November 2008 • Number 138

A regular series of notes highlighting recent lessons emerging from the operational and analytical program
of the World Bank‘s Latin America and Caribbean Region.

Mike Goldberg and C.S. Ramanathan
This note discusses the rapidly evolving issue of microinsurance in Latin America and how MFIs, insurance
companies and donors can respond to its challenges. This
note is part of a series summarizing the DFID-LAMIT
eight-part distance learning program with South American microfinance networks and government officials.
This note addresses three critical questions about microinsurance in Latin America.
1. What is microinsurance?
2. Is microinsurance a very useful way for low income
households to manage their risks?
3. What are the challenges for expanded coverage of
commercial microinsurance in Latin America, and what
can governments, donors and investors do to help?
What is Microinsurance?
Microinsurance is defined as the protection of low-income
people against specific risks in exchange for regular premium payments. Microinsurance can be provided by a
variety of entities, and should be run in accordance with
generally accepted insurance practices (see www.iaisweb.
org). Like any pro-poor financial product, microinsurance
can only be effective and attractive if delivery and collection mechanisms are innovative, products are demand
driven and affordable, and the risk management system
protects the portfolio from adverse selection and moral
hazard. MFIs can play a central role in microinsurance delivery, given their intimate knowledge of their clients and
the similarities in the products and processes. In partnership with MFIs, traditional insurance companies typically
underwrite the insurance contracts.(see Box 1).

Helping the Poor Manage Risk
Over the past two decades, Latin America has witnessed
rapid growth in microcredit (largely short term working
capital loans). Despite the incredible progress in creating assets owned by the poor, MFIs have not addressed
the risks faced by microbusinesses and low income
households – whether from hurricanes, fires, accidents
or other causes. The insurance penetration rate in Latin
America is only 2.5 percent, compared to 4.3 percent in
Africa and 3.1 percent in Asia. Only seven percent of the
region’s 113 million people with annual earnings below
US$3,000 have any form of insurance coverage.
Because they only have a small amount of savings and
other reserves, poor households are left with few risk
management options. They are more vulnerable to unexpected events or disasters than middle-income or wealthy
households. In the absence of insurance, they adopt
expensive risk management options. For instance, data
Box 1 - The Elements of a Microinsurance Contract:
• Policies are for small amounts and are provided as a group
policy, not individual.
• Documentation is simple and easy to understand.
• The client pays the premium in installments usually through
an existing payment source like a microcredit or a consumer loan repayment.
• The underwriter may be a private insurance company, a
cooperative, a mutual-based association or a community
based organization like an NGO or a funeral parlor.
• A variety of intermediaries (MFIs, public utility companies,
retail stores, and telecom companies) distribute the policies.

The work described in this note was supported by the UK Government’s Department of International Development (DFID) through
the Markets and Governance for Poverty Reduction Fund (MGPR) Trust Fund. The views expressed in this document are not
necessarily those of the UK Department for International Development’

have little disposable income. the institutional options are similar to microcredit—ranging from cooperatives to non-governmental financial institutions. 10 8 6 4 2 0 Chart 1 . presentation Feb. public utility companies. and are left out of market research studies. Pension. credit life (to pay off a debt upon the borrower’s death). and services that can lower costs. and banks. Microinsurance Centre. Drought. experience shows that the most efficient and effective way to achieve large scale microinsurance coverage is the partner-agent model. and efficient information management systems. Type Examples Life Credit . Agriculture. accident and life insurance are more common. Dismemberment. 10 percent send another household member to work. Optical. microinsurance requires an institutional provider with experience in risk management. 2006  • December 2008 • Number 138 2nd Priority Property Job loss 3rd Priority Livestock Other . Prices To overcome such barriers. 27.In traditional insurance. As such. while property and health insurance products are rare (Microinsurance Centre Landscape study of May 2007). Microinsurance providers have to operate with far less information because clients are often not served by formal financial institutions. Debt coverage due to disability Health Hospitalization. insurance companies must be aware of the rules of the game established by the government through legal and regulatory frameworks and supervision arrangements. illness. from the Living Standards and Measurement Study Survey demonstrate that. Dental. Insurance companies can enter the microinsurance mar- Launching a Microinsurance Program Number of countries The cost of underwriting coverage is directly related to the quality of information available about the client. They should be able to deploy the extensive delivery networks of their partners to develop an efficient and large scale program. in response to an unexpected and devastating event. Endowments Disability Permanent. or telecom companies. Given the distribution networks required to reach large numbers of clients. Though this individual client analysis results in higher costs. Surgical. Temporary. and another 25 percent meet expenses with more debt. and asset losses of poor households and microbusinesses to calculate the risks as the basis of the premium. Insurance companies maintain complex databases to estimate the risks faced by specific individuals. Few countries have databases with statistical information on the rates of mortality. To launch a microinsurance product. the level of benefits and the potential profits for the insurer. local networks. and specific diseases Property Fire. Total. Funeral. (see Chart 1). the client’s risk priorities are generally met. half of the poor households reduce their spending on food and clothing. 2007 From the supply side. Education. product development. the most common products include funeral. Microinsurance can address the need that these strategies represent by providing coverage when it is most needed. accidents. The insurance company provides the coverage and the partners provide local knowledge. Partial. Out-patient. This model pairs commercial insurance companies with MFIs. Flood. Evidence from demand studies in 11 countries shows that there are preferences for health and funeral/death insurance in most cases. Theft. Source: Michael McCord. a product’s price is based on the individual’s risk exposure. There are several types of insurance that are likely to be popular among low income households and microbusinesses (see table below).Risk management needs prioritized by the poor in 11 countries 1st Priority Health Death Source: Cohen and Sebstad.

munichre-foundation. For example. The bidding process has led to increased competition among insurance companies and resulted in more demand-driven products at an affordable price. sale and servicing. The Colombian case highlights an important feature—the integration of all four actors (government. FINSOL’s management noticed another gap in the market—a lack of insurance coverage for borrowers. the leading MFI Compartamos calls for microinsurance bids each year. in combination. electronic debit cards are allowed by the regulator for collection of premium payments. for example. Technology like smart cards. or new market opportunities. Seguros Mapfre. The Colombian competitive insurance market drives microinsurance growth and is largely responsible for the sale of 3. Successful Cooperative Models in Latin America Two cooperative insurance providers demonstrate another model that has proven effective in Latin America: La Equidad in Colombia and La Columna in Guatemala. The Spanish firm Seguros Mapfre is the underwriter. several MFIs have taken the lead in creating a microinsurance sector.Codensa. premium payment records and claims data. In Colombia. Yet.ket niche based on strategic decisions. in Mexico. FINSOL life insurance had reached more than 180.000 clients through 105 branches in 28 states. Such a robust information system enables Codensa to demand innovative product benefits from Seguros Mapfre. Finally an innovative delivery channel partner like Codensa (see Box 2) drives the Colombian insurance companies to offer better quality microinsurance products at a reasonable price.000 clients of Compartamos. The microfinance institutions did not have the specific insurance design and delivery skills. In 2002. The supportive norms help reduce the cost of distribution and products become easily accessible and affordable to low income clients. and viii) double coverage for accidental death. The policies for low income households include funeral. The insurance companies compete to offer voluntary insurance schemes to more than 600.000 Codensa clients and settled more than 30. the program for financial inclusion—Banca de las Oportunidades— strives to provide access to microinsurance among other financial services. Colombian microinsurance has also benefited from a supportive regulatory environment. company (SOFOL) in Mexico. according to the national insurance association FASECOLDA. The government has also recognized the importance of offering microinsurance to protect the gains made by poor people through improved access to financial services like savings and credit. Between 2001 and 2008.1 million policies.000 coverage iv) immediate pay-out of 30 percent for funeral expenses.000 claims. and by mid-2007 was serving more than 200. has insured 300. the regulator supports the distribution of microinsurance products through innovative channels like utility companies. Both programs have achieved significant levels of coverDecember 2008 • Number 138 •  . As the institution evolved. Codensa’s strength is in its well-structured client information system. For example. In addition. a group of financial sector investors created Financiera FINSOL. a regulated limited objective financial Box 2 . The terms of the insurance include: i) no medical examination required for coverage. iii) US$3. home insurance and personal accident insurance. The high costs of promotion and operations as well as the geographic isolation of many potential clients had made these clients unattractive to traditional providers. Codensa provides the promotion. Competitors in the traditional insurance business can also influence a company’s decision to enter the microinsurance market. life. Source: See: www. regulator. Successful Partner-Agent Models in Latin America In Latin America. Within one year of start-up. competitive pressures. The regulator does not set any price controls on premiums or commissions. extended warranties (on consumer goods). the life insurance product pays a lump sum and compensates the loss in income of the insured for 12 months to meet the education and food expenses of the household. the largest electric power distribution company in Colombia. v) remaining pay-out is made within three days vi) coverage of people ages 16 to 65. FINSOL began operations in August they could come up with a product that would be attractive to FINSOL clients and marginally profitable for the institutions. vii) use of a collective policy format.000 of borrowers. intermediary and competitors) is a pre-requisite for a successful microinsurance market development. ii) policy costs kept low. By providing policy leadership and using incentives. has used its base of two million clients to develop appealing microinsurance products with insurance companies. governments can encourage the growth of a strong microinsurance sector. which captures information on the demographic characteristics of the client.

Its success stems from its reinsurance of the insurance portfolio. Governments should develop an enabling environment for insurance companies to offer and for clients to purchase appropriate policies. The company is ranked 13th out of the 21 life insurance companies in Colombia in terms of premium income. market research. World Bank. Mexico. the institutions’ solvency is not monitored by an impartial government body. technical assistance. La Equidad is a regulated insurance company founded in 1970 by 41 cooperatives. Second. About the Authors Mike Goldberg is a Senior Private Sector Development Specialist and C. claims settlement.microfinancegateway.” Protecting the Poor: A microinsurance compendium. First. they might fund programs to develop actuarial tables and market research to understand risk priorities in the low income market segment. and leveraging an efficient and profitable distribution channel (thereby providing economies of scope and scale). Good and Bad Microinsurance Practice Case Studies. Washington DC. These companies already have the skills. 2007. It has special characteristics in design. Jim Roth and Dominic Liber. H. With 25 affiliated cooperatives and several large independent NGOs selling its policies. management information systems and client education. La Columna provides coverage to 54. Its success is based on its demand-driven products that reflect its clients’ risk priorities. Access to Insurance for the poor.http://www. 2007.worldbank. starting with investing in training to improve management  • December 2008 • Number 138 . donors and investors can help by financing training. an effective point-of-membership sales strategy (involving member testimonials and lotteries). actuarial tables. Cohen. February 17. F.273 cooperatives and non-profit institutions with a combined membership of two million people. www. Wisconsin. because insurance authorities do not supervise cooperatives. governments and investors to play in strengthening the cooperative service providers. special incentives for policy renewal. Presentation for Distance Learning Series. Website on resource centers. Microinsurance Centre. Presentation on Microinsurance Products and Delivery Channels. Finally. Monique and Jennifer Sebstad.age. Seguro de Vida – FINSOL. and its high quality services and efficient operations meeting international standards (ISO 9000 certification). USA Rivas. both with the Poverty Reduction and Economic Management Department of the Latin America and the Caribbean Region of the World Bank. There is a role for donors. Finally. They might also provide the seed capital to build a reserve fund for future claims. Finally. “The demand for microinsurance. its reinsurance program to help with risk management. 2007. FENACOAC) and nine leading cooperatives in 1994. To offer microinsurance products. Rio de Janeiro. The Landscape of Microinsurance in the World’s 100 Poorest Countries.000 members. or fund technical assistance for product design. information and risk management systems required for microinsurance. 2006 McCord Michael. Brazil McCord Michael. streamlined policy these cooperatives rarely have information systems that can handle the amount and type of information required for sustainable insurance operations. the design and pricing of microinsurance products might not be appropriate because cooperatives may not have experienced staff with risk management expertise. USA CGAP (Consultative Group to Assist the Poorest). La Columna was created by the National Federation of Credit Unions (Federación Nacional de Cooperativas de Ahorro y Crédito. in many countries the path to large scale microinsurance coverage will be through traditional insurance companies. As of 2008. Working Group on Microinsurance. delivery. it is not just a scaled down version of commercial insurance. The Future of Microinsurance in Latin America While microinsurance shows enormous potential. claims processing and premium structuring that make it an important alternative risk pooling mechanism for the poor. Bibliography CGAP (Consultative Group to Assist the Poorest). Although co-operative models have shown success in some cases. it is owned by 1. “en breve” is produced by the Knowledge and Learning Team of the Operations Services Department of the Latin America and the Caribbean Region of the World Bank . 2004-2006. these institutions had to overcome several disadvantages inherent in their institutional structures. and other support efforts. Ramanathan is a Consultant.