Formal Microinsurance in Indonesia - an advantage over informal risk mitigation strategies for low-income people?

Diploma Thesis , 2006 , 99 Pages , Grade: 1,7

South Asian Studies, South-Eastern Asian Studies

Around 52.4% of Indonesia’s 242 Mio. inhabitants have to live and struggle with an income - respectively a purchasing power parity - of less than two dollar per day. All people who live on less below this international benchmark - set by the World Bank - are considered as poor. The poor who dispose of only one dollar a day are considered the extreme or very poor whereas those who have a daily income between one and two dollars are considered as the moderate poor. Both groups are referred to in this work as the poor or low-income households. These low-income households in Indonesia face disadvantages as they are highly vulnerable to risk events such as health or property risks. The concept of vulnerability describes the poor people’s inability to deal with losses which result from the occurrence of an adverse event, e.g. illness or disability and is based on two perceptions. Poor people are most exposed to hazards as they often live and work in a perilous environment. In addition, the poor are the group in society least capable of dealing with losses after the occurrence of risk events. In Indonesia at least “two fifth of the population near the poverty line are …highly vulnerable to even modest shocks to the economy”. Thus, the economic situation of low-income households is intricate in two ways: „Poor households throughout the world face twin disadvantages. The first is difficulty in generating income, while the second is vulnerability to economic, political and physical downturns. Harder still, the two disadvantages reinforce each other; poverty is a source of vulnerability and repeated exposure to downturns reinforces poverty.” Besides vulnerability the economic situation of low-income households in Indonesia forms a barrier for the use of financial services in general. As low-income households face difficulties in generating regular incomes they only dispose of small funds that can be used as savings, credit collateral or insurance premium. The poor seem to be too poor to afford the premiums for commercial insurance products because these products are designed for the middle and upper-class market segments. As the poor are not able to purchase commercial insurance products they have to have to use alternative measures for dealing with their risks. [...]

Inhaltsverzeichnis (Table of Contents)

• 1. INTRODUCTION
• 2. SCOPE, METHODOLOGY AND STRUCTURE OF THE STUDY
• 3. AN INTRODUCTION INTO MICROINSURANCE
  • 3.1 MICROFINANCE
  • 3.2 MICROINSURANCE AS A MICROFINANCE SERVICE
  • 3.3 THE PRINCIPLES OF PROVIDING INSURANCE
  • 3.4 THE FRAMEWORK FOR MICROINSURANCE IN INDONESIA
  • 3.5 MICROINSURANCE PRODUCTS
  • 3.6 CRITICAL ISSUES FOR MICROINSURANCE PROVIDERS TO EFFECTIVELY SERVE THE POOR
    • 3.6.1 The minimum required pool size
    • 3.6.2 Group or individual insurance
    • 3.6.3 Minimizing transaction costs - possible distribution channels
    • 3.6.4 Setting prices and valuing losses
    • 3.6.5 Protecting against adverse selection, moral hazard and fraud
    • 3.6.6 Claims management
    • 3.6.7 Premium payment
    • 3.6.8 Marketing and market education
• 4. TRADITIONAL RISK MITIGATION OF THE POOR IN INDONESIA
  • 4.1 BACKGROUND
    • 4.1.1 The economic environment of low-income households
    • 4.1.2 Defining vulnerability
    • 4.1.3 Risks poor people face in Indonesia
    • 4.1.4 Risk management strategies
    • 4.1.5 Risk management arrangements
    • 4.1.6 The impact chain of risk events
  • 4.2 INDIVIDUAL RISK MITIGATION STRATEGIES
    • 4.2.1 Diversify income sources
      • 4.2.1.1 Effectiveness and secondary impacts of diversification
    • 4.2.2 Saving up assets and cash
      • 4.2.2.1 The usefulness of different assets and cash
      • 4.2.2.2 Effectiveness and secondary impacts of saving up
  • 4.3 GROUP-BASED RISK MITIGATION STRATEGIES
    • 4.3.1 Reciprocal transfers
      • 4.3.1.1 Effectiveness of reciprocal transfers
    • 4.3.2 Rotating savings and credit associations (ROSCAs)
    • 4.3.3 Accumulating savings and credit associations (ASCAs)
      • 4.3.3.1 Effectiveness and secondary impacts of ROSCAs and ASCAs
• 5. THE MICROINSURANCE SECTOR IN INDONESIA
  • 5.1 DEMAND FOR MICROINSURANCE IN INDONESIA
  • 5.2 THE DEMAND-SUPPLY GAP - THE MARKET FOR MICROINSURANCE PRODUCTS IN INDONESIA
  • 5.3 OVERVIEW OF INDONESIAN MICROINSURANCE PROVIDERS
  • 5.4 MICROINSURANCE PRODUCTS IN INDONESIA
    • 5.4.1 Credit life insurance
    • 5.4.2 Sharia-compliant accident life insurance
    • 5.4.3 Education endowment insurance
    • 5.4.4 In-patient hospitalization plan
    • 5.4.5 Effectiveness and secondary impacts of microinsurance
• 6. INDIVIDUAL AND GROUP-BASED RISK MITIGATION STRATEGIES IN COMPARISON TO MICROINSURANCE
  • 6.1 COVERAGE
  • 6.2 ACCESSIBILITY
  • 6.3 TIMELINESS
  • 6.4 SECONDARY IMPACTS

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This diploma thesis investigates the potential of formal microinsurance in Indonesia to provide an advantage over informal risk mitigation strategies for low-income people. It aims to analyze the effectiveness and secondary impacts of both formal and informal risk management approaches, ultimately determining whether microinsurance offers a viable and beneficial alternative for those living in poverty.

• The role of microinsurance in addressing the financial vulnerabilities of low-income households in Indonesia.
• A comparative analysis of formal and informal risk mitigation strategies, including their effectiveness and secondary impacts.
• The challenges and opportunities for microinsurance providers in reaching and serving low-income populations in Indonesia.
• The impact of microinsurance on the financial stability and well-being of low-income individuals and families.
• The broader economic and social implications of microinsurance adoption in Indonesia.

Zusammenfassung der Kapitel (Chapter Summaries)

• Chapter 1: Introduction provides an overview of the research topic and its relevance within the context of Indonesia's socio-economic landscape.
• Chapter 2: Scope, Methodology and Structure of the Study details the research approach, methodology, and the organizational structure of the thesis.
• Chapter 3: An Introduction into Microinsurance introduces the concept of microinsurance, its principles, and its framework in Indonesia. It discusses the challenges microinsurance providers face in effectively serving the poor, including issues such as pool size, distribution channels, pricing, and risk mitigation strategies.
• Chapter 4: Traditional Risk Mitigation of the Poor in Indonesia explores the informal risk management strategies employed by low-income households in Indonesia. This chapter analyzes the effectiveness and secondary impacts of individual strategies such as income diversification and asset saving, as well as group-based strategies like reciprocal transfers, rotating savings and credit associations (ROSCAs), and accumulating savings and credit associations (ASCAs).
• Chapter 5: The Microinsurance Sector in Indonesia examines the demand for microinsurance products in Indonesia, the market for microinsurance, and the existing microinsurance providers. It provides an overview of different microinsurance products available, including credit life insurance, Sharia-compliant accident life insurance, education endowment insurance, and in-patient hospitalization plans. It further discusses the effectiveness and secondary impacts of microinsurance.
• Chapter 6: Individual and Group-based Risk Mitigation Strategies in Comparison to Microinsurance compares the coverage, accessibility, timeliness, and secondary impacts of both formal and informal risk mitigation strategies, aiming to determine the advantages and disadvantages of each approach for low-income individuals and families.

Schlüsselwörter (Keywords)

Microinsurance, Indonesia, low-income households, informal risk mitigation strategies, traditional risk management, reciprocal transfers, ROSCAs, ASCAs, financial vulnerability, demand-supply gap, microinsurance products, effectiveness, secondary impacts, accessibility, coverage, timeliness.

• College: University of Passau
• Grade: 1,7
• Author: Diplomkulturwirt Daniel Weiss (Author)
• Publication Year: 2006
• Pages: 99
• Catalog Number: V58723
• ISBN (eBook): 9783638528412
• ISBN (Book): 9783656788751
• Language: English
• Tags: Formal, Microinsurance, Indonesia