Micro Insurance in India-Protecting the Poor

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1 Micro Insurance in India-Protecting the Poor N. Ratna Kishor, Assistant Professor, Department of Commerce & Business Administration, Acharaya Nagarjuna University, Nagarjuna nagar, A.P If we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value conscious consumers, a whole new world of opportunity will open up. Dr. C K Prahalad With global warming strongly impacting in India and elsewhere, the discussion on adaptation and insurance is intensifying. Also, insurance for the poor is a coping mechanism that helps prevent affected people from falling deeper into poverty. -Thomas Loster, Chairman of the Munich Re Foundation While growth is the best antidote for poverty, governments must now turn their attention to those who are at the bottom of the income pyramid. It is clear that wealth does not percolate down to society s poor, in India some 250 million people. Over half of the Indian population have no access to banking products, let alone insurance products. Addressing these concerns is as important as focusing on growth, -Mr. Sri P. Chidambaram Abstract Microfinance is it self one of the most important, remarkable phenomenon in developing the socio economic environment of the poor. Because of their poor socio and economic background most of the financial institutions thought that poor are not bankable. Microfinance has proved that these poor can be made credit worthy if they are organized in small groups.microinsurance is the term used to refer the insurance to the low income people as it is different from insurance in general where microinsurance is a low value product with less premium and benefits. Microinsurance can boost resources for the rural poor, governments and private sector. The entire economy gains as the insurance industry matures further as well. There is a need for microinsurance in India s poverty reduction strategy.microinsurance is a tool for investment, savings and as a measure of social security. It increases the livelihood of the poor where they can eat well, have good health since they wouldn t have to save as much for emergencies. Insurance Industry in India In India insurance is a big opportunity where large untapped population is there. Insurance business in India registered the growth rate of percent when compare to percent in Increasing insurance penetration contributed 4.00 percent to GDP in terms of premium volume for life insurance business. Increased consumer awareness helped the industry to grow and tap the untapped market. Increased competition brought innovative product with competitive price with good service. This created an impact on the insurance industry. The overall insurance industry in India is still yet to be developed. Tell now approximately 10.00percent of population is covered with insurance. In 2005 the total global insurance premium is estimated at US$ 3,426 billion, India s share accounted for 0.73 percent. This tells us that the coverage of the population in terms of insurance business is huge. Table: Showing population excluded from insurance Countries Percent Million India Bangladesh Pakistan Nepal Source: Mare Socquetl, ILO/STEP, Microinsurance workshop, Hyderabad. Microinsurance in India The market for microinsurance is enormous and remain untapped. Microinsurance in India given the greater policy stimuli, commercial interests and growing track record of local successes. India s Microinsurance Industry is going for rapid growth in the coming days. The UNDP study estimates the potential market size for microinsurance in India to be between Rs62000 and Rs84000 million. The potential for life insurance is estimated to range from Rs15393 to million. The population used for this estimation is percent of the Blue Ocean Research Journals 39

2 potentially economically active and earning less than US$1 a day. This is about to grow as microinsurance is better understood and demand grows with appropriate supply. INTRODUCION Low-income persons live in risky environments, vulnerable to numerous perils, including illness, accidental death and disability, loss of property due to theft or fire, agricultural losses, and disasters of both the natural and manmade varieties. The poor are more vulnerable to many of these risks than the rest of the population. According to the Consultative Group to Assist the Poor (CGAP) working group on microinsurance appointed by Government of India defined the term as the protection of low income households against specific perils in exchange for premium payments proportionate to the likelihood and cost of the risk involved. Micro-insurance is the protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved (Churchill, 2006, 12). The main difference between microinsurance and regular insurance is that the first is specifically targeted at low-income people, who have limited financial resources and often irregular income flows. Thus, the product design is adapted to these people s needs and financial capabilities. Microinsurance is the key element in the development of the people bottom of the pyramid. The poor face more risks than the well-off, but more importantly they are more vulnerable to the same risk. Usually, the poor face two types of risks idiosyncratic (specific to the household) and covariate (common, eg., drought, epidemic, etc.). To combat these risks, the poor do pro-active risk management grain storage, savings, asset accumulation (especially bullocks), loans from friends and relatives, etc. However, the prevalent forms of risk management (in kind savings, selfinsurance, mutual insurance) which were appropriate earlier are no longer adequate. Microinsurance especially designed for low income households and it is a critical tool to eradicate the poverty. Risks are common to all individuals. when compare to the risks with the common individuals poor experience the risks frequently with greater financial impact. Microinsurance and the MDGs The Millennium Development Goals, established by the United Nations in 2000, provide more than 40 quantifiable indicators to assess the progress made toward global economic and social development by The MDGs serve as a development framework, helping to focus the attention of policymakers, donors and development practitioners on the most critical objectives. Certain MDGs would be more achievable if insurance were widely available among low-income households, including the following targets: Halve the proportion of people whose income is less than one dollar per day Halve the proportion of people who suffer from hunger Ensure that children everywhere, boys and girls alike, will be able to complete a full course of primary schooling Eliminate gender disparity in primary and secondary education Reduce by two-thirds the under-five mortality rate Reduce by three-quarters the maternal mortality ratio Halt and begin to reverse the spread of HIV/AIDS Halt and begin to reverse the incidence of malaria and other major diseases Source: UNO There is one big issue in the insurers business. Why the current insurance business models are not reaching the poor? How to develop the new business models particularly for the microinsurance? One thing is that if they want to offer the microinsurance for the under served market of low households. Insurers have to overcome the obstacles in reaching the poor on a large scale. Blue Ocean Research Journals 40

3 Microinsurance As new Business Model for Existing Insurers Microinsurance Microinsurance As a tool for Eradicating the Poverty, social protection & Social security For The low households Microinsurance as Business Model for Existing Insurers The review of literature tells us that commercialization has been underway since 1992 when the Bolivian microfinance NGO Prodem created BancoSol, the first commercial bank dedicated to serving the low-income market. The creation of BancoSol started a revolution that has inspired at least 39 other NGOs to create regulated financial institutions (Fernando, 2004) and numerous commercial banks and finance companies to reach down market. The guru behind the articulation of the new market perspective is C.K. Prahalad (2005), who illustrates in his book The fortune at the bottom of the pyramid that the private sector, in its desire to gain market coverage, will invent new systems depending on the nature of the market. The following are the some of the principles to be considered when innovating the product: 1. New understanding of price-performance relationship: As we know that poor cannot afford high prices. This doesn t mean that we have to offer poor quality products. Down market is surprisingly brand conscious. Insurers they should keep in mind the they to secure the market s trust and confidence. 2. Combine advanced technologies with existing infrastructure: Many of the microfinance institutions are already introduced technology in providing the services like information kiosks, smart cards etc. 3. Scale of operation: The basis of return on investment is volume of sales. Insurers they have concentrate in generating more sales through product pricing, coverage of risk pool and the product should be affordable to the poor. 4. Eco-friendly: This may directly impact the microinsurance business but one thing we should not for get that many risks which are associated with poor is climate change. 5. Requires different functionality: Products and services for the under served market cannot just be scaled down or less expensive versions of traditional products. With microinsurance, for example, insights into how low-income households might use an insurance payout illustrate key differences with the conventional insurance market. For example, instead of a lump sum of cash, the poor might prefer in-kind benefits (e.g., funeral service, groceries) possibly spread over a period of time. 6. Process innovation: In microinsurance, insurers must recognize that the premium is not the only expense. The indirect costs of accessing and using that product, including transportation and the opportunity costs of lost wages may be much higher than the actual cost. When designing a product for the microinsurance, it is necessary to adapt the process as well as the product, taking into account the limited infrastructure typically available for the poor. 7. Deskilling work: Here in this business model the targeted market is labor oriented and low income households. It is important that for microinsurance business approach should be very simple and easy to understand so that products can be sold very easily and insurers they can generate revenue. 8. Significant investments in educating customers: Microinsurers they can reach the poor very easily when they educate what is insurance? How we are benefited from insurance? And how insurance works? Is the basic education has to be given to poor. Blue Ocean Research Journals 41

4 9. Designed for hostile conditions: The products and services designed for the BOP market must take into consideration the unsanitary conditions and limited infrastructure (e.g. electricity blackouts, poor water quality). For microinsurance providers, this involves investing in loss-prevention measures such as promoting low-risk behavior, water purification and hygiene in order to reduce claims for health and life insurance. 10. User-friendly interfaces: Serving this market requires careful consideration to make it easy for poor households to use the service. Make it easy in simplification of claims documentation and access benefits while protecting insurers from fraud. 11. Distribution: Insurance companies are particularly weak at distribution. The main solution to this problem is to collaborate with another organization that already has financial transactions with low-income households so the insurer can leverage existing infrastructure to reach the poor. 12. Challenge the conventional wisdom: In sum, to serve the low-income market, insurers have to think differently about customers needs, product design, delivery systems and even business models. There is a viable market out there if insurers are willing to learn about that market and develop new paradigms for serving it. Microinsurance for Social Protection Social protection generally consists of policies and programs designed to reduce poverty and vulnerability by promoting efficient labor markets, diminishing people's exposure to risks, enhancing their capacity to protect themselves against hazards and interruption/loss of income. The five main areas that are there in the social protection are 1. Labor Market. 2. Social Insurance 3. Social Assistance 4. Child protection 5. Poverty reduction (Micro and area based schemes). In social protection to reduce the poverty we are diminishing people s risk and improving their capacity to protect themselves. Every year Srilankan Government spends three percent of its GDP on social protection. The box titled Srilankan government approach to assist the poor. Social protection refers to the benefits that society provides for its members including: unemployment and disability benefits, universal healthcare, maternity benefits, old-age pensions, Protection for children and the disabled. Srilankan Government Approaches in assisting the poor: It comprises three main components the first one is employment protection and promotion second one is safety nets and the last one Social security/insurance programmes. The four different approaches are: 1) government agencies, which provide social security schemes and pension for low-income earners; 2) Samurdhi Authority, another government agency, which provides income support along with social security benefits; 3) private insurance companies; and 4) MFIs and community-based organisations (CBOs), which provide microinsurance. Source: Brookes world poverty Institute. Social Protection and effects on the poor 1. Social protection reduces the poverty through its positive impact on economic performance and productivity. 2. It helps people to cope with important risks and loss of income. 3. Used as a critical tool in managing change in the economy. 4. It will stabilize the economy by providing replacement income. 5. Enhancing the principles such as solidarity, dignity and equality. Microinsurance for Social Security According to the ILO (2000), social security is the protection which society provides for its members through a series of public measures: * To compensate for the absence or substantial reduction of income from work resulting from various contingencies (notably sickness, maternity, employment injury, unemployment, invalidity, old age and death of the breadwinner), * To provide people with healthcare, Blue Ocean Research Journals 42

5 * To provide benefits for families with children. Problems, issues and challenges in microinsurance * The contemporary insurance paradigm is not geared to serve the poor high costs, restrictive access and low transparency being the chief reasons. * Lack of unfamiliarity and trust on the service providers. * The penetration of microinsurance to the low income groups has not been successful and its promotion by MFIs has not yet realized its full potential. * When it comes to insuring the poorest, two important issues are referred to often Whose benefit should microinsurance target? the second issue is who should pay the microinsurance premiums? * Lack of awareness value of microinsurance. * Difficulties in understanding technology introduced by the service providers. * Delivery systems are poor when growing demand is there for microinsurance. * Irregular cash flows of households where they are unable to pay the premiums. * Big challenge in educating the market and overcoming the bias on insurance. * For illiterates it is very difficult to understand the terms and conditions of the insurance policy. What best can be done * Increasing the partnerships between MFIs, Government, and other societies to reach the under covered market. * Government Sponsored schemes * Community based programmes that pools funds (Refer best practice table) * Customer focused approach at the time of new product design. * Educating the market in their local languages through media, information kiosks, social meetings etc. * Designing the product that is operated in the particular microinsurance environment. * Minimizing the documentations and developing efficient, transparent claims processing systems. * Risk prevention strategies. * Product should be affordable to the poor. * Flexibility in premium Best Practice: Swayamkrushi Youth Charitable Organization (YCO) in the Andrapradesh is an example of a community-based model that still operates. It is primarily a savings and credit association with added insurance features. The cooperative s 8,100 members pay a yearly premium of Rs100 ($2.22) into a pool managed by the cooperative and receive cover for death and property loss. The life insurance benefit is Rs15, 000 ($333) for a natural death, and double that in the event of an accidental death. Source: CGAP. References [1] Anil Mehta, Diversifying financial services a case for microinsurance, Microfinance India summit conference report, [2] Craig Churchill, What is insurance for the poor? International Labour Organization 2006, ISBN (ILO). [3] Chriseten, R.Peck Rhyne, Elisabeth and Vogel, Robert C (1994) "Maximizing the Outreach of Microenterprise Finance: The Emerging Lessons of Successful Programs," IMCC, Arlington, Virginia. [4] James Roth, Craig Churchill, Gabriele Ramm and Namerta, Microinsurance and Microfinance Institutions: Evidence from India, CGAP Working Group on Microinsurance Good and Bad Practices, Case Study No. 15, September [5] Microinsurance Conference 2007, Microinsurance a pillar of India s strong Economic growth, Munich Re Foundation, Press Release, 14 November [6] M.Vishwanathan, Microfinance in the eradication of poverty, Organizational Management,VOLXXIV No.1 April- June [7] Rajeev Ahuja and Basudeb Guha-Khasnobis, Micro-Insurance in India: Trends and strategies for further extension. Indian council for research on International Economic Relations, June [8] R. Sairam, LIC targets 40,000 micro insurance policies from southern districts this fiscal, The Hindu Madurai, September 6, Blue Ocean Research Journals 43

6 [9] Tarun Bajaj, Diversifying financial services a case for microinsurance, Microfinance India summit conference report, [10] Thankom Arun, Susan Steiner, Micro- Insurance in the Context of Social Protection, Brooks World Poverty Institute Working Paper 55, Oct., ISBN [11] Y. V. Reddy, Micro-Finance: Reserve Bank's Approach, Speech, Sep 14, Blue Ocean Research Journals 44