There is hardly any person who does not need insurance. People need insurance cover for his life, health and various properties. Those who have a lot of wealth may not be in urgent need of all types of insurance.
But those who are not so fortunate need a good amount of insurance. It is the poor who suffer the most when misfortune comes in the life.
The poor are devastated when the breadwinner dies prematurely or when some serious ailment afflicts them or when nature plays havoc with their crops and other properties. If the poor are not insured against such calamities, they can suffer irreparably. In this paper, we would try to see how much the Indian poor are insured nine years after insurance sector was opened up.
Providing insurance cover for the poor people is a big challenge. Most of the poor people live in rural areas. Insurers need to have a lot of reliable data before designing an insurance scheme for them. But, it is very difficult to get actuarially relevant data for the people living in rural and even mofussil areas. In our paper, we shall see the exact nature of this problem as also how the Indian insurers are trying to overcome such problems.
As is evident, traditional insurance products are not suitable for the poor. The poor need low sum assured policies with a lot of flexibility in the matter of payment of premia. IRDA has already laid down rules for the insurers to develop products for the rural and social sector of the country. Insurance Regulatory and Development Authority (Micro-Insurance) Regulation.2005 clearly defines how the insurers have to do micro-insurance business in India.
We shall examine various products launched by state owned companies as also the private insurers. This paper also examines how far the insurers have been able to penetrate into the micro insurance market which is huge in this country. We shall see which model of distribution they are following.
Finally, the paper tries to arrive at strategies that can really work in the country. It is important that the insurer gets good volume of business so that microinsurance remains a viable and even a profitable business. As microinsurance had been a massive success in many underdeveloped countries of the world in the past and also in the recent past, there is no reason why India can be an exception.
The insurers, various rural institutions, regulators and the government have their roles to play in making microinsurance available to all who need it badly. This paper makes a humble attempt to define what roles they can play at this juncture and what is achievable by the industry in foreseeable future.
What exactly is microinsurance?
A draft paper prepared by the Consultative Group to Assist the Poor (CGAP), formed by the government defines it as “the protection of low income households against specific perils in exchange for premium payments proportionate to the likelihood and the cost involved.†So, essentially microinsurance is a product which is useful and affordable for the poorer sections of the population.
While there was always a consensus that low cost and low value insurance should be made available to the rural people as a mass consumption good, a large proportion of the rural poor always stayed outside the cover of insurance. It is not that the awareness had never been there. It was not even the case that the rural people were unable to meet the cost of insurance. It was due to the fact that the insurers found the task of distributing low value insurance products costly and troublesome. Earlier, insurers never thought of developing any distribution channel beyond their tied agency network. But, the common model of selling insurance on a one-to-one basis simply never works for microinsurance.
The rural people living in areas far off from the district headquarters trust an organization that has been doing good work for them. So, microinsurance can primarily be sold through some groups or organizations boasting a large number of qualifying prospects. In a way, microinsurance is one form of group insurance where the insurer has to strike a balance between mass and homogeneity.
IRDA quickly realized that something was needed to be done by them to promote microinsurance in India as otherwise there was no other way poor people could buy some insurance on their own. IRDA came out with the notification called Insurance Regulatory and Development Authority(Micro-Insurance) Regulation,2005 in which it has not only defined microinsurance but has also stated unambiguously as who qualify as microinsurance agents and what role insurers have to play in the area of microinsurance.
The regulation has fixed minimum sum assured as Rs.10,000 and maximum sum assured as Rs.50,000 for term assurance(with or without return of premium) and accident benefit as a rider. Maximum sum assured will be restricted to Rs.30,000 for endowment assurance, health insurance( for individual as well as for family) and insurance on livestock, crops and all related assets. The minimum and maximum terms for which the life assurance benefits are to be granted are 5 years and 15 years respectively. For non-life insurance, there will be one year renewable covers like the existing non-life conventional plans.
The regulation clearly says that a micro-insurance agent means either a Non-Governmental Organization (NGO) or a Self-Help Group (SHG) or a Micro Finance Institution (MFI) who is appointed by an insurer to act as a micro insurance agent. It is also mentioned that the micro insurance agent can not employ any persons without obtaining approval of the insurer. The regulation stipulates the rates of commissions applicable for the agents working in life and non-life areas. To encourage the agents to provide prompt and efficient service to the policyholders/beneficiaries, the regulation has made provision for payment of commission at the same rate throughout the term of the contract in case of life assurance.
The regulation states that microinsurance products are to be developed for the benefit of both the rural and social sectors. By rural sector, it refers to a place which has a population of less than 5000, a population density of less than 400 per square Kilometer and which has more than 25% of male working population engaged in agricultural activities. By social sector it refers to unorganized sector, informal sector and economically vulnerable sections of the society living both in rural and urban areas. All this makes the potential market of microinsurance really very large. The market not only feels the need of the rural poor but also the need of those whose nature of occupation and place of residence may be such that the insurers currently do not consider them as strong prospects.
The regulation makes it mandatory for the life insurers to sell 16% of their policies in rural sectors and sell at least 20,000 policies to social sector. This target is to be achieved within five years. The non-life insurers have to bring 5% of total gross premium from rural sector within three years. They have also to cover at least 20,000 lives in social sector within five years. In case an insurer fails to meet this target, it has to pay fines to the concerned authority.
What is the prospect of microinsurance in India?
The market for microinsurance products consists of people working in the informal unorganized sectors of the economy. The informal sector contributes 63% of the country’s GDP but still remain economically weak as a mechanism of fair redistribution of generated wealth is not in place. According to one UNDP study, still 90% of our population is not getting any form of social protection.
As a result, these people are not in a position to manage various types of risks they are getting exposed to regularly. That makes them really economically vulnerable and poor ultimately. In fact one can easily notice a vicious cycle between such vulnerability and poverty. The economically weak people can neither access whatever educational and medical facilities are available in their areas. Such people are huge in a country like India and the nation can not sustain the high growth rate unless something special is done for them.
Once there was a misconception that rural people are not too appreciative of the value of insurance.Â
While there is no gainsaying the fact that financial literacy is not much there in the rural and social sector, people nevertheless understands the value of insurance and that means the market is there for the insurers and they need to develop that by launching and promoting suitable microinsurance products. According to one estimate the size of the market will be about Rs.250 billion at the end of the current financial year.
Many of us will do well to remember that microinsurance originated in USA at the early 1900s. Metropolitan Life insurance company was instrumental in providing low cost, low value insurance on the life of industrial workers of that country. Specially appointed agents used to collect weekly premia at the factory gates on the days the workers got weekly payments from the employers. This ultimately transformed the American society as the common people got much needed stability and protection for their families. Eventually, Metropolitan insurance company became the largest life insurer of the country and that paved the way for them to sell other forms of insurance to the other sections of the society. In fact as the standard of living improved at USA, the focus of the insurers shifted from factory to family.
Another very important reason why insurers should do well in the microinsurance market is that microfinance has been a great success in recent years in the country and we all know that microinsurance can be easily linked to microfinance. There are more than 150 million microfinance customers in the country now and they all need insurance! But, only about 39% of them have purchased microinsurance. So, there is huge untapped market and the market itself is growing.
In this context, we should mention that microfinance was the forerunner of microinsurance at Bangladesh. Owing to a perfect microinsurance model launched for the benefit of rural women of that country, 54% of the target households could come above the poverty line in just 5 years and another 20% in the next five years.
Delta insurance company of Bangladesh has been able to sell a lot of microinsurance products to the beneficiaries of microfinance projects. AIG Uganda has been able to partner with the leading MFIs of Uganda and has sold more than 2 million insurance policies to the beneficiaries of the microfinance projects. There is no reason why we should not emulate the feats of the insurers working in such poorer countries as Bangladesh and Uganda.
In India, agriculture is still the occupation of a vast majority of people. People need to insure not just their health and life, but also their livestock and crops as these are vital income generating assets of people engaged with agriculture. The poor face two types of risks – a) idiosyncratic (specific to the household) and b) covariate (common, e.g. drought, epidemic etc).
The poor do some proactive risk management — grain storage, savings and accumulation (especially bullocks). But these do not enable them to manage their risks fully. Only microinsurance in conjunction with micro savings and micro credit can lift the poor from the problems of hunger, exploitation and debt-trap. The poor understands that now and are ready to go for insurance if that is made available to them at affordable cost.
With the government’s recent measures for providing some social protection to the poor, the microinsurance scenario is set to improve a lot. Under Aam Admi Bima Yojona for the rural landless people, already 60.32 lakh lives have been covered as on 31/12/2008. Under Rashtra Swasthya Bima Yojona, already 41.8 lakh cards have been issued(benefiting 2.09 crore people) which enable BPL families to get some health insurance cover. The environment is now ready for the insurers to launch their well-researched innovative products for the market.
IRDA regulation on microinsurance, 2005 acknowledges NGOs, SHGs and MFIs as microinsurance agents and this was great news for the insurance sector as the traditional agents could only make limited inroads in the segments consisting of poorer people. NGOs/SHGs/Co-operative societies etc work very closely with the microinsurance prospects and are also considered more trustworthy to the prospects.
What are the problems in developing and distributing microinsurance
The main problem is that microinsurance can not be sold like standalone products. An endowment plan or a ULIP plan can be sold as standalone product using the conventional distribution channel. But microinsurance will simply not be viable if attempt is made to market it like that. The distribution cost associated with the conventional assurance is very high and unless the minimum sum assured is kept Rs.100,000 no surplus is going to come to the insurer. But the poor generally can not pay the premia for a policy with sum assured Rs.100, 000 and more.Hence, microinsurance can be sold only when some organized bodies like NGOs/SHGs etc are involved as that would reduce the distribution cost drastically and a lot of people will take up insurance cover.
The economically weaker people generally have seasonal incomes. They may find it difficult to pay premium at regular intervals and within conventional days of grace. They may not always be able to produce standard age proofs or title proofs. All this makes selling and servicing of insurance really difficult.
The rural and social sector people may not need the standardized microinsurance product at all. Unless a product is tailor made for them, there may not be any market for microinsurance at all in the respective area. The rural people still consider most of the products launched by the insurers as essentially urban products suitable for the elite groups of customers living in bog and metro cities. The new microinsurance products must have special features with which the rural people can readily identify themselves.
As there is lack of reliable historical data pertaining to a group for a particular type of risk, an insurer may find it very difficult to determine the fair premium for a product. The data for the life insurance is easier to find. So, the premium can be calculated with greater ease and confidence. But the possibility of moral hazard and adverse selection is very difficult to judge in the case of many typical non-life insurance products.
How insurers have fared in the microinsurance sector
At this moment, there are about 130 microinsurance products in the country and the number of microinsureds is about 30 million. While this number sounds encouraging, we should not forget that the number is nothing as compared to the total market size of about 742 million people. In fact the market size consists of 10% population of the world! Let us see what the insurers have been doing for marketing microinsurance and what prevents them in penetrating deeper into the market.
The public sector monoliths LIC and GIC have always been instrumental in spreading the value of insurance in the rural and social sectors. They have done commendable jobs in creating an awareness about insurance and a lot of policies have also been sold among the people who have better purchasing power in the rural areas. But what they sold prior to the new IRDA regulation (2005) were traditional products through the traditional distribution network.
No doubt, tied agents did a great job in spreading the awareness of India and these agents became like trusted family members, too. But, a larger section of the rural and social sector still could not be accessed because that market needed different products and the agents were also supposed to be quite different. Since 2005, the insurers started developing new products and distribution channel for the poorer sections of the society.
Let us consider the case of LIC. It has launched two microinsurance products so far as Jeevan Madhur and Jeevan Mangal. Jeevan Mangal is a policy very recently launched. Whatever LIC has so far done has been through Jeevan Madhur only. This policy is an endowment type policy under which the premia paid are refunded with bonuses, if the life assured survives and the sum assured if the life assured dies prematurely. Jeevan Mangal is a term assurance policy. The main advantages of the policies are that the premia can be paid even weekly and fortnightly and these will be collected from the doorstep of the policyholder. There will be no medical examination before granting the policy. The policy conditions are written in vernacular on the policy bond.Â
In the area of life insurance, the private insurers have come out with some really innovative products. We would like to mention some of the microinsurance plans launched by the prominent private insurers. Bima Suraksha Super launched by Birla Sun Life is a term assurance plan. Here, women policyholders pay lower premium. Grace period under the plan is 180 days. Sumangal Bima Yojona launched by TATA AIG is a limited payment money back policy.
In this policy, the assured gets 60% of total policy premium. Jan Vikas Yojona launched by Bajaj Allianz is a single premium plan where maturity benefit is 125% of SP and death benefit is Sum Assured. ICICI Pru Sarv Jana Suraksha is a term assurance without return of premium. Here death benefit is Sum Assured . Mode is yearly only and premium is very low. For a sum assured of Rs. 5,000 the premium is Rs.50/- and for a sum assured of Rs. 50,000 the premium is Rs.500/-.
How the microinsurance is being distributed in India ? One model is known as Partner-Agent model. Under this model, a partnership is formed between the insurer and NGO/MFI etc. Most insurers are following this model. It has limited risks and limited benefits. Under full-service model, the insurance service provider maintains a full fledged office to provide micro insurance. Yeshaswini micro health insurance scheme is being implemented totally by the farmers co-operative in the state of Karnataka.
The scheme is exposed to a high risk. Provider driven model is one under which a health care service provider runs and administers the insurance scheme while providing the medical treatment. The nationwide ESI scheme and Apollo DKV health insurance scheme are the best examples. Community based model is one where the policyholders themselves are in total charge of the operations. This model is still not very popular in India. Mauritius Sugarcane Insurance Fund follows this model. In USA this model is followed successfully by Auto owners Insurance and State Farmers Insurance.
We find it heartening to note that some co-operative societies are doing business of microinsurance. Some of such organizations are SEWA (Self Employed Wome™s Association), SPANDANA(at Andhra Pradesh only) and Swayamkrishi. Some other welfare societies like CARE and CASHE International are also on the job.
As we know that the poor need to be insured against the possible loss of their properties also, we need to mention about commendable work done by some non-life insurers in the recent years. Iffco-Tokyo Fertiliser Bag Insurance is perhaps the worlds most successful microinsurance product in terms of the number of people it has been able to cover. The insurer has covered more than 25 million people so far.
The policy automatically provides AD&D insurance(Accidental Death and Dismemberment insurance) to whoever buys fertilizer of 25 Kg or more of certain brands of fertilizers. There is insurance cover of about Rs 45,000 for accidental death and about Rs.22,000 for certain types of dismemberment. The advantage of this type of scheme is that nobody joins the scheme for the purpose of getting low cost of insurance. They do something as a part of their regular jobs and get insurance cover in the process. All this reduces the possibility of adverse selection and the insurer is expected to get risks which are not too unpredictable.
A very important health insurance initiative, known as Yeshasvini launched under the leadership of the celebrated heart surgeon Dr. Devi Shetty. Under this scheme, the poor can get some health insurance cover by paying a yearly premium of as low as Rs.60/-. The scheme has already covered more than 2 million people.
BASIX, a livelihood promotion initiative, has joined hands with AVIVA to provide life insurance to the rural poor and the premium under the policies is always revised on the basis of the claims experience. This has enabled the insurer to reduce the premium by 50% in just three years. The premium is now only Rs.8.61 per thousand sum assured. Moreover, this has prompted BASIX to arrange for a life cover for spouses, too, plus some health insurance cover.
The health insurance portion is insured by Royal Sundaram insurance. BASIX knows the economy of cattle rearing and helped Royal Sundaram in assessing and underwriting risks associated with micro cattle-insurance. Here is a great example of how the insurer can gain from the domain knowledge of the particular voluntary associations. Thorough researches made by BASIX have also enabled ICICI Lombard in launching the first index based weather insurance. This type of insurance has become very popular with the farmers of the country. Now the central government is also making enough provision for financing weather insurance in its annual budgets. So, a unique model of agriculture insurance is slowly shaping up in India.
Finally, we find that the new breed of insurance agents is slowly coming of age. Among all microinsurance policies sold so far, NGOs have sold 33%, MFIs 22% and co-operative societies 18%.
However, among the microinsurance products, 55% cover life risk and accident related risks. There should have been greater proportion of products covering other non-life risks.
Whatever progress has taken place in microinsurance has happened primarily in the southern states of the country, owing to healthy growth of microfinance in those states. Many poverty stricken regions of northern India have not yet seen much of microinsurance.
According to some honest estimates, microinsurance has so far been able to cover only 2 or 3 per cent of the poor in India. Female population is not adequately insured. The women need to be insured much more against specific risks like pregnancy related ones and domestic violence related.
Strategies for further growth of microinsurance
“Reducing poverty requires not just the generation of income among the poor, but also the protection of those incomes, said Minh H. Pham, Regional Manager of the UNDP Regional Centre in Colombo. True, it is not enough to provide some income and employment to the weaker sections of the country, it is equally important to help them use risk management measures so that they can lead life more confidently and with much greater dignity. An insurer can be an insurer by choice only when it caters to the needs of the people who constitute the major portion of the working population.
All insurers need to make a lot of research on the type of products required by the economically weaker sections of the society. They have to see whether the existing products are fond suitable by the prospects. The insurance institutes and other educational bodies can undertake such research work.
There should be more products that cover the risks of more than one peril. At the moment, more than 60% products cover only one type of risk. Only 20% products cover two risks and others cover more than two risks. That means, the people have to look out for insurers who can cover other vital risks of their life. This is not desirable. The poorer people are not expected to move here and there for insurers when they are too saddled with their typical dreadful problems of living.
Insurers have to make a lot of relaxations in the matter of underwriting principles. They have to waive the requirements of standard age-proofs, medical tests etc in most of the cases. They should not insist that there should be at least 10 beds in a hospital for it to be approved by the insurer in case of claim on health insurance policies.
Most of the health insurance products exclude risks on delivery and other pregnancy related complications. Almost all products exclude HIV/AIDS related risks. But a progressive insurer should not refrain itself from covering such risks.
In fact, in many cases, the insurers do not launch products as they find assessing the risk very difficult in the absence of actuarially relevant historical data. But, they should still launch a product, may be at somewhat high premium, to gain valuable experience which can enable them to devise better schemes in future at reduced premium.
Insurers can take up developing community groups which will be able to bring a lot of people under the cover of microinsurance. TATA-AIG created a Community Rural Insurance Group (CRIG) consisting of five low income women who were all members of some local religious group. TATA-AIG found enough leadership potential in one of them and then they insured her life and made her a general agent. Now, a lot of people have got insurance cover through her.
High yielding seeds given to the poor farmers on credit may be covered under index linked weather insurance contract. This will enable the farmers to take the risk associated with using the expensive but effective seeds.
The regional Rural Banks can be made institutional agents for marketing microinsurance as these banks have a vast network of branches and they also have rich experience of working among the poorer people of the society.
The government and IRDA should encourage re-insurance business in the areas of natural calamities, epidemics and terror-strikes. Reinsurance arrangement is especially needed by private insurance companies as most of them are still small in size and will therefore find it difficult to absorb big shocks.
India is rich in Information Technology capability. The insurers should tie up with the software companies to develop systems that can reduce distribution costs. It is surprising that this has not happened yet.
Development of microinsurance needs long term planning. Insurers can not throw in their towels if the initial response is not too encouraging. They have to take the pains to understand this unique market and they can definitely get business in course of time. Doing business of microinsurance is not social service. An insurer can make good profits if the volume is there and distribution cost is kept low.
The public sector insurers have the mandate to do something for the economically weaker sections of the society and they are doing that job in the field of microinsurance, as much as they are capable of. Up till now, the private insurers have not been able to do anything spectacular in microinsurance. One thing they need to keep in mind. Although microinsurance will not improve their bottom-line dramatically, it can give them much needed access to the huge potential market.
All success insurers of the world have built strong and healthy communities wherever they worked. This is expected of the Indian insurers, many of whom have some global experience as well. There is so much growth potential in the Indian insurance market! If the market insurance market is properly taken care of, the future will be glorious for the insurers. The Indian economy is growing and it will grow further. The insurers can not afford to miss the opportunities.
Article published in The Insurance Times, journal
Nirjhar Majumdar
References:
1. IRDA Journals of 2008 and 2009.
2. Insurance Post of 2008
3. Insurance Times (Issues of 2008)
4. The website www.bimaonle.com
5. Marketing Whitebook 2009-10 (Published by Business World)
6. Economic Survey, 2008-09 (Published by Government of India)
