Vacationing with many of my very large Italian family this summer, I have been reminded of some of the financial dynamics of family, which offer me the opportunity for a real-life reflection on some of the key points of our recent brief, “Keep Your Insurance Close, and Your Friends and Family Closer”. For example, supermarket shopping for 20 or more may seem overwhelming, but not if you alternate turns. Over the long term, when a younger brother who receives help paying for school grows up, he may be the one helping his older brother cover the cost of a long illness. Emotional and physical proximity, the promise of reciprocity and culture all play a role in creating this seemingly efficient financing circle (Ligon, Thomas, & Worral, 2002) (Fafchamps & Lund, 2003).
Friends and family are usually a preferred source of support.
When we began our client value work with the MILK project, a three-year collaborative initiative of the MicroInsurance Centre to understand client value and business case in microinsurance, the first country we visited was the Philippines. I spent some time on and around Panay Island, interviewing people who had just lost a family member. So many of the responses resonated as I recalled my own family’s experience. One woman who lost her husband responded by abandoning her small house and moving in with her in-laws and their extended family. I asked her, aren’t you concerned about losing your independence? No, she replied, I appreciate the help as well as the company.
Throughout our Client Math studies, we are seeing that friends and family are often a preferred source of support when a financial shock strikes. People in the communities we visited tend to have strong emotional ties, and often give money to their community or lend it at no interest, and usually quite quickly. Loans have to be paid back, but they can be very flexible, where the borrower pays what they can when they can rather than having to stick to fixed terms of a formal loan. There is strong reason to help strengthen these existing networks.
However, friends and family are often an imperfect solution for a financial shock. Why?
Friends and family cannot be relied on for all shocks. Our Client Math studies suggest that Friends and Family offer a greater proportion of support when a large and infrequent shock, such as a death occurs. Poor people often have friends and family who are also poor and may not have access to sufficient funds to fully cover a financial shock. These people must be careful about selecting when and why to offer help, at the risk of becoming the “go to people” for others when they themselves are unable to cover their own expenses. In the case of weather-related risk, we saw some evidence that covariate risk may have also reduced the ability of affected individuals to raise money from family or nearby community members (in particular insurance covered rural homes rather than separate business activities in urban markets).
Friends and family networks are also generally insufficient. Our studies of life microinsurance show that after a death, gifts and loans from friends and family covered between 6-61% of the costs across four of our studies for the insured and 12-81% for the uninsured. When crises were more frequent, and perhaps less emotionally difficult, such as hospitalization, friends and family covered much less - 12% and 14% of the total cost for the insured in two programs in India, and 15% and 26% for the uninsured.
So, what is the role of microinsurance?
Microinsurance, it seems, can often serve as a lever to crowd-in additional support, primarily loans, from friends and family.
In a sample of our studies, we found that each one-dollar increase in direct shock cost is associated with 27 cents in additional financing from friends and family. In Mexico, for example, we interviewed beneficiaries of Banco Compartamos’ funeral insurance and found that they were more likely to access informal debt, rather than using more stressful financing mechanisms. It seems that friends and family are more comfortable offering short, “bridge” loans when crises hit, with the promise of an insurance payout to the borrower serves as a sort of “collateral”.
In our view, microinsurance and social network support are generally complementary, and not competing, forms of protection for low-income individuals. Social support networks function differently depending on the place, type of shock, and other factors. For example, urban clients may benefit more from funeral insurance than more traditional, rural clients that are closer together. Frequent shocks may also be less able to be supported through social networks than infrequent ones. Our studies of health and flood insurance coverage showed quite low support compared to life insurance, even in similar regions such as the rural Philippines.
To be more effective, microinsurance providers, could gain from taking into account the role of social networks to design more relevant, targeted products for their clients as a strategy to increase client value vis-à-vis informal networks. For example, knowing that the community covers much of a funeral cost in the Philippines may be an argument against large immediate insurance payouts on life insurance and for more periodic installments of claims benefits payments. Offering fast payments, or better still cashless services as insurance benefits in other communities that don't receive as much support for funerals might help replace a role that community no longer plays. When people fall ill or suffer from natural disasters, families may offer less financial help, and insurance might play a key role in leveraging additional support. The better we understand where friends and family can help, the better we can tailor insurance to complement this support.
My cousin showed me a picture last night of my father as a teenager, clinging to his little brother’s hand in a busy market square in Italy in the early 1960s. His little brother stared up at my movie star-like father, with his crisp linen pants and Polaroid glasses, in awe. Today, the little boy in the picture with the big ears and short pants has my father’s back, but a little insurance wouldn't hurt too.
----- The author leads the client value effort in the Microinsurance Learning and Knowledge (MILK) project.