Colombia: For the poor, a new way to protect against disaster

BARRANQUILLA, Colombia — Before a sales team for Liberty Mutual fanned out into a crime-infested slum to sell insurance, the venders bowed their heads, asking god to bless their work and protect them from thieves.

A ramshackle neighborhood where horse carts ply the streets and the floors of many houses are made of dirt might seem an odd place to peddle insurance. After all, insurance companies have historically ignored the poor.

But the Liberty team was offering something new to low-income families in the northern city of Barranquilla: health insurance for 3,000 pesos a month, which is less than two dollars. In case of serious illness, policyholders would receive an immediate payout of about $2,000.

“Before insurance was too expensive,” said construction worker Luis Marmolejo, who signed up with Liberty: “But 3,000 pesos is nothing.”

These low-cost policies, which provide coverage for accidental death, medical problems, crop failures and other calamities, are known as microinsurance. Development experts say microinsurance could become a key tool in fighting poverty because impoverished families are the most exposed to risk but almost never have coverage.

“The idea is to insure the working class and the poor,” said Lilian Perea of the Bogota office of the insurance group RSA. “These people make up the bulk of the population yet they are the least protected.”

Microinsurance was inspired by the success of microcredit programs, which supporters say have pulled millions of people up the economic ladder by providing them with low-interest loans. One of microcredit’s pioneers, the Bangladeshi economist Muhammad Yunus, won the 2006 Nobel Peace Prize. But loans are not always enough.

Michael McCord, who ran a microcredit program in Africa in the 1990s, said what many of his clients really needed was insurance. That’s because if disaster strikes, the uninsured may be forced to reduce food consumption, pull their kids out of school or sell off productive assets, such as land and livestock. And that makes them even poorer.

“They live on the margins. One small financial jolt can put them way back into deep poverty,” McCord said. “I would watch people build up their businesses, make better profits with microcredit but then as soon as there was a health crisis in the family, or a death in the family, all those gains would be lost.”

Back in the United States, McCord founded The Microinsurance Centre in 2000 to design insurance policies for the poor. Meanwhile, commercial insurance companies, the Gates Foundation, the International Labour Organization and religious groups all began promoting microinsurance.

Still, it can be a hard sell. Unlike microfinance programs that provide poor people with instant cash, microinsurance requires them to dig into their wallets to pay for something they may never use. Many potential customers have little education and get confused by the whole concept of insurance. Others have been stiffed after filing claims.

Delia Mendoza, a slum dweller in Barranquilla, described her frustrating experience after purchasing funeral insurance. “My father-in-law died and the insurance company never paid up,” she said.

Another problem is collecting premiums. Nearly half of all new policyholders in Colombia drop out within a year because they are unable to come up with even cut-rate fees, said Perea of RSA. As a result, some insurance companies have teamed up with public utilities. In Barranquilla, for example, Liberty’s microinsurance fees are included on their client’s monthly natural gas bills.

So far, about 150 million people worldwide are now covered by microinsurance, twice the number of five years ago, according to McCord. China and India are the biggest markets but sales are also booming in Brazil, Mexico and Colombia.

Health insurance is one of the biggest sellers because many countries offer universal health care only in theory. In run-down public hospitals, poor people often end up paying for everything from meals to antibiotics. Perea, of RSA, said her teams in Colombia are selling 60,000 microinsurance policies a month, mostly for health coverage.

She said insurance companies hope to turn profits by selling these policies on a mass scale. So far, they have largely avoided the backlash faced by some microfinance companies, which have come under fire in India and elsewhere for charging high interest rates and pursuing overly aggressive loan-recovery tactics.

Microinsurance promotors say if their clients are unable to pay, their policies will simply be canceled.

Poor people find this risk-free arrangement attractive, which is why the Liberty Mutual sellers in Barranquilla often close the deal.

Sales are even brisker after families receive big settlements. One Liberty salesmen recalled making a $6,000 payout after a policyholder was killed in a knife fight. He said people formed a line in the street to sign up for microinsurance.

“I immediately sold 20 policies,” he said.