In Indonesia today, about one third of the population, or about 77 million people have no financial protection or savings to fall back on. Imagine the consequences when a poor family’s breadwinner dies, when a child from a poor household is hospitalized, or when a family’s crops are destroyed by drought or flooding. Such catastrophes threaten the very existence of poor households, and usually drive them deeper into poverty and despair.
This is where the use of ‘micro-insurance’ can be of tremendous help. Micro-insurance is not a specific product line or limited to a specific provider type. It provides coverage to low-income households and is offered in multiple forms: for example, to cover children’s schooling in the event of the death of a bread-winner; to cover children’s hospitalization; or to cover small farmers’ against crop failure due to drought or other extreme climatic events.
Micro-insurance helps low-income families cope when things do go wrong, and prevents them from falling deeper into poverty. In Indonesia’s case, the target market is mainly the rural poor who work in the informal sector, i.e. farm laborers whose earnings are volatile and unpredictable. For farmers, the traditional “urban” business model of agent-based and branch-based brokers fails to work.
Given the size of the potential market, private sector insurance companies are now seeing the attractions of developing products to serve this market. However, several factors have so far prevented micro-insurance from flourishing in Indonesia.
On the demand side there is a lack of awareness; a lack of insurance products addressing the needs of the poor; the perception that insurance is strictly for the rich; and finally a lack of trust due to the poor reputation of Indonesia insurance companies and people’s bad experiences dealing with providers in the past. On the supply side, financial contracts are overly complicated; claim settlements are too time-consuming and riddled with red tape; and high transaction costs make existing insurance products ultimately too expensive for the poor.
For micro-insurance to work, it has to be affordable and attractive to lower-income households. Providers need to offer products with low transaction costs, cost-effective distribution, and simpler settlement processes. Micro-insurance products should also offer a high degree of accessibility and flexibility. Mobile-phones could be used to help bring micro-insurance to rural and remote areas. For instance, a farmer in a remote area could pay premiums for drought insurance using a special micro-insurance application on his mobile phone. Policyholders with irregular cash flows could pay more premiums when funds are available, and pay less when cash flow is tight. Low-value assets could also be insured for short time periods: a single rice paddy, for example, could be insured against drought for a single crop rotation of say, four months.
Ultimately, for micro-insurance to succeed in Indonesia, the solutions need to be homegrown. Collaborations between the public and private sectors could lead to a range of innovative products, driven by demand. The World Bank in Indonesia is helping to foster this innovation by bringing together regulators and insurance providers, and sharing global knowledge. Once these micro-insurance products become available, lower-income households would need to be educated on the benefits of micro-insurance. At the same time, the skills of relevant institutions and potential intermediaries would need to be strengthened, in order to create an enabling environment for micro-insurance. The hope is that through nationwide access to micro-insurance, Indonesia will be making a major step towards the alleviation of poverty, while also providing a boost to the private sector and the overall economy.
When things go wrong in our lives, as they inevitably do, many of us have some money set aside or an insurance policy to fall back. Micro-insurance offers the opportunity for lower income families to make their ends meet and weather these hardships, without added financial strain.
Yoko Doi is a finance specialist working on financial inclusion issues at the World Bank office in Jakarta.
