Microlending The microlender extends small loans to poor people under terms and conditions
The provider puts up the capital and trusts the customer to pay it back
Microfinance model based on microlending can survive with a few clients
People work themselves out of poverty using microlending
Microinsurance The provision of insurance to the low- income earners
The policyholder pays upfront and hopes the provider keeps their promise to make a payment in accordance to the contractual terms
Microinsurance cannot be offered on a micro-scale because it hampers with the basic law of large numbers
Microinsurance helps prevent them from falling back into it
Table 2: (above) Differences between microlending and microinsurance (Adapted from
http://microfinancehub.com, 2010 and Researcher’s own construct, 2011)
Overview of low-income insurance market in South Africa
South Africa has an estimated population of 49,991 300 people in 2010 (Stats SA, 2010). The South African insurance industry accounts for 71% of Africa’s total premiums and has the third largest insurance penetration of 15.3% in the world (PricewaterhouseCoopers, 2010). However, with more than 70% of the South African households classified as low-income earners (those earning less than R3000 a month), it has been reported that South Africa has a long way to go before its population is adequately insured.
Just over 35% of the South African low- income earners have life policies (Centre for Financial Regulation and Inclusion, 2010). The Living Standard Measure one to five (LSM 1-5) which consists of about just under 20 million; 33.2% of the market have a funeral cover; only 2.2% have other life cover and only 0.04% have credit life. Referred to as the “Insurance Gap”, approximately 65% of the low-income households which are not insured represent a huge opportunity for the South African insurance industry.
The impact of adverse events, for instance the uncertainty of nature, affects the low- income households’ income and consumption significantly. For instance the tornado which hit the Free State province in South Africa recently, has significantly affected the low- income households’ income, belongings and consumption levels. When faced with financial shocks, most low-income people have to make harsh choices like reducing the food consumption level, depleting productive assets to cover expenses and many others. These situations jeopardise the economic and human development prospects and leave those who have made such choices to enter the poverty trap. Being more exposed to risks and yet the least protected against the consequences, the poor people are in dire need for microinsurance, cover extended for the low- income people can hamper them from being further impoverished. Microinsurance enables the low-income households to retain the gains they have made.
What must South Africa do? The microinsurance providers have to create more trust in the low-income earners. Low- income households perceive microinsurance providers as taking money easily, but having difficulty in paying out in the event of a claim. More promotional campaigns should be
January 2012 | Management Today 107
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