Aga Khan Agency for Microfinance

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Microinsurance

AKAM has been working on insurance products for the poor since mid-2005. Microinsurance refers to insurance services targeted at poor and low income households. It provides protection against specific risks in exchange for a regular payment of premiums whose amount is proportional to the likelihood and cost of the relevant risk. While microfinance can help alleviate poverty through productivity, microinsurance can protect households that are climbing out of poverty from catastrophic losses such as the death of the breadwinner, severe or chronic illness, or loss of assets including livestock, crops or housing. These sorts of events can push poor or vulnerable households back into the depths of poverty.

AKAM has been working on insurance products for the poor since mid-2005. Grants from the Bill & Melinda Gates Foundation for research and the start of operations were provided to AKAM as part of the Gates Foundation’s wider efforts to improve access to financial services for the poor. With this funding AKAM was able to open the First Microinsurance Agency Pakistan (FMiA-P) in 2007 and the First Microinsurance Agency Tanzania (FMiA-T) in late 2008.

AKAM’s flagship microinsurance product is hospitalisation insurance. AKAM is working from the hypothesis that the most appropriate solution for health financing involves a combination of health savings accounts and microinsurance. The objective is to help families prepare for both expected and unexpected health expenditures by encouraging saving for the future and providing insurance safety nets for catastrophic events. Most households understand that in a given year they will experience a number of relatively low-cost but frequent medical events requiring outpatient coverage. Families need to be encouraged to save ahead of time to cover these costs with appropriate and flexible savings instruments. Incentives for savings programmes are most easily provided through access to non-financial services such as drug discounts and referral services.

The insurance safety nets kick in when households experience a catastrophic event requiring immediate hospitalisation, such as accidents, obstructed births and acute illnesses. These events, while of high cost for the family, are sufficiently infrequent as to be amenable to coverage under risk-pooling mechanisms that charge as little as $5 per person/per year in premiums. Specifically tailored products are being developed for expectant mothers, infants and children.

AKAM will be moving forward in the next two years to gradually introduce mixed savings and insurance mechanisms into new countries wherever possible. Products which have been tested in Pakistan and Tanzania will be further refined and modified for use in other countries. The Aga Khan Foundation Canada and the Canadian International Development Agency are also providing some grant funding to support the “ Healthy Mother/Healthy Infant ” pilot project that is based on this combined savings-insurance approach.

AKAM also offers credit life insurance which helps to protect the family of the borrower from debt in case of the death or serious disability of the borrower - who is most often the primary breadwinner in the household. Most credit life products also provide the family with some funeral benefits to assist the family. As well, should the credit life client be willing to pay a little more into the insurance plan, the family of the borrower will have the funds to transition into a new livelihood, whether it is an entrepreneurial endeavour or just the leeway to be able to find a job and still feed everyone in the household. By the end of 2008, nearly 350,000 lives were covered in Pakistan.

FMiA can provide a safety net against unforeseen risks. Livestock can, for example, be insured against unforeseen diseases, while insurance can be placed on the receipts of crops placed in warehouses. Additionally, a group of entrepreneurs can insure their income-generating assets.

Crop, livestock and asset insurance products are also being developed. Two out of every five Pakistanis earns his or her living by working the land or reaping the products of the sea; many supplement that income with small microenterprises. But the family ’ s livelihood can be threatened by disease, drought, floods and fire that destroy its income-generating assets. A single event can wipe out the household income for an entire year or force a microenterprise to close down.

FMiA-P was incorporated in February 2008, offering life, savings and health insurance products to clients in Lahore, Karachi and in Northern Pakistan. As an insurance agent, FMiA-P is not the legal underwriter of the insurance polices. Rather, it manages the product development, marketing, sales, and claims management for the New Jubilee Life Insurance Company, which is majority owned by AKFED. This partnership has enabled AKAM to quickly begin providing dedicated microinsurance products to poor families.

By linking life insurance to credits provided by seven different microfinance institutions, FMiA-P has helped prevent the families of borrowers from being mired in debt upon the unforeseen death of their loved one. Clients of FMiA-P ’ s medical insurance policies have also benefited from access to hospitalisation on a cashless basis. This has been achieved after lengthy negotiation with numerous medical service providers.

FMiA-T will be the newest microinsurance entity for AKAM and will be incorporated in April 2009. Market research for microinsurance in Tanzania has already been completed, and has indicated a preference by low income families for health related insurance, much as was the case in Pakistan. The strategy for FMiA-T will reflect the lessons learned from Pakistan and will contain many of the same elements. In addition, FMiA-T will also act as AKAM's regional hub for microinsurance in East Africa.

AKAM's microinsurance initiative prides itself in being at the forefront of innovation in microinsurance, both in terms of designing new products that are attuned to the needs of poorer populations and in using new partners and technologies to distribute these products. AKAM hopes to build on this experience by providing insurance to help tackle the specific challenges faced by populations in this part of the African continent.

FMiA - Pakistan: Insured Lives

Credit Life helps to protect the family of the loan borrower from debt in case of death or serious disability.

Health Insurance provides cashless coverage for medical expenses in case of hospitalisation for serious illnesses, obstetric care and accidents.

Saving Completion ensures that a family's savings objectives are met even in the event of the death or injury of the breadwinner.