The research on how insurance supports consumer financial health
As we discussed in The largely ignored component of financial health: Resilience, financial resilience is a component of consumer financial health whose importance has been overlooked.
Financial health advocates and financial services institutions have primarily focused on credit and savings products, lending practices, and other methods of supporting finhealth. But research is growing to show that insurance can also serve as a viable and impactful tool.
Recap: consumer financial resilience
Financial health is often defined as a consumer’s ability to spend, save, borrow and plan for the future. This last includes both planning for future expenses and growth, but also planning for unexpected expenses and costly life events.
The methods for developing financial health are varied and interconnected (e.g. affordable credit products, savings and budgeting tools, etc.). Financial resilience is critical because no matter what a consumer does to advance their financial health, they can be thrown back into debt and insecurity if they are not able to weather the potentially devastating impacts of financial shocks.
Supporting financial resilience: savings and credit vs insurance
Finserv providers and finhealth organizations tend to focus on savings and credit as the preferred mechanisms for supporting financial resilience. Emergency savings and access to quality credit products are intended to buffer financial shocks. Both of these are useful, but not effective for every situation.
Many of the financial shocks that devastate low- to moderate income (LMI) households are insurable life events. It does not make financial sense to deplete an emergency savings fund, or max out credit limits (no matter how high quality the credit product), if the financial problem can be solved by insurance.
Impact studies on how insurance supports financial resilience in this respect are not as prevalent as studies on other aspects of financial health, but here are a few notables.
The Oregon Health Insurance Experiment in the United States
Katherine Baicker, Amy Finkelstein, and other researchers, examined how a Medicaid expansion impacted residents in Oregon. The Oregon Health Insurance Experiment in the United States followed approximately 74,900 low-income adults during 2008 to 2010.
Among such impacts as decreased depression, and increased use of healthcare and preventive services, the study found that access to insurance reduced the participants’ financial strain.
The report concluded, “Coverage significantly lowered medical debt, and virtually eliminated the likelihood of having a catastrophic medical expenditure.”
Medicaid diminished financial hardship. Medicaid reduced the likelihood of having any unpaid medical bills that were sent to collection agencies by 6.4 percentage points (a 23 percent decrease). It also reduced several other measures of financial hardship such as having any medical debt at the time of the interview and having to borrow money or skip paying bills in the past year to pay for medical bills. Catastrophic expenditures, defined as out-of-pocket medical expenditures in excess of 30 percent of household income, were nearly eliminated.
(“The Oregon Health Insurance Experiment in the U.S.” Baicker, Katherine; Finkelstein, Amy, 2011.)
Building Resilience through Financial Inclusion
In “Building Resilience through Financial Inclusion: A Review of Existing Evidence and Knowledge Gaps”, Innovations for Poverty Action aimed, among other goals, to study existing evidence to examine if financial services can build economic resilience. Related to the use of insurance to build resilience, the report states:
Insurance coverage can limit households’ need to sell assets or cut meals when a shock occurs and, in the case of health shocks, encourage households to seek high-quality care…. This research suggests that financial products, and particularly insurance, can incentivize investment in high-risk, high-reward productive activities that households may otherwise shy away from due to unmanaged risk.
(“Building Resilience through Financial Inclusion”, Innovations for Poverty Action, 2019.)
“Building Resilience” offers accounts across nations where insurance allowed LMI populations to build their economic resilience by allowing them greater freedom to invest for the future. For example, insurance allowed economically struggling farmers to:
- Purchase a riskier, less drought-resistant but higher yield, variety of rice
- Invest more in their farms and shift to farming more pro-table crops
- Increase spending on productive inputs such as fertilizer
- Increase their demand for credit and reduce their need for emergency savings
Global Research into Insurance and Resilience
Compared to the U.S., insurance as a strategic part of financial health and resilience has been looked at more in depth globally. A couple of examples:
The Microinsurance Network discussing the impacts of microinsurance globally concluded in A Practical Guide to Impact Assessments in Microinsurance that of the six dimensions or areas that insurance can impact (e.g. health, education, etc.), the guide highlights financial protection: “We are convinced that this impact [financial protection] is one of the most important that microinsurance can have, which mirrors the fact that this relationship has been subject to many studies.”
The Consultative Group to Assist the Poor is a global partnership of more than 30 development organizations working to advance the lives of poor people through financial inclusion. A few examples of insights from CGAP’s research:
Building Resilience through Access to Insurance — “We believe that the world’s poor will not achieve lasting prosperity without access to insurance.”
Resilience and Health Shocks — “The findings suggest that HSA and the health loan have the potential to help the poor better manage health shocks, leaving them better off financially and reducing their long-term costs.”
Disaster Risk Insurance to Promote Resilience — “Disaster risk insurance should also be considered to complement a package of resilience-building policies that includes financial inclusion, access to health and non-health insurance, and stronger social protection shields…”
Changing how consumers view insurance when planning for “soon” vs “later”
Financial resilience is about how consumers are able to plan for and adapt to the future. Traditionally, some insurance products are seen as planning for the immediate future or “soon” (e.g. health, dental, and short disability), while others are for the long-term or “later” (e.g. life insurance, AD&D, and long-term disability).
But for LMI households all insurance tends to be seen as for “later”. Because LMI consumers are often overwhelmed trying to meet their immediate financial needs, insurance is set on the back burner, so to speak. If a consumer has trouble making rent, buying groceries, or paying bills, then insurance protections become less pressing.
The reason why is simple: insurance costs them money in the now, but the returns may not come until later, if at all. Thus, expenses such as rent, food and bills will always come first.
This “costs now with possible returns later” is the pain point to address if the industry is going to change consumers’ relationship to insurance, and help LMI households become financially resilient.
In our next piece, we’ll dive deeper into how Resilient’s Inclusive Insurance model fills the resilience gap and allows people to plan and be prepared for “later”, now…
With no-cost life insurance, AD&D, and disability, or significantly discounted health and dental insurance, LMI households can access inclusive microinsurance products in a framework that opens up opportunities to plan for both the near and long term future.
Resilient’s Inclusive Insurance model can change consumers’ relationships with insurance, and provide them a way to build their financial resilience.
Learn how Resilient’s Inclusive Insurance programs can benefit your business. Visit imresilient.co, and contact us as Maximilian.Weiner@imresilient.co.
