Microinsurance as a Liberal Market Approach to Social Protection? A Second Look

This viewpoint looks at the characteristics of microinsurance from a social protection perspective. Insurance products, which are specifically designed for the low-income population of developing countries, have lately seen a large boom. This viewpoint questions the common perception that microinsurance is a liberal market mechanism that substitutes for state action. The conclusions are relevant for policy makers concerned with social protection in developing countries.

Tabea Goldboom is a doctoral researcher at the Freie Universität Berlin, Germany, working on microinsurance as social protection. She is also a member of the research network, desigualdades.net at the Freie Universität Berlin.


Microinsurance is among the instruments for social protection which, over the last decade, have gained new prominence in developing countries. From the perspective of social protection research, the question is whether microinsurance products follow different principles of welfare production compared to traditional social insurance programmes and, if so, which ones. Microinsurance products cover areas such as health, agriculture and life insurance and are specifically designed for low-income groups, mostly in developing countries. Members of microinsurance schemes usually pay at least part of the insurance premium out of their own pockets. Policy makers often discuss microinsurance as a partial substitute for formal social security schemes in contexts where the state is either unable or unwilling to implement comprehensive systems. Most microinsurance products target informal economy workers and the rural population.

Given the large number of microinsurance schemes which have emerged recently, the specific ways in which this mechanism contributes to the creation of social protection deserve some attention. This viewpoint looks at whether microinsurance embodies specific principles of welfare production. While social protection research has thoroughly discussed other recent innovations, in particular conditional cash transfers (CCTs), microinsurance has received less attention. This is perhaps not surprising given that microinsurance seems to represent a liberal market approach to social protection with responsibility for social protection going to the market and to individuals rather than to the state. Some policy makers regard this market approach as a distinctive advantage of microinsurance vis-à-vis other instruments: it is seen as a pragmatic answer to limited state capacity, or as an embodiment of the liberal guiding principle that the state should only step in where markets fail. However, a considerable part of social protection research favours formal social security systems and public social provision, and takes a critical stance as to whether private insurance is the most appropriate social protection mechanism for the poor.¹

While the perception of microinsurance as a liberal market mechanism is not totally wrong, a second look reveals a more complex picture. It shows that, in many instances, public actors have financial or administrative responsibility for microinsurance schemes or are heavily involved in the marketing of these instruments. Some state actors have also tried to use microinsurance for the promotion of social rights. Thus, the instrument often does not represent a market solution in situations of state failure or retreat. This is in opposition to the market ideology, which provides the basis for many microinsurance activities. The following paragraphs explain with some more detail why the perception of microinsurance as a liberal market-based instrument is incomplete and what a more holistic approach to microinsurance entails.

Microinsurance creation around the world: A plethora of non-state and state actors
Microinsurance products cover risks in the areas of life, health, disability, agriculture and property. In spite of many challenges, microinsurance schemes or pilots have been introduced in most Asian, Latin American and African countries.² Over the last years, the speed of microinsurance proliferation has been fastest in large and rapidly developing countries like Brazil, India and South Africa. India is the biggest market for microinsurance: approximately 163 million Indian citizens had some form of microinsurance in 2009-2010.³

While microinsurance is a product of the microfinance industry, a large range of actors has participated in its promotion. Mutual benefit organizations, microfinance institutions, non-governmental organizations (NGOs) and commercial insurers are among the institutions that have helped to set up schemes. At the same time, government institutions and bilateral and international donors have often played a vital role. In many cases, several of these actors have entered partnerships in order to share central functions with regard to the design, implementation and administration of the schemes, and with regard to financing and risk-carrying functions.

From a social protection perspective, it is particularly interesting to look at the specific roles that state, market and civil actors have played with regard to microinsurance. Contrary to microinsurance ideology, state actors have taken on a range of important tasks. In several countries, government institutions have provided subsidies for microinsurance or have engaged in formal public private partnerships (PPPs) for implementation. An often-cited example is India, where the state subsidizes some microinsurance schemes, and where legislation also requires insurance firms to offer specific products for low-income groups. In other instances, the participation of state actors in microinsurance schemes has been less formalized, for example, where public institutions have supported promotional or marketing activities. State actors located outside the developing world have also played a decisive role with regard to microinsurance: donors have been crucial to its promotion by, for example, providing subsidies and forming partnerships with transnational insurance firms in order to introduce microinsurance products in the South.

Governance beyond the state – with the state
The participation and support of state actors has in many instances been vital to the global expansion of microinsurance products for two main reasons. First, some microinsurance products, particularly more complex ones like health and agricultural microinsurance, require high initial investments. Market actors (insurance firms) have often been reluctant to cover these costs, since the profitability of microinsurance in the longer term is still controversial. Second, given the higher costs of providing microinsurance compared to normal insurance products (usually because of higher administrative costs and lower economies of scale) and the objective of reaching the poor, many microinsurance products require continuous subsidies in order to provide meaningful cover. Again, this is mainly true for complex products like health or agricultural microinsurance, but not for relatively simple and less costly products like life microinsurance. Against this background, state, market and civil society actors have partnered in different combinations in order to implement microinsurance. From the institutional point of view, microinsurance does in many instances not embody a “pure” market mechanism, but rather a hybrid approach.

Beyond this, another observation also unsettles the notion that microinsurance can substitute for state action: some governments have tried to use it in order to extend social rights. For example, Bolivian state and municipal governments have subsidized agricultural microinsurance schemes or have entered administrative PPPs with private actors in order to support the creation of agricultural microinsurance. In this way, they responded to the commonly held notion in the country that the state has a duty to support smallholder peasants.⁴

These findings are in line with several common observations regarding new forms of “governance beyond the nation state”.⁵ As microinsurance is introduced, private economic actors and parts of civil society play an important role with regard to policy making and implementation. At the same time, state institutions play a central role in this process and position themselves as strategic actors. Often, innovative institutional arrangements, including PPPs, emerge. This shows that in many cases the governance of microinsurance is only partly located beyond the state and often depends both on state and private actors.

Conclusions
Common assumptions regarding the market character of microinsurance are only partly true: governments as well as international public donors have contributed in important ways to the creation and implementation of microinsurance and continue to do so. Some government actors have used microinsurance in order to fulfil their own social protection objectives. The recent rapid proliferation of the mechanism on a worldwide scale would probably not have taken place without the engagement of government actors and public donors. This shows that, in many instances, microinsurance does not fill a gap in situations of state retreat or failure.

This has important implications. First, this observation contests the liberal market view of microinsurance, which is used to justify its promotion. If it is not the heralded market substitute for state action, policy makers have to answer a specific set of questions: is it better, in terms of effectiveness or efficiency, for governments to support microinsurance than to implement more comprehensive state systems? Under which conditions is this the case? Donors that advocate the creation of microinsurance PPPs in the field of microinsurance⁶ or engage in other forms of support are also confronted with these questions.

Beyond this, observations regarding the role of state institutions and hybrid institutional partnerships draw attention to the politics of microinsurance creation and implementation. Negotiation processes among institutions that partner for microinsurance implementation and the diverging interests, ideas and resources on which these negotiations rely, impact on the evolution and results of microinsurance schemes. Interestingly, the politics of microinsurance have found limited interest in discussions about the mechanism.

My working paper, An Instrument for Social Protection and Climate Change Adaptation? The Politics of Implementing Agricultural Microinsurance in Bolivia provides a further discussion of the politics of microinsurance creation. In the paper, I look specifically at hybrid institutional setups—where public and private institutions share financial or implementation responsibilities—in Bolivia. In that Andean country both public private partnerships (PPPs) as well as public subsidies have been largely unsustainable at the subnational state level. This was partly due to the volatility of the political situation and to large inequalities between private actors and state institutions. Furthermore, in the cases under consideration the legitimacy of public support for agricultural microinsurance emerges as a specific concern. All in all, the paper shows that the potential of agricultural microinsurance schemes with regard to social protection and climate change adaptation is currently limited in Bolivia. Beyond this, it develops some recommendations for policy makers.

Footnotes
¹ See, for example, Armando Barrientos. 2004. “Latin America – Towards a liberal-informal welfare regime.” In Ian Gough and Geoff Wood, Insecurity and Welfare Regimes in Asia, Africa and Latin America – Social Policy in Development Contexts. Cambridge, Cambridge University Press; UNRISD. 2010. “Towards universal social protection.” In Combating Poverty and Inequality. United Nations Research Institute for Social Development, Geneva.

² Jim Roth, Michael McCord and Dominic Liber. 2007. The Landscape of Microinsurance in the World’s 100 Poorest Countries. The Microinsurance Centre, Appleton; Michael J. McCord, Clémence Tatin-Jaleran and Molly Ingram. 2012. The Landscape of Microinsurance in Latin America and the Caribbean: A Briefing Note. The Microinsurance Centre, Appleton.; Michael J. McCord, Roland Steinmann and Molly Ingram. 2012. Briefing Note: The Landscape of Microinsurance in Africa 2012. The Microinsurance Centre, Appleton.

³ Rupalee Ruchismita and Craig Churchill. 2012. “State and market synergies: Insights from India’s microinsurance success.” In Craig Churchill and Michal Matul (eds.), Protecting the Poor. A Microinsurance Compendium: Volume II. ILO and Munich Re Foundation, Munich.

⁴ You can find more details on this in my working paper, An Instrument for Social Protection and Climate Change Adaptation? The Politics of Implementing Agricultural Microinsurance in Bolivia [link].

⁵ Erik Swyngedouw. 2005. “Governance innovation and the citizen: The Janus face of governance-beyond-the-state.” Urban Studies, Vol. 42, No. 11, October.

⁶ For example, Gaby Ramm. 2011. Public Private Partnerships in Microinsurance. Microinsurance Network Discussion Paper Nr. 001/2011. ADA, Luxemburg.