MicroWHAT?? From Microfinance to Microinsurance.

Nita Nehru

As a social business dedicated to improving access to insurance among economically disadvantaged communities in the US and across the globe, Avana wants to raise awareness about the importance of microinsurance in development and poverty reduction. Our first several blog entries will be dedicated to answering some of your most commonly asked questions about the concept of microinsurance in general and Avana Microinsurance in particular.

First things first: “What exactly is microinsurance” and “How is microinsurance different from microfinance?”

By now, almost everyone has heard about microfinance, right? The provision of small loans to poor people, frequently women, has become a well-known tool of economic development. Millions of microfinance investment dollars– first from nonprofit and multilateral development institutions, and later from social and even commercial investors– have been deployed to drive its expansion. As a result, the microfinance sector has enjoyed a dizzying growth trajectory over the past decade. This growth has been enhanced by high-profile industry leaders like Mohammed Yunus and innovative business models like Kiva that have helped catapult microfinance from the confines of the development industry into the mainstream. From a recent storyline on the Simpsons featuring Mr. Yunus to a spoof headline in The Onion, proof that microfinance has “tipped” surrounds us every day!

In reality, though, the word ‘microfinance’ is conflated with ‘microcredit’, which is the more accurate term for the business of making small loans to economically disadvantaged individuals. Microfinance, more broadly (and accurately) defined, encompasses the provision of all types of financial services –not just loans, but also savings, remittances and insurance –to those who typically lack access.

Anecdotal evidence supports the conclusion that extending credit to a family living in poverty is a good first step. But without offering accompanying opportunities for savings or insurance services, these efforts will be (at best) ineffective in achieving sustainable economic development, and in some cases, pose the danger of deepening the poverty trap.

As we learned the hard way during the recent financial crisis, ubiquitous credit is not necessarily a good thing; not everyone needs—or should receive – a loan. That being acknowledged, we strongly believe that all families should, regardless of their socioeconomic status, have the opportunity to save their hard-won income and protect their tenuous economic gains from vulnerability to unexpected events. Microinsurance can provide the peace of mind that, if faced with a cataclysmic or life-changing event, all is not lost.

Microinsurance refers to low-premium insurance policies that protect policyholders, low-income individuals and families against the risks faced in their daily lives, whether due to loss of life, livelihoods or property. It is a crucial pillar of microfinancial service delivery and is lagging far behind its credit-centric counterpart. Expanding access to microinsurance will enhance the effectiveness of microcredit and contribute to ending the entrenched cycle of poverty.

For more information on Avana Microinsurance, please visit our website at www.avanamicroinsurance.com

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