A lot is being heard about micro-credit possibly because Bangladesh is its birthplace. But micro-insurance (henceforth abbreviated as MI) is now emerging as a policy tool to shield micro-credit clients from adverse circumstances. MI is meant for protection of low-income people living on approximately $1.0 to $4.0 per day (below $4.0)) against certain odds - natural or man-made - in exchange of regular premium payment. The premium for insurance is tuned to cost of the likely risks involved. By and large, it is a mechanism to protect low-income people against risks, such as accidents, illness and natural disasters in exchange of premium payment depending on needs, income and level of risks.
The insurance products are claimed to be simple, accessible and affordable in terms of economic segments (low-income people), amount of premium (low), and nature of risks (ill health, death, crop damage due to floods and other natural calamities). By and large, the objectives of proposed MI are as follows: (a) protecting family from loan payment pressures in the event of death of a borrower, spouse or guardian, (b) increasing possibility of economic revival of the family after shock and (c) stopping the incremental loan default in the portfolio.
Admittedly, the emerging importance attached to MI follows from a number of factors and we will mention a few. Available data show that over the last two decades or so, Asia has borne almost half of the estimated global economic cost of natural disasters amounting roughly to $53 billion per annum. Natural disasters in Asia are estimated to have cost US$ 45 billion in 2015 but insurance covered only 8.0 per cent of the loss. Further, across the globe each year, healthcare payments push 100 million into poverty. About 150 million people exceed a threshold (catastrophic) ratio of health spending to households' capacity to pay. The out-of-pocket (OOP) expenditures account for about one-thirds of total healthcare expenditure in low middle-income countries of Asia. Needless to mention, Bangladesh, China, India, Nepal and Vietnam rely most heavily on OOP expenditure financing. Global MI covers 5.0 per cent of total population (approximately 400 million people) with Asia 4.0 per cent (172 million), Africa about 6.0 per cent (62 million) and Latin American countries about 8.0 per cent (45 million).
It is a well-known fact that micro-credit clients are more susceptible to shocks that create, more often than not, a credit trap. This happens because borrowers use the loan money for spending on contingencies like health hazards rather than on income-generating activities. Failing to access institutional loans, they also borrow from informal sources of credit at an exorbitant rate of interest.
BRAC, the largest non-governmental organisation (NGO) in the world, has embarked on a programme, in collaboration with Guardian Life Insurance, to bring 5.0 million of its micro-credit clients under the umbrella of MI. The programme is called 'Credit Shield Insurance' (CSI). As the name implies, it is to shield micro-credit clients against hazards that adversely affect borrowers' repayment capacity and overall welfare. The credit shield assumes immense importance as clients face crises such as: (a) hospital and funeral cost to be settled immediately, (b) withdrawal of savings to cover immediate expenses, (c) liquidation of productive assets to cover unpaid debts, (d) limited access to institutional loans and increased dependence on informal ones at exorbitant interest rates and (e) pulling children out of schools to put them to work.
The Credit Shield Insurance, piloted previously and now ready for replication, could be very useful as it provides certain benefits to a borrower such as waiver of outstanding loan amount, funeral benefit of Tk 10,000 to Tk 20,000 and keeping savings intact. Such a family insurance would include borrower and one family member aged 18 to 65. The premium rate per thousand taka loan is estimated to be Tk 3-4 for single policy and Tk 7.0 for dual policy. Again, one-off premium at the rate of only 0.3 per cent (single) or 0.7 per cent (dual) amounts to Tk 90 based on an average loan size of Tk 30,000. Interestingly, females mostly go for dual policy while males like single policy. This is because females consider that the death of husband might be more devastating and hence she needs to be insured.
Insurance initiatives for the low-income earners, especially those borrowing from micro-credit institutions, are very rare. Provisions of micro-credit to low-income or poor households hardly recognise risks of various forms faced by the borrowers for which, seemingly, many of them turn broke and fail to repay the loans. The information that 20-30 per cent of the households accessing micro-credit reports deterioration in economic condition over time could possibly be adduced to lack of protection against perils. The innovative Credit Shield Insurance scheme should pave the way for putting micro-credit under a protective veil.
The writer, a former Professor of Economics at Jahangirnagar University, is Chair, Economics and Social Science Department, BRAC University. [email protected]
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