Demand for Micro Life Insurance in Sri Lanka: Impact of Social Capital and Religion

Micro-life insurance provides protection against small premiums to low-income people in developing countries. Demand, however, is very moderate. The aim of this empirical work is to explain, how social capital and religion affect life insurance demand in developing countries using the example of Sri Lanka. Social networks allow for access to information, money, or innovation in an environment where infrastructure is not well functioning or less developed. Thus, social networks shape both, the consumption and the risk management behavior of individuals. In addition, cross-country studies show that the religion of Islam has a negative impact on life insurance consumption. This research follows a mixed-method research approach to study the role of social capital and religion on micro life insurance demand. The qualitative focus group discussions and the quantitative household surveys were conducted in the Eastern province of Sri Lanka in 2013. This work identifies three mechanisms through which social capital influences the demand for micro-life insurance: imitation, information exchange, informal risk sharing. People buy a micro-life insurance if they know an insured person. Informal risk management practices crowd-out formal micro-life insurance and the exchange between friends, family members or neighbors can reduce consumption if prior negative experiences weaken the confidence in the insurance promise. Regarding religion, the qualitative study shows that Muslims are reluctant to buy conventional insurance as they perceived it as a financial product contradicting with their religion. This study confirms that the financial situation contributes significantly to the purchase decision. It further found, that people are motivated to sign-up for micro life insurance by the perception to support other people in need with their purchase