CHAPTER III-

THEORETICAL VIEW

Microinsurance is a term increasingly used to refer to insurance

characterized by low premium and low caps or low coverage limits, sold as
part of a typical risk-pooling and marketing arrangements, and designed to
service low-income people and businesses not served by typical social or
commercial insurance [Link] institutions or set of institutions
implementing microinsurance are commonly referred to as a
microinsurance scheme.

Microinsurance 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. 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.

Microinsurance products

Microinsurance, like regular insurance, may be offered for a wide variety of

risks. These include both health risks (illness, injury, or death) and property
risks (damage or loss). A wide variety of microinsurance products exist to
address these risks, including crop insurance, livestock/cattle insurance,
insurance for theft or fire, health insurance, term life insurance, death
insurance, disability insurance, insurance for natural disasters, etc.
Microinsurance has made a significant difference in countries like Mali,
Maxime Prud'Homme and Bakary Traoré describe. Innovations in Sikasso
Still, many countries face continuing challenges. Specifically in
Bangladesh, micro health insurance schemes are having trouble with
financial and institutional sustainability, Syed Abdul Hamid and Jinnat Ara
describe, but things are improving. Progress in Bangladesh

Microinsurance delivery models

One of the greatest challenge for microinsurance is the actual delivery to

clients. Methods and models for doing so vary depending on the
organization, institution, and provider involved. As states, one must be
thorough and careful when making policies, otherwise microinsurance
could do more harm than good. Tricky challenges In general, there are four
main methods for offering microinsurance[2] 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

microinsurance scheme and an agent (insurance company,
microfinance institution, donor, etc.), and in some cases a third-party
healthcare provider. The microinsurance 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,
microinsurance schemes benefit from limited risk, but are also
disadvantaged in their limited control.

• Full service model: The microinsurance 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 microinsurance schemes
full control, yet the disadvantage of higher risks.

• Provider-driven model: The healthcare provider is the

microinsurance 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.

Microinsurance scheme

A microinsurance scheme is a scheme that uses, among others, an

insurance mechanism whose beneficiaries are (at least in part) people
excluded from formal social protection schemes, in particular informal
economy workers and their families. The scheme differs from others
created to provide legal social protection to formal economy workers.
Membership is not compulsory (but can be automatic), and members pay,
at least in part, the necessary contributions in order to cover benefits.

The expression "microinsurance scheme" designates either the institution

that provides insurance (e.g., a health mutual benefit association) or the set
of institutions (in the case of linkages) that provide insurance or the
insurance service itself provided by an institution that also handles other
activities (e.g., a micro-finance institution).

The use of the mechanism of insurance implies:

• Prepayment and resource-pooling: the regular prepayment of

contributions (before the insured risks occur) that are pooled
together.
• Risk-sharing: the pooled contributions are used to pay a financial
compensation to those who are affected by predetermined risks, and
those who are not exposed to these risks do not get their
contributions back.
• Guarantee of coverage: a financial compensation for a number of
risks, in line with a pre-defined benefits package.

Microinsurance schemes may cover various risks (health, life, etc.); the
most frequent microinsurance products are:

• Life microinsurance (and retirement savings plans)

• Health microinsurance (hospitalisation, primary health care,
maternity, etc.)
 • Disability microinsurance
• Property microinsurance – assets, livestock, housing
• Crop microinsurance

Dirk Reinhard provides a good list summerising reading pertinent to

microinsurance. Small means, massive impact

Microinsurance and development

Microinsurance is recognized as a useful tool in economic development. As

many low-income people do not have access to adequate risk-
management tools, they are vulnerable to fall back into poverty in times of
hardship, for example when the breadwinner of the family dies, or when
high hospital bills force families to take out loans against high interest rates.
Furthermore, microinsurance makes it possible for people to take more
risks. When farmers are insured against a bad harvest (resulting from
drought), they are a in a better position to grow crops which give high yields
in good years, and bad yields in year of drought. Without the insurance
however, they will be inclined to do the opposite; since they have to
safeguard a minimal level of income for themselves and their families,
crops will be grown which are more drought resistant, but which have a
much lower yield in good weather conditions. [5]

Microinsurance regulation and supervision

Although microinsurance markets are growing access to insurance services

for low-income households at affordable cost and by sustainable providers
remains a huge task.

This challenges policymakers, regulators and supervisors to create an

environment which facilitates improved growth and outreach of
microinsurance markets. While sector authorities such as finance ministries
and insurance supervisors have strived to guarantee the soundness of the
market and customer protection, proactively pursuing a financial access
agenda and integrating low-income households is new to most of them.
Regulation and supervision is a key policy tool to fulfil this task as
regulatory barriers can prevent insurance companies from serving the low-
income market with microinsurance. In some jurisdictions regulators are
challenged to integrate informal insures which helps to ensure sound
growth and customer protection. However, other policy tools such as
macroeconomic, fiscal and legal aspects can be essential complements to
these initiatives.

Need for Micro-Insurance – Risks Faced by the Poor

Micro-insurance is a key element in the financial services package for
people at the bottom of the pyramid. The poor face more risks than the
well-off, but more importantly they are more vulnerable to the same risk.
Usually, the poor face two types of risks – idiosyncratic (specific to the
household) and covariate (common, eg., drought, epidemic, etc.). To
combat these risks, the poor do pro-active risk management – grain
storage, savings, asset accumulation (specially bullocks), loans from
friends and relatives, etc. However, the prevalent forms of risk
management (in kind savings, self-insurance, mutual insurance) which
were appropriate earlier are no longer adequate.

Poverty is not just a state of deprivation but has latent vulnerability.

Microinsurance should, therefore, provide greater economic and
psychological security to the poor as it reduces exposure to multiple risks
and cushions the impact of a disaster. There is an overwhelming demand
for social protection among the poor. Microinsurance in conjunction with
micro savings and micro credit could, therefore, go a long way in keeping
this segment away from the poverty trap and would truly be an integral
component of financial inclusion.

Consultative Group on Micro-Insurance Constituted by GoI

In 2003, GoI constituted a Consultative Group on Micro-Insurance to
examine existing insurance schemes for rural and urban poor with specific
reference to outreach, pricing, products, servicing and promotion and to
examine existing regulations with a view to promoting micro-insurance
organisations with specific reference to capital requirements, licensing,
monitoring and review, etc. The report of the consultative group has
brought out the following key issues :
• Micro-insurance is not viable as a standalone insurance product.
• Micro-insurance has not penetrated rural markets. Traditional insurers
have not
made much headway in bringing micro-insurance products to the rural
poor. (In
addition, the Committee feels that micro insurance has not penetrated even
among the urban poor).
• Partnership between an insurer and a social organisation like NGO would
be
desirable to promote micro-insurance by drawing on their mutual strengths.
• Design of micro-insurance products must have the features of simplicity,
availability, affordability, accessibility and flexibility.

Findings of the UNDP Study Report

A study commissioned by the United Nations Development Programme
(UNDP) titled “Building Security for the Poor - Potential and Prospects for
Microinsurance in India” states that 90% of the Indian population - some
950 million people - are not covered by insurance and signify an untapped
market of nearly US$2 billion. This enormous “missing market” is ready for
customized life and non-life insurance, but first, serious mismatches
between the needs of the insured and the insurers must be overcome,
pitting priorities against profits.

The UNDP report has analysed six key issues pertinent to the growth of the
micro-insurance industry in India, capturing the concerns of different
stakeholders as indicated below :
(i) There are specific reasons for low demand for insurance in spite of
intense
need. Suppliers have their own concerns which helps to explain why there
have been so little efforts at market development. Consequently, the rural
market is characterized by limited and inappropriate services, inadequate
information and capacity gaps.
(ii) There are challenges in product design, which has resulted in a
mismatch
between needs and standard products on offer. Efforts at product
development / diversification have been limited.
(iii) Pricing, including willingness to pay and the availability of subsidies,
influence the market. In the absence of a historical data base on claims,
premium calculations are based on remote macro aggregates and
overcautious margins. Building and sharing claims histories can help in
aligning pricing decisions with actuarial calculations, thereby reducing
prices.
(iv) Difficulty in distribution is one of the most cited reasons for absence of
rural
insurance. The high costs of penetrating rural markets, combined with
underutilization of available distribution channels, hinder the growth of rural
insurance services. This adds to costs, both, managerial and financial. Like
inclusive credit, inclusive insurance is expected to be a “low ticket”
business, requiring volumes for viability.
(v) Cumbersome and inappropriate procedures inhibit the development of
this
sector.
(vi) Contrasting perspectives of the insured and the insurers, lead to low
customization of products and low demand for what is available.
The UNDP report further states that micro-insurance solutions should,
therefore, attempt at addressing key issues that will improve customer
satisfaction
(demand-supply gaps, appropriate products and pricing), provide
distribution
efficiencies for better outreach and remove procedural hassles facilitating
easier
renewals and claim settlements. With a view to reduce costs, the report has
also
suggested that the premia payable on micro-insurance be exempted from
payment of service tax, which will also enable greater penetration in rural
markets.

Enabling Environment for Micro-Insurance in the Indian Context

Helping the rural poor systematically manage financial risks to their
livelihoods and lives through micro-insurance offers innovative ways to
combat poverty in India. The timing of the UNDP study is strategic as policy
interest has been renewed in energizing the rural insurance market in India.
The following factors could provide the needed impetus to push micro-
insurance to the “next level” in terms of growth and outreach :
• The widening, deepening and upscaling of microfinance interventions has
provided the institutional precincts on which the edifice of micro-insurance
could be built in rural areas.
• In October 2004, the RBI permitted RRBs to undertake insurance
business as a
“corporate agent” without risk participation. As RRBs have a network of
branches in rural areas, they could play an important role in increasing
outreach.
• Though the 2005 IRDA regulations on micro-insurance have some
restrictive aspects, they have also a number of positive features. Its most
innovative feature is legally recognizing NGOs, MFIs and SHGs as “micro-
insurance agents.” This has the potential of significantly increasing rural
insurance penetration.
• Many commercial banks have partnered foreign insurance companies for
providing life insurance policies. Thus, banking outlets (which number close
to 70,000) and more than 1 lakh cooperative societies could provide the
needed outreach to purvey micro-insurance facilities, without any further
addition to transaction costs.

Addressing Differing Perspectives in Micro-Insurance

As already indicated, there are contrasting perspectives which have
traditionally impeded the growth of this sector globally. The same is true of
the Indian experience also. The competing perspectives of the insured, viz.,
need, affordability and willingness vis-à-vis the insurer’s, viz., insurability,
profitability and deliverability continue to be the core dilemma in micro-
insurance thru’ institutional sources. Further, the core problems in
institutional insurance, viz., moral hazard, adverse selection and poor
infrastructure which results in high claims costs, administrative costs and
consequently inadequate coverage have to be addressed effectively, for
enabling the growth of an affordable, cost-effective and sustainable model.

Recommendations Leveraging Existing Network for Micro-Insurance

It would be difficult for the insurers to establish a vast network for
distribution of micro-insurance products. They need to utilize existing
Government organizations, banks, MFIs, NGOs and SHGs to increase the
outreach of microinsurance to the poor. The advantages of these entities
are that they find greater acceptability among the financially excluded, and
with a better understanding of their needs are well equipped to advise them
on the choice of products. In India with a vast rural population
characterized by challenges and complexities, it makes sense to latch on to
an existing mechanism operating in these segments to lower costs and to
help the insurer to leverage on the faith already generated by the entity.
Hence it would be prudent to choose a partner-agent model for delivery
where the insurer underwrites the risk and the distribution is handled by an
existing intermediary. This model keeps the cost of insurance attractive
enough for the poor to enter and remain in its fold even while addressing
the concern of the insurers about the low returns of micro-insurance.
Implementation Strategy for Micro-Insurance
Keeping in view the various issues dealt with earlier in this Chapter, the
Committee has identified five major areas for formulation of strategies for
effective implementation of micro-insurance programmes. These are
explained in the following paragraphs :

Human Resources Requirement and Training

As indicated earlier, the UNDP report states that there is a huge untapped
market – of around 950 million people and nearly US$2 billion – for
insurance in India. IRDA may consider putting in place an appropriate
institutional structure for deciding on service packages including premia
and formulating strategies for effective promotion of micro insurance. There
is also a felt need for development, of both fulltime and part-time staff, thru’
effective training in insurance marketing and servicing concepts.

Operations and Systems

To address the requirements of the huge market potential available,
appropriate systems should be evolved for tracking client information,
either manually or using technology. While a technology platform may take
time for setting up, in the long-run, the same will be cost-effective and
reliable. Similarly, the procedures for premium payments, claims and other
services should be formalized along with increased customization of
products to stimulate demand.

Development of Adequate Feedback Mechanism

Keeping in view the diverse nature of market requirements, suitable
mechanisms to collect market intelligence, collating and interpretation of
the same, in a formally structured manner, is important for product
development and process refinement. Insurance companies should go
beyond devising new products to improving their processes for building
awareness, marketing enrollment, premium collection, claim settlement and
renewal. For this they need use innovative channels such as business
correspondents, SHGs, NGOs and MFIs as also cooperatives and mutual
associations. Further, the use of technology such as mobile phones and
ATMs for premium collection should be encouraged to keep transaction
costs low.

Development of Data Base

High costs of penetration and acquisition often leads to higher pricing of
products, thereby impacting client outreach and market depth. Building up
historical data base on risk profiles, claims, settlement ratios, etc., will
facilitate in better pricing of products, based on actual rather than
presumed risks. Besides enabling cost reduction, warehousing of such data
will make the market more transparent for entry of more operators. The
IRDA and the Government should help in provision of data such as human
mortality and morbidity, weather parameters and livestock
mortality/morbidity, on a timely, large sample and regular basis. This will
lead to finer pricing on actuarial basis and eventually cut costs of
insurance.

Consumer Education, Marketing and Grievance Handling

The micro-insurance sector is unique in the sense that there is an ongoing
challenge to explain the concept and benefits to the insured. Creating
awareness thru’ use of pictorial posters, local folk arts and street theatres
might be useful to explain the mechanisms of insurance. Local community-
based organisations could organize premium collections, as they have
better access to the local people. To make it more acceptable to the
people, micro-insurance products, apart from covering only risks, should
also provide an opportunity for providing long term savings (endowment).

IRDA’s Regulations on Micro-Insurance

Building on the recommendations of the consultative group, IRDA notified
Micro-Insurance Regulations on 10th November 2005 with the following
key features to promote and regulate micro-insurance products. The
regulations focus on the direction, design and delivery of the products :
• A tie-up between life and non life insurance players for integration of
product to
address risks to the individual, his family, his assets and habitat,
• Monitoring product design through “file and use”,
• Breakthrough in distribution channels with inclusion of NGOs, SHGs,
MFIs and
PACS to provide micro-insurance, with appropriate compensation for their
services,
• Enlarged servicing activities entrusted to micro-insurance agents,
• Issue of policy documents in simple vernacular language.

Currently the IRDA regulations do not favor composite insurance (i.e., life
and non-life insurances by the same company) and also limit the agency
tie-up to one life and one non-life insurer. However, in recognition of the
uniqueness of micro insurance, these regulations enable life and non-life
companies to tie-up for offering a combined policy in rural areas. Further,
the IRDA has allowed insurers to issue policies with a maximum cover of
Rs. 50,000 for general and life insurance under these regulations. The
regulations have also eased the norms for entry of agents relating to
training and pre-recruitment examination. As an attraction, remuneration to
agents has also been leveled across the term of the policy.

Another striking feature of the regulation is the provision of extending

coverage to the family as a unit as against the system of insurance
coverage to individual lives. The insurer has to take IRDA’s prior approval
for launching microinsurance products through the “file and use” mode. The
maximum cover will be Rs. 30,000 per annum for a dwelling and contents
or livestock or tools or implements or other named assets or crop insurance
against all perils. For individual and group health insurance, the maximum
cover is Rs. 30,000 per annum per individual. For personal accident
policies the maximum Rs. 50,000 per annum and is open to 5-70 age
group.

In case of life micro-insurance products, the cover amount for term

insurance ranges between Rs. 5,000-50,000 for a minimum term of five
years and maximum of 15 years. The entry age for this product is kept
between 18-60. Endowment insurance policy provides cover for Rs. 5,000-
30,000 for a minimum five years and maximum 15 years for people aged
between 18 and 60. Further, an insurer can collect the premium for both life
and general insurance components directly from the consumer or agents.

At the time of opening of the insurance sector, IRDA had decided that all
insurers, including the new entrants, should fulfill certain obligations to
spread insurance in rural areas. Specific regulations have been issued
prescribing targets in terms of quantum of policies to be written in the rural
sector consistent with the years of their operations and also certain
quantified target for coverage of lives in the social sector. With a view to
encouraging the insurers to meet these obligations and give a fillip to
micro-insurance products, IRDA also decided that all micro-insurance
products may be reckoned for the purpose of fulfillment of the social
obligation and where such policy are issued in rural area they could also be
reckoned for rural sector obligation. IRDA has also proposed to benchmark
the above obligations with reference to quantified limits of sums assured
under micro-insurance policies. The above approach would ensure the
faster development of the micro-insurance market and take the insurance
penetration to rural areas.

The Committee wholly subscribes to the initiatives of IRDA in widening

outreach of micro-insurance products to the rural poor and recommends
that the same may be implemented with renewed zeal as providing micro-
insurance is a necessary and essential adjunct in the inclusive process.
The IRDA should continue to impose Rural and Social Sector Obligations
but there should be no unreasonable caps on premiums and channel
commissions. This is in line with the de-tariffing process in other sectors
also. In the long run, it is only when the insurance companies find it
profitable to serve this market that they will do so on their own.

Other Recommendations
Micro-insurance in India is a new concept and in the real sense, is yet to be
tested for its conduciveness to the needs of the target segment. The most
significant constraint is the lack of base line data on potential claims that
can help the insurers to design or price products. The consumption and
saving patterns are also a critical aid to assess the insurance needs. The
issue of moral hazard and adverse selection is a matter of concern for the
insurer. Above all, spreading awareness among this segment of insurable
population and capacity building of the delivery organisations are major
challenges.

Product Development / Process Re-engineering

Customised product development to suit the varying requirements of the
local populace is a pre-requisite. The processes / procedures are to be
streamlined and simplified, to facilitate easier access for the rural poor.
Information should be made available in vernacular for easy understanding
of the terms on offer.

Building Data Base

With a view to bringing down product costs, building data base of claim
histories, risk profiles, etc., are to be undertaken. This will also help in
aligning pricing decisions with actuarial calculations.

Using Existing Infrastructure

Micro-insurance service providers can use the existing banking
infrastructure and also adopt the agency-mode (NGOs, SHGs, NBFCs,
etc.) for providing services, thereby leveraging on the existing physical
branch network and
reducing costs.

Use of Technology
The technology platforms being envisioned to facilitate financial inclusion
should enable micro-insurance transactions also. Towards this end, there is
a need to integrate the various modules - savings, credit, insurance, etc. -
into the technology framework so that holistic inclusive efforts are possible
in the rural areas.

Review of existing schemes

There are a large number of group life and health insurance schemes
which are run by various central ministries and State Governments. The
level of actual coverage in terms of claims preferred and settled in such
schemes is disturbingly low. These schemes should be reviewed by an
expert group set up by the IRDA.

The above are general recommendations. However, with reference to

specific segments, the Committee makes the following recommendations:
(a) Life Insurance:
A wide range of products are available but penetration is really limited in
rural areas. The procedural requirements at the time of entry and in case of
claims
settlement are cumbersome. The commission structure for agents is also
heavily
weighed in favour of getting new policies with very little incentive to service
existing policies. In this regard, Micro Insurance Guidelines (MIG) 2005
issued by IRDA has provided for equal commission throughout the life of a
policy and this will now remove the disincentive in servicing existing policy
holders.

(b) Health Insurance:

In case of Health Insurance, penetration level is even much lower than Life
Insurance. The two categories viz., Critical Illness and Hospitalisation are
the main product segments. Some State Governments have developed
Health Insurance schemes which are still in very early stages. The
Committee has observed that mutual health insurance models have
advantages of its members performing a number of roles such as
awareness creation, marketing, enrolment, premium collection, claims
processing, monitoring, etc. Under this arrangement, the costs of offering
small-ticket health insurance gets significantly reduced. The high covariant
risks such as epidemics will have to be taken care of by a mutual entity
taking reinsurance for such risks. IRDA has also suggested that the capital
requirements for stand-alone health insurance companies be reduced to
Rs.50 crore as against Rs.100 crore for Life Insurance Companies and the
Committee endorses the same.

(c) Crop Insurance:

This is a very important risk mitigation arrangement for small and marginal
farmers. However, the present scheme suffers from very serious
implementation problems. Leaving the discretion to notify crops/regions to
state governments has contributed to adverse selection. Further, claims
settlement based on yield estimation has been cumbersome and the
sampling area for crop cutting experiments is very large. An alternative
model based on weather insurance has been attempted. Farmers are
happier with it because of quick settlements. On the down side premium
rates are very high. Further, due to low density of weather stations, the
problem of large area averaging is a critical factor even with weather
insurance. To counter this, there is a need for having a large number of
smaller weather stations. The Committee recommends that policies be
evolved to make crop insurance universal, viz., applicable to all
crops/regions and pricing actuarial.

(d) Livestock Insurance:

As in Life Insurance, the problem lies in the process of enrollment and
claims settlement. Several pilots indicate that the involvement of local
organisations like SHGs, dairy co-operatives, NGOs and MFIs improves
the quality of service, reduces false claims and expedites claims
settlement. The Committee recommends that these experiences be studied
and adopted by insurance companies.

(e) Asset Insurance:

This could cover a wide range including residential buildings, farm and
nonfarm equipments and vehicles. For poor households, insurance for a
hut, irrigation pump, a handloom or a bullock cart could have considerable
economic significance. Products are available but penetration levels are
negligible. The main constraint seems to be lack of distribution channels
appropriate for lower income groups. The Committee again recommends
that involving local NGOs, MFIs, SHGs, etc. as distribution channels as
well as facilitators of claim settlements would be quite useful.

Inventory of Micro-insurance Schemes - ILO

The ILO (2004) has recently prepared an inventory of micro-insurance
schemes operational in India.
_ The inventory lists 51 schemes that are operational in India.
_ Most of the schemes were launched in the last 4-5 years.
_ 43 schemes for which the information is available cover 5.2 million
people.
_ Most insurance schemes (66%) are linked with micro finance
services provided by specialised institutions or non-specialised
organisations. 22% of the schemes are implemented by
community-based organisations and 12% by health care providers.
_ Life and health are the two most popular risks for which insurance
is demanded; 59% of schemes provide life insurance and 57% of
them provide health insurance.
_ Most schemes (74%) operate in 4 southern States of India: Andhra
Pradesh (27%), Tamil Nadu (23%), Karnataka (17%) and Kerala
(8%). The two western States: Maharashtra (12%) and Gujarat
(6%) account for 18% of the schemes.