Microinsurance is often touted as an important potential new revenue stream for insurers operating in developed markets, as well as the foundation for outsized growth in emerging economies. Yet with few tangible examples of the effectiveness of microinsurance, such prospects tend to remain relegated to the realm of the “potential.” A recent catastrophe in Haiti signals that change may be afoot, however, as microinsurance payouts work to help borrowers recover from loss more quickly.
Fonkoze, one of the largest microfinance institutions in Haiti, is providing catastrophe microinsurance coverage to its approximately 50,000 lending clients with support from the Microinsurance Catastrophe Risk Organization (MiCRO) - a new entity formed by a consortium of public and private sector participants earlier this year. An excessive amount of rainfall occurred in June that resulted in widespread flooding, mudslides and loss of life. Insurance proceeds provided by MiCRO to Fonkoze helped insured borrowers to repay outstanding microloan balances, gain access to new credit as needed and manage expenses in an emergency based upon assessed damage to their property, which included homes and business inventory.
Historically, a natural catastrophe in an emerging economy such as that of Haiti would leave the local poor without any means of recovery. Generally, loss of personal property or business assets would complicate what was already a difficult financial situation by retarding personal economic development and, in certain cases, causing poverty regression or deepening to occur. The social promise of microinsurance has been its ability to bring a fundamental financial service into markets that are difficult to reach in order to make reliable post-event recovery a reality. The payouts by MiCRO to Fonkoze in Haiti demonstrate the effectiveness of microinsurance in achieving this.
The difference is salient.
Following the heavy rainstorms that struck Haiti in early June, borrowers had vastly divergent experiences. One borrower, who took a loan in December 2010 - prior to the January 2011 implementation of Fonkoze’s microinsurance scheme - was only one interest payment away from full loan repayment. Because of the rains, her home collapsed, leaving her family to sleep in the kitchen. To begin rebuilding, her partner secured a loan to buy cement from a local creditor, borrowing more than the amount of the initial loan taken from Fonkoze.
Another client, whom borrowed a loan coupled with catastrophe microinsurance from Fonkoze in April 2011, suffered the loss of her home and the inventory of her business. Due to this loss, Fonkoze was able to pay off her outstanding debt and provide her with an additional cash payment to help her begin to recover. Additionally, as soon as she is ready, she will have access to another loan from Fonkoze.
The implications of this story are clear: microinsurance makes a difference. In addition to changing people’s lives, it increases the viability of other microfinance products and supports long-term economic development and stability.