Title layout

Microinsurance in India

Group 7D005 Varun AgarwalD020 Sanket GuhagarkarD054 Himanshu SoodF045 Sachin Sanghvi1I would say that I did something that challenged the banking world. Conventional banks look for the rich; we look for the absolute poor. All people are entrepreneurs, but many dont have the opportunity to find out that -Mohammad Yunus (founder of Grameen Bank) Microfinance recognizes that poor people are remarkable reservoirs of energy and knowledge. And while the lack of financial services is not just a sign of poverty, today it is looked as an untapped opportunity to create markets, bring people in from the margins and give them the tools to help themselves." Kofi Annan (Sec. General of UN) The poor stay poor, not because they are lazy but because they have no access to capital. Laureate Milton FriedmanMicrofinance

Lets understand with this example

Mrs. Bharti, 48 years old

Unemployed husband 4 children No savings Good sewing skills

Mrs. Bharti decides to start a home based sewing business She goes to the bank and makes a demand for a loan at her bankMRS. Bhartis DEMAND IS REJECTED

Microfinance

Traditionally banks and Lending Institutions do not lendmoney to Low Income Individuals

The reasons being High Transaction cost of processing Lack collateral or guarantors Gap in the communication / lack of confidence in the Banks Doubt of the bank of the repayment capacity Lack of access to financial infrastructure and services in remote areas

Microfinance provides a solution for the above problem

Introduction to Microfinance

Microfinanceis the provision offinancial servicestolow-incomeclients orsolidarity lending groups including consumers and theself-employed, who traditionally lack access tobankingand related services.Microfinance is not just about giving micro credit to the poor, It covers a wide range of services like credit, savings, insurance, remittance and also non-financial services like training, counselling etc.

Salient features of Microfinance:Borrowers are from thelow incomegroupLoans are of small amount micro loansShort duration loansLoans are offered without collateralsHigh frequency of repaymentLoans are generally taken for income generation purposeMicrofinance in India - The Need in India

India is said to be the home of one third of the worlds poor; official estimates range from 26 to 50 percent of the more than one billion population. About 87 percent of the poorest households do not have access to credit.The demand for microcredit has been estimated at up to $30 billion; the supply is less than $2.2 billion combined by all involved in the sector. Microfinance has been present in India in one form or another since the 1970s and is now widely accepted as an effective poverty alleviation strategy The microfinance industry has achieved significant growth in part due to the participation of commercial banks, despite this growth, the poverty situation in India continues to be challenging.

Microfinance in India - The Need in India

The Indian Microfinance sector has been rated as one of thefastest growing sectors in the world There are 1,000 MFIs operating in India (as of March 2009) MFIs have reached 234 of the 331 poorest districts identified by the government At present lending to the economically active poor both rural and urban is pegged at around Rs 7000 crores in the Indian banks credit outstanding. As against this, according to even the most conservative estimates, the total demand for credit requirements for this part of Indian society is somewhere around Rs 2,00,000 crores.More than 350mn people in India live below the poverty live MFIs cater to over 55mn people in India, with 90% of them being women The total market potential is to have a reach of about 275-300mn people in India

A Need For Financial Inclusion

A great need for a 100% financial inclusion is being felt by the economists and practitioners The un-bankable population of India promises a huge market in itself

Poor people are trapped in poverty, because: Commercial banks will not lend them money as they are often neither in a position to offer collaterals nor are they considered creditworthy enough; while Local money-lenders, who are often their only source of credit, charge exorbitantly high interest rates, thereby depleting them of whatever little possible savings they can manage

Hence, there is a need for micro credit institutions offer small amountof loans to the people in the bottom of the pyramid

Channels of Micro finance

In India microfinance operates through two channels:1. SHG Bank Linkage Programme (SBLP)2. MicroFinanceInstitutions (MFIs)

Who requires Microfinance?In India, generallymicrofinance is sought by: Small and marginal farmers;Rural artisans; and Economically weaker sections Women constitute a vast majority of users of microcredit and micro savings facilitatesChallenges Faced By The Sector

Correcting Large Geographic AsymmetriesMicroinsuranceThe protection of low income households against specific perils in exchange for premium payments proportionate to the likelihood and cost of the risk involved.

Microinsurance is specifically designed for the protection of low -income people, with affordable insurance products to help them cope with and recover from common risks.

It is a market-based mechanism that promises to support sustainable livelihoods by empowering people to adapt and withstand stress.

Myth: Microinsurance policy is simply a low -premium insurance policy

Evolution of Microinsurance in IndiaNo regulation, no legal framework, no ombudsman for grievance redressal

13IRDA Regulation on MicrofinanceTie up between life insurer and non life insurer:A life insurer may offer general micro-insurance products provided:The life insurer has a tie up with a general insurer.Premium for such sold micro general insurance can be collected by the life micro insurer and transferred over to the tied up general insurer.In the event of any claim regarding the general micro insurance product, the life insurer shall forward it to the tied up general insurer and assist in disposal of the claim.

Similarly, a general insurer can offer life micro insurance products besides general micro insurance products with above mentioned conditions.IRDA Regulation on MicrofinanceDistribution of micro insurance products:This can be done by:an insurance agent, corporate agent, broker licensed under the Act,micro insurance agents provided :that a micro insurance agent shall not distribute any product other than a micro insurance product. IRDA Regulation on MicrofinanceAppointment of micro insurance agents:

By an insurer by entering into a deed of agreement specifying duties and responsibilities of both the parties.A micro insurance agent cannot work for more than :1 insurer carrying on life insurance business1 insurer carrying on general insurance business

IRDA Regulation on MicrofinanceFiling of micro insurance product design:Every insurer shall be subject to file and use procedure with respect to filing of micro insurance products with the authority.Every such micro insurance product cleared by the Authority for micro insurance purpose shall be captioned as Micro Insurance Product.

Underwriting:No insurer shall authorize any micro insurance agent or any other outsider to underwrite any insurance proposal for the purpose of granting insurance cover. IRDA Regulation on MicrofinanceRemuneration/Commission:Remuneration, including the commission, to the micro insurance agents by the insurer shall not exceed the following limits:for Life Insurance :Single Premium Policies 10% of the single premiumNon Single Premium Policies 20% of the premium for all the years of the premium paying term.for Non Life Insurance :15% of the premiumIRDA Regulation on MicrofinanceObligations to Rural and Social Sectors :All micro insurance policies may be reckoned for the purpose of fulfillment of social obligations by an insurer as per the lawWhere a micro insurance policy is issued in a rural area and falls under the definition of social sector, such policy can be reckoned for both under rural and social obligations separately.Handling of complaints/grievances :It is the responsibility of the insurer to handle complaints against a micro insurance agent.The insurer shall also send a quarterly report to the authority regarding the handling of complaints against the micro insurance agent.

IRDA Regulation on MicrofinanceType of coverMin amt to coverMax amt to coverTerm of cover MinTerm of cover MaxMin Age at entryMax Age at entryDwelling and contents, or livestock or tools or implements or other named assets / or crop insurance against all perilsRs 5000 per asset coverRs 30000 per asset cover1 year1 yearNANAHealth Insurance Contract (Ind)Rs 5000Rs 30000 1 year1 yearInsurer's DiscretionInsurer's DiscretionHealth Insurance Contract (family)Rs 10000Rs 300001 year1 yearInsurer's DiscretionInsurer's DiscretionPersonal Accident (per life/earning member of family)Rs 10000Rs 500001 year1 year570General Micro Insurance Products :IRDA Regulation on MicrofinanceType of coverMin amt to coverMax amt to coverTerm of cover MinTerm of cover MaxMin Age at entryMax Age at entryTerm Insurance with or without return of premiumRs 5000Rs 500005 year15 year1860Endowment InsuranceRs 5000Rs 30000 5 year15 year1860Health Insurance Contract (individual)Rs 5000Rs 300001 year7 yearInsurer's DiscretionInsurer's DiscretionHealth Insurance Contract (family)Rs 10000Rs 300001 year7 yearInsurer's DiscretionInsurer's DiscretionAccident benefit as riderRs 10000Rs 500005 year15 year1860Life Micro Insurance Products :Important factors which differentiate Microinsurance with other insurance policiesLive in remote rural areas requiring a different distribution channel to urban insurance productMost vocations related agriculture , thus income generation is seasonal and irregularAre often illiterate and unfamiliar with the concept of insurance, requiring new approaches to both marketing and contractingFace more Risks compared to wealthy people because they can not afford the same defensesHave little experience in dealing with financial institutionsNot enough reliable actuarial data available for effective product designOften have high transaction cost as compared to the benefit sought

Distribution ChannelsPartner-Agent ModelInsurers utilize MFIs delivery mechanism to provide sales and basic services to clientsThere is no risk and limited administrative burden for MFIs

Community-Based ModelThe policyholders own and manage the insurance program, and negotiate with external health care providersMicro Agent Model Bypasses the Agents (MFIs,NGOs)Appoints representatives from among the SHG as Micro insurance agents

Full-Service ModelThe provider is responsible for all aspects of product manufacturing, sales, servicing, and claims assessment The insurers are responsible for all insurance-related costs and losses and they retain all profits

In the partneragent model, insurers and MFIs team up to exploit each others comparative advantages. Insurers utilize MFIs efficient delivery mechanism to provide sales and basic services to the clients. MFIs benefit from being able to provide insurance to their clients with no risk and limited administrative burden. FINCA Uganda has entered such a partnership with American International Group (AIG) to provide its clients insurance. In the community-based insurance model, the policyholders are themselves the owners and managers of the insurance program. This model is used mainly in health insurance. The members themselves design, develop, service, and sell the product, and they negotiate with external health care providers.The full-service insurance model is similar to the model followed by formal sector insurers, where the provider is singly responsible for all aspects of product manufacturing, sales, servicing, and claims assessment. The insurers are wholly responsible for all insurance-related costs and losses, but they also retain all profits. Under the provider model, the service provider and the insurer are the same. Like the community-based model, this model is also used mainly in health services, where hospitals or doctors offer policies to individuals or groups. Determining which model is most appropriate for a given institutions situation depends on:Availability of partners.Availability of resources. The more responsibilities an institution assumes, the greater the resources required in terms of time, money, and training to develop the necessary capabilities. Becoming a full-service insurer typically requires approval of the commissioner of insurance. In most countries, this also requires significant initial capital requirements before an insurer can begin offering policies.Organizational capabilities. MFIs and other organizations that have an established client base with whom they regularly conduct financial transactions already possess many of the capabilities required to perform product sales and servicing activities; however, many may be poorly equipped to perform the product manufacturing function.Degree of risk. Institutions preferring not to burden themselves with the risks of offering insurance are more likely to prefer the partnership or group policyholder models.Income potential. Institutions interested in maximizing the financial gains from their insurance products are more likely to prefer the full-service insurer approach.

23Partner Agent ModelAgents act as intermediaries between an insurance company and its marketAgents can beMicrofinance InstitutionNGOCommercial Enterprises that cater to large number of Low-income people e.g. Fertilizer Company

The MFI acts as the agent, marketing and selling the product to its existing clientele through the distribution network it has already established for its other financial services.

The insurance provider acts as the partner, providing the actuarial, financial, and claims-processing expertise, as well as the capital required for initial investments and reserves as required by law.

Partner-Agent ModelProduct Manufacturing Product SalesProduct Servicing Service Provider PartnerAgentPolicy holderInsurance CompanyMFI, NGO, SHGPartner Agent ModelMicro-agent modelThe central building blocks of the model are Rural Community Insurance Groups (CRIGs) supervised by rural organizations such as churches, NGOs or MFIsCRIGs are a partnership firm formed of five women from a self -help group (SHG). The leader of the CRIG is licensed as an agent.A typical leader(micro-agent) is Educated to the 12th standard or above, have a good track record of past social -sector performance and integrity, systematic and organizedCentralized training given for CRIGS in same geographical areaCRIG as a whole is registered as a body under the Andhra Pradesh Societies Act (where the model is currently being used)CRIGs are responsible for promotion, sales and collection of insurance proceeds and maintaining records.Micro-agent modelProsCreates an insurance distribution infrastructure in low -income neighbourhoodsCreates a new profession, that of micro -agent, with new livelihood opportunities in his/her vicinitySustainable for long term, since unlike NGOs, MFIs it is not dependent on the goodwill and public recognition for aids flowConsRelatively high training costTransaction cost of sales increases once the agent has sold to all people he knows and has to sell to strangersWhen a claim arises the MFI or NGO investigates the claim, pays the benefit immediately, and then claims it back from the insurer. This is not possible in this modelTYPES OR RISK FACED AND EXAMPLES OF CURRENT OPERATIONAL POLICIESCharacteristics of RiskExamples of Policies (1/2)

Examples of Policies (2/2)

Overview of Current ScenarioWith a few schemes launched by non government organizations (NGOs), micro finance institutions (MFIs), trade unions, hospitals and cooperatives to create an insurance fund against a specific perilThe micro-insurance landscape changed with the first set of regulations published in 2002 entitled, the Obligations of Insurers to Rural Social Sectors while IRDA came up with the micro-insurance regulation in 2005

Source:KPMG 2013 Penetration of Insurance

Source: IRDA Just meet target approach

Challenges for various stakeholders

FUTURE OUTLOOKPotential Solutions to further increasePenetration and scaling up of Micro-insurance Business Regulatory Structure and Policies