Why People Don’t Buy Microinsurance

Low demand of microinsurance is often attributed to a lack of understanding of microinsurance concepts and products. Poor understanding, however, is only part of the problem. Many other factors influence a household’s decision to buy microinsurance.  

New evidence from a review of more than 30 quantitative and qualitative studies reveals trust, liquidity constraints, the client value proposition and behavioral constraints to be the most important determinants of demand.

The new evidence debunks some of the most common myths about the determinants of demand. For instance, it is believed the demand is low because people can’t afford microinsurance.  The evidence shows that liquidity constraints are one of the biggest determinants of demand, but not because the poor have no money; rather, they have insufficient funds at the time of enrollment.

Insurers can mitigate liquidity constraints by scheduling premium payments when money is readily available, for instance after a harvest. Researchers evaluated the effect of deferred premium payments in a pig insurance scheme in China. They offered credit vouchers that allowed farmers to take up insurance while delaying the premium payment until the end of the insured period, coinciding with when pigs are sold and liquidity constraints are relieved. Deferred premium payments increased the purchase of the insurance by 11 percentage points (from 5%, observed for those farmers not receiving vouchers).

Barriers to action greatly influence demand. Even people who are convinced about insurance do not buy it because of a failure to convert intentions into action. People are influenced, sometimes disproportionately, by seemingly inconsequential behavioural constraints that prevent enrollment. These constraints can be situational, such as requiring clients to submit the enrollment form at the insurer’s office, without knowing the location of the office. Researchers in Nicaragua found when they allowed market vendors to enrol directly at their market stall rather than the insurer’s office, uptake was 30 percentage points higher.

In a study in China renewals were higher when clients had to opt-out, rather than stay-in insurance. Such a default option needs, however, to be clearly communicated to clients as an undesired renewal can easily lead to distrust in the scheme.

The evidence (though limited) also shows that client value and demand are interlinked and products that deliver (or are perceived to deliver) higher client value are likely to produce greater returns for the insurer in the long term. Practitioners need to think about client value holistically; they should abandon the simplistic approach of crafting the value proposition only on cost and benefits, but also focus on how clients access and experience the product and related services. For instance, in the case of health microinsurance, the quality equation extends beyond the cost and benefit levels of the product itself. It is difficult to separate the related service from the product, and the ability and ease of access to the health-care service is, in fact, considered an insurance product feature. Lack of quality of health centres is often identified as one of the strongest impediments to take-up of health microinsurance.

The importance of the quality of the client value proposition is even more noticeable in the context of renewals. Researchers reported that the (negative) perception of the value was one of the three most important determinants of renewal for the Swayam Shikshan Prayog (SSP) health scheme in India. SSP observed that clients who had accessed discounted consultations and medicines, offered as a value-added service, were three times more likely to renew.

Microinsurance should be developed in relation to other risk management practices.

Bundling insurance with other financial products could increase the demand for both products if they are seen as complementary solutions. Evidence from MicroEnsure in Ghana shows that bundling savings and insurance can increase insurance penetration and stimulate savings.  Depositors who held a minimum balance of $60 each month were entitled to free life insurance with benefits of up to $180.  Five months after the launch, deposits in the bank increased by 19%. Deposits from clients with balances below $60 increased by 207%. This increase along with anecdotal evidence from interviews with depositors suggests that many customers changed their savings behaviour as a result of the free insurance cover.

Demand is a complex issue, with trust, liquidity constraints, the quality of the client value proposition and behavioural constraints emerging as the most important determinants of demand.  Practitioners need to understand the demand puzzle in their context, identify the most important determinants and design specific product design, pricing, promotion and distribution strategies.

---- Michal Matul heads the Knowledge Team of the ILO’s Microinsurance Innovation Facility, a program funded by the Bill and Melinda Gates Foundation, Z Zurich Foundation and AusAid to stimulate innovation in microinsurance.Aparna Dalal works for the Facility Knowledge Team.