Insurance mitigates the economic effects of events like illness, death, disability, fire, theft, and natural disaster on individuals, households, or enterprises.
In doing so, insurance helps people to avoid destitution, smooth their consumption, protect their assets, and pursue high-return economic activities and investments. In this way, insurance is one strategy on a continuum of risk management options.
Increasing the access of poor households to insurance mechanisms can prevent them from having to rely on publicly funded support from, for example, a safety net program to cope with the negative consequences of a shock.
It can also encourage them to adopt alternative, more productive livelihoods (for example, planting higher-yield crops insured against the risk of drought) that can help to lift them out of poverty.
Therefore, insurance should be regarded as an integral part of a social protection system.
The overall insurance agenda is broad, but it relates to social protection in so far as it supports people who are left out of the market to access insurance products and prevents vulnerable families from falling into destitution.
Currently insurance instruments in Africa are still relatively underdeveloped.
There are some historical precedents in the region such as cooperative insurance, community-based health insurance schemes, and informal insurance arrangements through funeral and burial societies.
Hardly any private insurance products exist for the rural and urban poor and, even when they do exist, these households cannot afford them. Public social security, which includes not only pensions but also disability and life insurance (survivorship), is limited in Africa, reaching only an estimated 10 percent of the population who are mostly civil servants.
It is estimated that health insurance has similarly limited coverage. A growing area of insurance is micro-insurance, which offers insurance products – most often credit-life and life insurance – to low-income individuals for low premiums. This is largely an outgrowth of microfinance, with the microfinance institutions (MFIs) being the main providers of micro-insurance.
A 2009 ILO survey of micro-insurance in Africa estimated that 14.7 million people were covered by these products, equivalent to about 2.6 percent of the population living on less than $2 per day. Despite some recent progress, the vast majority of African households have no insurance against most risks.
Three types of insurance are of particular interest in terms of furthering the social protection of vulnerable populations in Africa in the coming decade:
Life insurance - is the most common form of micro-insurance in Africa, facilitated by the extension of the microfinance model into the area of insurance. However, the life insurance provided by MFIs is mainly a way of insuring loans (“credit life insurance”) rather than providing income support in the case of the policyholder’s death.
Agricultural insurance - has mainly consisted of crop insurance that covers famers against multiple shocks and pays out against losses that the insurer assesses by observing harvest yields. Index-based insurance pays out fixed sums to farmers when an independently observed trigger (often rainfall levels, livestock mortality rates, or crop yields) shows that an insured event has occurred. Experiments with index-based insurance are being carried out in various countries, such as Kenya and Malawi, to manage the effects of covariate shocks on rural livelihoods.
Health insurance - Many African countries are developing public, private, and community-based health insurance programs to pool the risks associated with health shocks. The coverage of these programs remains quite low, particularly among the poor, but there is some growth in community health insurance for low-income populations. Several countries (such as Rwanda and Ghana) have recently expanded the coverage of health insurance to a large share of their populations. Gabon, Kenya, Nigeria, and Sudan have begun to scale up their national health insurance schemes to extend coverage. Despite this progress, most health insurance policies cover only a limited amount of the full spectrum of health costs, and few programs anywhere cover loss of earnings for non-formal sector workers, which often dwarfs the out-of-pocket costs incurred by adults.
The experience of African countries with insurance has also provided the following operational lessons; these include;
To deliver insurance in a cost-effective way, investments in existing institutions need to be leveraged. For life insurance, these institutions may include networks of MFIs and community-based organizations. In Senegal, Benin, and Mali, the populations are increasingly being covered by mutuelles de santé - non-profit, membership-based health insurance organizations with funding based on member premiums. This model can be used to expand the coverage of insurance as has happened in Rwanda.
Setting premiums at the right level is only one aspect of extending insurance to poor households. Experience has shown that how insurance is delivered is crucial to the successful expansion of coverage. This means timely payouts, good technical advice, and regular, credible information (for index-based insurance, this specifically means reliable and timely data on index values).
It is critical that any insurance products supported by governments should be strictly market-based, including having a design and a rating methodology that are actuarially sound.
Achieving high rates of insurance coverage among poor populations will require subsidizing or even entirely covering the cost of premiums for these households in the short term. Determining which groups to subsidize, to what extent, and for how long is ultimately a political question but needs to be informed by a sound understanding of poor populations, including their location and employment status, and of the possible implications of such subsidies for labor markets.
Based on these key learning’s and experiences however, there are also a number of challenges and opportunities which exist too.
The burgeoning experience with insurance instruments in Africa suggests the following priorities:
Promote the access of poor populations to insurance. Increasing the access of the poor to insurance will significantly improve the delivery of social protection and yield important gains in poverty reduction and economic growth.
Build insurance instruments into national social protection systems. National social protection systems aim to provide a continuum of risk management options, and insurance plays an important role in this. Some of the demand for safety nets after a crisis could be handled more effectively by encouraging the purchase of insurance before the shock occurs to mitigate its impact. For example, weather-based crop insurance can help farmers to survive a catastrophic loss of agricultural production due to poor rains, thus reducing their need for emergency food aid or other short-term coping measures. In this way, promoting the uptake of insurance by poor households not only ensures that a higher share of poor households is covered by the social protection system but also enables governments to target scarce public resources to the poorest of the poor.
Bundle insurance with other financial services or with targeted social protection programs. This can be an effective way to reach poor households and to harness the synergies between insurance and other financial services to promote the livelihoods of the poor. For example, life insurance could be bundled with credit, or agricultural input lending could be coupled with a weather insurance policy.
Leverage social protection programs for the outreach, targeting, and delivery of insurance. Many of the constraints to expanding access to insurance to poor households can be addressed cost-effectively, at least in part, by using existing social protection delivery mechanisms. For example, pre-existing targeting mechanisms can be used to identify those poor households who are eligible for subsidized health insurance. Finding these synergies is one of the advantages of building a national social protection system.
Lee-Roy Chetty holds a masters degree in media studies from the University of Cape Town and the University of Massachusetts, Amherst. A two-time recipient of the National Research Fund Scholarship, he is currently completing his PhD at UCT and an economics degree with Unisa.
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