Micro-insurance isn’t commonly considered as vital a service for the poor as loans and savings are. However, insurance offers a unique risk management advantage compared to other financial services for the poor.

Insurance versus savings

If we compare insurance to savings, we learn that insurance policies may limit the accidents/risks faced by the poor, but they (insurance schemes) allow access to large sums of money instantaneously.

For instance, consider Farmer A, who acquires cattle insurance for the protection against the sudden death of his goats, and Farmer B who saves some money every week instead of paying the insurance premium. If catastrophic floods kill all goat herds in their community, Farmer A will be better off as it’s unlikely that Farmer B’s saved funds will compensate the huge loss. Alternatively, if both farmers are suddenly met with an illness, Farmer A will be unable to leverage his insurance policy, whereas Farmer B will be able to dip into his savings.

In other words, insurance is more favourable if the risk is certain. Farmers living in areas with unpredictable weather patterns can easily benefit from insurance schemes.

Insurance versus loans

Comparing insurance to loans is another topic, because the product structures are too different for simple comparison. However, the utility offered by micro-loans seems to be universal compared to insurance schemes for the poor.