The devastating fire which swept through Nairobi’s Toi market recently, destroying hundreds of stalls and causing thousands of dollars in damage, is a timely reminder of the insecurity faced by many people trying to make a living. It is unlikely that many of the market traders had insurance cover. Bernice Wasike, a stall holder at the market, told local media: “We did not salvage anything. Our goods were burned. Personally, I have lost 200,000 shillings (USD 2000) worth of stock in shoes and other wares.”
Countless millions of informal traders, micro-entrepreneurs and small businesses in developing countries live with the daily risk of falling back into poverty because they either can’t access or can’t afford insurance. Risk management and insurance are vital for building the resilience that underpins the Sustainable Development Goals (SDGs). Inclusive insurance has the potential to be a significant weapon in the fight against poverty (SDG 1), to ensure good health and well-being (SDG 3) and to achieve decent work and economic growth (SDG 8).
Inclusive insurance can help end poverty by accelerating economic growth, increasing resilience, preventing the intergenerational transfer of poverty and reducing the risk of going under after a crisis. It can be an important addition to basic state-provided health protection, as it encourages people to seek better healthcare. Inclusive insurance can also help micro, small and medium-sized enterprises (MSMEs) in emerging economies which are vulnerable to risks and have a high incidence of business failure. Insurance is a vital component of integrated risk management for them, and can help them grow by unlocking access to credit and other financial services.
Recent research in Ghana, Nigeria, Kenya and Rwanda by MiN member Cenfri, in partnership with the World Bank – a fellow member of the Network - the UK Department for International Development (DfID) and FSD Africa suggests that insurance contributes to inclusive economic growth in three specific areas: building household resilience, building business resilience and developing capital markets.
Insurance can boost the welfare of individuals in households by building resilience to financial shocks caused, for example by illness or unemployment, and by providing peace of mind even when life is smooth. A payout after a shock can greatly reduce or even eliminate the risk of sliding back into extreme poverty. Knowing that their risks have been transferred to an insurer allows individuals and households to focus on their “productive expertise” to earn and invest more. Insurance also opens up access to other services such as credit, health and education.
Insurance also improves business resilience. Micro and small entrepreneurs - such as those hit by the Nairobi market fire - can transfer the financial impact of a risk, thus enabling them to bounce back from shocks. In addition, insurers may well require a business to put risk management strategies in place to reduce risk in the first place, thus encouraging more responsible business behaviour and practices. Significantly, insurance also enables businesses to access credit and other financing such as mortgages and leasing. Insurance reduces the risk of a business defaulting on a loan which in turn allows for more credit to be extended on better terms.
Finally, insurance can help develop the depth and efficiency of capital markets to support growth in emerging economies. It does this in four ways: mobilising capital through premiums, pensions and business investment; creating large investment funds pooled from numerous small investors and savers; allocating capital more effectively, more productively, at greater scale and over a longer period than individual investors can; and building professionalism, governance and investor and business confidence.
Taken together, these impacts create a powerful case for inclusive insurance as a crucial tool to boost economic growth and well-being. Insurance results in welfare improvements for households, growth and investment for businesses, and long-term, large-scale investment such as infrastructure by capital markets. However, illness, accidents and fires are just some of the risks faced by individuals, families, businesses and communities in developing countries. Micro and small-scale farmers and agricultural entrepreneurs have to cope with the additional shocks caused by climate change and natural disasters. They suffer disproportionately due to their higher vulnerability and exposure and lower ability to cope and recover. The upcoming 15th Consultative Forum on Inclusive Insurance will explore how insurance providers, policymakers, regulators and supervisors can collaborate to reduce the protection gap and help to build resilience.