How do Poor Community Manage Different Risk?
Crises are recurrent in the lives of the poor. Such crises – personal, social, or natural – often involve high expenditures and drive poor families deeper into poverty. Most common crises are accidents, sudden hospitalization, and death of a bread earner, and loss of crops or assets. Expenses incurred during such crises are met either by borrowing form money lenders, sales or mortgaging of assets or by drawing on scarce saving resulting into a simultaneous reduction in income and saving, and an increase in debt and expenditure. Each crisis leaves a poor family weaker and more vulnerable.
All households in developing countries, whether better or worse off, are exposed to a variety of risks, such as illness, disability, death, unemployment, crop failure, natural catastrophes, or crime. Low-income households, however, are less able to prevent and mitigate risks than others; and in the case of shocks, they are less able to cope with the consequences (Churchill, 2006). They are therefore more vulnerable to risks, i.e. they are more likely to experience a significant decline in wellbeing when a shock occurs (World Bank, 2010).
Most poor people manage risk with their own means. Many depend on multiple informal mechanisms (e.g., cash savings, asset ownership, rotating savings and credit associations, moneylenders, etc.) to prepare for and cope with such risks like death of a family breadwinner, severe illness, or loss of livestock.
Very few low-income households have access to formal insurance for such risks. These means include (i) prevention and avoidance, (ii) preparation and (iii) coping.
- Prevention and avoidance: When possible, poor people avoid and/or actively work to reduce risk, often through non-financial methods. Careful sanitation, for example, is a non-financial way to reduce the risk of infectious illness. Using family networks to identify business opportunities is another such mechanism. The imperative to avoid risk often leads to conservative decision making by poor people, especially in business considerations.
- Preparation: Poor people save, accumulate assets (such as livestock), buy insurance, and educate their children to handle future risks. For certain risks, informal community systems (e.g., Ghanaian burial societies) offer protection. However, such systems generally do not adequately protect against costly and unpredictable risks, such as the debilitating illness of a family income earner. Formal insurance products are beginning to be offered to low-income markets, such as simple credit life insurance, which covers an outstanding loan balance in the event of a borrower’s death; but these insurance products sometimes appear to be designed to protect the lending institution rather than its clients.
- Coping: Ex post coping can result in desperate measures that leave poor households even more vulnerable to future risks. In the face of severe economic stress, poor people may take out emergency loans from moneylenders, micro-finance institutions (MFIs), and/or banks. They may also deplete savings, sell productive assets, default on loans, and/or reduce spending on food and schooling. In general, prevention and planning are far less costly than coping strategies for the individual.