Definition and Examples of Microinsurance
Microinsurance offers specified insurance products to those who cannot afford traditional insurance.
The concept of microinsurance lets you pay to insure only what you need. For example, it can cover small items such as a one-day trip, a one-time event, or even specific health needs. It's meant to help people with lower incomes, and it can be sold in any number of ways, such as through licensed insurance agents, community groups, microfinance lenders, and other non-governmental organizations.
This form of insurance has had some success in developing countries as a way for low-income families to afford insurance, especially health insurance.
How Microinsurance Works
Microinsurance can apply to almost any kind of insurance product. Pay-as-you-go (also referred to as "usage-based") auto insurance is a popular form of microinsurance. With this option, you only pay to insure the miles you really drive. Those who drive fewer miles pay a lower auto insurance premium.
Most things that can be insured with a normal policy can be insured on a small scale or a “micro” level.
Other examples of microinsurance products include:
- Crop insurance
- Disability insurance
- Natural disaster insurance
- Livestock insurance
- Credit-life insurance
- Burial insurance
These are all single policies that lower-income individuals and families can pick and choose based on their budget and need.
American International Group (AIG) was one of the first insurers to offer microinsurance on an international level. It offered its first policy in Uganda in 1997. Microinsurance also made a big difference in helping natural disaster survivors recover from Typhoon Haiyan, a storm that caused devastation in the Philippines in 2013. Microinsurance firms paid $12 million in claims for that disaster by 2014.
Benefits of Microinsurance
Microinsurance is a way many more people can insure and protect some of their most valuable assets. It can bring a sense of security to low-income families who could not afford insurance before.
Other benefits include transparency. There's the ability to handle claims quickly and accurately. Research shows that when farmers and other small entrepreneurs feel protected by insurance, they are willing to take more risks and invest more in new business ventures. That is good for the economy.
What It Means for You
There are signs that microinsurance could grow beyond low-income communities. In an on-demand economy, products and services that offer immediate fulfillment are growing more attractive.
The insurance industry is highly regulated. Legal requirements for insurers include liability and reserves that must be maintained. With microinsurance, the need for these reserves goes away since microinsurance is a “short-term” policy.
For microinsurance to take off in the United States, insurance regulations must catch up.
Microinsurance is an area where growth in developing countries exceeds growth in the rest of the industrialized world. Research from consulting firm Accenture shows that insurance customers are willing to share personal information with their insurers in exchange for lower rates.
Startups that embrace this technology, such as Lemonade (a peer-to-peer insurance company) and Metromile (a pay-per-mile car insurance company), may pave the way for the rest of the U.S. insurance industry. Over time, these trends may make "microinsurance" a common term in the U.S.
- Microinsurance is a type of insurance that offers highly specified policies to cover specific needs at an affordable rate.
- It is designed to make essential insurance options more available to low-income people around the world.
- Innovative forms of microinsurance, such as pay-per-mile auto policies, are becoming popular in the U.S.