Explanation of Microinsurance

Microinsurance refers to an insurance plan designed to cover a very small portion of the market that would not typically be able to attain coverage through traditional methods. Microinsurance offers low capitalization, low premium and, in turn, low coverage limits. It is essentially a way for individuals who do not have a large amount of income or profit to spend on insurance to at least partially cover losses. By binding together with others who have similar needs and circumstances, these individuals can pool risk and still attain a level of coverage to protect against various liabilities.

Definition of Microinsurance

"Micro" implies a small scale or focused purpose. Insurance is a system that involves pooling resources into one common fund in order to share the risks each individual member of the fund may be exposed to. While many members will never need assistance from the fund, if they do experience a claim, they will be guaranteed coverage. The fund grows from contributions from its members, called premiums, which are very low in the case of microinsurance. The individuals in a micorinsurance group are exposed to very similar risks; this reduces the chance each of them will actually be exposed to the risk. If any one member is exposed, however, that member will be entitled to pre-determined benefits that are very low to moderate compared to those in the general market.

History of Microinsurance

Microinsurance evolved through risk pools. These groups formed out of the need for specific areas of the economy, such as low-income individuals or small businesses, to obtain less costly insurance coverage. The individuals forming these risk pools agree to a lower benefits package. They are willing to assume a greater amount of risk than many individuals in exchange for low premiums. For example, with a standard health insurance company, an individual may go for routine checkups with a physician to reduce the risk of illness. With microinsurance, individuals agree to receive no reimbursement for this type of office visit. They may stop going for routine checkups as a result, and they may even avoid the doctor when sick because they have low coverage. However, they pay far less in premiums every month.

Types of Microinsurance

There are several types of microinsurance agreements. In a full-service model, the microinsurance company handles everything about the plan from design to implementation. In a more limited partner model, the microinsurance company teams up with another agent and simply markets the product but does not design the plans. With a provider-driven model, a health care company acts as a full-service microinsurer. With a community-based model, the individuals participating in the risk pool are responsible for all aspects of its management.

Problems with Microinsurance

While micoinsurance agreements have filled a crucial gap in coverage of health care and other liabilities for low-income individuals, they face significant risk of bankruptcy. They have very few "healthy" members willing to continue providing premiums even when the premiums go unused. As a result, they have higher claims per person, and this can lead to a draining of the fund.

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