Social insurance: Going beyond the basics

Social insurance to cover life, health, old age, disability – and sometimes unemployment – is integral to most national social protection systems. However, there are significant benefits to risk sharing in other areas, which are currently under-utilised and require more attention from governments, as well as private insurance providers.

 

Insurance as a form of social protection

Social protection frameworks help citizens meet their basic needs, and protect them from deprivation through various instruments, one of which is social insurance. Like any form of insurance, social insurance is a mechanism for pooling financial risks. It operates on the principle that a group of individuals make contributory payments into a common pool, which is used to pay out benefits to individuals who suffer losses on particular accounts.

However, only 27% of the world’s population enjoys access to comprehensive social security systems, whereas 73% is covered only partially or not at all (ILO, 2014).

Without insurance, the poorest of the poor end up facing severe financial shocks every single time they experience a major loss or setback – this includes not just death, illness or disability, but ‘regular’ occurrences such as loss of informal job, crop failures, flood/draught, livestock deaths, and even social commitments such as weddings. Often, families deplete all their resources dealing with these shocks, rendering them vulnerable to falling further into poverty.

Only 28% of the labour force worldwide is potentially eligible for benefits (contributory or non-contributory) under existing legislation, should they become unemployed.

It has been seen that even in the absence of insurance, small improvements to risk sharing – for instance, through a mobile app – can improve individuals’ financial resilience. This can be facilitated through an informal network of risk sharing with relatives and friends through money transfers (informal loans or gifts). For example, in Kenya, users of the mobile-based money-transfer service M-PESA maintained their consumption and spending in the face of economic shocks, while non-users had to reduce consumption by 7% when facing these shocks.

While governments are working towards extending universal social safety nets that cover life, health and ageing, it is also worthwhile to investigate devising financial instruments that can provide buffers against other setbacks, such as those mentioned above.

 

Non-conventional insurance services for social protection:

 

i. Crop, weather or rainfall insurance

The most common of these specific-focus insurance products is crop insurance, or rainfall/drought insurance. While commonly available in developed countries, the product has been slow on the uptake (with contributory premiums being paid by farmers) in developing nations. However, rain-fed agriculture is the norm in most developing countries and variation in weather often leads to crop failure. This is not only a key source of risk for poor farmers, but also affects decision-making about the kind of crops to produce (opting for low-risk, low-returns staple crops as opposed to high-risk, high-return cash crops) and the amount of investment in their farms.

Being insured against crop failure encourages smaller farmers to cultivate higher-return, higher-risk cash crops, which is essential to breaking out of vicious poverty traps. In Ghana, for instance, farmers who received rainfall index insurance cultivated more land and spent 13% more on fertilizer and labour than those who received just cash. This implies that “uninsured risk — not lack of access to capital — is a primary constraint on investment by farmers” (Harvard Business Review, 2016). Similarly, in India, when farmers were provided rainfall index insurance, they were 12% more likely to plant cash crops, and increased the amount of land devoted to cash crops by about 27%.

While conventional crop insurance is neither easily available nor very popular in developing nations, a market for rainfall index insurance has emerged in recent years.

 

ii. Livestock insurance

Although provided at a smaller scale by governments or private banks/insurance providers, several factors hinder the uptake of livestock insurance, such as high operational costs, difficulties in verification of claims, high insurance premiums, and lack of awareness about insurance products. However, studies are ongoing to develop digital or index-based products that can counter these impeding factors.

Keeping in mind the risk to livestock from frequent droughts in the Horn of Africa, which impacts vegetation (fodder), the Index-Based Livestock Insurance product was developed in Ethiopia and Kenya. Using remote sensing, it generates a vegetation index and correlates it with livestock losses associated with fodder shortages. This enables it to offer insurance coverage in regions without much access to conventional insurance products.

In rural India, researchers are collaborating with a private insurance provider to conduct a randomised evaluation of its Android-based application that digitises the marketing, enrolment and claim settlement process of a livestock product.

 

iii. Disaster insurance

Experts believe that when insurance pay-outs are available during a natural disaster, “economic recovery is quicker, human deprivation is lower, and there is lower cost to the taxpayer”. In developed nations, nearly half of the costs of natural disasters are covered by insurance. But in the poorest countries, less than 5% of losses suffered are covered by insurance and humanitarian appeals do not raise enough funds.

Every year, natural disasters force 26 million people further into poverty (DFID, 2017).

While some countries have shown foresight in preparing for these disasters, bilateral/multilateral organisations like DFID are working to build insurance markets in developing countries by supporting improvements in capacity, regulation, and data. But there are few market players in this space, as it is admittedly a tough (and neglected) area in which to build products and function commercially.

 

In conclusion

Insurance is a valuable instrument to provide protection against shocks, but it is difficult to scale. High operational costs and difficulties in the verification of claims prevent private insurance providers from entering the fray. Low trust or awareness of products, and the high cost of premiums (a result of the low number of premium subscribers) hinder users from adopting the product. Despite some innovative products around the world, consumer adoption has been low at market prices, and commercial products have not been sustainable.

In the times to come, especially with digitisation on the horizon, there is immense scope for government, non-governmental, as well as private players to study existing gaps and solve insurance market failures for the betterment of large communities of vulnerable people.

More research is needed to determine factors that can assist in understanding complex markets and refining products so that they perform better – for instance, an evaluation study of agricultural insurance in China found that financial education about insurance increases uptake from 35% to 50%, and that offering a menu of insurance contracts (rather than a single contract) increases uptake dramatically. User surveys, market research and academic studies will help provide the insights that can help build some much-needed insurance products.

 

References

International Labour Organization (2015). World Social Protection Report 2014-15. Accessible: http://socialprotection.org/discover/publications/world-social-protection-report-2014-15

Harvard Business Review (2016). Making Microfinance More Effective. Accessible: https://hbr.org/2016/10/making-microfinance-more-effective

J-PAL, CEGA, and ATAI Policy Bulletin (2016). Make it Rain, Cambridge, MA: Abdul Latif Jameel Poverty Action Lab, Center for Effective Global Action, and Agricultural Technology Adoption Initiative. Accessible: https://www.povertyactionlab.org/sites/default/files/publications/make-it-rain-high.pdf

Cole, S. et al. (2016). Impact of Rainfall Insurance on Farmer Behavior in India, AEA RCT Registry. Accessible: https://www.socialscienceregistry.org/trials/1452/history/10424

American Economic Review (2018). Risk Sharing and Transactions Costs: Evidence from Kenya’s Mobile Money Revolution. Accessible: https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.104.1.183

Karlan, D. et al. (2014). Agricultural Decisions after Relaxing Credit and Risk Constraints, The Quarterly Journal of Economics, Oxford University Press. Accessible: https://ideas.repec.org/a/oup/qjecon/v129y2014i2p597-652.html

Jensen, N. et al. (2015). The favourable impacts of Index-Based Livestock Insurance: Evaluation results from Ethiopia and Kenya, ILRI Research Brief 52. Accessible: https://cgspace.cgiar.org/bitstream/handle/10568/66652/ResearchBrief52.pdf

Alexwhi, A. W. (2017). Insurance for poor could protect the most disaster-vulnerable. Retrieved January 28, 2018. Accessible: https://www.reuters.com/article/us-climatechange-aid-insurance/insurance-for-poor-could-protect-the-most-disaster-vulnerable-governments-idUSKBN1A52DO

Cai, J. et al. (2014). A Randomized Evaluation of the Effects of an Agricultural Insurance Program on Rural Households' Behavior: Evidence from China, International Initiative for Impact Evaluation (3ie). Accessible: http://www.eldis.org/document/A72057

 

This blog post is published as part of the Ambassador Series, which presents insights into social protection around the world from the viewpoint of our Ambassadors, a group of international online United Nations Volunteers who support the online knowledge exchange activities, networking and promotion of socialprotection.org.