Abstract
In the recent past, concerted efforts have been made to encourage financial service access to the poor starting with microfinance and subsequently micro-insurance. With complexity of insurance and the vulnerability of the target market, there are inherent risks that insurance companies face in serving the low-end market. This study documents these risks, discusses the strategies that Kenyan insurance companies are using to mitigate the risks and discerns creative strategies to minimize them. Purposive sampling was used to select 8 companies that offer micro-insurance products in Kenya, from which 49 key informants responded to the survey. Visual binning approach was used to describe the data, while statistical tests of correlation and association were carried out by use of Pearson Correlations and Chi-Square tests. The study singled out the most ubiquitous risks facing micro-insurance providers as; diseconomies of scale resulting from low penetration, limited distribution channels, correlation risks and rigid regulatory framework. The strategies being used to counter the risks include; use of technology to lower administration costs, control of moral hazard and adverse selection, thorough scrutiny of claims, development of risk measurement models and continuous monitoring of the clients. Micro-insurance service providers are advised to invest in research and actuarial services to improve pricing of the products, develop innovative distribution channels, adopt technology conscious partnerships and devise flexible premium payment terms to enhance control of micro-insurance risks. The industry regulator (Insurance Regulatory Authority) is further advised to ensure that micro-insurance policies are drafted in simple language understandable by the clients.
Highlights
Micro-insurance entails delivery of insurance products to participants at base of the pyramid
Low-income earners face risks and economic shocks that might be the same as conventional insurance clients, the low-end market is more susceptible due to limitation of resources and knowledge (Churchill, 2006; Maleika & Kuriakose, 2008), are not able to mitigate risks compared to their higher-income participants; and in case of economic loss from perils, they are less equipped to cope with the aftermaths
This study focuses on an area that has not been expressly addressed by other studies namely; risk management in the context of micro-insurance provision
Summary
Micro-insurance entails delivery of insurance products to participants at base of the pyramid. Low-income earners face risks and economic shocks that might be the same as conventional insurance clients, the low-end market is more susceptible due to limitation of resources and knowledge (Churchill, 2006; Maleika & Kuriakose, 2008), are not able to mitigate risks compared to their higher-income participants; and in case of economic loss from perils, they are less equipped to cope with the aftermaths. The poor face two types of risks namely; idiosyncratic (specific to the household) and covariate (common to all). To combat these risks, they have traditionally used risk pooling (for instance funeral and burial societies), income support (for instance credit arrangements and transfers) and informal insurance or risk-sharing schemes such as grain storage, savings, asset accumulation and loans from friends and relatives (Bhattamishra & Barrett, 2008; Tadesse & Brans, 2012). The prevalent forms of risk management (in kind savings, self-insurance, mutual insurance) which were appropriate earlier are no longer adequate and feasible (Pierro & Desai, 2007; Giesbert & Steiner, 2012)
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