Integrated risk management

Low-income households often work in the informal economy and are more vulnerable to risks than the rest of the population. Yet, they are the least able to cope when crises occur. Insurance holds the promise of breaking a part of this vicious cycle. By reducing the financial burden of shocks, insurance can help low-income people to get out and stay out of poverty. Insurance can also be a relevant mechanism to manage risks that could lead to large financial losses, but which low-income households cannot cope with out of their own cash flow or through the informal support of friends and relatives.

To be most effective, insurance should be part of a broader menu of financial services to facilitate integrated risk management. This broader menu includes savings, credit (such as emergency loans) and money transfers, which together can enable the working poor to manage different risks through improved preparation, prevention and coping strategies.

Financial institutions serving the low-income market play a critical role here. Many banks, credit unions, microfinance institutions and digital financial service providers have been testing new approaches and innovative products to help the working poor manage risks more effectively. There are for example savings-linked insurance products, that encourage members to save up to a pre-identified goal and which provide protection against death, illness or natural calamity risks that could prevent members from achieving this goal.

Such savings-linked insurance products should improve savings behaviours, but more research is needed to test the impact of these solutions on both members and institutions’ well-being.