Origin and Development of Micro-insurance

Microinsurance is insurance with low premiums and low caps / coverage. In this definition, “micro” refers to the small financial transaction that each insurance policy generates. “General micro insurance product means health insurance contract, any contract covering the belongings, such as, hut, livestock or tools or instruments or any personal accident contract, either on individual or group basis, as per terms stated in Schedule-I appended to these regulations”; and “life microinsurance 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 Schedule-II appended to these regulations as those within defined (low) minimum and maximum caps. The Indian Insurance Regulatory and Development Authority (IRDAI) characterizes microinsurance by the product features. This is further complemented by their definition for microinsurance agents, those appointed by and acting for an insurer, for distribution of microinsurance products (and only those products).

As in much of the developing world, India has a large number of informal quasi insurance schemes: for example, households that pool rice. In addition to this, there are small schemes run by cooperatives, churches and NGOs that may pool their members’ incomes to create an insurance fund against a specific peril: for example, funeral costs. In a few countries, there is specific legislation to regulate these schemes, e.g., the South African Friendly Societies Act. In India no such law exists, and any individual or institution conducting insurance has to comply with the stipulations of, among other regulations, the 1938 Indian Insurance Act as amended.

Compliance with this Act requires, among other conditions, over $22 million of capital. All insurance schemes that do not comply with the Act operate outside it and in a legal vacuum. This includes all community-based schemes, and in-house insurance schemes run by MFIs 4, NGOs, and trade unions, in-house hospital schemes, etc. At present, the IRDA has not taken action against these schemes as the Authority does not conside r them to be ‘insurance’ according to its definition although the IRDA realizes that this legal vacuum could cause some problems.

Furthermore, regulated insurers have expressed to the IRDA their dissatisfaction at needing to compete against non-regulated insurers that do not bear any regulatory expenses. The situation may change if regulated insurers place sufficient pressure on the regulator to act. Two possible scenarios may occur: either the development of specific legislation to cater for microinsurers or active closure of non-regulated insurers. The authors believe the best approach is the former. As a number of unregulated microinsurance schemes are innovative and should be further studied, it could limit practical knowledge concerning microinsurance i f they were to be closed down. The interests of the customers of these schemes must be protected. The development of specific legislation to support and supervise 5 currently unregulated microinsurers is to be preferred.

If the IRDA decides to create spe cific regulation to support currently unregulated micro – insurance schemes, e.g., in-house schemes run by MFIs, donors could support its development.

Many unregulated insurance schemes are run by well -intentioned staff and confer positive social benefits in the areas in which they act. Indeed much of the innovation in microinsurance has emerged from unregulated microinsurers. Unregulated microinsurers may hold significant funds on behalf of low-income clients. The risk of working with these unregulated organizations is that there is no legal framework that ensures that they meet minimum prudential standards and other professional insurance qualifications. In addition, they do not have a statutory ombudsman or other feasible means of enforcing consumer rights.

It would be useful to help establish a consumer protection mechanism for clients of unregulated microinsurers.

Should requests of support come from NGOs running in -house insurance schemes, donors should consider that these schemes are unregulated an d carefully weigh up the costs and benefits of supporting such schemes.

Two central regulations have shaped microinsurance in India. The first is a set of regulations published in 2002 entitled the ‘Obligations of Insurers to Rural Social Sectors’. This is essentially a quota system. It compels insurers to sell a percentage of their insurance policies to de facto low-income clients. It was imposed directly on those new insurers that entered Indian insurance after the market was liberalized. The old public insurance monopolies had no specified quotas, but had to ensure that the amount of business done with the specified sectors “not be less than what had been recorded by them for the accounting year ended 31st March, 2002.”

Compliance with this Act requires, among other conditions, over $22 million of capital. All insurance schemes that do not comply with the Act operate outside it and in a legal vacuum. This includes all community-based schemes, and in-house insurance schemes run by MFIs 4, NGOs, and trade unions, in-house hospital schemes, etc. At present, the IRDA has not taken action against these schemes as the Authority does not conside r them to be ‘insurance’ according to its definition–although the IRDA realizes that this legal vacuum could cause some problems.

Furthermore, regulated insurers have expressed to the IRDA their dissatisfaction at needing to compete against non-regulated insurers that do not bear any regulatory expenses. The situation may change if regulated insurers place sufficient pressure on the regulator to act. Two possible scenarios may occur: either the development of specific legislation to cater for microinsurers or active closure of non-regulated insurers. The authors believe the best approach is the former. As a number of unregulated microinsurance schemes are innovative and should be further studied, it could limit practical knowledge concerning microinsurance i f they were to be closed down. The interests of the customers of these schemes must be protected. The development of specific legislation to support and supervise 5 currently unregulated microinsurers is to be preferred.

In India, it is often assumed that a microinsurance policy is simply a low-premium insurance policy. This is not so. There are a number of other important factors. Low-income clients often:

• Live in remote rural areas, requiring a different distribution channel to urban insurance products;
• Are often illiterate and unfamiliar with the concept of insurance, requiring new approaches to both marketing and contracting;
• Tend to face more risks than wealthier people do because they cannot afford the same defences. So, for example, on average they are more prone to illness because they do not eat as well, work under hazardous conditions and do not have regular medical check -ups;
• Have little experience of dealing with formal financial institutions, with the exception of the National Bank of Agriculture and Rural Development (NABARD) Linkage Banking programme;
• Often have higher policyholder transaction costs. Thus, a middle -class, urban, policyholder can send a completed claims form to an insurance company with relative ease: a quick call to the insurance company, receipt of the claims form by post, and then return of the form by post. For a low-income policy holder, submitting a claims form may require an expensive trip lasting a day to the nearest insurance office (thereby losing a day of work), obtaining a form and paying a typist to type up the claim, sending in the claim, followed by a long trip back home. Aside from the real costs of doing this, the low -income policyholder may be uncomfortable with the process; clerks and the other officials are often haughty with such low-income clients and can make clients feel ill at ease.
• Designing microinsurance policies requires intensive work and is not simply a question of reducing the price of existing insurance policies.

The characteristics of microinsurance clients in this market are:

• They typically live-in households of five or more, sharing income and access to financial services. This has important implicatio ns for access to microinsurance. One member, who has access to the insurer, can purchase policies on behalf of another household member.
• Agricultural labour is the main source of income. The implications of this are that much of the income is irregular and seasonal. Note, not all income derives from agriculture as households tend to pursue multiple livelihood activities with off-farm income as a component. Premium collection must take into account the particular variances in the seasonal income of this market;
• The group’s poverty means that they present a higher than average risk profile for many types of insurance, e.g., lack of sanitation, lack of access to clean water, hazardous working conditions and poor nutrition imply higher rates of death and disease.
• To offset this, small rural communities often have better internal surveillance than large urban sprawls, and so there may be opportunities for controlling fraud.
• Low levels of literacy imply that marketing needs to be done without written media: for example, film, radio and word of mouth.
• The rural poor often live in areas with inadequate road and telecommunications infrastructure, which increases the costs of selling and servicing policies. The other crucial implication of this is a massive gap in the specific socio-economic data on this target group, even such basic data as mortality rates in large areas of rural India. This makes rate-making very difficult;

The insurable perils would be:

• Loss of life: Most household members contribute to household income, except those too old, young or infirm to work;
• Critical illness: This has the dual impact of loss of earnings/household labour as well as treatment expenses;
• illness that reduces the working days and also creates expenses though at a smaller level than critical illness;
• Old age, because there are few income options during old age. In addition, there is some evidence of emerging social trends in which the obligation of the young to take care of the old is weakening;
• Risk of lowered agricultural productivity or returns, e.g., through low levels of rainfall or natural catastrophes;
• Asset loss especially those assets used to generate income.
• Among specific occupational groups (e.g., construction workers) accident at the workplace and disability.