Micro Insurance- Progress Report in India

Introduction

Marsh defines micro insurance as insurance that is designed specifically for the low income market. If given appropriate products, processes and knowledge, the low income consumers can get a good market benefit. Micro insurance offers a larger and diversified risk pool, benefits to reputation, market intelligence and innovation that can be applied to other business activities.

The government has defined micro insurance as the protection of low income households against specific perils in exchange for premium payments proportionate to the likelihood and the cost involved. Accenture says that micro insurance is typically defined in terms of the income of target customers, the limits on the amount of premium or the size of the benefit set by the local regulator, or a combination of these criteria.

90% of Indian population and 88% of Indian workforce remain uninsured. Nongovernmental organizations initiated a few micro insurance schemes and these efforts became significant after the growth of microfinance in India. The regulation has also made it mandatory for all formal insurance companies to sell micro insurance.

IRDA’s micro insurance regulation was a pioneering approach. In 2002, IRDA developed rural and social sector obligation norms that indicated the number of policies to be sold in rural areas and number of lives to be covered in social sector. In 2004, Regional Rural Banks were allowed to sell insurance as ‘corporate agent’ and in 2005; IRDA came up with the micro insurance regulation. The IRDA (micro insurance) Regulation 2005 defines how the insurers have to do micro insurance business in India. Distribution model of insurance to be followed is also specified.

In its regulation, IRDA has defined as to who would qualify as micro insurance agents and what role insurers have to play in micro insurance .The regulation has fixed minimum sum assured  = Rs 10,000 and maximum sum assured of Rs 50,000( for term insurance) and accident benefit as rider. In case of endowment policies (health insurance and crop insurance), the maximum sum assured is Rs 30,000. Micro insurance is targeted at both rural and social sectors – scope for penetrating this market is huge.

Minimum and maximum terms for which the life assurance benefits are to be granted are 5 years and 15 years respectively. For non-life, there are one year renewable covers. A micro insurance agent is NGO/ Self help groups / MFI( micro finance institution) . Rates of commissions applicable have been specified.

The regulation makes it mandatory for the life insurers to sell 16% of their policies to social sector. This target is to be achieved within 5 years . Non life insurers have to bring 5 % of total gross premium from rural sector within 3 years. They have to cover 20,000 lives in social sector within 5 years.

Micro insurance products insure for health care and death. When these are combined with an investment opportunity, they offer several attractions for low income people. As per IRDA regulations, the insurers are required to provide 7% of new life insurance policies from rural areas and social sectors. This quota raises to 20% over 10 years. Currently there are 6 million such life insurance policies and 10 million non life insurance policies.

Micro insurance is designed for the protection of low income people, with affordable insurance products to help them cope with and recover from common risks. It is a market based mechanism that promises to support sustainable livelihoods by empowering people to adapt and withstand stress.

Insurance Penetration in India

The Insurance Regulatory and Development Authority said that since opening up of Indian insurance sector for private participation, India has reported a fall in the insurance density for the first time in the year 2011. The figure fell to $49 (about Rs 2,695) in 2011, from $55.7 (about Rs 3,063) in 2010. According to the Irda Annual Report for 2011-12, there was an increase in insurance density for every subsequent year from 2001.

The measure of insurance penetration and density reflects the level of development of insurance sector in a country. While insurance penetration is measured as the percentage of insurance premium to GDP, insurance density is calculated as the ratio of premium to population (per capita premium).

After the insurance sector was opened up, rural insurance uptake was expected to increase. But the insurance for poor people has been a big challenge. In rural areas, insurers need to have lot of reliable data before designing insurance schemes for them. Insurers are experiencing difficulties in getting actuarially relevant data for designing an insurance scheme for the rural population.

For people living in rural and mofussil areas, the traditional insurance products have to be tweaked to suit their requirements. Low sum assured policies with flexible premium payment are needed because of the seasonal incomes of the rural population.

The global association of insurance regulators is following India’s lead in recognizing micro insurance as a distinct activity with a separate set of regulations. The IAIS (International Association of Insurance Supervisors) categorically stated that different types of insurance providers may be needed for different population segments.

Example – Mutual or co-operative insurers are in a better position to serve the low income market. The post offices in India have a massive distribution reach. India has got an extensive network of 50,000 + bank branches. In 2007, Munich Re foundation chairman Thomas Lester had mentioned that India, with a capacity to serve the market of over 200 million micro insurance products, is a key  country in micro insurance.

Technology and Micro Insurance

Only 3% of low income people in the world’s 100 poorest countries benefit from micro insurance leaving approximately two billion people uncovered. Information technology has to help reduce costs. Subscriptions for mobile phones have increased exponentially.

Insurance providers issue smart cards to poor policy holders to confirm identity and provide instant access to information on coverage and payment of premiums. However, the reach of the internet in rural areas cannot be a game changer if rural population continues to be illiterate. The issue of Adhar cards can help overcome the challenge of reaching out to the rural population and complying with the KYC (Know your Customer) norms.

The Government of India under its National e-governance plan, has introduced common service centers in rural areas and agencies like BASIX have initiated efforts to use these channels to service insurance clients. Technology can be deployed to reduce insurance frauds and also transaction costs. Technology plays a key role in health insurance schemes that offer ‘cashless’ benefits.

LIC has launched new software to promote micro insurance which will equip the micro insurance agents serve better. The software will facilitate information exchange with LIC systems and be a desktop-based full-fledged application with information on micro insurance agents. This system will provide greater co-ordination between LIC and its agents.

Market Size of Micro Insurance

The Indian micro insurance market is estimated at between 140-300 million policies (6). Some estimate the size of market to be approximately 250 billion rupees, 30 million micro insured population,market size  742 million people.

In India, market penetration has been driven largely by supply not demand. Liberalization of the economy and the insurance sector has created new opportunities for insurance. Regulation has to facilitate innovation and demand based products. There is also a need for capacity development based-agent training and market education.

Potential Market Size of Micro insurance in India (3)

Life Rs.15.39 to 20.14 billion per year

Health Rs.13.42 to 17.89 billion per year

Crop RS.9.76 to Rs.13.01 billion per year

LivestockRs.5.86 to Rs.8.2 billion per year

Total Micro Rs.62.30 to Rs.84.27 billion per year

insurance market

Pension for  Rs.201.3 billion (2.5 billion US $)

unorganized

workforce

In 2010-11, 3.65 million micro insurance policies were sold in India covering lives of 18.9 million people. Cumulative premium collected from micro insurance was Rs 2.86 billion. Public life insurers are leaders in micro insurance. Group micro insurance policies are popular with private players. Most insurers still focus just on achieving the target. Micro insurance distribution has been un-uniform in spite of special regulation on Micro insurance agents.

As per a report, more than 90% of the Indian population does not enjoy social protection of any kind. Both government and civil society actors, including charitable hospitals, trade unions and community based organizations, apart from micro finance institutions have tried to make a dent on this huge deficit in recent years. The movement was greatly strengthened by the social obligation placed on the new private insurance companies to intervene in the micro insurance sector by IRDA in 1999.

No. of Micro insurance Policies (Public + Private)

2007-08 Rs 0.94 million

2008-09 Rs 2.15 million

2009-10 Rs 2.98 million

2010-11 Rs 3.65 million

The state of micro insurance in India

According to a UNDP study, 90% of our population is not getting any form of social protection though they are poor and economically vulnerable. For nation to grow, the Government has to take care of this economically weaker section as part of consolidating its efforts for financial inclusion.

In India, it is often assumed that a micro insurance policy is simply a low -premium insurance policy. This is not so. There are a number of other important factors. Low income clients live in remote areas and are illiterate and unfamiliar with the concept of insurance. They also have little experience of dealing with formal financial institutions, with the exception of the National Bank of Agriculture and Rural Development (NABARD).

For the policy holder, the transaction costs are high. Thus middle -class, urban, policyholder can send a completed claims form to an insurance company with relative ease: a quick call to the insurance company, receipt of the claims form by post, and then return of the form by post. For a low-income policy holder, submitting a claims form may require an expensive trip lasting a day to the nearest insurance office (thereby losing a day of work), obtaining a form and paying a typist to type up the claim, sending in the claim, followed by a long trip back home.

Aside from the real costs of doing this, the low -income policyholder may be uncomfortable with the process; clerks and the other officials are often haughty with such low-income clients and can make clients feel ill at ease. Designing micro insurance policies requires intensive work and is not simply a question of reducing the price of existing insurance policies.

Cross-country lessons to be learnt

Every serious illness, every accident and every natural disaster threatens the very existence of poor people and leads to deeper poverty. That is where micro insurance comes in.

Success of micro insurance depends on rural prosperity. If retail malls can take baby steps in rural areas, so can micro insurance products. Institutions like Grameen bank, NABARD, Regional rural cooperative banks and Cooperative Credit societies must work together to improve the prospects of the rural population through micro insurance.

Micro insurance originated in USA with efforts by the Metropolitan life insurance company to sell low cost, low value insurance. The lives of industrial workers were positively impacted. Bangladesh and Uganda have sold micro insurance products and have made difference to the lives of the rural population there.

Indian villages have agriculture as the primary occupation. So, the scope of cover includes  – Life, health , property, crops , livestock. Indian government should use micro insurance schemes to enable the poor villagers to overcome the problems of hunger, exploitation and debt trap. Distribution costs for micro insurance in India are high, to break even the minimum sum assured has to be fixed at Rs 1, 00,000. But this is not possible as the rural population with seasonal incomes can’t even afford to think of such high premiums. Therefore, distribution cost has to be reduced.

KYC  norms are difficult. Incomes of rural population can be seasonal. So paying premium at regular intervals can be an issue. Therefore, staggered payments should be encouraged. Due to lack of historical data, it is difficult to determine the fair premium. Data for life insurance is easier. Moral hazard and adverse selection risks are not as huge in life insurance as they are in non-life insurance.

It is possible for countries to learn from each other’s experiences .

Steps to be taken by Government

In India, people generally consider non-life insurance as unnecessary expenditure. The Government has to strengthen the financial infrastructure, develop capacity for potential insurance providers and build knowledge of micro insurance mechanism and products among potential policy holders. Micro insurance is a low -price, high volume business. Transaction costs have to be kept low. There is a need for public and private sector to work together. The Government has to create and enabling environment for the micro insurance sector to flourish.

Poverty Alleviation – As per the Allianz-UNDP report, the insurance companies provide the quota of micro insurance to rural customers as designated by the Govt. and once they achieve the quota they stop trying to sell more. Life insurance – most common type of micro insurance, as it is actuarily simple, is less subject to fraud, moral hazard and administrative costs than are health, crop insurance.

Assistance will be required from multilateral agencies, banks, bilateral donors for removal of barriers and make a successful micro insurance business model. Banks offer a great deal of unexplored potential as partners as they can sell micro insurance through bancassurance.

Lessons can be learnt from the Tata – AIG model in Andhra Pradesh where 4/5 women recruited from Self – help groups became informal brokers and  were selected to sell micro insurance.

In India, there is a greater degree of consumer protection for unregulated micro insurance schemes. The quota system can be a lesson for other countries. Micro insurance for women population is important. Credibility of NGOs and microfinance institutions have suffered. Corporate Donors can help.

Insurers need good micro insurance actuarial data. A Nodal agency needs to be setup by Govt. for micro insurance. (Under IRDA) -presence of a body that could coordinate the collection of data will help. Regional factors will need consideration. Language, cultural, social factors in that particular area will help effective underwriting.

India needs a council of insurers who can share micro insurance information and lobby. Establishment of such a body is very important.

Greater involvement of local bodies, village and district councils, Panchayat raj institutions and village representatives is a must. Tie ups between MFIs and insurers need strengthening. For example -Grama vidiyal, an MFI in Tamil Nadu provides life insurance through Bajaj Allianz AG and AMP Sanmar. The needs of specific vulnerable groups like disabled persons, widows and children could not be sufficiently addressed due to time constraints. Their needs must be considered while developing micro insurance products.

Premium collection has to take into account seasonal and irregular income. Film, radio, word of mouth – different media for advertising needs to be deployed due to low levels of literacy. Telecom services have vastly improved, so this should be leveraged to increase the penetration of micro insurance.

Insurable perils – Need to analyse this carefully based on historic data.  Sahara and Peerless had bundled insurance benefits (accidental coverage) by purchasing cover from state- owned general insurance companies with local chit funds. Some of these schemes, marketed through multilevel/ network marketing system became delinquent. So either the rural population had insurance which they could not afford or with which they did not have a good experience.

Micro insurance needs greater level of personal interaction because the rural population can confuse it with savings. So  if they don’t get anything at the end of the term, they presume it  is a loss and do not realise that they have received protection against the insured perils.

Many clients do not understand the concept of insurance and do not trust insurance companies. The level of trust is very important which is why the Tata – AIG policies had much greater credibility. Some of the actions that can be taken as part of marketing strategy could be :

 Public reimbursement of claims at village meetings. This can be used as a marketing opportunity.

 Exposure tours/ Roadshows / Melas

 Meetings

 Careful, well managed rejection of claims.

 Feedback , use it to improve your processes

As of now, there are three models namely Partnership model, Agency Model and Micro Agent Model. One has to look at other models of distribution besides partnership and Agency. Insurers should differentiate from competitors, on some basis other than price. Satisfactory relations with agents like MFIs and  NGOs definitely helps.

Co variant risk is a risk or a combination of risks, which affects a large number of the insured items/ people at the same time. Examples – tsunami, earthquake, flood. It is better to reconsider whether co variant risks have to be excluded. It is worthwhile to conduct a workshop for agents & partners and obtain a reinsurance for co variant risks..

Distribution Partner and Agent Model

Partnership between insurer and NGO/MFI limited risks. Under full service model, the insurance service provider maintains a full fledged office to provide micro insurance. Capture the learnings from failures of micro finance schemes. There is a need to engage women population as rural insurance agents. RRBs can become institutional agents. Government can create a separate body for rural insurance.

Micro insurance involves long term planning.Good Profits can be made as Volume increases and distribution cost decreases . Micro insurance need not be compared to social service. Private players can access to a potentially huge market as rural incomes are increasing.

Since 2002, when providing micro insurance became a legal requirement, there has been a surge in product innovation and experimentation with new distribution channels. The total market for micro insurance in India is estimated to be between 140 and 300 million policies. As per Marsh, the trends that will shape the future of micro insurance will include economic growth, urbanization, financial sector development, climate change including extreme weather events and structural adaptation, the rapid pace of product and logistics innovation and innovative use of communication and information technology. One needs to understand the simple world of low income groups to tailor path breaking solutions.

The micro insurance sector in India is yet to realize its potential. Product development efforts have not scaled up beyond some donor funded projects. Distribution systems need improvement as Micro finance based partner – agent model seems to dominate other channels. Thus, there are challenges in the areas of strategic positioning, product innovation, distribution and process, latent demand and financial literacy.

This is why insurers and distributors are unable to figure out if micro insurance can be an independent revenue generator or a value addition to existing services. Marginal difference in premium has become the differentiator. Micro insurance players are also not ensuring optimum service quality.

Different types of micro insurance policies

Let us now discuss the different types of micro insurance policies.

1. Royal Sundaram Alliance offers Shakti Health Insurance while there is a Micro insurance policy offered by Cholamandalam MS General.

2. ICICI Lombard offers Micro insurance and also an index based weather insurance scheme.

3. United India Insurance offers advanced medical insurance called Group Uni Micro Health.

4. Some insurers also offer Hut Insurance.

5. Package insurance for credit society is offered by New India Insurance company

6. Shakti Security Shield is offered by Royal Sundaram Alliance

7. Livestock insurance policies. (cattle insurance) offered by United India insurance co. and New India insurance co.

8. SBI Life offers Super Suraksha and Janata Personal Accident policy.

9. Sankat Haran group Insurance policy is offered by, Iffco Tokyo

10. Janashree Bima Yojana, Krishi Shramik Samajik, Suraksha yojana are other policies offered by LIC.

11. Chitradurga Gramin Bank ( sponsored by Canara Bank) has sold microinsurance to self help groups.

12. Yeshaswini micro health insurance scheme in Karnataka was launched by  Dr. Devi Shetty.

13. SEWA , Spandana,  Swayamkrishi welfare socities, Care, Cashe are some of the NGOs that have sold special micro insurance policies.

14. Iffco-Tokyo has sold Fertiliser  Bag Insurance to 25 million people. This policy provides Accidental Death and Dismemberment insurance to whoever buys fertilizer of 25 kg or more of certain brands of fertilizers. Insurance cover of Rs 45000 for accidental death and Rs 22000 for certain types of dismemberment. Here, people do something as part of regular jobs, get insurance cover in the process. All this reduces the possibility of adverse selection and insurer can expect to cover risks that are fairly predictable.

15. Basix and Aviva have joined hands to sell micro insurance.

16. The Government introduced the Aam Aadmi Bima Yojana for rural , landless people.  60.32 lakhs lives were covered as on 31.12.2008.

17. Rashtra Swasthya Bima yojana – 41.8 lakh cards issued benefitting 2.09 crore people which enable BPL families to get some health insurance cover.

18. LIC Jeevan Madhur – Endowment policy premia paid are refunded with bonuses , if the life assured survives the policy term and if the life assured dies , his family gets the sum assured , Jeevan Mangal  – Term insurance policy.

19. Bima Suraksha Super – Birla sun life Term assurance plan . Women policyholders pay a lower premium.

20. Tata AIG  Sumangal Bima Yojana Tata AIG is a limited payment moneyback policy ( 60% of premium given back. ( Need for greater involvement of private insurance companies.)

21. Bajaj Allianze Jan Vikas Yojana single premium plan.

22. ICICI PRU Sary Jana Suraksha  Term assurance without return of premium for a sum assured of Rs 5000 , the premium is Rs 50 and for Rs 50,000 the premium is Rs 500.

On July 3 , 2012 , Future Generali launched a micro insurance policy for rural segment. This policy is called Future Sampoorna Suraksha Policy & covers hospital cash benefit accident cover, building & furniture , robbery and burglary, farm produce , agricultural pumpset, cart protection and liability and pedal cycle.

There are 130 Micro insurance products in the market. Some amount of consolidation is needed as regional dynamics won’t change much. Having said that, one has to remember that there are regional dissimilarities as far as demographics are concerned. Look at the neo rural rich in Haryana and  Gurgaon.  You can’t sell them the same insurance policies that you would sell to a poor farmer in Satara, Maharashtra,

The Southern part of India is more prominent in micro insurance purchase than Northern/ Western/ Eastern parts. This is because in the Southern states, penetration of micro finance has increased and this has resulted in increase in micro insurance.

Challenges faced by micro insurance companies

Micro Save’s India Focus Note 88 examines the challenges faced by players in the Indian micro insurance sector, including insurance companies and their distributors. These challenges are more systemic than institution specific.

1. Access to clients is difficult

2. Operating costs are huge

3. Greater need for innovative, simple and flexible products considering the life style of rural population

4. Enhanced role of self-help groups

5. Enhancing insurance awareness among the bottom-of-the-pyramid population.

6. It is difficult to decide whether standardized underwriting procedures are needed for micro insurance

7. There is a need for innovative strategies for sustainability

8. Administrative costs, fraud, adverse selection, moral hazard

Summary

It is evident that the micro insurance sector will soon cease to be influenced by the rural and social sector obligations. Insurers have innovated products and distribution beyond the regulatory requirement to conduct business in the low income segment. Group based policies, alternative micro insurance products and distribution innovations have to be brought under the regulation of micro insurance to accelerate the growth of micro insurance in India.

Micro insurance is important both from social security and business opportunity point of view. India is among the few countries to draft and implement specific micro insurance regulations. It is not enough to make premium collection easy, claim collection also should be made easier. Of the 150 million microfinance customers in India only 39% of them have purchased micro insurance . So there is a huge untapped market.

The micro insurance sector in India is still supply led. Rather than designing market-led sustainable schemes, the insurers are looking up to government subsidies and donor funding. What is clearly needed is a strategic perspective towards micro insurance along with technology supported innovations.

Dror (2007) says that insurers are not clearly aware of client’s priorities and end up misinterpreting low demand as reflecting low willingness to pay, ignoring the unattractive value proposition of the main product and the devastating impact of cherry picking. Insurers are allowed to select preferred risks (cherry picking) or discontinue insuring bad risks (lemon dropping). This cannot be remedied only by modifying the insurance premium. It is vital to improve the value proposition to the rural customer and offer a variety of micro insurance products (or rather solutions) to the rural population at large.

Micro insurance is viable when there is good volume of business (economies of scale), there are appropriate strategies (market penetration) & insurers are able to make profits out of micro insurance. All the rural institutions, IRDA , government have significant roles to play in making micro insurance available to all those who need it badly.

The rural population is unaware about the benefits of insurance per se. Distribution of low value insurance products is a huge challenge. Earlier, insurers did not think beyond the traditional agency model, but for micro insurance to succeed, you’ve to think of innovative ways (bottom of pyramid marketing propounded by C.K. Prahlad) of distributing micro insurance. With the Government’s efforts to popularize the Adhar scheme, it is imperative that micro insurance also benefits out of such efforts.

Nirjhar Majumdar argues that micro insurance should be sold through organizations working in the rural areas which have gained the trust of the rural population. Mahindra tractors and Asian paints used buzz marketing to market their products (tractors and paints respectively) by involving the local communities and panchayat heads. The insurers should follow a similar marketing model.

Micro insurance can also be positioned as a Group insurance where the insurer needs to have a trade- off between mass selling and homogeneous selling.

There is a misconception that rural people do not appreciate insurance. Things are changing. Rural incomes are improving. Promoting tailor made micro insurance products can act as a catalyst to spur the growth of micro insurance.

From 2007-08 onwards, real farm wages has grown at a rate of 6.8% – this is a sign of rural prosperity. Since 2004-05, there is a sharp fall in poverty at the rate of 1.5% a year. Rising of food prices, demand outstripping supply is a concern in rural areas, but this reflects rising popularity in rural areas. This is a situation that the Indian insurers and micro insurance agents have to leverage.

Just like the govt. has formed Agriculture Insurance company of India (AIC) , a similar agency or the same thing can be upgraded to Micro insurance agency and merged with NABARD to strengthen the latter.

Profitability of micro insurance products is always a suspect. Technical assistance to insurance companies provided by World Bank. ( for ICICI Lombard’s weather insurance that was index based) to develop innovative micro insurance products.

Underwriting guidelines for micro insurance need to have a degree of flexibility in terms of age -proofs, medical tests etc. Health insurance should include pregnancy related complications too. Insurers should launch some schemes to get / gain a valuable first hand experience (cross subsidise the products just like the pharma industries charge a higher price for drugs in developed countries as a cushion against the lower prices charged in developing countries).

Adverse selection results from the tendency of some people with high risk profiles to provide false information to get standard premiums. Therefore insurance companies verify information when a claim is filed.

Government has recently amended the Companies bill to declare that every company with an annual turnover of Rs.1000 crore or net worth of Rs.500 crore or with an average net profit of Rs.5 crores in the preceding three years  should invest 2% of their net profits in CSR related activities.

India is one of the first countries in the world to have introduced micro insurance regulation. So far only supply side interest is generated in micro insurance via regulations and rural sector obligation imposed on insurers. Therefore there is a need to create demand side interest in micro insurance.

The proposed standard product on micro insurance is expected to get the regulator’s nod. Such off-the shelf products are expected to be available from March 2013. This product can be sold through Kirana stores . IRDA was planning to  develop 10 standard products which could be launched by the insurance companies without regulatory nod. Such a standard micro insurance policy provides a comprehensive insurance cover for economically weaker sections in rural and urban areas. Standard products can be sold as composite products  by both life and non life insurance companies.

IRDA  is planning to allow co-operative banks , regional rural banks. agricultural co-operative societies and individual (shopkeepers, medical store owners, petrol pump owners , public telephone operators) to act as micro insurance agents.

But the question is : Why has the IRDA taken such a long time to initiate such measures. Despite the immense potential and despite the availability of state of the art technology, the insurance industry is still not in a good shape. The players and the regulators need to introspect the reasons.

There was a lot of misspelling in insurance and atrociously erroneous/ delayed claims payment processes. Despite the regulators, gullible investors of ULIP get shortchanged. The penalties/ fines imposed by the regulator should be such that it should dissuade other insurers from committing a similar non-compliance. Serious introspection is the need of the hour.

Regulatory intervention, product development, distribution optimization and financial education would help overcome these challenges.

On the positive side, the Accenture report presents a picture in contrast saying that micro insurance is  a concept whose time has come. There is a greater degree of collaboration between state agencies and non-governmental organizations. The Accenture report states that micro insurance is an opportunity for insurers to establish new markets and enhance their reputation while contributing to development. Despite challenges galore, it is possible to overcome these.

In many cases, what poor households are willing to pay and able to pay for the insurance has led to inability to cover risks adequately. Under this situation, dire credit need of poor households often surpasses their need for insurance.

On supply side, constraints of the insurers and intermediaries (MFIs) help to explain why there has been so little development of the micro insurance market. While insurers look to experiment and explore the large client base of MFIs and to fulfill the social and rural obligations imposed by the regulator, the intermediaries (MFIs) are keen to protect their credit. It also partly explains the low voluntary demand for insurance and wide gaps between the client’s needs and insurance products on offer.

MFIs as distribution channel of micro insurance can prove to be useful in reducing administrative costs of penetrating rural markets, but underutilization of this distribution channels is visible. Though MFIs enjoy flexibility to choose insurance partner through bargaining process, some of them change insurance partners frequently which further affects the insurance activity.

Creation of complete awareness, flexibility for premium payment options, efficient claims processing system, trained and trustworthy insurance agents or staff and effective client redressal system are some core areas for policy intervention. Role of MFIs along with involvement of local institutions (Gram Panchayat, Gram Sabha and other community based institutions) could be useful in addressing insurance related matters such as, claim settlement, premium payment, client identification in consultation with the insurers.

The documentation and submission of proof of claim need to be standardized. Insurers should involve MFIs and representatives of clients in product design and development. MFIs may obtain clients feed-back and use it in negotiations with the insurers. Better incentives for intermediaries and training for field staff are also suggested.

Suggestions & Recommendations

The Government should explore strengthening NABARD which is now acting only as an extended arm of RBI. NABARD can play a significant role in propagating micro insurance in India. The quota system imposed by IRDA has its benefits as other countries are realizing. However, it also leads to insurers only following the norms stipulated by IRDA and not exploring the market further for deeper penetration of micro insurance.

LIC, State Bank of India, Post offices have massive reach in India, so the Government should use them to improve the distribution channels of micro insurance. This may not be still enough but nevertheless, it is worth attempting. The private insurers have been working with micro insurance agents and partners like NGOs but there is a need to find out new ways of reaching the deeper rural pockets.

If shampoo sachets can be sold in rural India by Hindustan Lever, there is no reason why micro insurance products can’t be sold. Yes, there is a difference in the marketing strategies to be adopted as one cannot compare a FMCG product with insurance which in most cases the customer thinks is a wasteful expenditure. The panacea for the same lies in training the rural population. There should be no cheating during claims processing.

Insurers have to understand that the entire business model of micro insurance is radically different from that of conservative insurance products. Seasonal incomes of rural population make it an even more of a challenge to sell micro insurance products. Adverse experience of rural population in the past has a role to play in the purchasing of micro insurance.

So, insurance companies should endeavor to inspire trust by working with NGOs or institutions that work with the rural population at the grass root level. The insurers cannot expect the same level of profit from micro insurance-however the insurance companies can explore ways of working with corporates who are looking at complying with their corporate social responsibility targets. This can create a win-win situation for all.

Training and creating awareness among the rural population are vital factors for charting a path for the success of micro insurance in India. The companies should use techniques of “buzz marketing” to socialize the micro insurance schemes with the villagers. Community involvement is a must if micro insurance has to deliver tangible benefits.

It is also important to reiterate the point that micro insurance or for that matter, insurance, is not a saving mechanism where you can expect returns like in a fixed deposit. India should learn from the experiences of other countries.

Innovation, distribution channels and enabling technologies hold the key for success as far as micro insurance is concerned. The rural markets are not yet mature, so heterogeneity and inaccessibility continue to be challenging. What is true for one rural market need not be true for another rural market. Absence of data, adverse selection, moral hazard and co variant risk makes micro insurance rather unaffordable for both the insured and insurer. Large volumes have to be sold to break even. This needs the support of local partners who already have a presence in the market.

Pilot studies can be conducted to understand the markets and cultural dimensions better and this knowledge can be pooled with the existing knowledge base that is available with insurers. This can result in proper pricing of micro insurance products. Rather than selling micro insurance as stand alone products, it would be better to bundle micro insurance along with other forms of credit. Going forward, analytics must be used for predictive modeling to enable new product development.

Documentation has to be simple, exclusions reasonable and claims processing hassle free. Underwriting can be improved by understanding the risk better which will need greater research across multiple markets. Data can be shared across insurers. As regards micro insurance is concerned, there is a greater need for collaboration among the players in the market rather than just a spirit of competition.

References-Various Sources

Author-Venkatesh Ganapathy