Portfolios of the Poor - Dealing with Risk

In this chapter of POTP, the authors address how the world's poor manage risk through a series of both formal and informal financial instruments. They describe how emergencies can lead families to both devour assets and incur massive debt.

The majority of the chapter is spent on focusing on the high cost of funerals in South Africa. A study shows that South African households with monthly incomes in the range of $155-$300 a month typically spend around $1,500 for a funeral! To pay for these funerals, South African families purchase formal insurance products (funeral insurance) and participate in informal risk-sharing arrangements (burial societies and informal insurance-like products offered by funeral parlors). Despite these arrangements, however, families still resort to a series of informal sharing arrangements to finance their funerals including in-kind contribution and loans from family members.

The South African funeral example is used to show the way families in all of the three countries (South Africa, Bangladesh, and India) actively seek out risk-sharing arrangements and in the gaps filled by a lack of commercial products, find or create informal arrangements.

Despite the high number of informal services, some innovation is occurring. For example, the authors talk about the inventive ways insurance is being introduced into the markets through similar services. A great example is the concept of linking insurance with microcredit. Microcredit institutions are already in the community collecting periodic loan payments and thus pairing this process with a premium collection process makes sense.

In my own experience, I saw this firsthand. While working as a Kiva Fellow , I was lucky enough to pair up with a loan officer with Sinapi Aba Trust who recognized the natural fit between insurance provision and loan provision. He required that all of his clients also buy into the Ghanaian health insurance scheme. I blogged about the positive results here.

When I view this chapter from SaveTogether's perspective, the obvious overlap is between the state of health insurance in our country. A recent Harvard study shows that nearly 62% of bankruptcies are due to medical bills. Many families in the U.S. are one emergency away from devouring their assets, incurring massive debt, and losing income due to the lack of health insurance. With recent changes to our laws, it will be interesting to see how this number changes over time.

Another interesting point the authors make and one which I have had trouble articulating over time is the difference between microsavings/microinsurance and microcredit products. In the much more widely-recognized microcredit markets, it is the consumers who have to earn the trust of the institutions. But, this is reversed for microinsurance and microsavings where the institutions have to earn the trust in the consumers. This is obvious, but something that is often under-appreciated when questions arise about how there are so many unbanked here in the U.S. (recent studies estimate 1 in 13 Americans don't have a bank account). In many cases, there is mistrust in formal financial institutions and that only re-emphasizes the need for financial education to be paired with the matched savings accounts we profile at SaveTogether. With this in mind, we review each of our partner's financial education curriculums as part of our partner selection and due diligence process.

Dylan