Tuesday, July 14, 2015

Clients “Do the Math”––we should too when valuing microinsurance

The value and viability of microinsurance products in the developing world are often ambiguous and difficult to assess, ex-ante, as we cannot know who will be affected by shocks. While the theoretical value of protecting households from risk is clear, many insurance products designed to do this may not offer sufficient value vis-à-vis the alternatives that end-clients use to deal with shocks. 
Conducting a Client Math interview
in the Philippines

Between 2010-2014, EA Consultants managed the Client Value work for the MILK Project of the Microinsurance Centre.  The assumption underlying this approach is that low-income individuals are required to constantly do mental math to economize their uneven and volatile income streams. In the face of severe cash constraints, individuals necessarily have to think strategically about how best to mitigate risk and invest in the future while maintaining a certain standard of living over the year.

Client Math are quick, low cost studies that consist in interviewing small samples of microinsurance target populations about the costs of a specific financial shock ex-post and the subsequent coping mechanisms used by insured and uninsured groups to deal with this shock. We can explore the value of insurance in comparison to other financial tools (asset sales, savings, formal and informal loans, family support, etc.) on people’s ability cope with shocks, including deaths in the family, health problems, or disasters affecting households and businesses. By factoring this information into a product analysis, we can determine the advantages, or lack thereof, of different types of insurance for target users.

Client Math studies capture products’ underlying value proposition for their end users. They take into account that clients make rational decisions based on what they know. When a product offers poor value, they can be a starting point for refocusing products to better serve client needs or designing new ones.  When a product offers good value, other constraints, such as insufficient information, trust and pricing may be at play and can be explored throughout the Client Math study process as well.  The Client Math Toolkit is available online and can be used by insurers, distributors or researchers independently or with our support.