Generally, the low-income groups adopt two types of strategies to reduce the impact of adverse income shocks: Risk management strategies and risk coping strategies. But these are not very efficient in protecting them. Insuring against the adverse situations is another option before the poor. Yet, due to unawareness of the benefits and mismatch between premium and income schedule such beneficial schemes are not availed by the poor.

The poor are more vulnerable to risk. With low coping capacity, they find it impossible to rebuild their economic foundation in the event of a shock and continue to peril in poverty. Most of them work in the informal sector and normally function under risky conditions. This makes them largely vulnerable to illness, accidental death and disability. Disaster, both natural and man-made, devastates their economic life to such an extent that no amount of relief or rehabilitation is able to make good the loss. They are the most vulnerable ones and are the least capable of withstanding the adversaries and regain strength to normalize.

Generally, two types of strategies are adopted by the low-income groups to reduce the impact of adverse income shocks: Risk management strategies and risk coping strategies. The former reduces the risk in income fluctuations and is known as income smoothing. This is ex ante and is achieved by income diversification, income skewing, etc. For smoothening income the poor normally take up low-risk income generating activities even at the cost of low returns. Risk coping strategies include self-insurance, which is mainly achieved through precautionary saving and also through informal group-based risk pooling. Low-income households build up assets in good years and deplete the same in bad ones. Informal groups are formed among the members of a village to support each other in the event of crisis.

These ex post strategies are known as consumption smoothing. Insuring against the adverse situations is another option before the poor. Insurance can assist them to manage and diversify these many kinds of risks they encounter, help them to possess a sense of financial confidence and cope with the adverse situation. But high risks are difficult to be insured in the formal market. Credit and insurance markets are virtually non-existent in the developing countries, more so for the poor. They can hardly afford to pay the premium. Sparing a part of the meager income to take care of the uncertain future eventualities is next to impossible. Therefore, insurance benefits are modified for the low income group to suit their needs and it is christened as microinsurance.

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