Micro--Insurance

A PROJECT REPORT ON
“MICRO-INSURANCE”

SUBMITTED TO
UNIVERSITY OF MUMBAI
IN THE PARTIAL FULLFILMENT OF B.B.I. DEGREE

SUBMITTED BY
YOGITA BANGERA
T.Y.BCOM (B&I) SEMESTER- V
ROLLNO- A-01
SEAT NO- 574

STUDYING AT
RIZVI EDUCATION SOCIETY’S
RIZVI COLLEGE OF ARTS, SCIENCE & COMMERCE
BANDRA (W), MUMBAI-50

ACADEMIC YEAR
(2009-2010)

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DECLARATION

I, Miss Yogita Bangera, a student of T.Y.B.com (Banking & Insurance) 6th SEM of Rizvi

College of Arts, Science and Commerce hereby declare that I have completed this project

titled “Micro-Insurance” for the academic year 2009-2010. It is an original and true work

to the best of my knowledge.

____________________
Signature of the Student
[Yogita Bangera]

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CERTIFICATE

I, Prof Pushaanjali Sahu hereby verify that Miss Yogita Bangera have completed this

project titled “Micro-Insurance” for the academic year 2009-2010. It is an original and

true work to the best of my knowledge.

____________________ ___________________
Signature of the Principal Signature of the BBI Co-ordinater
[Dr.S.G.A.Zaidi] [Mr Furquan Shaikh]

__________________________ _____________________________
Signature of the Project Guide Signature of the External Examiner
[Mrs Pushaanjali Sahu]

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Acknowledgement

First and foremost, I would like to thank

Almighty god for energy, strength, guidance

and help that has always been with me

throughout

My work

While presenting this project at this project at this juncture, I feel deeply obliged to our

Mumbai University for providing me with an opportunity to do this project. I also extend

my sincere thanks to our Principal Dr.S.G.A.Zaidi and the vice Principal Beena pant for

their moral support and encouragement

I am highly grateful and express my sincere gratitude to my Prof Pushaanjali Sahu, who

guided me so well before the beginning of the project. To sum up I would like to thank my

Prof Furquan Shaikh (BBI Co-ordinater), who have helped me in some or other way in

successfully completing this project. It has been a warming experience for me, which will

surely help me in the future.

Last but not least I would like to thank my friends and family members for their

continuous, patience, encouragement, support and blessings that enabled me to make this

project a success.

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EXECUTIVE SUMMARY

This project is prepared with an intention to methodically study the developments in micro-

insurance witnessed in India. I have tried my level best to understand the topics covered in

this project. To understand the practical aspects of micro-insurance sector has changed the

outlook of the poor and their contribution to socio-economic welfare of the poor.

 The potential market for insurance in developing economies is estimated to be

between 1.5 and 3billion policies. There is significant demand for a range of

insurance products from health and life, agricultural and property insurance, to

catastrophe cover.

 Besides profits, there are several other benefits for commercial insurers providing

micro-insurance: a larger and diversified risk pool, benefits to reputation, and market

intelligence and innovation that can be applied to other business activities. In the

longer term, the combination of first mover advantages and sustained growth in

developing markets can lead to strong future business prospects.

 The success of microcredit worldwide has shown that people with low incomes are

a proven market for financial services and are effective consumers if given

appropriate products, processes, and knowledge. In the insurance field, micro

insurance can provide the specialised insurance products demanded by under-served

low income markets.

 Micro insurance already covers around 135 million people, or around 5% of the

potential market. In many countries, annual growth rates are 10% or higher.

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 The trends that will shape the future of micro insurance include: economic growth,

urbanization, financial sector development, climate change including more extreme

weather events and structural adaptation, the rapid pace of product and logistics

innovation, and innovative use of communication and information technology

(mobile phones, internet).

 Micro insurance is effective even in markets with little experience of insurance, as

long as products, procedures and policies are simple, the premiums are low, the

administration is efficient, and distribution channels are innovative.

 The main suppliers of micro insurance are commercial insurers. Most international

insurers and reinsurers are involved in micro insurance initiatives or offer products

directly. At the same time, International organisations, donors, non-governmental

organisations (NGOs) and governments are important facilitators.

 Community-based and informal insurance schemes will prove valuable sources of

innovation, but it is likely that, as communities develop, opportunities for regulated

insurers with appropriate Products and processes will increase and these insurers will

become market leaders.

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Sr.No Table of Content Pg. No

1. DESIGN OF STUDY 9-10

 Title For The Study
 Objective
 Scope Of The Study
 Methodology
 Limitations

2. WHAT IS MICRO-INSURANCE 11-22

 Introduction
 Definition of Micro-Insurance
 History & Vision
 Scope and functions
 Types of micro insurance in India
 Micro-Insurance delivery models
 The Key Characteristics of Micro Insurance
 The Micro Insurance Mechanism

3. DEVELOPMENT OF MICRO-INSURANCE 23-26

 Development of Micro-Insurance
 The Potential Market for Micro-Insurance in India:
(The UNDP Study)

4. NEED FOR DEVELOPING MICRO-INSURANCE IN INDIA 27-34

 Background
 Development Goal
 Institutional Adaptation
 Linkage to Insurers
 Proposed Micro-insurance Regulations
 Tie-up between life insurer and non-life insurer
 Code of conduct of Micro insurance agents
 Micro-insurance agent

5. MICRO-INSURANCE PRODUCT 35-38

6. RESEARCH METHODOLOGY 39
7. DATA ANALYSIS & INTERPRETATION [with pie charts] 40-45
8. FINDINGS 46
9. RECOMMENDATION 47

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10. CONCLUSIONS 48-49

11. BILIBOGRAPY 50

ANNUREX:-Survey Questionnaire [to customer]

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1. DESIGN OF STUDY

TITLE FOR THE STUDY

 ‘’ M I C R O - I N SU R A N C E ’’

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.

SCOPE OF THE STUDY

 Meaning and concept of Micro-Insurance.

 Need for developing micro-insurance in India.

 Since it is a new concept, untouched and unaware, the information was not easily

available.

METHODOLOGY

 Data has been collected for the following sources:

 Primary data

 Secondary data

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

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

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LIMITATIONS
 Data collection was very time consuming.

 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.

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2. 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) 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).

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 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.

 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

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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.

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.

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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.

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

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

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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:--

 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.

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

insurance company.

TYPES OF MICROINSURANCE IN INDIA

i. 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.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.

ii. 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

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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.

iii. 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.

iv. 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 Philippines are examples of MFIs

providing clients with disability insurance.

v. 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

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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.

vi. 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.

vii. 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. 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

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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.

i. 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.

ii. 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.

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iii. 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.

iv. 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 operation

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 Insur-

ance:

i. Inclusiveness:

While formal channels of insurance business tend to exclude low-income

households, Micro Insurance schemes generally tend to be inclusive.

ii. 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 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.

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iii. Simple Processes, Rules and Restrictions:

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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3. DEVELOPMENT OF MICRO-INSURANCE

INTRODUCTION

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:

 a population of less than five thousand,

 a density of population of less than four hundred per square kilometer

 More than 25% of the male working population is engaged in agricultural pursuits.

The categories of workers falling under agricultural pursuits are: cultivators,

agricultural laborers, and workers in livestock, forestry, fishing, hunting and

plantations, orchards and allied activities.

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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

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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.

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 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.

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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

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4. NEED FOR DEVELOPING 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. Micro insurance 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.

iii. The greatest challenge for micro insurance 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.

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DEVELOPMENT GOAL

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.

 Establishing new local institutions providing micro insurance services.

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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 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.

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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 procedure

 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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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” .

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TIE-UP BETWEEN LIFE INSURER AND NON-LIFE

INSURER

i. 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.

ii. 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

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

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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).

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.

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

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

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5. MICRO-INSURANCEPRODUCT

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 Min Amt Max Amt Term Term Min Max
of Cover of Cover of of Age at age at
Cover Cover entry entry
Min. Max.
Dwelling & content, or
livestock or Tools or Rs. 5,000 Rs. 30,000
implements or other Per Per 1 year 1 year NA NA
named assets/or Crop asset/cover asset/cover
insurance against all
perils
Health Insurance
Contract (Ind.) Rs. 5,000 Rs. 30,000 1 year 1 year Insurers’
discretion
Health Insurance
Contract (family)
(Option to avail limit for Rs. 10,000 Rs. 30,000 1 year 1 year Insurers’
Individual/Float on discretion
family)
Personal Accident (per
life/earning member of Rs. 10,000 Rs. 50,000 1 year 1 year 5
family) 70

SOURCE: IRDA Micro-Insurance Regulations, 2005, www.irdaindia.com

NOTE:

i. The minimum number of member comprising a group shall be at least twenty for

group insurance.

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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:

Type of Cover Minimum Maximum Term of Term Minimum Maximum

Amount of Amount of Cover of Age at age at
Cover Cover Min. Cover entry entry
Max.
Term
Insurance with
or without Rs. 5,000 Rs. 50,000 5 year 15 18 60
return of years
premium
Endowment 15
Insurance Rs. 5,000 Rs. 30,000 years 18 60
Health
Insurance Rs. 5,000 Rs. 30,000 1 year 7 year Insurers’ discretion
Contract
(Individual)
Health
Insurance Rs. 10,000 Rs. 30,000 1 year 7 year Insurers’ discretion
Contract
(Family)
Accident
Benefit as Rs. 10,000 Rs. 50,000 5 year 15 18 60
Rider years
SOURCE: IRDA Micro-Insurance Regulations, 2005, www.irdaindia.com

NOTE:

i. Group insurance products may be renewable on a yearly basis.

ii. The minimum number of members comprising a group shall be at least twenty

for group insurance

LIST OF MICRO-INSURANCE PRODUCT

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Financial Name of the Product Product UIN In operation Remarks,

Year No. if any, by
From
IRDA
(opening date)
2007-08 Bajaj Allianz Jana 116N047V01 4-Apr-07
Vikas Yojana
2007-08 Bajaj Allianz Saral 116N048V01 4-Apr-07
Suraksha Yojana
2007-08 Bajaj Allianz Alp 116N049V01 4-Apr-07
Nivesh Yojana
2007-08 Grameen Suraksha 122N039V01 16-Mar-07
2007-08 Birla Sun Life 109N032V01 13-Aug-07
Insurance Bima
Suraksha Super
2007-08 Birla Sun Life 109N033V01 13-Aug-07
Insurance Bima Dhan
Sanchay
2008-09 ICICI Pru Sarv Jana 105N081V01 2-Jun-08
Suraksha
2007-08 ING Vysya Saral 114N032V01 3-Sep-07
Suraksha

2006-07 LIC's Jeevan Madhur 512N240V01 14-Sep-06

2009-10 LIC's Jeevan Mangal 512N257V01 4-May-09
2008-09 Met Vishwas 117N042V01 2-Jun-08

2007-08 SBI Life Grameen 111N038V01 6-Sep-07

Shakti
2007-08 SBI Life Grameen 111N039V01 6-Sep-07
Super Suraksha
2006-07 Ayushman Yojana 110N042V01 30-May-06
2006-07 Navkalyan Yojana 110N043V01 30-May-06
2006-07 Sampoorn Bima 110N044V01 2-Jun-06
Yojana
2008-09 Tata AIG Sumangal 110N061V01 3-Jun-08
Bima Yojana
Sahara Sahayog 127N010V01 21-Apr-2006
2006-07 (Micro Endowment
Insurance without
profit plan)
2007-08 Shri Sahay 128N011V01 7-Feb-07
2007-08 Sri Sahay (AP) 128N012V01 24-Apr-07
2008-09 IDBI Fortis Group 135N004V01 5-Nov-08
Microsurance Plan
2008-09 DLF Pramerica Sarv 140N007V01 16-Mar-09
Suraksha

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2008-09 SUD Life Paraspar 142N009V01 17-Mar-09

Suraksha Plan

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6. 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 Mumbai 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 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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7. DATA 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.

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%.

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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.

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.

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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

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.

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Chart 7: No. of dependent

Inference: The above result reveal that majority of respondent 39% have 3 no. of

dependent where as only 4% have 5 dependents.

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

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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.

Chart 10: Awareness about insurance

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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.

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8. 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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9. RECOMMENDATIONS
Some of the recommendations could be:
 Simplification of products and bundling where requires making them easy to

understand, easy to use, sill and service.

 Simplifying and making premium payment plans flexible to suit the needs.
 Focus on volumes by targeting large groups.
 Innovations are required at all stages for products, in pricing policy and in

delivery channels
 Success of marketing micro insurance depends on understanding the social and

cultural needs of the target population

 Integrating micro finance activities with micro insurance for a most beneficial

outcome.
 Claim settlement to be timely, simple and transparent.
 Maximizing the benefit of connectivity revolution in rural India to reach the un-

served markets.
 Using additional innovative distribution channels to achieve cost-efficiency in

agricultural markets.

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10. 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

Do poor people have any security?

What if they face any risk?
Who is going to look after them?
Their family members?
Do they have any insurance policy?
Are they capable to pay the premium?

The answer for this is Micro Insurance.

THE MICRO INSURANCE IS BECOMES MICRO ENSURE

‘’A new name and tagline to reflect our positioning and mission to the poor’’

Micro Insurance is designed keeping in mind to poor people. Like everybody else, the poor

people face a variety of risks such as risk of death, illness, disability, accident, income &

property & so on. Like all other, they also need to be protected from these risks.

Policy-induced and institutional innovations are promoting insurance among the low-

income people who form a sizable sector of the population and who are mostly without any

social security cover. Although the current reach of ‘micro-insurance’ is limited, the early

trend in this respect suggests that the insurance companies, both public and private,

operating with commercial considerations, can insure a significant percentage of the poor.

Serving low-income people who can pay the premium certainly makes a sound commercial

sense to insurance providers. To that extent imposing social and rural obligations by

insurance regulator (IRDA) is helping all insurance companies appreciate the vast untapped

potential in serving the lower end of the market.

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Although micro insurance is unlikely to ever be the major focus of more than a few

insurers, many insurers have found micro insurance to be profitable if they operate simply

and efficiently on all levels, respond to market needs, and access large numbers of low

income people.

Investments in micro insurance have diverse returns that evolve over time: reputational

gains in the short term, knowledge in the medium term and growth in the long term. If we

view insurance as a sector in which knowledge is a decisive resource, then micro insurance

can be viewed as a driver of local learning and ultimately economic growth. It is becoming

increasingly clear that micro-insurance needs a further push and guidance from the

regulator as well as the government.

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11. BILIBOGRAPY

The following companies and association’s web sites were referred while collecting

information used in the research.

INTERNET SOURCE

 www.irdaindia.com

 www.irdaindia.org

 www.banknetindia.com

 www.microinsurancecentre.org

 www.economist.com

 www.businessworld.in

BOOKS/MAGAZINES REFFERD

ON THE BASICS OF MICRO-INSURANCE

 Protecting the poor: A micro insurance compendium ---Authors Craig F.
Churchill

ON MICRO-INSURANCE REGULATION

 Making insurance markets work for the poor: micro-insurance policy,

regulation and supervision ---CGAP Working Group on Micro-insurance, 2009

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SURVEY QUESTIONNAIRE
Personal Profile

1) Name: _________________________________________

2) Age: A) 20-25 B) 25-30 C) 30-35 D) 35-40

3) Educational qualification: A) Up to primary B) Higher sec C) Graduation

4) Do you have: A) Bank a/c B) Post office a/c C) Both

5) No. of members in family __________________________________

6) No. of earning members ___________________________________

7) Monthly Income: A) 0-3000 B) 3000-5000 C) 5000-7000 D) 7000-10000

8) No. of dependents A) 1-2 B) 2-3 C) 4-5 D) 6-above

9) Expense pattern (please mention no.) (1-highest & 6-lowest)

A) Travelling ___ B) Clothing ___ C) Health ___ D) Education ___

E) Rent & electricity ___ F) Drink & entertainment___

10) Did you faced any problem in family health or asset

A) Yes B) No

If yes, then how did you managed it __________________________

_______________________________________________________________

11) Do you know about insurance?

A) Yes B) No

If yes, then any known insurance company __________________________

_______________________________________________________________

12) If yes source of information of the insurance company

A) TV B) Hoardings C) Cinema halls D) Banners E) Radio

F) Company agents G) Friends H) Relatives I) Magazine J) Newspaper

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