Expanding Microinsurance for Low-Income Households via Private Sector Support

Low-income groups are more vulnerable to shocks from illness, death, and disasters. Despite needing insurance the most, their enrollment rates are low due to economic constraints. For example,^[1] while 90.8% of households earning more than KRW 60 million ($43,170) a year hold insurance plans, only 26.9% of households earning less than KRW 12 million ($8,633) and 48.7% of households earning between KRW 24 million ($17,267) and KRW 36 million ($25,901) have insurance. When asked why they are not enrolled, 88.7% of households with annual incomes below KRW 12 million and 71.4% of those earning between KRW 24 million and KRW 36 million replied that they cannot afford it.

Table 1: Enrolled for Private Life Insurance vs. Not Enrolled Due to Economic Reasons

Source: 2021 Life Insurance Propensity Survey of Korea Life Insurance Association.

Most current policy supports for low-income groups are direct financial aids through loans and subsidies. Indirect supports, such as insurance, would help low-income individuals remain economically stable during illness, death, and disasters. 

KIFA, in partnership with five private insurance companies, runs microinsurance programs for low-income households and vulnerable groups. However, the scope of beneficiaries and coverage is limited due to budget constraints.^[3] The budget relies on returns from dormant insurance funds, amounting to about KRW 5 billion per year on average. In 2022, KIFA could pay full insurance premiums amounting to KRW 4.26 million for about 19,000 contracts, only 0.06% of the entire financial aid given by KIFA. The budget for microinsurance was only 0.27% of the total budget for KIFA programs in 2023.

Currently, those eligible for microinsurance include children aged 13 and under, dependents in single-parent families receiving child benefits, users of products by KIFA or partner organizations (e.g., rehabilitation support fund, self-supporting funds for the vulnerable), and some individuals in credit recovery. KIFA provides only two microinsurance products: 1) medical insurance for single-parent families and 2) self-supporting insurance for low-income households. Moreover, only three out of 300 personnel at KIFA are assigned to microinsurance as incidental work, with no one taking full responsibility for the program.

Fundraising is key to facilitating microinsurance. Besides relying on returns from dormant insurance funds, it is necessary to seek other financial resources, such as involving more private sector participants or securing additional budgets. Reallocating budgets can be challenging. Therefore, it is important to encourage private insurance companies to voluntarily establish a "Low-Income Insurance Support Fund" or make special contributions to the microinsurance program.^[4] Utilizing existing funds, such as the "Life Insurance Social Contribution Fund" or the "Community Chest of Korea," is another option.

Assuming sufficient funds are raised, microinsurance should expand its beneficiaries, diversify its products, and promote education. The scope of eligible beneficiaries should be broadened within budget allowances, including the near-poverty group by differentiating the support ratio by income group. Comprehensive investigations should be conducted on the demand for microinsurance to develop products reflecting low-income groups' needs, such as loan-related credit insurance and specialized insurance for young people with low income. Potential beneficiaries should be educated about microinsurance and how to make claims when necessary. KIFA should have personnel solely responsible for the microinsurance program.

Moreover, private insurers could target low-income households above the near-poverty line as customers to avoid overlapping with the scope of KIFA programs and share the role of the social safety net. Insurers in advanced countries, such as AIG, Allianz, and ING, view the microinsurance market as a blue ocean and are actively expanding their businesses globally. However, insurers should design products with some public value rather than being completely commercial, considering low-income families' economic constraints. They could use joint sales platforms and develop standardized products to reduce costs. The government should provide incentives, such as reflecting ESG performance, management evaluation, and tax benefits, to encourage private insurers' participation in the microinsurance market. Taipei,China's example shows the success of such incentives, with approximately 1.55 million microinsurance plans offered by private insurers as of March 2023, supported by policy incentives from financial authorities.^[5]

^[1] Korea Life Insurance Association, Life Insurance Propensity Survey, 2021.

^[2] Microinsurance refers to insurance targeting low-income groups. The basic insurance form (insurance type, coverage details, etc.) is not much different from general insurance, but it is characterized by relatively low levels of insurance premiums and guaranteed amounts. In particular, the portion of business cost of the insurance premium is often minimized or limited.

^[3] J. Hong. 2023. Report on Excavation of New Beneficiaries and Product Development of Microinsurance. KIFA.

^[4] It is known that the banking sector is currently promoting a financial support plan for the public with a total amount of KRW2.1 trillion or over $1.5 billion (including a special contribution of approximately KRW 220 billion (over $158 million) to the KIFA). Refer to Banking Association, Banks to Implement Financial Support Plan for the Public "Autonomous Program,” Press Release, March 27, 2024.

^[5] Refer to website of Taipei,China's Supervisory Commission (www.fsc.gov.tw) and J. Hong. 2023. Report on Excavation of New Beneficiaries and Product Development of Microinsurance. KIFA.

Korea Institute of Finance website.