Insurance and financial services across developing countries: an empirical study of coverage and demand
Income fluctuations resulting from socioeconomic, climate and other environmental risks are an important barrier to sustainable development. This is particularly the case in developing countries that have a high dependence on agriculture, are vulnerable to natural disasters including those made more likely by climate change, and lack efficient mechanisms for coping with the impacts of these disasters.
In the last two decades, access to financial services such as savings and credit has increased across the developing world. However, use of insurance services for financial protection against these risks has remained low. Analysing data from nearly 66,000 households from 16 developing countries across Asia and Africa, this paper examines the landscape of access to and sources of financial services.
The authors find that demand for insurance coverage may be twice as sensitive to household income as previously thought. An extra US$1 of daily income for a poor household increases the probability that they will demand insurance by around 5 percentage points. However, a higher income does not necessarily translate into higher probability of being insured across all countries, implying that many other factors are important in influencing insurance uptake. These include education level, age and being in formal employment.
The results shed new light on how insurance uptake could be increased through more tailored and targeted products and services that are designed to meet local needs and requirements in the face of climate and other shocks.
Key points for decision-makers
- This paper uses a pooled dataset of 65,916 households from 16 developing countries across Asia and Africa, derived from the Making Access Possible (MAP) programme.
- The data allow the authors to unpack the current levels of coverage of different kinds of financial services among the adult population. Access to finance is widely considered a key component of helping those most vulnerable to build resilience to climate change impacts.
- The results offer insights into three dimensions of financial services: savings, borrowings and formal insurance.
- The authors examine the factors that determine the probability that a household is covered by different kinds of insurance products. The focus on insurance is important because it is considered to offer more reliable and effective protection than post-disaster aid, and to help to increase risk planning and risk understanding; and because ongoing efforts to increase insurance penetration have had relatively limited success to date.
- 16 per cent of the survey respondents had insurance of one kind or another. Importantly, in some countries uptake of insurance is largely driven by funeral insurance products as opposed to insurance for crops or health and as such there is large asymmetry in uptake of different insurance products.
- The lack of health insurance in both Asia and Africa was notable with only 3.5 percent of survey respondents covered under medical insurance. This significantly impacts households’ risk mitigation capacity.
- The authors’ approach shows that many demographic effects are in fact not related to demand but to the supply of insurance. When one accounts for selection bias, demand for insurance coverage may be twice as sensitive to household income as previously thought.