Many risks can be insured by microinsurance, although as with traditional insurance, some of them are more complex and therefore more difficult and expensive to cover than others.
Microinsurance, as other types of insurance, should only cover insurable risks.
As the graph below illustrates credit-life microinsurance, insuring a loan against the death of the borrower, is widely viewed to be the simplest type of microinsurance.
Other relatively simple products include life, funeral, and savings microinsurance. Health and agricultural insurance products are among the most complex.
Microinsurance is particularly appropriate for microeconomic shocks that affect individuals or households and are linked to unpredictable events, such as the death of a member of the household, damage affecting the house or goods (business-related or personal), illness, or accidents. Other financial tools, such as savings or credit, may also be used to cover the costs of these shocks, but are often insufficient, especially if the incidents are repeated or substantial.
Mesoeconomic shocks can hit groups of households, a community or a whole village; microinsurance is therefore not as easy to apply. Such shocks are said to be covariant, i.e. they are common to all households within a given group.
They include natural disasters, technological disasters (such as India’s Bhopal disaster in 1994), or social risks (wars, riots, consecutive fires), epidemics, and other major events causing substantial and simultaneous losses in a large part of the population. Reinsurance is the main way of protecting oneself against these type of events, as it enables microinsurers to provide additional coverage.
Macroeconomic shocks are beyond the reach of microinsurers as they happen nationally or internationally. The solution can only be provided by national or international instances, or in some cases by financial markets (weather derivatives).
- Christian Biener & Martin Eling (2012). Insurability in Microinsurance Markets: An Analysis of Problems and Potential Solutions. The Geneva Papers, 2012, 37, pp. 77–107. Geneva: The International Association for the Study of Insurance Economics.