Demand for Property Microinsurance in Canada

Introduction

The term “microinsurance” refers to low-cost insurance products designed to satisfy the interests of poor communities by making financial risk management more affordable. Because it necessarily targets low-income communities, microinsurance has attracted the international attention of development policymakers as a tool for mitigating the worst effects of poverty.¹ By making poor populations less susceptible to adverse financial risks, microinsurance should theoretically ensure greater financial stability in low-income communities, sufficiently improving the lot of the poor. However, the existing research of microinsurance demonstrates a paradox specifically highlighted by Platteau, de Bock and Gelade: while microinsurance can theoretically protect the poor populations against adverse shocks, the take-up rates for stay lower than expected.²

It is also worth noting that while microinsurance providers generally target developing countries, the same lack of demand is also evident in developed countries, such as the United States or Canada.³ This paradox means there are factors in work that negatively affect the demand for microinsurance, including property microinsurance, in developed countries. One can identify three major factors responsible for this development in Canada: insufficient financial literacy, informal risk-sharing mechanisms, and deficiencies of supply.

Supply Deficiencies

The first and most obvious factor influencing the demand for property microinsurance in Canada is represented by various supply deficiencies of different kinds. One of such potential deficiencies is the price of the insurance for the potential policyholder. As one may logically expect, the price of the microinsurance demonstrates an inverse relation to the demand – in other words, the higher the price, the lower the demand, and vice versa. Studies conducted in the number of developing countries in Africa, Southeast Asia, and Latin America for different kinds of microinsurance all confirm that lowering the price results in a relative increase in demand.⁴

Unfortunately, there is no literature concentrating on the interrelation between price and demand in developed countries or Canada in particular or concentrate on the property microinsurance specifically. This absence makes any estimations of the factors influencing demand for property microinsurance in Canada necessarily speculative and based on general observations. Still, as the relation between price and demand is a universally applicable economic principle, one may safely assume that price is one of the supply characteristics influencing the demand for property microinsurance in Canada.

However, price is not the only relevant aspect, as the transaction costs for a potential insurer also play a considerable role. Just as the insurer, the potential client inevitably bears the costs not included in the contract explicitly. These costs may include the difficulty of purchasing or renewing the insurance as well as the difficulty with paying premiums or receiving payouts.⁵ Apart from it, the complexity of filing a claim may also pose a significant challenge for the potential client and, as such, increase the transaction costs.⁶ All these factors acquire an increased significance in the light of the low financial literacy levels among the target populations, which is to be discussed below. Yet even regardless of financial literacy, transaction costs, however insignificant at first glance, may implicitly increase the actual costs of microinsurance and, as such, “have important effects on demand”.⁷

Admittedly, transaction costs tend to be lower in developed countries than in the developing ones.⁸ Still, transaction costs for potential policyholders represent yet another supply deficiency that may influences demand for microinsurance, including property microinsurance, even in developed countries.

Yet one should alas be aware that, for all the importance of price and transaction costs, they cannot be the only meaningful influence on the demand for microinsurance. Evidence analyzed by Eling, Pradhan and Schmit suggests that price reduction only leads to a modest increase in demand for microinsurance. In fact, even though “reducing the cost of microinsurance is likely to increase demand, overall take-up rates may remain low.”⁹ More than that, even if the prices are significantly below those that would be actuarially fair, only a small part of potential client pool may react to such price reduction by purchasing insurance.¹⁰

Platteau, de Bock and Gelade support this notion and point out that, while lower price inevitably increases the demand to a certain degree, its influence as a factor is not overwhelming.¹¹ Even if the supply is largely devoid of fundamental deficiencies, it is not yet enough to ensure a high demand for microinsurance. One should also pay attention to other factors in work, which complement the price and transaction costs and largely create the above-mentioned paradox when poor populations are reluctant to afford microinsurance. These factors are financial literacy and informal risk-sharing networks.

Financial Literacy

Among other factors that most likely influence the demand for property microinsurance in Canada, there is insufficient financial literacy of the potential purchasers. As mentioned above, both scholars and policymakers generally view microinsurance as a means of alleviating poverty, and the orientation on low-income communities is inherent in the concept itself. However, the low income may often coincide with low levels of education in general and low awareness of the inner workings of the financial system in particular. Platteau, de Bock and Gelade are right to note that the “core concept of insurance – spending money in return for an uncertain payout covering a hypothetical event – is, indeed, not straightforward.”¹²

Eling, Pradhan, and Schmit also note that just like higher levels of financial literacy increase demand for insurance, the lower levels usually decrease it.¹³ This interrelation constitutes a problem: in order to purchase a service, one needs to understand its meaning in detail, but the populations in supposed need of said service lack the knowledge to analyze it properly. Thus, one may identify the low level of financial literacy among the target populations as one factor affecting the demand for property microinsurance in Canada.

One may reasonably doubt that the level of financial literacy, even among low-income populations in Canada, is so low that the potential purchasers of the service would not understand the notion of insurance properly. Indeed, the studies stressing interrelation between low demand for microinsurance and low levels of financial literacy usually concentrate in the developing countries, such as Uganda, West Africa, and Kenya.¹⁴ However, one should also remember that, as of 2018, Canada was the world’s leading country in terms of refugee resettlement, providing shelter for more than 28,000 refugees in that year alone.¹⁵ A sociological survey by PEW Research Center reveals that as much as 34 percent of these come from Africa, and 55 percent more from the Middle East.¹⁶

Coffie confirms that resettled refugees usually fill in in low-income communities, which constitute the primary target audience of microinsurance.¹⁷ Thus, at least a part of potential microinsurance clients in Canada is represented by the refugees from the very regions that demonstrate low demand for microinsurance due to insufficient financial literacy.

Apart from this, one should also remember that living in a developed country is by no means a guarantee of sufficient financial literacy even among its autochthonous population. Cole demonstrates that, even in developed countries of North America, “financial literacy has been identified as a barrier” preventing the low-income population from fully appreciating the benefits of microinsurance.¹⁸

Low levels of financial literacy and the correspondingly reluctant approach to microinsurance are, therefore, common traits of low-income populations per se, largely regardless of their geographic origin. Hence, it is entirely feasible to assume that financial literacy impacts demand for property microinsurance in Canada, despite it being a developed country.

Informal Risk-Sharing Mechanisms

Another important factor known to influence the demand for microinsurance, including property microinsurance, is represented by informal risk-sharing mechanisms in low-income communities. Eling, Pradhan and Schmit have established that informal risk-sharing mechanisms are a pivotal means of alleviating potential adverse shocks among poor populations.¹⁹ According to Platteau, de Bock and Gelade, such informal mechanisms serve the same goals as formal insurance: to cover unexpected “health or schooling expenses, necessary disbursements for funerals or other important ceremonies,” and many other occasions.²⁰

These networks serve as substitutes for other forms of risk management, including insurance in general and property microinsurance in particular. As the people from the low-income communities have limited financial resources, investing in informal risk-management options leaves them not only less predisposed, but also less able to purchase microinsurance contracts. As a result, informal risk-sharing mechanisms may exert a negative influence over demand for property microinsurance, and this observation fully applies to Canada.

However, one should also be aware that mechanisms of informal risk-sharing are not necessarily conclusive to lower demands for microinsurance. Quite on the contrary, they also have the potential to increase the demand if addressed properly. Eling, Pradhan and Schmit have shown that informal networks have the capacity to influence the population’s participation in other risk-sharing mechanisms, including but not limited to insurance and microinsurance.²¹ Demand for microinsurance grows if the insurance provider succeeds in incorporating the informal risk-sharing mechanisms into the marketing strategy and make them one of the ways through which potential clients may learn more about the services offered. Platteau, de Bock and Gelade point out that “risk-sharing groups can be an especially efficient way of spreading information about insurance, thereby promoting its uptake.”²²

In order to exploit such networks and raise the demand, the provider has to offer property microinsurance not to individuals, but to the pre-existing informal risk-sharing groups.²³ Hence, the informal risk-sharing mechanisms may not only decrease the demand for property microinsurance by acting as its competitors but also increase it by acting as marketing agents.

The importance of the informal networks in influencing the demand for property microinsurance stems from the fact that the people in low-income communities put greater trust in them than in formal mechanisms. Platteau, de Bock and Gelade identify trust as a notable variable of considerable importance that may influence the demand for microinsurance both positively and negatively.²⁴ Eling, Pradhan and Schmit also stress that trust, as applied to microinsurance, constitutes “an issue of potential importance throughout the globe” – developed countries as well as the developing ones.²⁵i In informal risk-sharing networks, contacts between the participants are, as a rule, more personal, and the pool of the participants itself tends to be small in size. As a result, the members of such networks “can monitor each other more efficiently” than they would be able to monitor a formal insurer.²⁶

This greater level of trust toward informal mechanisms as compared to the formal ones is what makes them such an important factor influencing the demand for microinsurance. Informal networks may be either a powerful competitor, or an effective marketing agent, but influence the demand for microinsurance in any case.

Conclusion

When identifying the factors influencing demand for property microinsurance, one should be aware of the fact that studies concentrating on developed countries or property microinsurance specifically are virtually nonexistent. Still, drawing on the more general studies, one may identify three principal factors that influence demand for property microinsurance among low-income Canadian populations: supply deficiencies, financial literacy, and informal risk-sharing mechanisms. Just as with any other good or service, prices and transaction costs for microinsurance inevitably affect the demand, but one should also be aware that prices alone cannot account for the take-up rates. Another factor influencing the demand is financial literacy, which tends to be lower among the poor populations and, therefore, makes them unable to evaluate the potential benefits of microinsurance properly.

Finally, informal risk-sharing networks also influence the demand almost invariably, since they function either as powerful competitors or as influential marketing agents. Thus, even though the evidence for Canada specifically is hard to find, one may assume with a high degree of certainty that several universal factors affect the demand for property microinsurance in the country. These factors are supply deficiencies, financial literacy, and informal risk-sharing mechanisms.

References

1. Bernards, Nick. “The Truncated Commercialization of Microinsurance and the Limits of Neoliberalism.” Development and Change 49, no. 3 (2018): 1-24.
2. Coffie, Amanda. “Tapping into Resettlement for Rebuilding: Lessons from Peacebuilding Engagement Activities of Resettled Liberian Refugees in Canada.” African Conflict and Peacebuilding Review 8, no. 2 (2018): 38-62.
3. Cole, Shawn. “Overcoming Barriers to Microinsurance Adoption: Evidence from the Field.” Geneva Papers on Risk and Insurance 40, no. 4 (2015): 1-21.
4. Eling, Martin, Shailee Pradhan and Joan T. Schmit. “The Determinants of Microinsurance Demand.” The Geneva Papers 3, (2014): 224-263.
5. Platteau, Jean-Philippe, Ombelin de Bock and Wouter Gelade. “The Demand for Microinsurance: A Literature Review.” World Development 94 (2017): 1-18.
6. Radfor, Jynnah and Phillip Connor, “Canada Now Leads the World in Refugee Resettlement, Surpassing the U.S.” Pew Research. 2019. Web.

Footnotes

1. Nick Bernards, “The Truncated Commercialization of Microinsurance and the Limits of Neoliberalism,” Development and Change 49, no. 3 (2018): 1-2.
2. Jean Philippe Platteau, Ombelin de Bock, and Wouter Gelade, “The Demand for Microinsurance: A Literature Review,” World Development 94 (2017): 14.
3. Platteau, de Bock and Gelade, 8.
4. Martin Eling, Shailee Pradhan and Joan T. Schmit, “The Determinants of Microinsurance Demand,” The Geneva Papers 3, (2014): 231-232.
5. Platteau, de Bock and Gelade, “The Demand,” 8.
6. Platteau, de Bock and Gelade, 8.
7. Platteau, de Bock and Gelade, “The Demand,” 8.
8. Platteau, de Bock and Gelade, 8.
9. Eling, Pradhan and Schmit, “The Determinants,” 230.
10. Eling, Pradhan and Schmit, 230.
11. Platteau, de Bock and Gelade, “The Demand,” 8.
12. Platteau, de Bock and Gelade, “The Demand,” 5.
13. Eling, Pradhan and Schmit, “The Determinants,” 242-243.
14. Eling, Pradhan and Schmit, “The Determinants,” 245.
15. Jynnah Radfor and Phillip Connor, “Canada Now Leads the World in Refugee Resettlement, Surpassing the U.S.,” Pew Research, 2019.
16. Radfor and Connor, “Canada Now Leads the World.”
17. Amanda Coffie, “Tapping into Resettlement for Rebuilding: Lessons from Peacebuilding Engagement Activities of Resettled Liberian Refugees in Canada,” African Conflict and Peacebuilding Review 8, no. 2 (2018): 38-62.
18. Shawn Cole, “Overcoming Barriers to Microinsurance Adoption: Evidence from the Field,” Geneva Papers on Risk and Insurance 40, no. 4 (2015): 12.
19. Eling, Pradhan and Schmit, “The Determinants,” 243-244.
20. Platteau, de Bock and Gelade, “The Demand,” 14.
21. Eling, Pradhan and Schmit, “The Determinants,” 244.
22. Platteau, de Bock and Gelade, “The Demand,” 13.
23. Platteau, de Bock and Gelade, 13.
24. 2424. Platteau, de Bock and Gelade, 7.
25. Eling, Pradhan and Schmit, “The Determinants,” 239.
26. Platteau, de Bock and Gelade, “The Demand,” 13.