Microinsurance - the next sexy development initiative?

In the last couple of years, microcredit has managed to get a sexy reputation, for better and for worse. The attention helps to bring large dollops of funding, but at the same time raises expectations higher than can ever be met. Development initiatives of this type probably go through something similar to Gartner's hype cycle for technological breakthroughs, with a peak, a trough, and a leveling off:

Microcredit is probably past its peak of inflated expectations. Microinsurance, though, may be one its way up - now that the Bill and Melinda Gates Foundation has thrown its weight behind microinsurance, attention is sure to grow. The Gates Foundation recently awarded a grant to the International Labor Organization to establish a Microinsurance Innovation Facility - in cooperation with CGAP - that will award some 40 to 50 innovation grants at a total value of $18 million. (For more on the initiative, check out Improving risk management for the poor.) Microcredit has proven effective enough that it will undoutedly make it to the 'plateau of productivity'. Can the same be said of microinsurance?

In its October edition, The Banker reports on one of the success stories of microinsurance.  The Micro Insurance Agency has been able to offer a commercially viable product with extraordinarily small margins:

Founded in 2005 by parent company Opportunity International, among the world's largest microfinance networks, MIA is something of a specialist in this regard. As a designer, distributor and administrator of insurance products specifically for the poor, the organisation has to think dynamically when it comes to the technological and operational aspects of delivering crop insurance. Working in conjunction with the World Bank and several other partners, MIA has become a recognised pioneer in delivering inexpensive, accessible microcrop insurance to poor communities, through the development of the world's first weather index-linked microinsurance products.

Will this all turn out to be hype that all comes tumbling down? My take it is that microinsurance will also follow something similar to the Gartner hype cycle, although perhaps less pronounced than microcredit. On the upside, technology has enabled MIA - and will enable others - to do what was not possible in the past:

1. Microinsurance, like all insurance, faces the problem of moral hazard - how do we know that disaster actually struck? MIA has overcome this problem for crop microinsurance by relying on meteorological data - payments are automatic if certain weather patterns emerge.

2. Crop microinsurance faces the problem of correlational risk - weather disasters tend to hit a lot of farmers in a single geographic area. A microinsurance provider that is not geographically diversified would probably go bust. MIA has managed to offer this kind of insurance worldwide because advances in internet technology have allowed it to engage local organizations the world over as agents.

Yet this is not the end to all the problems of microinsurance. As with microcredit, creating trust with poor clients will always create a non-trivial cost. And persuading clients that it's in their interest to buy microinsurance will remain difficult. I just hope that inflated expectations don't get in the way of quickly reaching the plateau of productivity.