How to insure essential yet informal workers during the pandemic

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Many of the workers on the front lines of the pandemic lack insurance and basic social protections. Photo: Olha Zaika

The “informal economy” is often seen as primarily daily-wage laborers, such as in the construction sector or housekeepers, but it also encompasses vast numbers of workers in short- term, usually contract jobs in the formal service sector such as hospitality, retail, and transport. It also includes those working in the new gig economy.

Their work is often characterized by uncertainty, instability and insecurity. As opposed to those in business or government employment, they bear the risks of their work and receive limited social benefits and entitlements.

The Asia-Pacific region accounts for around 60% of the non-farm global workforce, higher than in Latin America and Eastern Europe, ranging from about 20% in Japan to over 80% in Myanmar and Cambodia. They are twice as likely as formal workers to belong to low-income households and often live hand-to-mouth. If they cannot work for extended periods, their family’s income is at risk.

The informal economy is not a relic of the past or a sign of backwardness. It is also not a consequence of the failure of modernization strategies. Today’s informal economy is an essential feature of global production networks. It operates in an environment marked by complex formal and informal economic links, global economic cycles, and domestic economic concerns.

For many in the informal economy, savings are either nonexistent or extremely limited. Typically, they lack employment security, healthcare benefits, sick leave, pensions, and severance packages. Only some of these low-income households are beneficiaries of social transfer programs or other formal insurance arrangements. And here also coverage and adequacy of benefits remain an issue. In short, informal workers earn their living without a safety net.

Without these protections, informal economy workers, especially the poor, face a wide range of occupational, safety, and health risks. They are disproportionally affected by natural hazards and human-made disasters. When affected, the poor tend to lose a larger fraction of their wealth, given their lower ability to cope and recover from disaster impacts. 

Even those whose employment is technically on the books, such as Uber drivers, face a raft of disadvantages. Being classified as independent contractors, many struggle to win unemployment benefits because their employers fail to pay insurance premiums or report wage data to state agencies.

Today, many at-risk informal workers are classified as “essential” to keep the economy going during the pandemic even though they lack basic labor protections.

The private insurance sector should see this as an opportunity to contribute to societal development by designing and offering fit-for-purpose healthcare provision, pensions, and insurance solutions for the missing middle. 

The extension of social protection or insurance to workers in the informal economy often concerns households already relying on informal support and risk-sharing. Insurers should gain insights from the interactions between pre-existing informal risk-sharing networks, social protection schemes, and formal insurance markets while designing new solutions. The design elements must reinforce rather than undermine the positive aspects of informal support mechanisms in risk management. 

Often the potential to build on community-based insurance like cooperatives and mutuals is overlooked. A thorough understanding of these mechanisms can help create positive synergies to manage the idiosyncratic risks. For covariate risks, financing the extension of risk protection needs to be done via risk transfer. 

Microinsurance provides a credible option to balance equity and sustainability. Post-disaster, microinsurance products can cover the cost of health care, deaths, and burials, loss of livestock or crops, or business assets. They can also support the business or income-generating enterprises while the overall system recovers. 

However, limited access to a range of risk management mechanisms and data prevents insurers from offering access to affordable insurance. A case in point is the challenge of developing business interruption products post-pandemic due to a lack of legal documents, proof of inventory and income, and insurance providers’ misperceptions about the client group. 

Today, many at-risk informal workers are classified as “essential” to keep the economy going during the pandemic even though they lack basic labor protections.

The COVID-19 outbreak and accompanying disasters due to natural hazards have exposed the challenges in protecting informal workers and vulnerable households in Asia.

In the new normal:

Mutuals and community-based insurance need strengthening through regulatory and supervisory oversight as they play a critical role in insuring the missing middle. In doing so, the women’s position as the households’ risk manager can be reinforced further and recognized at the community level. 
Governments should consider linking social protection programs with insurance to provide a safety net response. The use of digital technologies to target social protection programs towards households most at risk and targeting the female heads of families would be necessary. 
Subsidies do not automatically lead to high take-up, although evidence suggests that they expand coverage in different contexts. The role of smart subsidies needs to be further explored. And the same goes for smart technology.
The viability of insurance is a direct function of an insurer’s solvency of following a large-scale catastrophe or sequential disaster events. Well capitalized and regulated insurers can diversify their portfolios via reinsurance and help in growing this nascent market.
The design elements of new insurance products need to address the informal sector’s risks and the gig economy workers. They must also consider access to existing risk-pooling arrangements to offer optimal protection.
There is little awareness or understanding of the merits of insurance for managing large-scale disasters. More awareness-building is needed to instill trust and to involve women as change agents. Home is the best school, and the mother is the best teacher. In this manner, one can instill the value of insurance in an entire generation. At the same time, stringent action should be taken against those who are mis selling. 

To address the future of work, a shift in thinking is needed about private partnerships and putting the elderly, women, and youth at the center of loss prevention and building resilience for the households. This will be the most effective way forward for developing future protection solutions.

covid, covid-19, coronavirus, novel coronavirus, corona virus, covid-19 response, communicable diseases, infectious diseases, emergency response, health response, outbreak, pandemic, covid-19 prevention, insurance, informal workers, informal labor, social protections, health insurance, vendors, day laborers, contract workersArup Kumar ChatterjeeArticle

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