Unit 6
Unit 6
Unit 6
Structure
6.1 Introduction
6.2 Definition and Concept
6.3 Microinsurance : Link for Financial Inclusion (FI)
6.4 Need for Micro Insurance
6.5 Micro Insurance Regulation
6.6 Distribution of Micro Insurance
6.7 Micro Insurance Products
6.8 Issues in Growth of Microinsurance
6.9 Summary
6.10 Key Words
6.11 Self-Assessment Questions
6.12 Further Readings
6.1 INTRODUCTION
Micro insurance is insurance for low income group. Conceptually, Microinsurance is
similar to concept of micro finance in banking. To put microinsurance in right perspective,
we need to understand the role played by micro finance in banking and finance. Micro
finance, as name indicates, represents small saving and credit for low income groups.
It is banking and credit services extended to the section of population which does not
have access to banking services. This section of population does not have asset base
to extend as collateral and the transactions done by them are too small to make banking
viable for the formal banking institutions. Thus, Micro finance is a branch of finance
which has focus on unserved population or population excluded from main stream
banking and finance.
Micro finance sector extends micro loans to low income households who are members
of Self - Help Groups (SHG) based on group collateral or group guarantee. It works
on principles of solidarity and peer-pressure. Members of an SHG extend social
154 collateral for fellow members based on solidarity and adhere to financial discipline in
saving and repayment of loans due to peer-pressure. SHG also helps the members in Micro Insurance
reducing transaction cost by way of collectively opening saving account in banks, which
is called bank linkage. After bank linkage, and satisfactory continuous saving record,
banks extend loan to the SHG members collectively, three to five times of their collective
saving in the account. This whole process of formation of SHGs and bank linkage
leads to formal association of SHG members to the banking services.
Success of micro finance in Bangladesh, attracted Noble peace prize for Prof
Mohammad Yunus in the year 2006. Prof Yunus is known for his pioneering work in
micro finance through his brain child Grameen Bank and for popularising micro finance.
Similar success story was followed in India in the regulatory framework of National
Bank for Agriculture and Rural Development (NABARD). The growth and development
of micro finance sector created need for financial risk management tools to deal with
the financial setbacks that the clients face. The low income group draws its livelihood
from informal sector which faces risks from various sources originating from the social,
economic, environmental and political uncertainty associated with the sector. The low
income group is more risk prone as it does not have adequate saving and asset base to
fall back upon at the time of crisis. Micro insurance was conceptualised to take care of
this risk of low income group.
Micro insurance is one of the missing links of micro finance, which takes care of risk
management of low income households, who do not have access to formal insurance
solutions. It is the fourth pillar of financial services. The other three pillars - saving,
credit and money transfer are taken care of by banking sector.
Microinsurance in India stared in late 90’s when NGOs/MFIs working with low income
group/poor for livelihood enhancement through micro finance realised the need for
financial protection of its clients. Subsequently, insurance companies started offering
low cost insurance products through these informal organisations to reach the doorsteps
of low income groups. Micro insurance was taken seriously by insurance companies
after IRDAI came with first Microinsurance regulation in 2005. India became the first
country to have separate Microinsurance Regulation. Countries like Indonesia and
South Africa followed with their microinsurance regulation in later years.
It is estimated that 60 % of the people around the world, who are covered by
microinsurance, live in India (ILO Microinsurance Innovation Facility, 2012). Total
263 million people are covered by microinsurance in three regions -Asia, Africa and
Latin America and the Caribbean (LAC) wherein the majority of the low income
population live (PEW Research Centre, 2015). The total microinsurance Gross Written
Premium (GWP) in these region is around US$ 2.2 billion. About 80% of the total
lives covered in Asia belong to two countries – China and India (Microinsurance
Network, 2015).
In simple words, ‘Microinsurance is a small ticket-size insurance for the low income
segment’ of population (Singh & Bihari, 2018). The low income segment which earns
US$ 1.90 per day (in US dollars, based on purchasing power parity in 2011) to US$
5 per day is the target population for Microinsurance (CGAP, ILO).
Micro insurance is treated as a synonym for Social Insurance and Rural Insurance.
Conceptually these three terms- Micro Insurance, Rural Insurance and Social insurance
have different meanings and target different segment of population. Rural Insurance, as
the name indicates, is insurance sold in rural areas. It has a geographical and demographic
connotation, but it is not meant for poor or low income population only. Since majority
of low income population in India lives in rural areas, it is misunderstood as insurance
for rural poor, which is not the case. The target customer for rural insurance is anyone
living in rural areas, irrespective of economic or social status. In this manner, even a
conventional insurance product sold in rural areas is treated as rural insurance. Any life
insurance or general insurance product sold in rural areas can be termed as rural
insurance. Rural insurance also has specific products, taking care of needs of agrarian
economy, like, crop insurance, cattle insurance etc. The marketing strategy for rural
insurance is different suiting to the demographic, social and cultural realities of rural
areas.
Microinsurance covers all risks that are covered in conventional insurance e.g.death,
health, accident, asset etc. However, microinsurance is different from conventional
insurance in terms of product, pricing and practices of insurance, distribution, target
market and approach to marketing.These differences arise basically from the
difference in characteristics of target market. Target market for microinsurance is
low income group predominantly from rural areas or strong rural linkages- living in
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urban slums, where literacy rate is low, awareness and access of banking and finance Micro Insurance
is low. Source of livelihood for this segment is classified under unorganised sector,
where income is irregular, saving is low and long term investment is missing. Micro
insurance products are designed to suit these ground realities of the target market,
hence nature if microinsurance is very different from conventional insurance, as discussed
below.
Products are simple, easy to understand and policy documents are in local language.
The sum assured for micro insurance policy is low compared to conventional insurance
products and hence premium is also low. As per IRDAI guidelines, there is upper cap
on insurance premium and sum assured (discussed in section on regulation), which is
not the case with conventional insurance products. Prices of micro insurance products
are based on group pricing/ community pricing, keeping in view paying ability of the
target population, whereas risk based pricing is done in case of conventional insurance
products. Microinsurance products offer flexible payment terms for premiums, mode
of premium can be as frequent as weekly or monthly; whereas in case of conventional
insurance, mode of premium are single premium, annual, biannual or quarterly, keeping
in view transaction cost of premium collection.
Eligibility of Customer Limited eligibility, High entry Inclusive, Low entry barrier,
barrier, standard exclusion few exclusions
Target Market Higher income group, high Low income group, Low
Insurance literacy insurance literacy, Price
sensitive
assured Rs two lakhs with maximum annual premium up to Rs 6,000/-. A micro insurance
product may have flexible premium payment terms and it cannot be unit linked product.
There are specifications given regarding Micro variable life insurance products which
insurers have to follow before filing of the product. An insurer can file a microinsurance
product with the Authority under “File and Use” procedure. The products approved
by the Authority under this procedure shall carry prominently the caption
“Microinsurance Product”. The microinsurance contract issued to an insured should
be printed in the primary language of the insured.
The regulation also specifies the upper limit of commission that can be paid to
microinsurance agents. The commission for life insurance business can be up to ten
percent of single premium and twenty percent of cumulative premiums for the policy
term in case of non-single premium.The maximum commission of general insurance
business can be up to fifteen percent of the premium. The commission to agents stops
when the agreement between microinsurance agent and the insurer stops. Under
microinsurance Regulation, a life insurer can offer general insurance and vice versa
provided the two insurers get in an MOU with arrangement to pass on corresponding
business and claims to each other.
Mutual Insurance
Insurance Organisations
In the mutual model, the insurer is owned by clients (members), who share in the
benefits and costs of the insurance operations, often with members’ liability limited to
their premium contributions. Mutual Insurance organisations are registered as Mutual
Cooperative Societies or Multi-Cooperative Societies or any other form of Non-
Government Organisations in India, which work closely with community and organise
them in form of Mutual, which is owned by all its members. Together they create a fund
by charging membership fee/ premium, which is used for policy administration and
claim settlement. Annapurna Parivar Heath Mutual, Uplift India Health Mutuals, Life
Mutuals by Dhan Foundation are few examples of insurance mutual. These organisations
are professionally managed, charge experiential premium but are moving towards
actuarial premium. They do not fall in purview of IRDAI and so are a part of informal
microinsurance in India.
Insurance organisations are the formal insurance companies who sell microinsurance
directly or through intermediaries. In India, they fall under purview of IRDAI and form
formal microinsurance segment. In India currently there are 57 insurance companies of
which 24 are in life insurance business and 33 are non-life insurers and all of them offer
microinsurance products.
Microinsurance being low cost, it is expected that cost of distribution is low. However,
customer profile and behaviour makes it inevitable to deliver it at the doorstep of the
consumer. Microinsurance competes with informal risk coping mechanisms, which are
tried and tested by the community and in which community plays a very important role.
Insurance being an intangible product, where customer will get proof of its existence
only when an unforeseen event happens. All these aspects combined make
microinsurance a service oriented product, where customer needs to be assured of its
utility indirectly. Trust is a very important aspect in sale of microinsurance. Keeping in
view these ground realities, distribution of microinsurance is a major challenge.
There are four primary channels of distribution identified for microinsurance. Apart
from this, there are four emerging channels of distribution. Next section enumerates
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microinsurance distribution channels along with details. Micro Insurance
d. Provider Model
The motivation for the partner-agent model is to leverage the strengths of both
parties. The partnership allows the product to reach a segment of the population
at low transaction cost that would be difficult or impossible to access without a
partner. Insurers typically lack the trust of the market, as well as an understanding
of the clients. This hinders their ability to sell within this market. Going directly to
the end market for such a low cost product, will be costly for the insurer. By
partnering with organisations that already work with the low-income market,
insurers can leverage the trust and access developed, by the delivery channel and
the knowledge of their clients that these channels have gained over a period of
time.
At the same time, the model places the risk-bearing function on a regulated insurance
company, which is best equipped to manage it, while allowing the delivery channels
to focus on their core functions and better serve clients. But insurance companies
do not have direct reach to the clients and have low control on the channels partners,
which is the weakness of this model. Insurance companies lack flexibility to cater
to the needs of the clients which becomes inconvenient for the channel partners
and they lose interest. At the same time, insurance companies lose credibility if the
channel partner does not follow the rules and commit fraud by not passing the
premium to the insurance company or claim amount or to the insured/claimant.
There are many innovations and experiments happening all across the world to take
microinsurance, by increasing access and bringing presence of Points of Sales (PoS),
closer to the target market. These emerging channels are leveraging the already available
networks engaged in frequent financial transactions with low income groups. Since
these networks have high footprint and high footfall and have had long term association
with the target market, they command high credibility and trust which becomes useful
in convincing customers to buy insurance. These channels are taking shape in African
and Latin American countries. Adoption of these channels in India will require regulatory
changes and innovations in product design.
(a) Cash Based Retailers: Insurance Companies in South Africa have tied up with
Cash based retailers selling clothing and small appliance to low income groups.
These retailers have chain of stores in suburban and urban low income pockets
and are established brands with high footfall. These retailers do off the shelf selling
of standard products and have no active involvement. The products sold through
these retailers are Individual & Family Funeral Insurance. The premium is charged
monthly in cash by the store along with bill of other purchases from the store. It is
a form of bundled sale. Retailers have no role to play after the sale as policy
servicing and claim management is done by the insurer. The examples of this
distribution channel are Hollard Insurance & PEP Retailer in South Africa.
(b) Credit Based Retailers: The retail stores that sell goods on credit bundle insurance
products with their sales and premiums are collected with installments of the credit
payment. The products sold through this channel are personal accident,
unemployment and life micro insurance with additional policy benefits. Policy
Servicing is done jointly by insurer and retailer in this model. Retailers provide on
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the ground after sales support through sales agents and assists insurer in back Micro Insurance
(d) Third Party Bill Payment Providers: Third party bill payment providers who
collect bills of electricity also provide insurance service in South Africa. These
channels sell Funeral and personal accident policies and collect monthly premium
in cash. In case the service provider sells cellular airtime the premium is deduction
from airtime. In other words, premium collection is bundled with monthly bill
payment or payment for airtime. These providers have Rural Vendor network
who also do registration along with providing regular collection service. Policy
Administration is done by third party administrator and Claim Management is
taken care of by Insurer. Examples of this channel are Cover2go insurer, Wiredloop
& Shoprrite.
New Jeevan Mangal was introduced in January 2014. It is modified version of the
earlier plan Jeevan Mangal. It is an individual term insurance plan with return of premiums
on maturity and in-built accident benefit cover. Accidental death benefit is a rider which
provides for double risk cover in case of accidental death. The term of the policy
ranges between 10 years to 15 years for regular premium and 5 years to 10 years for
single premium. The minimum sum assured under the scheme is Rs 10,000 and maximum
sum assured is Rs 50,000. The minimum annual premium rate is Rs 37 (age 18 years
and term 15 years) and maximum annual premium rate is Rs 95 (age 55 years and term 165
Life Insurance 10 years) depending on age and term. Similarly, the minimum single premium rate is Rs
138 (age 18 years and term 10 years) and maximum single premium rate is Rs 319
(age 55 years and term 5 years). The policy also offers several modes of premium
payment. The maturity benefit under the product is total amount of premium paid during
the term of the contract in case of survival till the maturity date. Death benefit is Death
Sum Assured payable. An accidental death benefit will be paid to the nominee in the
event of death of policyholder due to an accident.
Shriram Life Insurance Company Ltd is contributing more than 50% share of Life
microinsurance business done by private life insurers in last three years. Shriram Life
offers one individual life microinsurance plan named Shriram Grameena Suraksha Plan
and three group life microinsurance plans namely- Shriram Life Jana Sahay, Shriram
Life Shri Sahay (SP) and Shriram Life Shri Sahay (AP).
product offers mode of the premium payment as yearly, half yearly, quarterly and
monthly. The insurance coverage is available from Rs. 5,000 to Rs. 2,00,000 per
member. The minimum group size required is five and there is no limitation on the
maximum size of the group. In case of Lender-Borrower schemes the individual member
of the group policy authorizes Shriram Life insurance company to make the payment
of outstanding loan balance amount to master policy holder by deducting from the
claim proceeds payable on the happening of the contingent event covered by the policy.
Balance claim amount, if any, will be settled directly in favour of nominee/ beneficiary
of the deceased member of the policy.
Janata Suraksha Bima Yojna is a Package Policy to marginal and small farmers,
labour class, rural households involved in agricultural and allied activities and people
engaged in unorganized sectors of urban economy. It covers asset (house and
belongings) against fire and burglary and personal accident (against death and permanent
total disability) for insured and spouse on floater basis. The total minimum sum assured
is Rs 49,500/- for fire and burglary for a premium of Rs 87/- and maximum sum
assured offered under the product is 2 lakhs for fire and burglary for a premium of Rs
870/- per annum.
Jan Sewa Bima Yojna is a single fixed cover and fixed price package insurance for
rural and semi urban households. It offers comprehensive insurance protection for
their entire assets, interests, liability and self. The risks covered are household contents
against Fire and Special Allied Perils, household contents, against Burglary,
housebreaking, robbery and dacoity, Personal accident cover to the proposer/family
member resulting in death or Permanent Total Disability (PTD) and death of the Insured
person due to accident (Education Protection Cover for named child). The policy
offers two options of covers. In option one, the cover for Fire and Burglary is Rs one
lakh, Personal accident Rs 50,000/- and Education Protection Cover for Rs 50,000/
- for a premium of Rs 275 /-. In second option, the cover for Fire and Burglary is Rs.
50,000/-, Personal accident Rs. two lakhs and Education Protection Cover for Rs.
two lakhs for a premium of Rs. 348 /-.
The Kisan Suvidha Bima Policy offers a single Package Policy to farmers and rural
households involved in agriculture. It provides a comprehensive insurance protection
for the entire assets and interests of a household, including risks of Personal Accident
and Critical Illness for insured and family members under one umbrella.
Jan Suraksha Bima is a personal accident policy targeted to group members of Self-
Help Groups (SHGs) from economically weaker sections. It covers the risk of death
and disability due to accidents or natural disasters. Groups which contain only female
members are covered under the name Mahila Suraksha Yojana.The minimum Sum
Insured per person per annum is Rs 10,000. A higher Sum Insured can be chosen in 167
Life Insurance multiples of Rs 5,000 subject to a maximum of Rs.1,00,000. The age limit set by the
company for this policy is 5-70 years. It can be extended up to the age of 80 years
after suitable loading of premium. The standard premium charged is 0.60% of the
group Sum Insured. Group Discount on premium is available depending on the group
size. The policy document also illustrates some examples of the kinds of events that
can be considered as accidents under the policy.
Uplift India Association (a Sec 8 Not for Profit Company) is a Pune based organisation
which has done pioneering work in the area of Mutual insurance. It mobilises and
brings together different communities to share their health risks based on the principles
of solidarity and shared responsibility by setting up health mutual. The model is unique
in the sense that it mutualises the risks, i.e. provides a mechanism to share the risk
within the community, in spite of transferring the risk to a third party and rescuing the
risk through an ecosystem of health service approach.Mutual collects the premiums
from its members and pays out the claims from its own fund. Profits earned on the fund
after operational expenses are either to be paid out to shareholders as dividends, or
the surplus is reinvested back or both. Health care and services offered by uplift are
cashless out- patient medical services (OPD) and guidance for members on preventive
care. Organise speciality and multi-speciality health screenings for members every
quarter, medical help over phone, medicines on discount and discounted hospitalised
treatment through network hospitals. This model of insurance is popular in Canada
and European countries like Sweden and Netherlands. So far uplift has setup nine
mutuals in Maharashtra and Rajasthan in urban, rural and tribal areas and covered 3
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lakh people. They are also using mobile app to provide services to the members. The Micro Insurance
mutual is also including children in their program by setting up mutual for children.
There are behavioural and attitudinal issues in the market as well. Low income group
does not have enough resource and know how for long term financial planning.They
look for assured income for each investment, which is very difficult to insure in an
intangible product like insurance. Low literacy rate and low insurance awareness
contributes to it. Most of the time people are not aware about claim settlement process.
They are scared they will have to spend money and run around to get claims. They
lack trust on the product as well as the process.
6.9 SUMMARY
Micro insurance is insurance for low income group aimed at bringing financial inclusion.It
is one of the missing links of micro finance, which takes care of risk management of
low income households, who do not have access to formal insurance solutions. Micro
insurance is the fourth pillar of financial services. Financial security of low income is
important for a county like India, where majority of working population is from
unorganised sector.
6.10 KEYWORDS
Microinsurance : It is a type of insurance aimed at low income groups which
provides cover for a relatively lower amount and low
premium proportionate to the risk covered.
2. How is India placed on Global map in terms of growth and development of micro
insurance?
2) Churchill, Craig and Michal Matul (ed.). 2006. Protecting the poor: A
microinsurance compendium, ILO, Geneva.
e-book can be accessed on http://www.ilo.org/global/publications/ilo-bookstore/
order-online/books/WCMS_175786/lang—en/index.htm
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Life Insurance
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