Microinsurance is one of the most fascinating and tricky types of pro-poor financial services that I’ve encountered.  The basic concept of insurance (be it for health, crops or life) is an incredibly powerful one in the face of exogenously varying incomes and the strong need for income smoothing and predictability, but it seems to suffer from the same problem as savings vs. microfinance – an existing emergency is a stronger incentive to ex-post savings than a predicted or potential emergency is to ex-ante savings.  Thus there seems to be a very real moral hazard of people joining insurance programs shortly before a planned medical expenditure or crop failure, in order to receive all of the benefits of membership without the burdensome advance saving that long-term membership would require.  Given that insurance, savings accounts, and microloans all represents systems of savings & disbursement, it seems possible to incentivize all of them similarly to promote ex-ante savings.  I wonder if there are any microinsurance agencies that pay their clients to sign up, which has been effective for encouraging regular savings accounts.

Income variability & emergency saving

Income variability is hugely important.  The salient factor about the incomes of poor people isn’t just that they’re low; it’s that they vary seasonally and daily, which makes regular payments for anything difficult.  Commitment savings devices are even better worth pursuing in this circumstance, because the combination of poverty and a variable income can be tragic when it comes to large welfare-related expenses, such as school fees or healthcare.  Pursuing “opt-in” savings strategies (such as paying people to open accounts) is a good option.   So is designing loan repayment systems with A) realistic assumptions of the timeframe of income generation, and B) flexible payment options.

In a sense, “emergency” microloans are just a more expensive form of saving for the poor.  Rather than saving in advance and earning interest, they have to save after the fact and pay interest.  The incentives of the poor (not reducing current consumption for future expenditures) and the banks (taking in interest instead of paying it out) are currently aligned on this issue, but it results in a suboptimal equilibrium.  Or, actually, I wonder how these incentives might vary between formal banks, and microfinance organizations (often non-profits) which may acquire their capital from different sources.