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Micmicro Insurancero Insurance in India
Micmicro Insurancero Insurance in India
ACKNOWLEDGEMENT
I take this opportunity to offer my deep gratitude to all those who have extended their valued support and advice to complete this term paper. I cannot in full measure, reciprocate the kindness showed and contribution made by various persons in this endeavor.
I acknowledge my sincere thanks to Mr. ABHISEK DUTTA (Faculty Member) who stood by me as a pillar of strength throughout the course of work and under whose mature guidance the term paper arrives out successfully. I am grateful to his valuable suggestions.
Arun Guleria
INDEX
S.No. 1.
PARTICULAR
Introduction Micro Insurance An Overview Of The Indian Insurance Market Need For Developing Micro-Insurance In India
Page No.
4 7 10 12
2. 3.
4.
Micro-Insurance Product
15
5.
Micro-Insurance Agent
16
6.
18
7.
18
8.
Bibliography
22
1. INTRODUCTION
1.1 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 youre 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 a. Assets & revenue insurance b. People insurance c. Liability insurance
Burglary
Insures your business assets against burglary, and is most important for retailers or a business which maintains unattended premises.
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 doesnt 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.
B. People insurance
It includes: A. Superannuation B. Workers compensation requirements Insurance cover for you and your employees:
Workers Compensation
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.
Superannuation
If 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.
C. 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.
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.
Definitions of Micro-Insurance
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. 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 strategies2, 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 ,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. In this paper, we analyze the early evidence on micro-insurance already available in this regard, highlight the current initiatives being contemplated to strengthen micro-insurance activity in the India, and suggest specific ways that can help promote insurance to the target segment.
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: 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.
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 micro insurance 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, 11
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 micro insurance 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 micro insurance. However, if a proper balance could be found, it is possible that the combination of government programs, commercial micro insurance, mutual insurance, and traditional commercial insurance could make each of these more efficient, and make the government interventions more effective in addressing those that truly require such services.
Micro-Insurance
in
India
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.
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 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 member13 ARUN GULERIA | arun_guleria@ymail.com
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: 1) Sound financial management, 2) Convenient and safe savings premium collection and deposit facilities, 3) Appropriate claim appraisal and processing procedures, 4) Adequate risk management, 5) Timely collection of premium installments, 6) Monitoring and 7) Effective information gathering, all of which may include cooperation between different formal and non-formal intermediaries in fields where each is most effective.
4. Micro-insurance Product
1. 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:
Table A:
Type of Cover
Maximum Amount of Cover Rs. 50,000 Rs. 50,000 Rs. 15,000 Rs. 50,000
Term Insurance with or without return of Rs. 10,000 premium Rs. 10,000 Endowment Insurance Health Insurance Rs. 10,000 Contract Accident Benefit as Rs. 10,000 rider
NOTE: The present average sum insured is around Rs. 5,000. This is highly inadequate to provide any tangible relief even to an individual below the poverty line. Therefore, it is suggested that the minimum amount of cover of Rs.10, 000 appear more realistic.
Type of Cover
Hut or livestock or Tools or implements Rs. 10,000 or other assets against all perils Health Insurance Rs. 10,000 Contract Rs. 10,000 Personal Accident
1 year 1 year
1 year 1 year
18 18
60 60
5. 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 Societys 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 atleast ten for insurance of individuals, and atleast fifty for group insurance.
a) Maintaining a register of all members and their dependants covered under the insurance scheme alongwith details of name, age, address, nominees and thumb impression/ signature; b) Collection of proposal forms; c) Collection of self declaration from the member that he is in good health; d) Collection of monies for issuance of contract or remittance of premium; e) distribution of policy documents; f) Assistance in the settlement of claims; g) Nomination; and
h) Any policy administration service. i) The micro-insurance agent or the insurance company shall have the option to terminate the agreement/ MOU after giving a notice of three months. j) All such agreements/ MOU must have the prior approval of the Head office of the insurance company.
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 Lifes 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. 18 ARUN GULERIA | arun_guleria@ymail.com
Policies Available:
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.
AYUSHMAN YOJANA
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.
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. 20 ARUN GULERIA | arun_guleria@ymail.com
How do we operate?
We operate in 11 states with a specific relationship management team for each state. A dedicated & trained sales and marketing team manages the front end of the Micro insurance program. Our micro insurance distribution model collaborates with NGOs (Nongovernmental organizations) and Rural organizations with community level SHG (Self Help Group) women advisors who provide insurance advisory services to the rural customers at their doorstep. The grassroots level agents explain the product details in the local language of the customer, thereby enabling the customer to make a decision. The training programs, brochures, contract documents, and application forms are available in 8 different languages other than English and Hindi.
BIBLIOGRAPHY
1. Lyengar Vijayaragavan, Introduction to Banking, Excel Books, 1st Edition, 2007 2. 2. Mishra, M.N., S.B., Insurance Principles and Practice, Sultan Chand, 16th Edition, 2009 3. Srinivasan, G. and R.S. Arunachalam, forthcoming. Microinsurance In India ILO Social Finance Working Paper (draft). 4. Vaughan, E.J. and T.M. Vaughan. 2002. Fundamentals of Risk and Insurance, 9th edition. John Wiley and Sons
Web - Sites: 1.
Ledgerwood, J. 1996. Financial Management Training for Microfinance Organisations: Finance Study Guide. Toronto: Calmeadow, www.pactpub.com.
2. Lunde, F. and S. Srinivas. 2000. Learning from Experience: A Gendered Approach to Social Protection for Workers in the Informal Economy. Geneva: WIEGO and ILO-STEP, www.ilo.org/step. 3. Manje, L. and C. Churchill. 2002. The Demand for Risk-Managing Financial Services in Low-income Communities: Evidence from Zambia. ILO Social Finance Working Paper No. 31. Geneva: ILO, www.ilo.org/socialfinance. 4. Matin, I., D. Hulme and S. Rutherford. 1999. Financial Services for the Poor and Poorest: Deepening Understanding to Improve Provision. Finance and Development Research, Working Paper No. 9. IDPM, University of Manchester, http://idpm.man.ac.in/wp/fd/index.htm. 5. Matin, I. 2002. The Changing Microfinance Landscape in Bangladesh: A Study of ASA, SafeSave and Gono Bima. Finance and Development Research, Working Paper No. 37. IDPM, University of Manchester, http://idpm.man.ac.in/wp/fd/index.htm.