Parametric insurance (also called index-based insurance) is a non-traditional insurance product that offers pre-specified payouts based on a trigger event. It basically covers the probability of a loss-causing event happening instead of indemnifying the actual loss incurred from the event.
It is particularly well-suited for natural catastrophes, but it can also be applied to other emerging risks where data is available and can be analysed. Such emerging risk areas may include those affecting the volatile informal sector in Kenya.
The parametric insurance differs from traditional life insurance by using predefined triggers to determine payouts rather than individual claims assessments.
The informal sector in Kenya has experienced specific trigger events such as the pandemic, climate-related events, political protests, loss of income and sudden economic downturns.
This model can definitely be useful for informal sector workers in Kenya, who often lack financial stability and formal employment benefits to cushion themselves against the said events.
Kenya’s informal sector is the backbone of the economy, employing approximately 83 percent of the workforce. From street vendors and motorcycle taxi operators to small-scale farmers and artisans, these workers form the lifeblood of the nation’s economic activity.
Parametric insurance could be designed to address the unique challenges faced by these workers leveraging technology such as mobile money platforms, biometric identification and data analytics. Insurers can create affordable, accessible, and scalable products tailored to the needs of this underserved population.
Informal sector workers often operate on thin margins, with little disposable income to allocate to insurance premiums.
Parametric insurance structured to offer micro-premiums, payable in small, frequent instalments via mobile money platforms would expand the accessibility of the cover. This aligns with the cash flow patterns of informal workers, making it easier for them to participate through affordable and accessible insurance covers.
One of the most significant advantages of parametric insurance is its speed of payout. In the event of a policyholder’s death, the beneficiaries, often spouses, children or dependents, can receive funds within days, if not hours.
This urgency is critical for informal sector families, who often rely on the deceased’s daily earnings for survival. A quick payout can help cover funeral expenses, settle debts and provide a financial cushion during the transition period for the family.
The aspect of mitigating economic shocks supports the gaps within informal sector that is highly susceptible to such downturns, whether from personal tragedies like illness or death, or broader crises such as pandemics and natural disasters.
Parametric insurance can serve as an entry point into the formal financial ecosystem, providing a stepping stone through financial inclusion.
Linking these policies to mobile money accounts encourages build up of a financial identity, which could later facilitate access to credit, savings products and other financial services.
Insurers can use mobile apps, USSD codes and SMS to educate potential customers, collect premiums, file claims and disburse payouts
Parametric insurance can act as a buffer, ensuring that families are not pushed deeper into poverty by such events. For instance, a policy could be designed to include additional payouts in the event of a public health crisis, providing extra support during times of widespread hardship.
Latest insurance uptake data indicates that there are almost three men for every one woman on a life insurance cover in Kenya. Women also constitute a significant portion of Kenya’s informal workforce, particularly in sectors like small-scale trade and agriculture.
However, they face greater financial insecurity due to lower earnings and limited access to resources. Parametric insurance can be tailored to address these disparities, offering women affordable coverage that protects their families and empowers them to invest in their businesses or education.
Kenya’s high mobile penetration rate and robust digital infrastructure provide an ideal environment for the rollout of parametric life insurance.
Additionally, partnerships with mobile network operators and fintech companies can enhance distribution channels, making it easier to reach even the most remote workers.
Many informal sector workers are excluded from formal financial systems due to lack of documentation, credit history or inadequate collateral acceptable to majority financial system.
