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Studying MicroEnsure’s “Obra Pa” Insurance in Ghana

Mar 11, 2013
Helping low-income Africans to improve their ability to manage financial risks is a key component of sustainable development. Insurers, intermediaries and others around the continent have been working to develop and improve microinsurance products that offer both value for clients and a business case for insurers. This blog focuses on one such product offered by a microinsurance intermediary to help market vendors and others manage potential financial losses due to flooding.
In October 2011, the bustling Circle Market in Accra was devastated by a torrential flood, destroying many small businesses and bankrupting many of their owners. The MicroInsurance Centre’s MILK Project partnered with microinsurance intermediary MicroEnsure and German aid agency GIZ to explore the value of a microinsurance product in helping small business owners cope with the severe financial consequences of the flood. The “Obra Pa” product is mandatory for borrowers of certain microfinance institutions (MFIs), and offers clients two benefits: i) payment of their outstanding loan balance and one month of interest to the MFI, and ii) a cash payout of USD114.
We applied MILK’s “Client Math” methodology, which aims to address some of the open questions about the value of microinsurance, using detailed surveys of small samples of insured and uninsured groups (20-30 each) to document their responses to shocks.
To explore the role insurance played in coping with the flood, we measured the full cost of the shock for the insured and the uninsured and examined the financing strategies used by each.
What did we learn? That insurance, alone, was insufficient to cover the full cost of such a large shock. When our MILK team visited clients after the flood, we found that they had still not recovered from the devastation of the event. They had not fully regained their borrowing status nor returned to pre-flood sales levels in their businesses. Coping mechanisms used by both the insured and uninsured included the same strategies - borrowing from friends and family, reducing consumption and using their limited income to slowly re-start their businesses. These findings are consistent with MILK’s studies of other property insurance programs in Colombia, Haiti and the Philippines. Insurance provided some relief, but the insured still struggled to recover from the devastating consequences of the flood, even months later.
One interesting value component of the product appeared to be that it offered some access to additional borrowing, albeit not from MFIs.
The promise of a payout and the deleveraging resulting from the loan forgiveness seem to have served as a type of “guarantee”, improving clients’ creditworthiness and enabling them to borrow from friends and family to get by.
We do not typically think of insurance as a “guarantee” for a loan, but we are seeing indications that beneficiaries use the promise of a payout (particularly when claims are paid slowly) as a type of collateral against new borrowing to cover immediate needs before claims are paid. Compared to the uninsured, who remained indebted and had a reduced capacity to repay that debt, this benefit proved useful, even if only necessary due to the slow payment of claims. For some clients, this access to credit seems to have been instrumental in their ability to move toward to full recovery from the shock, however slowly.
Product limitations may partly reflect client willingness to pay. The Obra-Pa product in Ghana was a mandatory product with premiums included in MFI clients' loan payments. As such, it was a low-cost product that could be included in a loan payment without burdening the borrowers with separate, likely higher premiums. In all of our studies of similar products, MFIs offered property coverage on a mandatory rather than voluntary basis to address adverse selection and potentially low demand. This suggests that a higher coverage option, which would have proved more valuable in the wake of the flood, may be difficult to sell voluntarily, especially to the poorest and most price-sensitive.
In studying the case of Ghana, we identified some of the limitations of microinsurance products that aim to help microenterprise owners cope with the effects of a weather catastrophe. These clients face uncovered risks due to the size (too small) and timing (too slow) of the insurance benefit and must therefore complement the insurance with other strategies. In contrast, MFIs can typically use these products to transfer their loan related weather risk to an insurer. Efforts to support non-insurance risk management strategies for microentrepreneurs as well as more risk-sharing between MFIs and their clients may be good next steps to helping microentrepreneurs cope with weather related risks.
You can read the full brief on property insurance in Ghana and all the other MILK documents at: http://www.microinsurancecentre.org/milk-project.html

Ms. Magnoni is President of EA Consultants and Client Value Project Manager for the MicroInsurance Centre’s MicroInsurance Learning and Knowledge (MILK) Project. She is an international development advisor with over 15 years of international finance and development experience. Much of her recent work has centered on understanding client needs and preferences and linking these to the development of products and programs to improve access to finance, markets and social protection for low income segments. She has designed microinsurance programs for various institutions, networks and government agencies. She is currently managing the collection and analysis of lessons around understanding the value for clients of microinsurance for the MILK Project. These studies have helped to further the industry understanding of the role microinsurance plays in mitigating financial risks in clients' lives. Ms. Magnoni has a Masters in International Affairs from Columbia University.

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