Micro-insurance is a new concept where premium is set in such a fashion that the low-income people can afford to pay it and get the benefit of insurance services. But then micro-insurance has been receiving less attention as an inclusive financial service for the poor and low-income people. Many developing and under-developed countries have already introduced micro-insurance. Some countries, such as Brazil, Peru, India and the Philippines have incorporated micro-insurance in their regulations.
The importance of micro-insurance for the low-income people is seriously considered for many reasons. In Bangladesh, shocks stemming from death, illness, fire, theft, livestock loss, crop loss etc. often cause severe setbacks that dramatically reduce the assets and income of poor households and gradually reduce consumption.
To avoid the shocks, the poorer households are often forced to sell their assets or borrow at unsustainable terms. Many of the affected people are unable to cope with the shocks and become more vulnerable. Micro-insurance services for the poor are deemed to be a sustainable solution to protect them from various perils.
Agricultural insurance may be considered as micro-insurance since small and marginal farmers are involved in farming activities in Bangladesh. A pilot project of crop and livestock insurance was undertaken for the first time in Bangladesh by Sadharan Bima Corporation (SBC) in 1978 which eventually collapsed in 1992 incurring huge losses.
The Bangladesh economy is agro-based where livestock, especially cattle rearing, is an integral part. Cattle rearing has emerged as an important source of livelihood of marginal, small and medium farmers. To many farmers, it is a source of main or supplementary income. In addition, cattle hides are important sources of foreign exchange earnings.
According to the Export Promotion Bureau (EPB), Bangladesh earned $ 1.29 billion from exports of leather, leather goods and footwear in the 2013-14 fiscal. The amount accounts for 4.2 per cent of the country’s total exports. Footwear alone fetched $550 million in foreign exchange of the leather sector’s total export earnings. In the 2012-13 FY, the footwear sector’s export earnings stood at $419.3 million.
Every year a large number of animals die or are infected due to improper management (inadequate feed, improper housing and poor hygiene), infectious and parasitic diseases. Natural disasters also cause huge loss of livestock. Cattle are one of the worst victims of severe flood, drought, cyclone and tidal wave.
Flood hazards may include drowning and snake-bite in addition to unavailability of feed and shelter. These are the causes of under-nutrition which reduces health, productivity and disease resistance of animals.
All these result in weight loss and death which increase veterinary expenses, bring economic losses and create debt burden at farmers’ level. Good return from cattle rearing depends on purchasing disease-free cattle, feed management, proper vaccination and improved shelter, etc.
In Bangladesh, the NGO-MFIs (non-governmental organisations and micro-finance institutions) are involved in micro-insurance mainly in credit life or debt insurance to protect the micro-credit borrowers from indebtedness in case of borrower’s or primary earner’s death. Many initiatives are taken in health insurance for the low-income people.
All these initiatives may be called quasi-insurance services, which are not actuarial-based. The government of Bangladesh established Palli Karma-Sahayak Foundation (PKSF) with a view to creating employment considering micro-finance as a poverty-reduction mechanism. PKSF provides credit and technical assistance to the poor people through its partner organisations (POs) which are micro-finance institutions (MFIs).
PKSF recently completed a micro-insurance project titled ‘Developing Inclusive Insurance Sector Project (DIISP)’ with cooperation of Japan Fund for Poverty Reduction (JFPR) and Asian Development Bank (ADB). Under this project, an international actuary has developed poor-friendly insurance services including a livestock insurance service for pilot testing.
PKSF has been executing the pilot test of actuarial-based cattle insurance through 28 POs for the last two years. Under this insurance service, only cattle which are fattened for the Eid-ul-Azha purpose are covered. It is mandatory for the borrowers under beef fattening programme to obtain livestock insurance policy for their cattle.
To obtain a policy, the borrower has to pay 0.7 per cent of loan amount as premium per cattle to get their cattle insured for the period of six months. In case of death of cattle-head during the insured period due to conventional mortality or natural catastrophe/epidemic, 100 per cent loan amount of the borrower with the MFI is waived.
The premium for cattle insurance has to be paid by the borrower during the time of policy issuance and at the beginning of the loan cycle. Other terms and conditions of cattle rearing need to be strictly maintained by the borrower.
In 2014, participating POs disbursed Tk 4.72 billion credits to their members for beef fattening. Using this loan, 4,19,757 cattle-heads were purchased and covered by the insurance scheme. In 2014, 1,078 cattle-heads died and Tk 20.15 million claims were paid. The mortality rate was found 0.26 per cent and claims ratio was 35 per cent.
One of the unique features of the cattle insurance programme of PKSF is that POs provide veterinary services to the poor farmers with a view to creating awareness on cattle rearing, cattle health management and vaccination. Veterinary services include monitoring cattle-heads, feed management, healthcare of cattle, check cleanliness of the shelter etc.
These have significantly reduced the morbidity and mortality rate of the cattle. Each cattle owner received health card for keeping records of his insured cattle.
One of the concerns in cattle insurance is that only insured cattle are properly vaccinated and well-maintained whereas non-insured cattle are out of proper attention which might affect the insured cattle. Absence of reinsurance is another concern that might hamper uninterrupted continuation of livestock insurance programme.
Reinsurance is essential to provide protection against covariant or catastrophic risks that affects a large number of the insured items. Covariant loss is generally incurred due to epidemic, natural or man-made disaster, or else, covariant risk may arise in insurance programmes due to extreme situation, e.g. excessive/abnormal claims.
Even if the cattle insurance of PKSF is affected by any sort of catastrophic events that increase the mortality rate to 0.75 per cent, the insurance programme would be unsustainable. Thus there is a need of reinsurance mechanism in insurance business.
But the MFIs are legally not permitted to engage in reinsurance business. In this respect, as an alternative of reinsurance, PKSF has established a covariant risk fund to meet obligations to pay claims associated in the event of a catastrophe.
Micro-insurance business has many challenges in Bangladesh. One of these is to make it affordable and sustainable. Operating cost of running micro-insurance programme is very high which discourages the formal sector insurance company from engaging in micro-insurance business.
Cost-effective delivery mechanism can solve this problem. In this context, NGO-MFIs, which are providing the financial services to the doorsteps of the poor all over the country through their branch network, can come forward to render insurance services in a reasonable cost.
Again, these NGO-MFIs have some institutional problems such as lack of skilled manpower, internal governance along with regulatory drawback. Recently-passed Insurance Act 2010 has no specific provision for regulation of micro-insurance business. But the government of Bangladesh has finalised a National Insurance Policy where provision of insurance for the low-income people has been given special emphasis.
Insurance is an extremely dynamic business where enormous systematic operational approach is essential to follow. Apex institutions like PKSF may be considered as a proper institution for promoting micro-insurance since it has been gathering experiences and has a nationwide network and resources.
Bangladesh is a highly disaster-prone country. Many individuals and institutions are trying to incorporate insurance in human- induced climate change events to protect the vulnerable people.
We should not forget that insurance could only address the insurable risks. If there is a chance of perpetual risk, insurance may not be a viable solution. In that case, we may incorporate insurance with broader social protection or safety net programmes of the country.
Many insurance companies at home and abroad have been aggressively trying to undertake micro-insurance with a motive of high profit. We need to be aware of those types of organisations and we should be careful not to make micro-insurance a panacea.
The writer is General Manager, PKSF. Views expressed in this article are of the writer’s own.
Apr 23, 2010 26
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