Save to insure — rational choices of the poor

David Roodman, in his book Due Diligence, offers an insightful comparison between insurance and savings:

An insurance policy can be thought of as a savings account with one change: with both entail repeated small pay-ins and an occasional large payout, an insurance payout occurs after some specified event, such as death — or not at all. Thus insurance raises the same prudential concerns for regulators as deposit-taking. And the conceptual switch from savings to insurance raises additional business challenges. For one, regulators need to make sure that what insurers charge and what they promise are roughly in balance so the insurers neither grossly overcharge, accumulating large surpluses, nor under charge, rendering them insolvent in the hour of greatest demand.

Regulation burdens discourage microfinance institutions from developing microinsurance products. Moreover, the poor often have doubts over insurance as it collects premium but may not pay any benefits back. In Uganda, buying insurance is considered “inviting diseases” in some communities.
Through talking with bank officers at the SACCO, I learned that some members (mostly motorcycle drivers) deposit their incomes daily when they finish working. The SACCO offers a savings account without any interest. In addition, it charges a monthly ledger fee of 500 UGX (approximately 0.2 USD). At first, I was surprised to learn that people are willing deposit in such accounts without any interest. But the manager explains: “Many of our members are farmers, and their incomes are unstable. Therefore their savings are inconsistent during the year. They also need to withdraw often.” It occurs to me that the credit union, by offering people this savings account, is simply providing a safe place for members to save. Money saved at home are easily stolen or spent on consumption.
I recommend anyone who is interested in microfinance and poverty alleviation to read Roodman’s book. Solid content and vivid language make it pleasant reading.

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