Principles of insurance

The basic principles that microinsurance providers should follow are the universal principles of insurance:

  • The policyholder has an interest in the subject matter of their policy
  • The insurable risk represents an event(s) that the policyholder has limited control over
  • Such events could potentially affect a large group of individuals. The essential role of the insurer is to pool a group of individuals that is large enough to spread the risk across this pool.
  • The maximum loss caused by the incident must be limited.
  • The damage and its likelihood of occurring must be measurable. Setting insurance premiums is based on the assessment of how high the expected losses can be and how likely they are to occur.
  • The amount of the insurance premium must be compatible with policyholders’ capacity and willingness to pay, as well as that required to sustain the provider’s business.
  • The insurance provider must be capable of analysing and limiting the main risks it faces: fraud, moral and anti-selection risks.