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. [...]
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
7. CONCLUSION
Objectives and Topics of the Study
This study aims to assess whether microinsurance serves as an effective and appropriate risk management tool for low-income households in Indonesia when compared to traditional, informal strategies. It explores the vulnerability of the poor, the limitations of current informal risk-sharing mechanisms, and the potential advantages of formal microinsurance in reducing secondary impacts and long-term poverty traps.
- The economic vulnerability and risk profiles of low-income households in Indonesia.
- Evaluation of informal individual risk mitigation strategies (diversification, savings, asset accumulation).
- Evaluation of informal group-based risk mitigation strategies (ROSCAs, ASCAs, reciprocal transfers).
- Analysis of the current microinsurance sector in Indonesia, including products and service providers.
- Comparative analysis of coverage, accessibility, and timeliness between informal methods and formal microinsurance.
Excerpt from the Book
3.6.1 The minimum required pool size
Right at the beginning of the insurance establishment process the first obstacle for providers is to reach a sufficient pool size of policyholders. If an insurance scheme lacks a sufficient number of participants - especially in the beginning of operations – there is a risk of losses as the amounted premiums may not be enough to cover huge claims. In the case of MHO (Mutual Health Organizations) in West Africa31 the minimum number of policyholders to guarantee secure and stable operations was about 5.000.
there are three different methods to develop a large enough customer base. The first one was historically used by insurance companies in North America in the 19th century. The companies did not provide coverage until a certain amount of customers were paying premiums.32 This method is not adaptable for the establishment of microinsurance schemes as people are doubtful about the benefits and therefore expect the schemes to be working once they pay premiums.
The second approach is to sell insurance on a mandatory basis. This is possible if insurance is linked to other financial service (e.g. credit) which means that all credit customers automatically become insurance customers as well.33 MFIs with a large number of clients can easily require a sufficient number of mandatory insurance customers but special attention is needed to assess client’s product value as they neither can opt out of the insurance policy nor express their dissatisfaction with the policy.
The third method is to offer group insurance policies which bring more customers at once to the insurance scheme than individual policies. Offering group insurance is less costly and less time consuming for the insurer. The difference will be discussed in the following.
Summary of Chapters
1. INTRODUCTION: Provides an overview of the poverty situation in Indonesia and defines the target group, establishing the basis for discussing their financial vulnerability.
2. SCOPE, METHODOLOGY AND STRUCTURE OF THE STUDY: Outlines the objective of comparing microinsurance with informal risk management and defines the criteria for this assessment.
3. AN INTRODUCTION INTO MICROINSURANCE: Examines the general principles of insurance provision and the specific critical issues, such as adverse selection and claims management, for providing insurance to the poor.
4. TRADITIONAL RISK MITIGATION OF THE POOR IN INDONESIA: Analyzes how low-income households currently cope with risks through individual and group-based informal mechanisms.
5. THE MICROINSURANCE SECTOR IN INDONESIA: Details current insurance products, the market for these services, and the challenges providers face in reaching low-income clients.
6. INDIVIDUAL AND GROUP-BASED RISK MITIGATION STRATEGIES IN COMPARISON TO MICROINSURANCE: Critically evaluates the effectiveness of different approaches based on coverage, accessibility, timeliness, and secondary impacts.
7. CONCLUSION: Synthesizes the findings, confirming that while microinsurance has significant potential to reduce vulnerability without long-term debt, accessibility and timeliness remain significant barriers.
Keywords
Microinsurance, Indonesia, Risk Management, Low-Income Households, Informal Finance, Poverty, Vulnerability, Financial Inclusion, Risk Mitigation, Microfinance Institutions, ROSCAs, ASCAs, Social Protection, Insurance Coverage, Claims Management.
Frequently Asked Questions
What is the core focus of this work?
The study examines whether formal microinsurance offers a superior alternative to traditional, informal risk management strategies used by low-income people in Indonesia to deal with economic shocks.
What are the primary thematic areas covered?
The work covers risk definition, the socioeconomic environment of Indonesia's poor, informal strategies like savings and community associations, and the practical implementation of microinsurance products.
What is the main research objective?
The objective is to identify if microinsurance is an effective and appropriate tool for poor households to secure their lives compared to the informal methods they have traditionally employed.
Which scientific methodology does the author use?
The study employs a comparative analysis approach, evaluating risk management mechanisms against four key parameters: coverage, accessibility, timeliness, and secondary impacts on household finances.
What is addressed in the main body of the text?
The main body details the theoretical principles of insurance, the specific informal strategies (diversification, saving, ROSCAs), the current landscape of Indonesian insurance providers, and a direct comparative analysis of these methods.
Which keywords characterize the work?
Key concepts include Microinsurance, Risk Mitigation, Vulnerability, Indonesia, informal finance mechanisms, and social protection strategies for the poor.
How does the author define "vulnerability" in the Indonesian context?
Vulnerability is defined as the inability of poor households to deal with losses resulting from adverse events, such as illness or property loss, which often leads to deeper poverty or the liquidation of productive assets.
What does the author conclude about the "Partner-Agent Model"?
The author identifies the partner-agent model as the most appropriate structural framework for microinsurance, as it leverages the outreach of microfinance institutions while utilizing the technical expertise of insurance companies.
What is the primary drawback of informal risk mitigation compared to microinsurance?
Informal strategies often require significant reserves or create long-term social and financial obligations, whereas microinsurance provides coverage without the necessity of building up high reserves or future debt commitments.
- Quote paper
- Diplomkulturwirt Daniel Weiss (Author), 2006, Formal Microinsurance in Indonesia - an advantage over informal risk mitigation strategies for low-income people?, Munich, GRIN Verlag, https://www.grin.com/document/58723
