Keynote Inclusive insurance should focus on important and destabilising risks

Keynote presentation by Dr. Daryl Collins, CEO, Bankable Frontier Associates (BFA), a firm specialising in using finance to help low-income people Dr. Daryl Collins made a compelling case for microinsurance by sharing stories of families interviewed for the Kenya financial diaries. The financial diaries is a methodology to obtain multi-dimensional qualitative and quantitative data on the lives of low-income households. Researchers make visits twice a month during one year to families randomly selected. During these visits, the researcher asks questions about their financial activity and their life events. The result is good information on income, expenses, risk faced, and the many transactions that the poor undertake to make ends meet (borrowing from neighbours and banks, saving under the mattress, credit in kind, support from the community and family, savings in ROSCAs, etc.). This methodology was recorded and described in Portfolios of the Poor: How the World’s Poor Live on $2 a Day, a book co-authored by Dr Daryl Collins, along with Stuart Rutherford and Jonathan Morduch.

Contrary to common beliefs, the poor use many financial tools, albeit the majority linked to informal networks and family. The Kenya study revealed more than 10 sources of income, including agriculture, casual work, side businesses, support from communities, remittances, family support, loans and savings. They need to use all of the possible (or available) sources of income, mainly because expenses are steady (when there are no unexpected shocks ) but income is highly volatile. One important risk that looms like a Sword of Damocles is health issues and illness. Analysis of the overall expenses of a typical family indicates that health spending is not overwhelming. Approximately, 5 median days of income equivalent to KES 1,073 (US$ 12.60) with an average of KES 3,962 (US$ 47) are consumed by health costs during one year. Risks happen however and they seriously affect their livelihoods.

This was illustrated by several cases exposing the nature of the risks and coping mechanisms; these cases also show that if insurance had been in the equation, the situation could have been less stressful.

Figure 10 Financing shocks – Most often, the family needs to help

George Median monthly HH income: KES 9,155 (US$ 108) George could manage with the medium-sized costs associated with his wife’s sickness, but his ability to cope alone was soon exhausted: First bill: KES 3,000 (US$ 35) Had KES 1,000 on hand, left KES 2,000 in arrears and paid a couple weeks later. Second bill: KES 8,000 (US$ 94) Asked for a loan from chama (KES 5,000/US$ 59), sold pig & chicken (KES 4,000/US$ 47), received from friend (KES 1,800/US$ 21) Third bill: KES 30,000 (US$ 353) Friends and family supported. Funeral: KES 50,000 (US$ 588) Friends and family supported. (Son stole an extra KES 10,000 (US$ 118) sent to him to get body released from hospital)

One case in Kenya was that of Molly who developed a severe headache. She went to an eye hospital and paid KES 1,700 (US$ 20). She was still feeling sick, and so went to another clinic and paid the equivalent of US$ 4.70. Treatment didn’t work and she had to go to yet another clinic with a cost of US$ 8.20. Finally, she had to go to Kenya National Hospital. The bill was for KES 11,500 (US$ 135). This illustrates the alternatives the poor have to face in the absence of insurance: they go to places they can afford, and eventually end up where they should have started if only they had had insurance.

Another case was about a family coping with almost 10 different sources of income from George and his wife, who suddenly had to face a dire situation. It illustrates how the community and friends can help, acting as de facto insurers. Judith, the wife, fell sick and eventually died. The expenses incurred by the family are explained in Figure 10. The case illustrates the help family and the community give, which is idiosyncratically more important when there is a big event than when those affected need to cope with “minor” events (like going to the urgent care centre). In George’s case, the community was generous. However, there are cases in which the community is also affected and cannot give all the support needed. Thus, having insurance is a formal safety net that could be explored more. Finally, the team that undertook the Kenya financial diaries study measured the risk aversion and loss aversion of the families interviewed. This was done holistically; in one game the families were given the option to decide between receiving a certain amount or playing games that only had a 50 % probability of winning. The answer showed that more than 60 % of the participants chose the certain amount, which means they are highly risk-averse. In another game, the participants were given the choice of playing or not playing, knowing that when playing there was a 50 % possibility of winning or losing. The results were the same: almost 60 % of the people were loss-averse. In conclusion, the poor have many ways of managing their money and risks. The effective access and use of insurance can help them cope better when facing risks; they would not need to sell assets, decrease their savings or get more and more into debt. However, there is no insurance that covers all the broad risks the poor face. Insurance should then focus on the most important and destabilising of risks.

30 — Keynote speaker, Daryl Collins, CEO, Bankable Frontier Associates, United States