Prashansa Jain discusses her work developing financial solutions for low and middle-income households in the Philippines
As an International Labour Organization (ILO) social finance fellow, I was given the task of implementing a holistic integrated risk management solution for a microfinance institution based in the Philippines. The product was to consist of credit, savings and insurance solutions, and needed to leverage digital innovations.
Financial inclusion in the Philippines
The Philippines lies along the Pacific Ring of Fire. Every year it experiences multiple natural calamities in the form of typhoons, volcanoes, earthquakes and so on, which displace many families and wipe out their livelihoods. This is just one of the vulnerabilities a low or middle income (LMI) household in the country is exposed to.
We conducted risk assessments across the archipelago, covering 550 households. Illness, death, natural calamity and inability to pay school fees emerged as prominent risk events. The majority of households relied on their peer group for monetary support, and people often ended up at local neighbourhood moneylenders. Forced to settle on expensive terms, this additional expense triggered a vortex of household resource depletion, forcing householders to continue accessing informal financial practices to tide them over. Very few households had access to more appropriate financial instruments, such as insurance and savings.
LMI households account for 97.7% of the Philippines’ total; of these, 50.9% are categorised as low income and the remaining are middle income. The per capita incomes range from the poverty line to 12 times the poverty line. These households are not only vulnerable to risk events, but also lack suitable protection or buffer mechanisms that would allow them to recover from a risk event.
The case for integrated risk management
An integrated risk management framework hypothecates mitigating the various idiosyncratic risks faced by LMI households through a bundled product that includes three critical financial solutions – credit, savings and insurance. Small to medium losses, with a certain probability of occurrence, can be managed through flexible savings products and credit solutions. Insurance and governments’ social protection schemes would help to manage more uncertain and larger losses. Volatility in LMI households’ cash flow would be stabilised by optimising households’ limited resources and deploying tiered financial solutions.
Many insurance solutions can help fill the resource gaps created for LMI households in times of stress. These solutions range from basic life and health protection to positive return yielding endowment plans, savings completion insurance, protection for property damage due to natural perils, and retirement or pension solutions. Flexibility of both premium contribution and withdrawal is preferred in these financial products, along with cost competitiveness and security.
Current challenges and the way forward
Lack of adequate and good quality data points is a challenge in the product development stage. Taking a complementary approach to the many risk mitigation strategies currently adopted by LMI households helps to refine the product features. Re-engineered operations and claims process flows are essential to cater to the specific needs and characteristics of this segment. An enabling regulatory environment can help to further push innovation and risk acceptance by financial service providers.
It was heartening to see the number of actuaries in the microinsurance space, all contributing in unique ways – but it’s barely enough. There is tremendous scope for exploring innovative and agile methods for offering the right solutions; an incremental benefit can go a long way in plugging the deficits faced by the LMI segment.
Prashansa Jain is a social finance fellow at the International Labour Organization