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Throughout history, humanity has grappled with a myriad of risks—from natural disasters like floods and droughts to the spectre of illnesses and mortality. These risks not only bring immediate suffering but also have long-lasting consequences, particularly for the vulnerable segments of society.

Farmers, for example, lose more than just the crop directly destroyed by a natural disaster. Once a farmer’s crop is ruined by a disaster, say a drought, the fear of future losses can discourage them from investing in their farm in subsequent years, resulting in decreased future productivity and income even without a disaster.

But what if their crops were insured?

With insurance, farmers can not only minimize their losses from a natural disaster but also have the confidence to continue investing so that productivity does not fall in the future. They can even confidently invest in new technologies that entail greater risks but have the potential to further increase productivity and income. Thus, insurance creates what economists call a “resilience dividend”; it enables people to take calculated risks to pursue opportunities that can help them break the cycle of poverty.

However, accessing insurance has traditionally been an uphill battle for the poor and marginalized. For receiving financial services like loans and insurances, an individual must be creditworthy in the eyes of the service providers. This is where they struggle the most. To begin with, typically their income is small and irregular, limiting their ability to make payments, and their assets are insufficient as collateral. Moreover, they primarily rely on cash transactions, which are challenging for a financial service provider to track and consider in the assessment, further limiting their creditworthiness. Consequently, their access to essential financial services, including insurance, is severely limited. Without insurance, poor and marginalized people, who also do not have a sufficient financial buffer or safety net to fall back on, suffer the most when a disaster strikes.

Rural poor are at a greater risk due to climate change because of their nature of livelihoods, e.g., agriculture. But generally, rural poor in developing countries have few options to protect their livelihoods from risks. Technology, particularly digital financial services (DFS), has the strong potential to change that.

In his keynote speech for BIGD’s international conference—Making Digital Finance Work for Women, which was held in June 2023—Dr Michael Carter, an economist at the University of California, Davis, discussed the possibilities and challenges of utilizing DFS to enable rural communities, particularly rural women, to better manage risks and secure their livelihoods. This article is based on Dr Carter’s presentation.

DFS has brought many essential financial services to remote and rural areas where they were not feasible before due to the high administrative costs of transactions in the traditional financial system. Dr Carter pointed out that just the access to DFS enhances the resilience of vulnerable people against unforeseen events. He gave an example of a woman in a remote Kenyan village who purchased crop insurance; the purchase was made possible by mobile money. Verified mobile money accounts of insurance clients like her also ensure that any payout can be made instantly, without error, and at a lower administrative cost.

Technology is not only transforming the ways transactions take place but also introducing new financial products that can better support the needs of the poor and marginalized people. The insurance the Kenyan woman bought was of a new type involving a loss-verified or an index insurance contract, in which payouts depend on the loss determined by satellite information and remote sensing observations. Moreover, digital transactions are trackable by design, which can help improve the creditworthiness of rural, poor, and other marginal groups who use them. The efficiencies and accuracies brought by these DFS innovations make it more feasible to offer much-needed insurance services to these vulnerable people.

Insurance products can help a variety of population groups manage risks, but women’s role in the family introduces an important dimension to this need. Women’s work in most developing countries is predominantly home-based, both economic and care work. Thus, one may assume that their livelihoods are less likely to be directly impacted by external risks. Paradoxically, relative to men, insurances for managing external risks have a more profound impact on women, and, more importantly, the long-term prospect of their families.

In traditional households, husbands are typically responsible for earning, while wives manage vital household functions like education, healthcare, and feeding. When husbands’ income decreases, the budget for these functions also declines, but it does not increase when incomes rise. This means that women primarily bear the downside risks in household contracts, despite their critical role in maintaining family well-being.

This skewed arrangement has serious consequences. An uninsured external risk can severely affect children’s education and nutrition, impacting the family’s human capital development. However, when women have access to risk management tools like crop or livestock insurance, the entire family benefits in the long term. Empowered by insurance, women can make important investments in their children’s nutrition, education, and well-being.

However, women tend to have narrower digital footprints because of their limited physical and financial mobilities, making them less trackable and consequently diminishing their creditworthiness to DFS providers. Service providers must take these constraints into account in designing inclusive digital financial products, for example, by coming up with gender-based client assessment criteria.

Women’s limited physical mobility also restricts their social networks. Consequently, they are also less informed about insurance products. Their weaker economic position restricts their capacity to pay for them. The adoption of innovative models like the Village Insurance and Savings Account (VISA) can prove instrumental in empowering women; developed in Nepal, VISA imparts financial literacy to rural communities, diminishes transaction costs through demand bundling, and leverages social mechanisms to foster savings and facilitate loan repayment.

Similar initiatives should be taken to address the barriers faced by different marginal groups in accessing DFS. Only then is it possible to fully leverage the power of technology to bridge the existing gaps in access to finance and to make financial services available to those who need them the most.

Investing in helping women access insurance is not just a financial decision. Women’s critical role in their households’ human capital development makes it a strategic investment and a step towards building a prosperous and equitable future, especially in the face of climate change.