7.1. INTRODUCTION
This research is a collection of essays which have examined the welfare benefits of microinsurance from the perspective of Ghana. Specifically the research sought to evaluate the impact of microinsurance on household asset accumulation, and tested whether microinsurance is a viable alternative for coping with risk and for smoothing consumption. The thesis also examined the asset inequality levels of insured and uninsured households and then tested whether microinsurance has any effect on the levels of inequality. Finally it tested whether households gain positive synergy by combining microinsurance and microcredit.
Using data on household living standards from the 2010 FINSCOPE survey, the impact evaluation was undertaken through Heckman sample selection, treatment effects model and instrumental variable modelling. Each of these methods provides a unique benefit to the whole impact estimations. For instance, both the Heckman and treatment models control for selection bias, however whereas the Heckman model uses the observed variables of only the insured to undertake the estimations, the treatment effect model uses the observed variables of both insured and uninsured households. The instrumental variable model controls for endogeneity bias by using the unobserved characteristics of both the insured and the uninsured for the empirical estimations. Together the three models provide results which are consistent and reliable.
On the whole the study makes a unique contribution to the literature in three main ways. First, income has been used quite extensively in welfare economics to measure the level of wealth and welfare. However, incomes, particularly of informal sector workers, are known to be seasonal and suffer from mis-measurement and recall bias (Moser & Felton, 2007; McKenzie, 2004). The accuracy of household income is also hindered by households’ reluctance to divulge sensitive information concerning their income and expenditure levels. In order to overcome these challenges associated with income and expenditure data, this study used an asset index created through multiple correspondence analyses to measure the welfare levels of low-income households. Although asset indexes have been used in the mainstream welfare economics, this study is one of the pioneers in the application of the concept in the microinsurance field.
Second, the study initiates a new dimension to the debate and controversies in the microfinance literature by asking whether households using microcredit in combination with microinsurance derive more significant welfare benefits than those using only microcredit schemes. Third, microinsurance schemes have been on the Ghanaian market for more than a decade, however
there has not been any empirical investigation into their impact on household welfare. This research thus addresses this urgent need by providing valuable empirical knowledge needed not only for the growth and development of the sector, but most importantly for improving the welfare of low-income households. The information is also very timely and an important input to the National Insurance Commission’s intention to amend the policy guidelines on microinsurance in order to make it more relevant to the conditions of low-income households.
7.2. SUMMARY OF THE FINDINGS
The impact of microinsurance on asset accumulation presented in Table 3.8 indicates that insured households derived positive significant gains from microinsurance through the protection of their assets against risks. The indemnity cover under microinsurance empowers low-income households to engage in high risk high yielding ventures necessary for the accumulation of essential assets. More importantly, the results indicate that the pay-out received if an insurable risk occurs prevents asset pawning. This implies that microinsurance protects households against asset liquidation during times of emergency.
The empirical evidence presented in Table 4.3 also reveals that households undertake better consumption smoothing through the use of microinsurance schemes. Specifically, insured households are on average 19-22 percent less likely to forgo daily meals when faced with an income shock. Sacrificing the quality and quantity of food can have pernicious and irreversible consequences on the health of household members, especially children. To the extent that microinsurance eliminates the tendency to cut meals, it promotes healthy living necessary for household development.
With respect to the level of asset inequality within and between the insured and the uninsured households, the analysis under the Gini index shows that insured households have lower levels of asset inequality. More importantly, insured female-headed households have lower inequality than insured male-headed households. But uninsured female-headed households are worse off than both uninsured and insured male-headed households. The geographical dimension shows that insured rural dwellers have lower asset inequality than the rural uninsured. However, the analyses of Northern and Brong Ahafo regions reveal that large developmental gaps may limit the effect of microinsurance in closing the asset inequality gap.
Finally, the study examined the scenarios where some households use only microcredit while others use microcredit in combination with microinsurance. The findings suggest a weak influence of microcredit on household welfare. However households using microcredit in combination with microinsurance derive significant gains in terms of welfare improvement. Microcredit may be good,
but its real benefits to the poor are best realised if the poverty trapping risks are covered with microinsurance.
In all the findings of the four empirical papers corroborate each other by confirming the theoretical underpinnings that indeed microinsurance improves the welfare of low-income households.
7.3. CONCLUSION
The combined evidence reveals quite strongly that microinsurance is a very good risk management instrument for improving the welfare of low-income households through asset retention, proper consumption smoothing, reduction in asset inequality and the derivation of positive synergies from microcredit.
7.4. RECOMMENDATIONS
The thesis recommends some policy interventions necessary for welfare enhancement through microinsurance schemes. The welfare benefits of microinsurance can be widened to cover more low-income households if the barriers to the uptake of microinsurance are eliminated. Barriers such as lack of substantive legislative backing need to be addressed expeditiously to encourage more insurance firms to enter the microinsurance sector. Of the 44 life and non-life insurance companies in Ghana only 11 are providing microinsurance schemes to the informal sector. Addressing the regulation obstacles may incentivize many more insurers to enter this largely untapped segment of the insurance industry.
There is also a need to upscale microinsurance to enable low-income households to participate and benefit to a larger extent. The key issue is to ensure a design that reduces transaction costs and makes it relatively less expensive to enhance significant participation. Achieving depth and large scale extension in a cost effective manner can be done through the use of mobile phone technology. The concept of mobile banking has proven to be cost effective in extending banking services to millions of poor households who were previously excluded from formal banking at a low transaction cost. “Mobile microinsurance” can be designed along the lines of the mobile banking concept to meet the specific needs of microinsurance transactions at a lower cost, and also result in a lower cost of premium and greater accessibility and depth. Already two mobile companies have started bundling microinsurance with their services. A formal public policy and regulatory backing by the NIC and key stakeholders such as the National Communication Authority will increase the confidence of the public in “mobile microinsurance” and possibly encourage other entities to venture into it. This will not only increase the uptake of microinsurance, but it will also equip low-income households to protect their assets against risk, escape consumption poverty and gradually bridge the asset inequality gap.
The upscaling of microinsurance amongst low-income households can also be enhanced by increasing the density and spread of microinsurance providers. The NIC can encourage more insurers to enter the microinsurance market by setting a different initial regulatory capital for microinsurance providers. Currently the regulatory capital is set at US$5 million for every insurance company irrespective of class of business or size. Requiring all insurers, either life, non-life or microinsurance providers, to start with the same capital may discourage some insurers from entering the microinsurance sector and will also not help in increasing the scale of uptake from low income households. Therefore to encourage more insurers to enter the microinsurance sector, the NIC can use its regulatory powers to lower the regulatory capital for prospective microinsurers. This will reduce the entry cost of microinsurance and increase the number of providers who can provide these services at a lower premium and thereby attract more low income households. The regulatory capital incentive can also be structured to be more favourable to institutions willing to locate in rural and semi-urban areas with high densities of low-income households. Such incentives can encourage significant entry into the industry and also help spread the provision of microinsurance at a relatively lower setup cost to low-income households and result in higher uptake.
In addition microinsurance can be a better enabler for reduction in asset inequality if institutional and developmental gaps are dealt with. Institutional and developmental deficits, such as inadequate hospitals and insurance companies in Brong Ahafo and the three Northern regions have reduced the influence of microinsurance, especially the national health insurance scheme, on asset inequality. It is therefore imperative for the government to initiate policies that will bridge the developmental gaps and increase the access of microinsurance services in these regions.
Microfinance providers can add more to clients’ value if they exploit the positive synergies between microcredit and microinsurance by designing products which tie the two products into a single scheme. This requires going beyond the usual credit life products into products that provide credit as well as cover health, fire, drought, theft and disability. To the extent that microfinance is inextricably linked to households’ welfare, combining microcredit and microinsurance will equip the poor to achieve steady asset accumulation and make a sustainable exit from poverty.
Sometimes welfare intervention programs suffer major setbacks when the recipients encounter risky events such as crop failure, fires and other shocks. These uninsured shocks can draw the recipients who may otherwise be above the poverty line back into poverty, thereby erasing any meaningful gains made under the welfare intervention. It is therefore essential that the beneficiaries of welfare programs are properly insured against the very risk that impoverishes them. This demands a policy that will integrate microinsurance into the government’s strategy on poverty reduction. Integrating microinsurance into the government poverty reduction strategy will
promote a sustainable reduction in poverty and facilitate a systematic empowerment of low-income households to achieve welfare improvements.
Future studies may consider using panel data (where such data is available) to analyse the dynamic influence of microinsurance on household welfare. The availability of panel data may also allow the application of other impact methods such as difference-in-difference to estimate the before and after effects of microinsurance on household welfare.