance. Hence, a demand-supply gap in insurance arises.”

Among others, the study recommended a “review of the current regulatory environment, identification of barriers to sound microinsurance and the formulation and adoption of appropriate rules and regulations and guidelines for the safe and sound operation of institutions providing microinsurance and for the protection of policyholders.” The study confirmed there’s huge demand for low-income households to have some insurance coverage. Clearly, there’s business to be made in this sector for insurance providers who can design microinsurance products for the poor.




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