Mandatory and voluntary coverage

Mandatory (as opposed to voluntary) coverage, often required in connection with a loan, is widespread in microinsurance, particularly among life and accident products. While it is not always desirable or feasible, mandatory coverage has a number of benefits, including:

  • Lower marketing and distribution costs
  • Opportunity to build experience with microinsurance among populations with little past exposure to it
  • For lenders, protection of the loan portfolio
  • Avoidance of adverse selection

By contrast, voluntary coverage is in many ways more difficult to sell and delivery, though it has the advantages of ensuring that clients perceive value in the insurance product (which they display through willingness to pay for it) and encouraging insurers and delivery channels to more carefully explain coverage to clients, so they better understand how to use it.

Some products combine mandatory and voluntary coverage, for example by requiring clients to purchase a base level of coverage with the option to add on either more coverage or more covered persons.