MICRO-INSURANCE

OBJECTIVES

To understand what Micro-Insurance is.

To recognize the Potential Market for Micro-Insurance in India.

To identify the Key Characteristics of Micro Insurance.

To have a look at the micro-insurance products.

METHODOLOGY

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Data has been collected for the following sources:

Primary data

Secondary data

All the data has been collected by doing library research, magazines,

articles, visiting bank’s official websites and various other web pages.

SCOPE OF THE STUDY

Meaning and concept of Micro-Insurance.

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Need for developing micro-insurance in India.

Conducted unstructured interviews sample size of 30 general people

having income less than Rs. 350 per day.

The area which was selected for the survey is bounded by central suburbs

of Maharashtra State.

All the data generated for primary data that was generated directly from

face to face communication.

LIMITATIONS

Data collection was very time consuming.

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Since it is a new concept, untouched and unaware, the information was

not easily available.

All the primary information included in the project is completely based on

the data offered by the applicants through survey analysis. There is no

alternate source for confirmation of this information and data.

Introduction

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Insurance

Insurance is an essential part of running any business. If you are operating a small business you need more than just property insurance. Taking out the right insurance will help protect your business and minimize its exposure to risk.

Your insurance requirements will vary according to the type of business you are operating, but you should be aware that some forms of insurance are compulsory, such as workers’ compensation and third party car insurance.

When you’re in business you deal with a variety of potential risks each day. Risk is not something you can avoid, but it is something you can manage. Risk management will increase the probability of success and reduce the probability of failure of your business.

Types of insurance

Assets & revenue insurance People insurance Liability insurance

Assets & revenue insurance

To protect your assets and revenue-generating capacity, here are some of the types of insurance available:

Building and contents

Covers the building, contents and stock of your business against fire and other perils such as earthquake, lightning, storms, impact, malicious damage and explosion.

Burglary

Insures your business assets against burglary, and is most important for retailers or a business which maintains unattended premises.

Business interruption or loss of profits

Covers you if your business is interrupted through damage to property by fire or other insured perils. Ensures your ongoing expenses are met and anticipated net profit is maintained through a provision of cash flow.

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Fidelity guarantees

Covers losses resulting from misappropriation by employees who embezzle or steal.

Machinery breakdown

Protects your business when mechanical and electrical plant and machinery at the work site break down.

Motor vehicle

It is compulsory to insure all company or business vehicles for third party injury liability. Many different types of policies are available, so make sure you understand the options before making a decision. There are four basic options:

1. Compulsory third party (injury) – covers you for claims made against you for personal injuries and legal costs arising from the use of your car. You must obtain this insurance to register your car.

2. Third party property damage - covers your liability for damage to another person or to the property of others and your legal costs. It doesn’t include repairs to your own car if you caused an accident.

3. Third party, fire and theft - covers you against the events covered above, as well as fire and theft. It also insures against damage caused if your car was stolen.

4. Comprehensive - covers you for all of the above plus damage caused to your own car by you in an accident. If you're buying a car on an installment basis, financiers will usually insist on this cover.

People insurance

It includes:

Superannuation Workers compensation requirements

Insurance cover for you and your employees:

Workers Compensation

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You must provide accident and sickness insurance for your employees - workers compensation - through an approved insurer. Workers compensation is covered by separate state and territory legislation. 

Personal accident and illness

If you are self employed you won’t be covered by workers compensation, so you need to cover yourself for accident and sickness insurance through a private insurer. There are several types of life insurance. Some are investment-type funds where you contribute over a certain time and get back your investment plus interest earnings at the maturity date. Others are designed to cover risk - things that could happen to you.

Income protection or disability insurance - covers part of your normal income if you are prevented from working through sickness or accident.

Trauma insurance - provides a lump sum when you are diagnosed with one of several specified life threatening illnesses.

Term life insurance or whole of life cover - provides your dependents with a lump sum if you die.

Total and permanent disability insurance - provides a lump sum only if you are totally and permanently disabled before retirement.

SuperannuationIf you are running a business or employing people, you are likely to have superannuation obligations to your employees. If you are self-employed you also need to provide for your retirement - superannuation is generally used to provide for a retirement plan.

Liability insurance

Types of liability insurance you need to consider:

Public Liability

Public liability insurance protects you and your business against the financial risk of being found liable to a third party for death or injury, loss or damage of property or ‘pure economic’ loss resulting from your negligence.

Professional Indemnity

Professional indemnity insurance protects you from legal action taken for losses incurred as a result of your advice. It provides indemnity cover if your client suffers a loss - either material, financial or physical - directly attributed to negligent acts.

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Product Liability

If you sell, supply or deliver goods, even in the form of repair or service, you may need cover against claims of goods causing injury or damage. Product liability insurance covers damage or injury caused to another business or person by the failure of your product or the product you are selling.

WHAT IS MICRO INSURANCE?

On a daily basis, the poor around the world face a multitude (huge

amount) of risks that threaten to derail any progress they have made to

work their way out of poverty. The death of a family member, loss of

property and livestock, illness, and natural disasters each pose unique

dangers. Protecting people against these losses is an important step to

alleviating global poverty.

Micro insurance - the protection of low-income people against

specific perils in exchange for regular monetary payments (premiums)

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proportionate to the likelihood and cost of the risk involved – seeks to

provide a suitable solution for managing these risks.

The institutions or set of institutions implementing micro-

insurance are commonly referred to as a micro insurance scheme.

DEFINITIONS

Micro-insurance is insurance with low premiums and low caps / coverage.

In this definition, “micro” refers to the small financial transaction that

each insurance policy generates. The Micro-insurance Regulations, issued

in 2005 by the Indian Insurance Regulatory and Development Authority

(IRDA), for example, adopted this definition in explaining “micro-

insurance products” as those within defined (low) minimum and

maximum caps. The IRDA’s characterization of micro-insurance by the

product features is further complemented by their definition for micro-

insurance agents, those appointed by and acting for an insurer, for

distribution of micro-insurance products (and only those products).

Micro-insurance is a financial arrangement to protect low-income people

against specific perils in exchange for regular premium payments

proportionate to the likelihood and cost of the risk involved. The author of

this definition adds that micro-insurance does not refer to: (i) the size of

the risk-carrier (some are small and even informal, others very large

companies); (ii) the scope of the risk (the risks themselves are by no

means “micro” to the households that experience them); (iii) the delivery

channel: it can be delivered through a variety of different channels,

including small community-based schemes, credit unions or other types of

microfinance institutions, but also by enormous multinational insurance

companies, etc.

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Micro-insurance is synonymous to community-based financing

arrangements, including community health funds, mutual health

organizations, rural health insurance, revolving drugs funds, and

community involvement in user-fee management. Most community

financing schemes have evolved in the context of severe economic

constraints, political instability, and lack of good governance. The

common feature within all, is the active involvement of the community in

revenue collection, pooling, resource allocation and, frequently, service

provision.

Micro-insurance is the use of insurance as an economic instrument at the

“micro” (i.e. smaller than national) level of society. This definition

integrates the above approaches into one comprehensive conceptual

framework. It was first published in 1999, pre-dating the other three

approaches, and has been noted to be the first recorded use of the term

“micro-insurance”. Under this definition, decisions in micro-insurance are

made within each unit, (rather than far away, at the level of governments,

companies, NGOs that offer support in operations, etc.).

INTRODUCTION

Micro-insurance, the term used to refer to insurance to the low-income

people, is different from insurance in general as it is a low value product

(involving modest premium and benefit package) which requires different

design and distribution strategies such as premium based on community

risk rating (as opposed to individual risk rating), active involvement of an

intermediate agency representing the target community and so forth.

Insurance is fast emerging as an important strategy even for the low-

income people engaged in wide variety of income generation activities,

and who remain exposed to variety of risks mainly because of absence of

cost-effective risk hedging instruments.

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Although the type of risks faced by the poor such as that of death, illness,

injury and accident, are no different from those faced by others, they are

more vulnerable to such risks because of their economic circumstance. In

the context of health contingency, for example, a World Bank study

(Peters et al. 2002), reports that about one-fourth of hospitalized Indians

fall below the poverty line as a result of their stay in hospitals. The same

study reports that more than 40 percent of hospitalized patients take loans

or sell assets to pay for hospitalization. Indeed, enhancing the ability of

the poor to deal with various risks is increasingly being considered

integral to any poverty reduction strategy (Holzmann and Jorgensen 2000,

Siegel et al. 2001).

Of the different risk management strategies, insurance that spreads the

loss of the (few) affected members among all the members who join

insurance scheme and also separates time of payment of premium from

time of claims, is particularly beneficial to the poor who have limited

ability to mitigate risk on account of imperfect labour and credit markets.

In the past insurance as a prepaid risk managing instrument was never

considered as an option for the poor. The poor were considered too poor

to be able to afford insurance premiums. Often they were considered

uninsurable, given the wide variety of risks they face. However, recent

developments in India, as elsewhere, have shown that not only can the

poor make small periodic contributions that can go towards insuring them

against risks but also that the risks they face (such as those of illness,

accident and injury, life, loss of property etc.) are eminently insurable as

these risks are mostly independent or idiosyncratic. Moreover, there are

cost-effective ways of extending insurance to them. Thus, insurance is fast

emerging as a prepaid financing option for the risks facing the poor.

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HISTORY & VISION

The Micro Insurance Agency has its roots within Opportunity

International, a large microfinance network motivated by Jesus Christ’s

call to serve the poor. With a network of 47 microfinance institutions,

Opportunity International has been serving the entrepreneurial poor since

1971. In partnership with Opportunity’s microfinance institutions, we

began working in 2002 on the development of a range of life, property,

livestock, crop derivative, disability, unemployment and health insurance

products to cover the risks faced by Opportunity’s loan clients.

Micro Insurance Agency staff observed that the risks the poor face can

often set them back months and years behind where their loans and

savings products offered by Opportunity had taken them. For instance, a

death of a family member from HIV/AIDS –“pre-condition” most

insurance companies would not cover – would often mean expensive

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funeral costs and the loss of a breadwinner, resulting in increased

economic hardship for the family. In response, Micro Insurance Agency

staff developed an affordable funeral benefit product that did not exclude

any pre-conditions, including HIV/AIDS. This transformed the mindset of

retail insurance providers in the country, who later developed similar non-

exclusive products in light of the competing environment.

Through the experience of serving Opportunity’s microfinance institutions

and their clients, Micro Insurance Agency staff observed that the products

most demanded by the poor are not always the ones available. Health

insurance, for example, is a critical need of the poor but the most limited

in terms of supply. In addition, policies that are available are often based

on first world practices and are too complex for the simple coverage

demanded. Further, when offered on an individual, one-off basis, high

premium requirements and a need to pay in a single lump sum preclude a

huge sector of the market from access. New distribution models and

channels were needed to increase access and reduce the effective price

charged to clients.

In 2005, the Micro Insurance Agency was founded by Opportunity

International as a fully-owned subsidiary capable of offering insurance

products and services to a wide range of customers.

Our mission is to empower the materially poor to transform their lives by

insuring them against financial risk and its consequences. Specifically, we

seek to serve the economically active poor who live on $4 per day or less

in developing countries and provide a safety net to reduce economic

setbacks.

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SCOPE AND FUNCTIONS

A micro-insurance agent shall be appointed by an insurer by a deed of

agreement or memorandum of understanding which should clearly specify

the terms and conditions, duties and responsibilities of both the micro-

insurance agent and the insurer, and he shall abide by the following:-

He shall work either for one life insurer or for one general insurer or for

one life insurer and one general insurer;

He shall be specifically authorized to perform one or more of the

following functions:--

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Maintaining a register of all members and their dependants covered

under the insurance scheme along with details of name, age, address,

nominees and thumb impression/ signature;

Collection of proposal forms;

Collection of self declaration from the member that he is in good health;

Collection of monies for issuance of contract or remittance of premium;

distribution of policy documents;

Assistance in the settlement of claims;

Nomination; and

Any policy administration service.

The micro-insurance agent or the insurance company shall have the

option to terminate the agreement/ MOU after giving a notice of three

months.

All such agreements/ MOU must have the prior approval of the Head

office of the insurance company.

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TYPES OF MICROINSURANCE IN INDIA

Life Insurance

Life insurance pays benefits to designated beneficiaries upon the death of

the insured. There are three broad types of life insurance coverage: term,

whole-life, and endowment. Term life insurance policies provide a set

amount of insurance coverage over a specified period of time, such as one,

five, ten, or twenty years. This insurance is appropriate when the

policyholder's need for coverage is temporary. Compared with other life

insurance policies this is not very complicated for the provider to offer.

This is the most widely used life insurance policy in low-income

communities in developing countries.

Whole life insurance is a cash-value policy that provides lifetime

protection. This is hardly offered in low-income markets in the developing

countries

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Endowment life insurance pays the face value of insurance if the

policyholder dies within a specified period. It thus has a longer time

horizon that the term life insurance. This is also not offered widely in

developing countries.

Health Insurance

Health insurance provides coverage against illness and accidents resulting

in physical injuries. MFIs have realized that expenditures related to health

problems have been a significant cause of defaults and people's inability

to continue improving their economic conditions. Several MFIs have

therefore, either started their own health insurance programs or have

linked their clients to existing programs. While actual coverage varies,

many health insurance providers cover for limited hospitalization benefits

for certain illnesses, and for costs of physician visits and medicine. Some

insurance providers also make available primary health care services such

as immunization and contraceptives.

Property Insurance

Property insurance provides coverage against loss or damage of assets.

Providing such insurance is difficult because of the need to verify the

extent of damage and determine whether loss has actually occurred. It is

difficult for most MFIs to guard against such moral hazard. A few,

however, do provide such coverage. SEWA in India, for example,

provides insurance against damage to home and productive assets.

Grameen Bank in Bangladesh offers its clients insurance against the death

of livestock and COLUMNA in Guatemala provides insurance against fire

damage.

Disability Insurance

Disability insurance in most cases is tied to life insurance products. It

provides protection to the policy holder and her family, should she or

some of her family suffers from a disability. This is not very widely

offered by Micro insurance providers. FINCA, Uganda and CARD in

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Philippines are examples of MFIs providing clients with disability

insurance.

Crop Insurance

Crop insurance typically provides policy holders protection in the event

their crops are destroyed by natural calamities such as floods or droughts.

The experience with crop insurance in developing countries and even in

the developed economies has had mixed results.

To improve the ability of rural farmers to repay loans from agricultural

development banks (ADBs), many governments developed crop insurance

programs in the 1970s and 1980s. These programs typically provided loan

repayment and occasionally income supplements to farmers suffering crop

yields below an established minimum. Similar programs were developed

in countries as diverse as Brazil, India, the Philippines and the USA. In

each country the results were disastrous, with expenses (administrative

and claims) far outstripping revenues. Reasons for the failure of crop

insurance have included: bad program design (such as failure to bring into

account the incentives faced by the policy holders), covariant risks typical

of rain-fed agriculture systems dependent on only one or two crops, and in

some cases / unanticipated catastrophic natural calamities.

Unemployment Insurance

Unemployment insurance is typically offered by the public sector. Private

insurance companies are usually not involved in it. This insurance

provides cash relief to individuals who become unemployed involuntarily

and who meet certain government requirements. It also helps unemployed

workers find jobs. Unemployment insurance attempts to stabilize the

economy by enabling people to maintain their purchasing power.

Reinsurance

Reinsurance is the shifting of part or all of the insurance originally written

by one insurer to another. This is a central feature of the operations of all

commercial insurers.

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Reinsurance reduces an insurer's risk exposure and acts as an effective

source of financing and a valuable source of actuarial expertise.

Reinsurance can be used to stabilize profits, instead of having large

fluctuations in financial outcomes year to year. It allows smaller insurers

to share risk with other insurers in different regions or countries,

effectively developing sufficient large risk pools by combining the risks of

many insurers.

Despite its obvious benefits reinsurance is largely unavailable for micro-

insurers. Access to reinsurance can spur both the development of new

micro-insurers and the growth of existing ones. An example of an MFI

using reinsurance is that of FINCA International, Uganda which has

entered a partnership with American International Group (AIG) to provide

its clients life and disability insurance.

MICRO-INSURANCE DELIVERY MODELS

One of the greatest challenges for micro-insurance is the actual delivery to

clients. Methods and models for doing so vary depending on the

organization, institution, and provider involved. In general, there are four

main methods for offering micro-insurance the partner-agent model, the

provider-driven model, the full-service model, and the community-based

model. Each of these models has their own advantages and disadvantages.

Partner agent model : A partnership is formed between the micro-

insurance scheme and an agent (insurance company, microfinance

institution, donor, etc.), and in some cases a third-party healthcare

provider. The micro-insurance scheme is responsible for the delivery and

marketing of products to the clients, while the agent retains all

responsibility for design and development. In this model, micro-insurance

schemes benefit from limited risk, but are also disadvantaged in their

limited control.

Full service model : The micro-insurance scheme is in charge of

everything; both the design and delivery of products to the clients,

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working with external healthcare providers to provide the services. This

model has the advantage of offering micro-insurance schemes full control,

yet the disadvantage of higher risks.

Provider-driven model : The healthcare provider is the micro-insurance

scheme, and similar to the full-service model, is responsible for all

operations, delivery, design, and service. There is an advantage once more

in the amount of control retained, yet disadvantage in the limitations on

products and services.

Community-based/mutual model : The policyholders or clients are in

charge, managing and owning the operations, and working with external

healthcare providers to offer services. This model is advantageous for its

ability to design and market products more easily and effectively, yet is

disadvantaged by its small size and scope of operations.

THE KEY CHARACTERISTICS

The IAIS-CGAP Joint Working Group on Micro Insurance document on

the -regulation and supervision of Micro Insurance identified the

following key characteristics of Micro Insurance:

Inclusiveness: While formal channels of insurance business tend to

exclude low-income households, Micro Insurance schemes generally tend

to be inclusive.

Group Coverage: Group insurance is more inclusive and cost effective

than individual coverage. Even though the informal economy is frequently

seen as disorganized, there are groupings available, such as women's

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associations, informal savings and credit groups, cooperatives, small

business associations and the like. These groups effectively by enlisting

their support in member selection and reduces insurance risks such as

fraud, over-usage and moral hazard.

Simple Processes, Rules and Restric tions: Insurance contracts are

generally full of complex conditions and conditional benefits. Micro

Insurance contracts have to be in plain language (preferably local

language) and kept as simple as possible so that everyone has a clear

understanding of what is covered and what is excluded.

THE MICRO INSURANCE MECHANISM

Micro Insurance operates by connecting multiple small units with larger

structures and thereby creates networks which enhance both insurance

functions (through risk pooling) and support structures for improved

governance (i.e. training, data banks, research facilities, access to

reinsurance etc.). This insurance mechanism is independent of permanent

external financial support. The principal objective of Micro Insurance is to

pool both risks and resources of whole groups for the purpose of

providing financial protection to all members against the financial

consequences of mutually determined risks. Historically, Micro Insurance

products have evolved out of community-based financing arrangements

with active involvement of the community in revenue collection, pooling,

resource allocation and, frequently, service provision.

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Development of Micro-insurance in India

Historically in India, a few micro-insurance schemes were initiated, either by non-governmental organizations (NGO) due to the felt need in the communities in which these organizations were involved or by the trust hospitals. These schemes have now gathered momentum partly due to the development of micro-finance activity, and partly due to the regulation that makes it mandatory for all formal insurance companies to extend their activities to rural and well-identified social sector in the country (IRDA 2000). As a result, increasingly, micro-finance institutions (MFIs) and NGOs are negotiating with the for-profit insurers for the purchase of customized group or standardized individual insurance schemes for the low-income people. Although the reach of such schemes is still very limited anywhere between 5 and 10 million individuals---their potential is viewed to be considerable. The overall market is estimated to reach Rs. 250 billion by 2008 (ILO 2004).

The insurance regulatory and development authority (IRDA) defines rural sector as consisting of:

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a population of less than five thousand, a density of population of less than four hundred per square kilometer More than twenty five per cent of the male working population is

engaged in agricultural pursuits. The categories of workers falling under agricultural pursuits are: cultivators, agricultural labourers, and workers in livestock, forestry, fishing, hunting and plantations, orchards and allied activities.

The social sector as defined by the insurance regulator consists of: Unorganized sector informal sector economically vulnerable or backward classes, and Other categories of persons, both in rural and urban areas.

The social obligations are in terms of number of individuals to be covered by both life and non-life insurers in certain identified sections of the society. The rural obligations are in terms of certain minimum percentage of total polices written by life insurance companies and for general insurance companies, these obligations are in terms of percentage of total gross premium collected. Some aspects of these obligations are particularly noteworthy. First, the social and rural obligations do not necessarily require (cross) subsidizing insurance. Second, these obligations are to be fulfilled right from the first year of commencement of operations by the new insurers. Third, there is no exit option available to insurers who are not keen on servicing the rural and low-income segment. Finally, non-fulfillment of these obligations can invite penalties from the regulator.In order to fulfill these requirements all insurance companies have designed products for the poorer sections and low-income individuals. Both public and private insurance companies are adopting similar strategies of developing collaborations with the various civil societies associations. The presence of these associations as a mediating agency, or what we call a nodal agency, that represents, and acts on behalf of the target community is essential in extending insurance cover to the poor. The nodal agency helps the formal insurance providers overcome both informational disadvantage and high transaction costs in providing insurance to the low-income people. This way micro insurance combines positive features of formal insurance (pre paid, scientifically organized scheme) as well as those of informal insurance (by using local information and resources that helps in designing appropriate schemes delivered in a cost effective way). In the absence of a nodal agency, the low resource base of the poor, coupled with high transaction costs (relative to the magnitude of transactions) gives rise to the affordability issue. Lack of affordability prevents their latent demand from expressing itself in the market. Hence the nodal agencies that organize the poor, impart training, and work for the welfare of the low-income people play an important role both in generating both the demand for insurance as well as the supply of cost-effective insurance.

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AN OVERVIEW OF THE MARKET

B Wealthy A

Middle Income

D C

Poor

E

Severely Poor

The market for micro insurance is represented by this pyramid diagram. Formal sector insurance companies generally focus on the area identified as “A”. In this realm the customers are corporations and wealthy individuals, and the products are voluntary products such as life insurance, and obligatory products required either by law (such as motor third party liability) or by banks (such as property loss and credit life). Also offered are products covering employees and civil liability. Most of the non-auto related commercial products are being sold within the area marked “B”. The aggregate market for microfinance providers is generally in the area identified as “C”. Some MFPs require borrowers to obtain insurance for property, or credit-life insurance as a means of protecting the institution’s interests. Area “D” indicates the broad range of products offered by the social security and public health insurance systems of developing country governments. They include coverage for pensions, disability benefits, primary health care, and medications. The weakness of this sector is indicated by the dashed line that suggests incomplete coverage. The potential market for microinsurance is indicated as “E”. This extends above the MFP range in providing access to individuals and others that cannot obtain appropriate products from the commercial sector. The microinsurance range also extends below the MFP range because it addresses agricultural coverage in some cases, and is now being sold through many delivery channels other than MFPs. Just a few of these delivery channels include:

Low-income focused retailers in South Africa Post offices in Indonesia

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On bags of agricultural inputs or through computer kiosks in India.

Micro-insurance delivery models

One of the greatest challenges for micro-insurance is the actual delivery to clients. Methods and models for doing so vary depending on the organization, institution, and provider involved. In general, there are four main methods for offering micro-insurance the partner-agent model, the provider-driven model, the full-service model, and the community-based model. Each of these models has their own advantages and disadvantages.

Partner agent model: A partnership is formed between the micro-insurance scheme and an agent (insurance company, microfinance institution, donor, etc.), and in some cases a third-party healthcare provider. The micro-insurance scheme is responsible for the delivery and marketing of products to the clients, while the agent retains all responsibility for design and development. In this model, micro-insurance schemes benefit from limited risk, but are also disadvantaged in their limited control.

Full service model: The micro-insurance scheme is in charge of everything; both the design and delivery of products to the clients, working with external healthcare providers to provide the services. This model has the advantage of offering micro-insurance schemes full control, yet the disadvantage of higher risks.

Provider-driven model: The healthcare provider is the micro-insurance scheme, and similar to the full-service model, is responsible for all operations, delivery, design, and service. There is an advantage once more in the amount of control retained, yet disadvantage in the limitations on products and services.

Community-based/mutual model: The policyholders or clients are in charge, managing and owning the operations, and working with external healthcare providers to offer services. This model is advantageous for its ability to design and market products more easily and effectively, yet is disadvantaged by its small size and scope of operations.

NEW MODELS FOR POOR COMMUNITIES

Much interest over the last few decades has focused on helping communities to establish mutual or community-based insurance schemes. Professionals typically manage mutual insurance companies. Community-based schemes, promoted by ILO STEP and CIDR among others, tend to be run by well meaning local people who give freely of their time, but are

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not insurance professionals. Often people who were simply in need of insurance end up being insurance managers with these schemes. One member of the management committee of a community- based scheme in Tanzania noted that he “wants insurance, but doesn’t want to be an insurer.” In community-based schemes, the limited management capacity frequently leads to a range of difficulties. The key issues of concern for community-based schemes include:

Pricing – Often the process of pricing is focused on what people say they can pay rather than being linked to the cost structure of benefits that the group wants to receive.

Insurance is subject to cash flow fluctuations and thus requires significant reserves. These schemes frequently have insufficient reserves or no reserves at all. Also, commercial reinsurance is rarely available to unregulated insurance schemes thus leaving them with no ability to manage cash flow deficits.

Controls on management are weak and temptation is strong. Fraud by management is frequently a problem.

These schemes are limited in size to those people within the defined local area. This reduces their ability to diversify a rather small risk pool, and enhances the potential for adverse selection, both of which make sustainability a serious challenge for local management.

Finally, in many countries there is no legal framework for these schemes. Indeed regulators are often unwilling to allow such schemes for fear that they will not be able to adequately supervise many small schemes run by non-professionals. This is the case in India. Service providers, most typically hospitals and other healthcare providers have offered pre-financing mechanisms that act somewhat like insurance. These products, it is argued, will attract more people to the facility and the people who come will be able to pay for the services. Often this becomes a problem because providers have limited ability to manage the insurance administration issues. One overseer of a particular group of hospitals noted that attempting to offer microinsurance could present a dual threat to the hospital network for which he works. He noted that the hospital administrators “do not even know how to price their own healthcare services”. Therefore, they mis-price their premiums based on those prices, which are typically too low. The resulting increase in patients using the insurance leads to even higher losses, due to higher administrative costs and incorrect fees that do not cover the actual costs of services. Governments also provide a form of microinsurance through the programs they provide for low-income Citizens. Unfortunately, in many countries these programs are simply insufficient to address the financial risks of the low- income and destitute populations. Certainly there is a population that will not be covered by commercial or other non-government microinsurance. However, if a proper balance could be found, it is possible that the combination of government programs, commercial microinsurance, mutual insurance, and traditional commercial insurance could make each of these more efficient, and

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make the government interventions more effective in addressing those that truly require such services. 11

Flexibility in PremiumIn the IRDA’s concept note on micro-insurance there is no provision thatexplicitly calls for allowing flexibility in premium collection which is necessary forextending the reach of micro-insurance. Although some micro-insurance products allow for half-yearly, quarterly and even monthly payment of premium, most products whether life or non-life require single, yearly payment of premium upon subscription. This can be a serious drawback in extending the reach of insurance to the low-income people, especially in rural areas. Often nodal agencies adopt several methods to facilitate premium collection. These methods may take the form of soft loans for paying premium, collecting premium in kind, collecting smaller amounts but more frequently, having insurance contract of shorter durations and so forth. Where a nodal agency collects annual premium in one go, there is not much involvement of the agency.Rural incomes display seasonality. Moreover, for the low income people premium constitutes a significant proportion of their income. Therefore, flexibility in premium collection has a bearing on their joining or not joining an insurance scheme, and hence, on the membership size. The literature on micro-insurance cites the importance of appropriate ‘timings’ for premium collection. In particular, premium collection schedule should match with the cash flows. The cash flow varies for different categories of workers. For example, the cash flows in case of farmers would depend on the number of crop cycles in a year as well as on the timings of harvest whereas a self-employed household worker may have a more stable income stream. Therefore, synchronizing premium collection with the harvest time is necessary for farmers whereas for self- employed household workers paying premium in small but regular installments may be easier. Also, cash flows for the rural poor may be different from those of the urban poor.13The ‘type’ of flexibility needed in premium collection would depend very much on (i) the pattern of income stream of the target population, and (ii) the spread of risk for13Rural poor get lump sums in the agricultural seasons whereas urban poor get small amounts frequently(

Need for Developing Micro-Insurance in India – IRDA perspective

27

MICRO-INSURANCE

Background

Micro-insurance refers to protection of assets and lives against insurable risks of target populations such as micro-entrepreneurs, small farmers and the landless, women and low-income people through formal, semiformal and informal institutions. Such products are often bundled with micro-savings and micro-credit, thereby allocating scarce resources to micro-investments with the highest marginal rates of return. Microinsurance is the most underdeveloped part of microfinance. Yet various schemes exist that are viable, benefiting both the institutions and their clients. Such schemes have generally served two major purposes: (i) they have contributed to loan security; and (ii) they have served as instruments of resource mobilization. The greatest challenge for microinsurance lies in the combination of viability and sustainability with outreach.

Although introduction of sound practices such as appropriate policy sizes and timely payment of installments of premium or positive incentives to renew on time in order to avoid policy getting lapsed can be feasible, the ultimate effectiveness of interventions focusing on institutional transformation and sound insurance practices will vary considerably, depending on the appropriateness of the regulatory environment.

POTENTIAL MARKET FOR MICRO-INSURANCE IN INDIA

: The UNDP Study

During 2005-06, the Human Development Report Unit of UNDP

conducted a study of the potential Micro Insurance market in India on the

basis of field surveys conducted in the States of Orissa, Tamil Nadu and

Rajasthan.

The UNDP report commented that the potential utility of Micro Insurance

may be even broader than that of micro-credit and may be closer to the

potential market for micro-savings, balanced by affordability

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MICRO-INSURANCE

considerations in the early stages. Some 52.4 per cent of India's

population of 1.08 billion earns less than US $ 2 a day (in terms of

Purchasing Power Parity). Micro Insurance can play an important role in

protecting the income of these people.

The UNDP report also tried to estimate the potential size of the Micro

Insurance market in India. The estimates corresponding to the life and

non-life segments are provided in Table 3. The population used for the

estimation is 40-50 percent of those earning less than US$ 1 a day and 50-

70 per cent of those earning between US$ 1 - 2 a day. The nonlife

estimation included four types of coverage - milch animals, livestock,

health and crop insurance.

The Potential Market for Micro-Insurance in India

Insurance Segment Market Size (Potential)(Rs.

Millions)

Life Segment 15393-20141

Non-Life Segment 46911.70-64,126.55

TOTAL (Life and Non-Life) 62304.70-84,267.55

SOURCE: UNDP (2007). Building Capacity for the Poor Potential and

Prospect for Micro-Insurance in India. UNDP Regional Centre, Colombo.

DEVELOPMENT GOAL

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MICRO-INSURANCE

To enable micro insurance to be an integral part of a country's wider

insurance system, it is important for every insurer to adjust its costs of

serving marginal clients in remote areas, collecting premiums and

installments, and offering doorstep services. It is also important to

recognize a wide network of intermediaries in the rural and social sectors

and notify regulations in order to guide and supervise the micro-insurance

service providers and their customers.

Today we have a variety of microfinance institutions with national and

local outreach. Many of them have already become corporate agents or

have entered into referral arrangements with insurers. However,

semiformal institutions including savings and credit cooperatives, NGOs

and self-help groups which have immense potential in carrying the

message of insurance as also solicit insurance business are yet to be

utilized in a manner where their true potential can be harnessed to increase

the insurance penetration levels. This is due to restrictions in the existing

agency regulations in terms of minimum eligibility norms in order to

become an agent.

Depending on the existence and vigor of such institutions, the following

alternatives have emerged, for offering strategic entry points for micro

insurance development:

Adapting formal insurance arrangements to the needs of the micro-

economy.

Upgrading non-formal (comprising semiformal and informal) insurance

arrangements with insurance companies.

Linking formal and non formal insurance institutions with banks and

self-help groups.

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MICRO-INSURANCE

Establishing new local institutions providing micro insurance services.

The first three strategies may be inter-connected:

adapting insurance companies to the requirements of the micro-economy

is a first step; then

Linking them as wholesale institutions to self-help groups as retailers;

and finally,

Upgrading self-help groups e.g. to the level of financial cooperatives or

village banks.

If insurers are to serve customers who differ widely in terms of service

costs and risks, the only viable inducement for them is an adequate

margin, lest they exclude small farmers, - micro-entrepreneurs and people

in remote areas. Only sound social insurance, which combines a social

mandate with profit-making, has a chance of sustainability.

INSTITUTIONAL ADAPTATION

The experience so far has been that formal financial institutions serve but

a fraction of the population, which typically lies within the upper quartile

of the social hierarchy. Through adaptation to the microfinance market

requirements, they may gradually expand into the second-highest quartile

31

MICRO-INSURANCE

and into segments of the lower quartiles. Within the foreseeable future

they will normally not be able to fully serve that market.

Non formal finance mostly rests on local institutions which are directly

accessible to all segments of the population. Self-Help Groups (SHGs) are

member-owned and member-controlled local institutions. They may either

be financial groups, with financial intermediation as their primary

purpose; or non financial groups, with financial intermediation as a

secondary purpose, such as vendors' associations, family planning groups

and numerous other types of voluntary associations.

The functions that need to be focused must include: providing guidance to

members, collecting premium installments from members, insurance

services to members, communication and exchange of experience,

providing linkages with banks, NGOs or donors, supporting the proposals

of individual members to insurance companies through recommendations.

LINKAGE TO INSURERS

On a modest scale, various forms of life and health insurance have been

successfully practiced by different institutions in different countries,

particularly as part of loan protection schemes. Micro-insurance

procedures and services should be set by insurers rather than the regulator.

Appropriate procedures and services should be applied to attain:

Sound financial management,

Convenient and safe savings premium collection and deposit facilities,

Appropriate claim appraisal and processing procedures,

Adequate risk management,

Timely collection of premium installments,

Monitoring and

Effective information gathering, all of which may include cooperation

between different formal and non-formal intermediaries in fields where

each is most effective.

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MICRO-INSURANCE

PROPOSED MICRO-INSURANCE REGULATIONS

In order to introduce the concept micro-insurance it is necessary to draft

suitable bring in suitable regulations to enable insurers to design and

distribute and service micro-insurance products and discharge their

obligations to the rural and social sectors as per provisions of the

Insurance Act, 1938.

It is proposed that an insurer transacting life insurance business shall be

permitted to provide life micro-insurance products as well as general

micro-insurance products provided it ties up with an insurer transacting

general insurance business for the general micro-insurance products, and

vice versa.

In addition to an insurance agent or corporate agent or insurance broker

who are authorized to solicit and procure insurance business, including

micro-insurance business with an insurer in accordance with the

provisions of the Insurance Act, 1938 and the regulations made there

under it is also proposed to introduce the concepts of “micro-insurance

product” and “micro-insurance agent” .

Initiative Taken By Private Sectors

Tata AIG Life - First insurance company to launch Micro Insurance

First major Micro Insurance initiatives venture by an Indian insurance company

33

MICRO-INSURANCE

Launches three new Micro Insurance products and five Micro Insurance branches

Adopts a tailor made rural communication strategy to reach out to the rural community

American International Group, Inc. (AIG)

American International Group, Inc. (AIG), world leaders in insurance and financial services, is the leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. AIG's common stock is listed in the U.S. on the New York Stock Exchange, as well as the stock exchanges in London, Paris, Switzerland and Tokyo.

Micro Insurance is the process of delivering and servicing relevant and affordable life insurance products to the low-income socio economic strata. The focus of Tata AIG Life’s Micro insurance program is rural India, where traditionally the far-flung, lower and lower middle-income segments have had limited access to life insurance services.

Cost of plans:

Tata AIG Life Micro insurance plans are available with or without survival benefits and with death benefits ranging from Rs.5, 000 to Rs.50, 000. With premiums as low as Rs.5** per month, there is now an affordable life insurance product for nearly every rural household in India.

Policies Available:

34

MICRO-INSURANCE

The following special Micro Insurance products from Tata AIG Life are now available for the rural population at the bottom of the pyramid.

Navkalyan Yojana Ayushman Yojana Sampoorn Bima Yojana

NAVKALYAN YOJANA

A regular premium payment, low cost term plan for the rural adults who seek life insurance protection without any maturity benefit.

Key features include:

Policy Term : 5 years Coverage Limits : Minimum Death Benefit (Sum Assured): Rs.5,000/-

                          Maximum Death Benefit (Sum Assured): Rs.50,000/- Premium payment frequency : Monthly, quarterly, half yearly & yearly Death Benifit : Sum assured to the policyholder’s nominee Maturity benefit : None Rider : Option to attach Accident Death Benefit Rider for issue ages 18

to 55 years at a nominal extra charge.

Tax Benefits and Age Eligibility

Premiums paid under this plan are eligible for tax benefits as per the Income Tax Act, 1961 and are subject to any amendments made therein from time to time.*

Anyone between ages 18 and 60 can apply for this policy.

AYUSHMAN YOJANA

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MICRO-INSURANCE

A single premium plan where the policyholder pays the premium at the beginning of the policy term. This is especially useful for those rural people who have a seasonal income.

Key features include:

Policy Term : 10 years Coverage Limits : Minimum Death Benefit (Sum Assured): Rs.5,000/-

                          Maximum Death Benefit (Sum Assured): Rs.50,000/- Death Benifit : Sum assured to the policyholder’s nominee Maturity benefit : On survival, 125% of the single premium paid.

Tax Benefits and Age Eligibility

Premiums paid under this plan are eligible for tax benefits to the extent of 20% of Sum Assured as per the Income Tax Act, 1961 and are subject to amendments made therein from time to time.*

Anyone between ages 18 and 60 can apply for this policy.

SAMPOORNA BIMA YOJANA

A low cost insurance plan where the policyholder receives all the premiums paid during the policy term upon survival until the term of the policy. Premiums are payable for only 10 years, while the coverage is up to 15 years.

36

MICRO-INSURANCE

TIE-UP BETWEEN LIFE INSURER AND NON-LIFE INSURER

An insurer carrying on insurance business may offer life micro-insurance

products as also general micro-insurance products, as provided herein.

Provided that where an insurer carrying on life insurance business offers

any general micro-insurance product, he shall have a tie-up With an

insurer carrying on general insurance business tor this purpose, and

subject to the provisions of section 64VB of the. Act, the premium

attributable to the general micro insurance product may be collected from

the prospect (proposer) by the insurer carrying on life insurance business,

either directly Or through any of the distributing entities of micro-

insurance products as specified in regulation 4, and made over to the

insurer on general insurance business. Provided further that in the event

of any claim in regard to general micro-insurance products, the insurer

carving on life insurance business or the distributing entities of micro-

insurance products, as the case may be, as may be specified in the tie-up

referred to in the first proviso, shall forward the claim to the insurer

carrying on general insurance business and offer all assistance for the

expeditious disposal of the claim.

An insurer carrying on general insurance business may offer general

micro-insurance products as also life micro-insurance products, as

provided herein.

Provided that where an insurer carrying on general insurance business

offers any life micro- insurance product, he shall have a tie-up with an

insurer carrying on life insurance business for this purpose, and subject to

the provisions of section 64VB of the Act, the premium attributable to the

37

MICRO-INSURANCE

life micro insurance product may he collected from the prospect

(proposer) by the insurer carrying on general insurance business, either

directly or through any of the distributing entities of micro-insurance

products as specified in regulation 4, and made over to the insurer

carrying on life insurance business.

Provided further that in the event of any claim in regard to life micro-

insurance products, the insurer carrying on general insurance business or

the distributing entities of micro- insurance products, as the case may be,

as may be specified in the tie-up referred to in the first proviso, shall

forward the claim to the insurer carrying on life insurance business and

offer all assistance for the expeditious disposal of the claim.

CODE OF CONDUCT OF MICRO INSURANCE AGENTS

Every micro-insurance agent and specified person employed by him shall

abide by the code of conduct as laid down in Regulation 8 of the

Insurance Regulatory and Development Authority (Licensing of Insurance

Agents) Regulations, 2000, and the relevant provisions of Insurance

Regulatory and Development Authority (Insurance Advertisements and

Disclosure) Regulations, 2000.

Provided that the insurer shall ensure compliance of the code of conduct,

advertisements and disclosure norms by every micro-insurance agent.

Any violation by a micro-insurance agent of the code of conduct and/or

advertisement or disclosure norms as aforesaid shall lead to termination of

his appointment. in addition to penal consequences for breach of code of

conduct and/or advertisement or disclosure norms pursuant to the

provisions of sub-regulation (1).

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MICRO-INSURANCE

MICRO-INSURANCE AGENT

A “micro-insurance agent” shall be a Non Government Organization

(NGO) or a Self Help Group (SHG).

Explanation: For the purposes of this regulation:

A Non Government Organization (NGO) shall be a registered non-profit

organization under the Society’s Act, 1968 with a proven track record of

working with marginalized groups with clearly stated aims and objectives,

transparency, and accountability outlined in its memorandum, rules and

regulations and demonstrates involvement of committed people.

Self Help Group (SHG) may be an informal group or registered under

Societies Act, State Co-operative Act or as a partnership firm, consisting

of 10 to 20 with a proven track record of working with marginalized

groups with clearly stated aims and objectives, transparency, and

accountability outlined in its memorandum, rules and regulations and

demonstrates involvement of committed people.

The minimum number of members comprising a group should be at least

ten for insurance of individuals, and at least fifty for group insurance.

39

MICRO-INSURANCE

GENERAL MICRO-INSURANCE PRODUCT

A “general micro-insurance product” means any health insurance

contract, any contract covering the belongings such as hut, livestock, any

personal accident contract, or tools or instruments, either on individual or

group basis, as per terms stated in the Table below, filed with the

Authority:

Type of Cover Minimum

Amount

of Cover

Maximum

Amount

of Cover

Term

of

Cover

Min.

Dwelling &

content, or

livestock or

Tools or

implements or

other named

assets/or Crop

insurance

against all

perils

Rs. 5,000

Per

asset/cover

Rs. 30,000

Per

asset/cover

1 year

Health

Insurance Rs. 5,000 Rs. 30,000 1 year

40

MICRO-INSURANCE

Contract (Ind.)

Health

Insurance

Contract

(family)

(Option to avail

limit for

Individual/Float

on family)

Rs. 10,000 Rs. 30,000 1 year

Personal

Accident (per

life/earning

member of

family)

Rs. 10,000 Rs. 50,000 1 year

SOURCE: IRDA Micro-Insurance Regulations, 2005,

www.irdaindia.com

NOTE: The minimum number of member comprising a group shall be at

least twenty for group insurance.

LIFE MICRO-INSURANCE PRODUCT

A “life micro-insurance product” means any term insurance contract

with or without return of premium, any endowment insurance contract or

health insurance contract, with or without an accident benefit rider, either

on individual or group basis, as per terms stated in the Table A below,

filed with the Authority:

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41

MICRO-INSURANCE

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42

MICRO-INSURANCE

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43

MICRO-INSURANCE

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discretion

44

MICRO-INSURANCE

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45

MICRO-INSURANCE

u

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46

MICRO-INSURANCE

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SOURCE: IRDA Micro-Insurance Regulations, 2005,

www.irdaindia.com

NOTE: 1. Group insurance products may be renewable on a yearly

basis.

2. The minimum number of members comprising a group shall be at

least twenty for group insurance.

47

MICRO-INSURANCE

RESEARCH METHODOLOGY

Data collection

For data collection, we developed a well defined questionnaire as a

research instrument, consisting questions aimed to measure the people

perception about insurance, their need and problems. We conducted

unstructured interviews sample size of 30 general people having income

less than 350 bugs per day like vendors, rickshaw-wala, milkman, cobbler

etc. Survey location was Thane and Mulund etc. All the data generated

was primary data that was generated directly from face to face

communication.

Data analysis

The data collected based on structured questionnaire is recorded on an

excel sheet and with the help of SPSS software a pie chart analysis along

with pillar data analysis is generated and based on this findings a

qualitative inferences are made for each analysis. The same is being

presented in form of graphs and tables

Survey Results

The following are my findings regarding the survey conducted. The

following graphs show the potential depth from different perspectives, as

shown below:

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MICRO-INSURANCE

ANALYSIS AND INTERPRETATION

Chart 1: Age of the respondents

Inference: The above reveals the fact that Majority of the respondents,

about 47% belong to the category of 35-40 ages and 21% belong to the

category of 25-35 of age, 18% belong to category 30-34 and 14% belong

to the category 20-25 of age.

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MICRO-INSURANCE

Chart 2: Educational Qualification

Inference: The above result reveals that majority of respondents i.e. 54%

were educated till higher secondary and the percentage of primary and

graduation is very close i.e. 21% & 25%.

Chart 3: Account Holder

Inference: The above result reveals that 11% of respondent don’t have

any account any where while majority of the applicants [43%] have post

office account, 32% have their Bank a/c and only 14% have both the

accounts.

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MICRO-INSURANCE

Chart 4: No. of family members

Inference : Above result reveals that majority of respondents 50% have 4

members in a family which is ideal whereas only 7% live with joint

family or have big size of family.

Chart 5: No. of earning member

Inference: From the above result it can be clearly seen that about 68% of

the respondent were the only earning member of their family, 32% have 2

earning member because of size of family.

Chart 6: Income level

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MICRO-INSURANCE

Inference: The above result reveals that 68% of respondent have income

level between 7000-10000 while 32% have income level between 5000-

7000 and no one below it.

Chart 7: No. of dependent

Chart 8: Expense Pattern

Inference: From the above result we can see that out of the three clothing

expense is more; least expense is health and expense in travelling is nil

but travelling is the highest at number 6th place.

52

MICRO-INSURANCE

Inference: From the graph we can say that out of the three; Rent &

Electricity is the highest expense and then comes Education. Least

expense is on Drinks & Entertainment but it is highest at 5th place.

Chart 9: Faced problem with health or asset

Inference: Above result shows that 36% of respondent didn’t face any

problem related with health or asset but 64% faced a serious or minor

health or asset loss in past of their life.

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MICRO-INSURANCE

Chart 10: Awareness about insurance

Inference: Above result reveals that each and every applicant is aware

about what the insurance is.

Chart 11: Source of information

Inference: The result above reveals that 30% of the respondent got the

information about insurance from newspaper, 20% got info from T.V,

least from Banners & Hoardings and remaining from the source pattern

shown above.

54

MICRO-INSURANCE

Articles

Case study

55

MICRO-INSURANCE

FINDINGS

Study reveals that majority of people whose daily income is less than

350 bugs have ideal family.

Earning members in majority of family are two so that they are able to

survive and meet their daily requirements.

Income level lies between 150-350 bugs per day.

Majority of respondent had post office account and very less had both

bank as well as bank account.

Majority of respondent have more spending on rent & Education, after

that on food & cloth and Medicare & entertainment.

Majority of respondent are the only earning member in family size of 4-

5.

Majority of them managed critical financial problem from their savings

and even borrowed some money. Only few had insurance or taken loan.

All of them are aware about insurance but not about micro insurance and

best source of information medium found to be newspaper, television and

from friends & relatives.

Many of respondents were not insured just because of either high

premium or lack of complete information.

Majority of respondent shows keen interest in micro-insurance policy in

life and health, some were very sensitive toward education and like to

have education insurance as well.

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MICRO-INSURANCE

CONCLUSION

We all know insurance is a very old concept. But the demand for

insurance was increased from a decade. Middle class people take

insurance policy according to their ability & capacity to pay premium to

secure their life.

When we talk about poor people a question comes in mind

Research Paper helphttps://www.homeworkping.com/

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