Microinsurance is generally, but inaccurately, referred to as a new concept. It first appeared as a new financial service within microfinance but is now increasingly becoming an independent approach. In fact, it is only the term - Microinsurance, Micro-Insurance or Micro Insurance - that is fairly new.
Microinsurance is defined as follows in different sources:
- The protection of low-income people against specific perils in return for regular premium payments proportionate to the likelihood and cost of the risk involved (Preliminary Donor Guidelines, 2003).
- A risk transfer device characterised by low premiums and low coverage limits, and designed for low-income people not served by typical social insurance schemes (Micro Insurance Academy, India, 2007).
- Insurance that is accessed by the low-income population, provided by a variety of different entities, but run in accordance with generally accepted insurance practices. Importantly this means that the risk insured under a microinsurance policy is managed based on insurance principles and funded by premiums (International Association of Insurance Supervisors, 2007).
- A mechanism to protect poor people against risk (accident, illness, death in the family, natural disasters, etc.) in exchange for insurance premium payments tailored to their needs, income and level of risk (Microinsurance Innovation Facility, 2008).
These different definitions have in common the element of protection for low-income people, even though the delineation between microinsurance and insurance and its role in social protection is not clearly defined and is subject to different points of view.
The origins of insurance
Commercial proprietors were the first to understand the need for and invent a type of insurance. In about 3.000 BC in China, merchants and their investors wanted to ensure a profit from goods shipped overseas and therefore developed a way of sharing the cost of lost goods. A similar development took place in Babylon.
In around 600 AD, the Greeks and Romans had organised guilds called “benevolent societies” which cared for the families and paid funeral expenses of members upon death. In the dark and middle ages, wealthier guilds had large coffers or reserves that acted as a kind of insurance fund; money from the coffers could be used to rebuild the burned down house of a guild member, or to support the family of a suddenly disabled or killed member.
In the late 1660’s, the London coffee shop of Edward Lloyd became a meeting place for merchants and ship owners seeking insurance. As an aftermath of the great fire of London in 1666 that destroyed some 14,000 buildings, marine insurance underwriters formed insurance companies to offer fire insurance policies. At the end of the 17th Century, the first mortality table was created, which enabled the subsequent development of modern life insurance.
The phenomenon of microinsurance
Although, not known as "microinsurance", here are some examples from Europe and the United States that predate the development we know today:
"Industrial life insurance" – life insurance policies with small sums insured and weekly premiums collected door-to-door – was marketed in the late 1800’s by Prudential Life Assurance Society in the United Kingdom and by Metropolitan Life Insurance Company in the United States.
Folksam General Mutual Insurance Company was founded in 1908 by the co-operative movement in Sweden to provide simple fire insurance policies on the contents of the flats of low-income workers and of co-operative shops.
CUNA Mutual Insurance Society was founded in 1936 by the credit union movement in the United States in order to provide simple group term life insurance cover on loans made to members by the credit unions. This was the origin of "loan protection insurance" which is used world-wide by credit unions (or savings and credit societies, caisses populaires, cooperativas de ahorro y credito, etc) to collectively protect all borrowing members and their families, as well as the lending credit union from losses due to the death or total and permanent disability of the borrower.
The term "microinsurance"
It has not been possible to determine when, where and by whom the term "microinsurance" first was used. What is certain is that the term appeared in print in three publications published in 1999:
These authors and other founding members of the Microinsurance Network recall that:
The term "microinsurance" was derived from a natural development from the older term "microfinance";
The term "microinsurance" was first used within the ILO and UNCTAD in Geneva in the mid-1990’s and in some academic circles in the early 1990’s.
The word "microinsurance" is used most common in the development environment to specify that one is talking about "insurance for the poor". Within the financial inclusion debate and the insurance industry, one prefers to use "insurance", insurance for a specific target audience. The Microinsurance Network uses the term "microinsurance" as it is a practical working title.
The present and future of microinsurance
There are innumerable microinsurance schemes around the world today, but they still only meet a fraction of the overall need. Recently some microinsurance schemes have become self-sustaining, however, many still rely on receiving essential support in the form of grants and technical assistance. Initiatives like the ILO's Microinsurance Innovation Facility are helping to support new research and projects to further the development of microinsurance.
Microinsurance can significantly assist the poor and low-income populations with managing some of their risks, but governments must meet their primary obligation to provide basic health services, fire fighting services, employment and education etc.
For microinsurance to be successful – for the insureds and for the risk-bearers – many elements are important; i.e. simple and affordable insurance products reaching large numbers of people; stream-lined administration, including premium payment; a simplified claims procedures and verifications; and rapid delivery of benefits. If most of these elements are present, it can be possible for microinsurance schemes to become sustainable, to perform well and to provide "real value" to the poor.