In the literature dealing with poverty the proposition that the uninsured risk has significant welfare cost not just in the short run but also in the long run by perpetuating poverty has taken up almost an axiomatic character. The fact that it has done so does not require a deep mind to reflect on it if we take some time out to think through the way the poor live and the consequent risks they are exposed to.

The poor are generally exposed to two types of risks. One of course stems from the personal level like illness, unemployment or theft of meager savings. Then there is the macro level risk like drought, flood or recession affecting earning capacity. All these have significant welfare implications by creating road blocks in the way of alleviation of poverty.

The poor tend to create their own risk hedging or trading off mechanism. The most common one that comes to mind to anybody is stashing away of cash for the bad time to come. A very unproductive no-return strategy as the surplus is hoarded whereas an investment with that amount might have provided some return to add to the surplus already generated.

There are other ways and all of them have a huge welfare cost to the society. For example, the way the deprived ones hedge against unemployment is debilitating in terms of welfare cost. To hedge against unemployment the poor tend to engage themselves in multitude of employment options so as to create a bouquet of earning sources. What it leads to is a cost to the society as it loses the best productivity option of its members. It also in the ultimate analysis leads to lower earning for the poor thus pinning them down to the vicious circle of poverty and reduces their ability to generate surplus.

The only way out for them is to go for the financial hedging against such risks through insurance. The poverty alleviation policy of the government also recognises it. But to take it down to the bottom of the pyramid needs the active involvement of the microfinance institutions. Given their level of individual level interaction and understanding of the needs of the poor, they can bring the segment concerned on board through awareness building and providing them with the exact product to satisfy their individual need thus closing a big gap in the financial inclusion.