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Micro insurance in India

Micro Insurance In IndiaMicro Insurance In India

A study funded by International Labour Organisation

By

Girija Srinivasan Ramesh S Arunachalam

October 2002

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Microinsurance in India

Currency unit – Indian rupeeOne U.S.$ = Rupees. 47. 10 (August 2001)

Abbreviations

AMTC Association men’s thrift co operatives

ASA Association of Social Activists

ATC Association of thrift co operatives

AWTC Association of Women’s Thrift Co operatives

CDF Co operative Development Foundation

DRAS Death Relief Assistance Scheme

ICNW Indian Co operative Net work of Women

IRDA Insurance Regulatory and Development Authority of India

LEAD League for Education and Development

LIC Life Insurance Corporation of India

MFI Micro Finance Institution

MSE Micro Small enterprises

NABARD National Bank for Agriculture and Rural Development

NGO Non Governmental Organisation

NIC National Insurance Company

RMK Rashtriya Mahila Kosh

SHG Self Help Group

SIDBI Small Industries Bank of India

SWSS Social Welfare Security Scheme

TC Thrift Co operative

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1. Introduction and background .............................................................................................................................. 5

2.0 Insurance in India ............................................................................................................................................... 6

2.1.Regulation of Insurance Industry ______________________________________________________ 7

2.1.1.Insurance Regulation and Development Authority( IRDA) ........................................................................ 7

2.1.2.Registration with IRDA ................................................................................................................................... 8

2.1.3.Prudential norms of IRDA .............................................................................................................................. 8

2.1.4.Norms for insurance in the rural social and disadvantaged sector ............................................................. 8

2.1.5.Norms for certification and appointment of agents ...................................................................................... 9

2.1.6. Opening up of the sector and what it means for microinsurance ............................................................... 9

3.0 Microinsurance scheme of Microfinance Institutions ____________________________________ 10

3.1.Details of the insurance schemes _____________________________________________________ 10

3.1.1.Co- operative Development Foundation ..................................................................................................... 10

3.1.3. League For Education And Development .................................................................................................. 17

3.1.4. Indian Co operative Network for Women .................................................................................................. 20

3.2. Analysis of the insurance schemes of the MFIs _________________________________________ 28

3.2.1.Entry strategies ............................................................................................................................................. 28

3.2.3. Types of coverage .......................................................................................................................................... 28

3.2.4.Voluntary/ compulsory ................................................................................................................................. 29

3.2.6. Marketing of insurance and building client awareness ............................................................................. 29

3.2.7. Staff involvement ........................................................................................................................................... 30

3.2.8. Procedural ease ............................................................................................................................................ 31

3.2.9.Protection/ prevention against moral hazard and adverse selection ....................................................... 31

3.2.10. Co variance of risks ..................................................................................................................................... 34

3.2.11. Risk mitigation ............................................................................................................................................ 34

3.2.12.Trade off between various services ............................................................................................................ 35

3.2.13.MIS and review mechanism ........................................................................................................................ 35

3.2.14.Outreach ....................................................................................................................................................... 35

3.2.15. Acceptance among the clients .................................................................................................................... 36

3.2.16. Financial performance ................................................................................................................................ 38

3.2.17 Lessons from partnering with formal insurance companies .................................................................... 44

3.2.18. Regulation issues - Legal status ................................................................................................................. 45

4.0. Risks faced by the MSEs ___________________________________________________________ 47

4.1. Demographics and brief background of the MSE households .................................................................... 47

4.2.Profile of Enterprises ....................................................................................................................................... 47

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4.3. Access to financial services .............................................................................................................................. 47

4.3.Life cycle events, setbacks and emergencies and coping mechanism ........................................................... 48

4.4. Life cycle events ................................................................................................................................................ 48

4.5. Major emergencies/ setbacks .......................................................................................................................... 48

4.6. Risk profile of the MSEs ___________________________________________________________ 49

4.7. Summary of observations on risks faced by MSEs _______________________________________ 50

4.8. Insurance Aspects - Present and intended insurance coverage of the households ..................................... 54

5.0. Conclusions ...................................................................................................................................................... 55

Annexure 1 ............................................................................................................................................................... 60

JANASHREE BIMA YOJNA GUIDELINES ...................................................................................................... 60

Annexure - 2 ............................................................................................................................................................ 62

List of MFIs offering insurance to the clients ....................................................................................................... 62

___________________________________________________________________________________ 62

Annexure 3 .............................................................................................................................................................. 65

Case studies of Micro insurance programmes of MFIs ....................................................................................... 65

THE ACTIVISTS FOR SOCIAL ALTERNATIVES (ASA) .............................................................................. 84

League For Education And Development ......................................................................................................... 109

INDIAN COOPERATIVE NETWORK FOR WOMEN (ICNW) ................................................................... 130

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Microinsurance in India

1. Introduction and background

Micro and small entrepreneurs (MSEs) have a variety of financial needs. While some of these needs can be predicted with a great degree of certainty, there are others that are uncertain. Savings and credit products are better suited for the events that will occur with certainty such as old age, marriage, education, purchase of income generating asset etc. The uncertain events such as sickness, accident, theft, fire, flood, etc which make the poor incur irregular or unplanned for costs, are better met by insurance especially where the amount required to mitigate or cope with the event is high.

The micro and small entrepreneurs, whether in urban or rural area, are time and again choked by uncertain events, but they have not taken recourse to buying insurance from formal insurers for a variety of reasons. The reasons for this include lack of knowledge, the inaccessibility of the existing insurance schemes, inflexibility and uncertainty about benefits. This has led some of the Microfinance Institutions( MFIs) to develop in house microinsurance programmes and some others to act as facilitators between the formal insurance companies and their clients.

The present study focuses on the micro insurance programmes of MFIs. Some of the micro and small entrepreneurs (predominantly clients of MFIs) have also been surveyed to understand and estimate the risks they face, identify their risk cover needs and propose actions to be taken by MFIs to address these needs.

The objectives of this study are three fold.

Map the micro insurance landscape and establish knowledge on a regulatory framework for the insurance industry in India.

Identify the details of MFI activities concerning the (practical) operations for the provision of insurance services and also isolate difficulties they have faced/are currently facing. This objective is the main focus in this field study. This exercise focuses on MFIs who have worked with insurance for at least a year.

Examine the demand for insurance from MSEs1 (Micro/Small Enterprises).

In conducting this study, a wide variety of research techniques have been used:

1. individual (personal) interviews and focus group discussions with about 120 micro-finance clients,

2. detailed discussions with 4 MFIs2 offering insurance as a serious product line.3. interactions with various stakeholders including insurance companies, government

including IRDA, NABARD, SIDBI, etc, and

1 In India, micro enterprises are those with investments upto Rs. 25,000( $525), tiny enterprises are those with investments upto Rs. 2,00,000( $4200) and enterprises with more than Rs. 200,000($4200) investments are small scale industries.2 In all seven micro insurers were approached. Four were selected on the basis of the age of the program, the model adopted by MFI for credit delivery, combination of in house and agency model and most importantly, the willingness of the MFI to share all the information including the financial details.

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4. analysis of secondary data from available secondary information.

2.0 Insurance in India

In India till recently the insurance industry was state owned. The life insurance business was managed exclusively by Life Insurance Corporation of India (LIC) and the non life insurance products were managed by General Insurance Company and its four subsidiaries. With the recent opening of insurance sector for private companies, there are 13 entrants/prospective entrants in life insurance business and 11 new/prospective entrants in the non-life sector.

LIC is a giant with 2046 branches3. Life Insurance Corporation has nearly 62 products covering various needs such as old age pension, child education, marriage, life cover etc., Though almost all the 62 products of LIC are suitable for SMEs, it is seen that the poorer families are not covered by insurance. LIC also implements subsidised group insurance schemes aimed at socially vulnerable classes4 which cover many of the poor MSEs but the coverage is very limited. New entrants5 to life insurance would have to compete against LIC’s large distribution and marketing network with all India presence.

General Insurance Corporation and its public sector associates had the monopoly of non-life insurance till the sector opened up recently. The general insurance companies have 150 products on offer. Only 30 of them contribute about 80% of premium income. General insurance has a low presence in rural India where majority of the population lives. Only 5.2% of premia is generated from rural areas6. Despite a wide product range offered in the rural areas (from insurance of large commercial plantations to individual cattle), fewer policies have been written compared to the potential. Insistence of banks on borrowers taking insurance cover on assets bought out of loans has accounted for a significant part of rural non-life insurance business.

The Indian Insurance market is still not a mature one. A fatalistic attitude, stoic acceptance of risks and a lack of faith in risk cover are some of the distinct cultural features of the people. The low levels of literacy and high levels of superstitious beliefs create additional hazards in marketing of insurance products. In the midst of such a culture, marketing insurance products is a challenge. Premia paid for insurance are viewed more as an investment and wherever possible returns on premia are sought. In fact life insurance has been driven by the tax rebates on income tax offered by the government to the policy holders on the premia payments and to a lesser extent by the insistence of lenders of term loans that the borrowers must assign life insurance policies as collateral.

3 The company has more than 120,000 employees and 600,000 active agents. During 1999- 2000, LIC issued 16 million new policies, with an average value of Rs 50000 (US $ 1100). LIC underwrites currently 50 % of its policies from rural areas. 4 The corporation is implementing a social security insurance programme since 1980s. In 2000 a new scheme has been designed by Government of India and LIC under the social sector. The scheme covers 23 approved occupations including micro enterprises of self employed. The scheme is not popular and the coverage is very poor - only 204,000 persons have been covered in the last one year. (The scheme details are given in annexure 1)5 The new entrants mostly come in with partnerships (typically between an Indian entity and foreign insurer), to leverage on local knowledge and technical expertise, as also to share the stiff equity contributions required by IRDA. The promoters come from a wide range of businesses - banks, industrial houses, financial institutions, newspaper group and corporate hospital group.6 This does not include crop insurance coverage which is a different product, sold differently and not on a commercial basis since the premium charged is not on acturial basis but is determined by the governement and offered as subsidized product.

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In the case of general insurance, the legal requirements and banking requirements have compelled most of the policy holders into taking risk cover. Voluntary non-life insurance among individuals and small enterprise is rare. Penetration in the rural areas7 especially to the poor is low, due to lack of awareness on the part of the people and absence of concerted marketing of customer friendly products suited to rural economic activities. Some specific insurance products (poultry insurance) for rural areas are uneconomic from the insurer’s point of view. Adverse selection, moral hazard and at times fraud affect the general insurers in rural business on account of their lack of presence in the rural areas.

The procedural hurdles and exacting legal requirements have made it difficult for policy holders to get their claims settled in time. The somewhat poor claim settlement record has exacerbated the negative sentiment on insurance coverage. On the other extreme, due to the vast geographical spread, the monitoring of the policies and investigation of claims has been difficult. Over the last five years changes in the market are increasingly evident. The demand for a wide range of products and customization of policies has been increasing. Increasing sophistication of products that are newly introduced point to the changes in the profile of customers and their awareness of role of insurance in their lives. The opening up of the sector has provided a fillip to product innovations and sustained dissemination campaigns to educate the customer about the need for insurance.

2.1.Regulation of Insurance Industry2.1.1.Insurance Regulation and Development Authority( IRDA)

The opening up of the insurance sector for private investments has made it necessary for the government to move away from control of the sector8 into regulation. IRDA is set up as an authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of insurance industry. The aspects of insurance industry that IRDA would seek to regulate are

• Entry of new players through entry norms and licensing• Prudential norms on capital, investments and reinsurance• Stipulations on minimum business in rural and socially disadvantaged sections• Norms on investment of insurance funds, both from social sector obligations and

prudential requirements points of view• Reinsurance and spreading of risks• Regulating entry of foreign insurers• Accounting and audit of insurance companies to ensure policy holders protection• Norms for agents in terms of education, professional competence

7 Penetration in rural areas has significance since 70 per cent of the Indian population lives in rural areas.8 The Indian Insurance Companies Act formulated in 1938 was amended in 1950 resulting in far reaching changes in the insurance sector. These included a statutory requirement of equity capital for companies carrying on life insurance business, ceiling on share holdings in such companies, stricter control on investments, submission of periodical returns relating to investments and such other information to the controller. The controller could also call for appointment of administrators and put a ceiling on expenses of management and agency commission for mismanaged companies.

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Some of the important entry regulations relate to foreign entities. They can hold a maximum of 26 % of equity. The remaining equity should be held by Indian shareholders. Even the Indian promoters should divest their equity over a ten year period and should hold not more than 26% at the end of the period. The same insurance company cannot take up both life and non-life business. At 26% equity, while a key stake is available, controlling interest vests with some other party. Foreign entities with insurance expertise may not freely enter and offer their products and experience to the local ventures when the equity stake is so low. Apart from IRDA, Reserve Bank of India has also stipulated norms for banks wanting to enter insurance business. Banks desirous of promoting insurance companies should have a positive networth of Rs 5 billion and meet capital adequacy norms. The level of NPA should be reasonable. The norms are to ensure that first class banks only enter the business.

IRDA has the powers of making regulations and imposing fines on those who violate its norms. It can also cancel licenses issued for repeated violations. Overall, it is expected that IRDA’s interventions should prove useful in regulating the insurance industry.

2.1.2.Registration with IRDA

All the existing insurance providers as well as new insurers should register with IRDA.To obtain the certificate of Registration from IRDA, among other provisions the insurers should have• Evidence of having rupees ten billion( $ 21 million) paid up share capital.• Original certificate of registration of the company.• Fees of rupees fifty thousand( $ 1050) for each class of business. The high initial capital norm is to ensure that promoters not only bring in high networth, but also demonstrate their willingness to stay invested in the business. The breakeven period of insurance is seven years or more depending on the business model and the products; hence a high initial capital is necessary to provide the necessary financial depth and confidence to clients about ability of insurer to settle claims.

2.1.3.Prudential norms of IRDA

• The insurers, both Life and Non-life, should not invest more than 15% of the total capital employed in equity shares and debentures.

• Loans are not to form more than 10% of the estimated annual accretion of funds.• Accounting system of insurance companies to ensure availability of separate statements

for any activity that yields 10 per cent or more revenue.• To ensure that there is never a lack of audit in the insurance company, there will be two

auditors, one with a tenure of four years and the second with a tenure of five-years.

The investment norms seek to ensure that risky investments with an eye on high returns are kept at low levels, so that insurance funds do not fall prey to speculative forces. Audit norms would secure good governance practices.

2.1.4.Norms for insurance in the rural9 social10 and disadvantaged sector

Insurance in rural India has significance since nearly 70% of the population lives in rural areas. The non life insurance companies should increase their rural coverage, reaching a level of 5 percent of total policies written, over a three year period. Similarly, life insurance companies

9 Rural area as per the IRDA norm is a place with a total population of not more than 5,000, with not more than 400 per sq.km of which at least 75 percent of the male population is engaged in agriculture.10 Social sector includes unorganised sector, informal sector, economically vulnerable both in rural and urban areas.

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should increase their rural business to reach a level of 15 percent of policies written over a five year period.

The stipulation seeks to enhance the coverage of rural population which presently has a low access to insurance. The emphasis on number of policies alone would not provide meaningful coverage in the rural areas.. Meaningful coverage could be ensured only by stipulating a combination of minimum percentage of number of policies and amounts underwritten.

With their existing marketing and distribution chains even the LIC and GIC have not been very successful in this market so far. The transaction costs of marketing and servicing insurance products in rural and social sector could be high on account of low sums assured per policy. The NGOs and Voluntary agencies have a strong committed customer base in the rural area. They could group their clients for taking out insurance cover and thus help in lowering transaction costs, as is the case in microfinance. They would be able to leverage on their network and distribute insurance products for the benefit of their constituents and financial gains for themselves.

2.1.5.Norms for certification and appointment of agents

IRDA has stipulated that persons should pass an examination to be certified fit for acting as insurance agents. The insurance companies can appoint as agents only those who have been duly certified as such. There is a provision for corporate agency, under which institutions pursuing a commercial objective can take up insurance marketing on behalf of insurance companies. However NGOs who are not usually corporates cannot act as agents as per the present norms. The same criteria will apply to MFIs which are not corporate entities. This is a setback to the microinsurance sector as marketing insurance products to rural people is not an easy task. NGOs who work with rural people already, would be in a much better position offer products best suited to rural clients. They have the credibility and skills of communication in the local idiom which are relevant in marketing risk cover. The denial of agency business to NGOs/MFIs has led to alternatives such as NGOs/MFIs acting as facilitators and advisors to insurance companies, without due remuneration for the work.

2.1.6. Opening up of the sector and what it means for microinsurance

Competition is the driving force in any economy. Overall the Indian insurance industry is poised to witness the following trends:1) Increase in the bargaining power of buyers2) Decrease in the bargaining power of suppliers3) Greater threat of new entrants4) Medium-strong possibilities for substitute products5) Intense rivalry among the various industry players.6) Introduction of newer products 7) Greater innovation in delivery mechanisms that cater to segments such as rural and

urban poor and MSEs.

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3.0 Microinsurance scheme of Microfinance Institutions

One of the objectives of the study is to analyse the microinsurance programmes operated by the micro finance institutions. A list of such programmes is given in annexure 2 . Four institutions were selected keeping in mind the coverage of members, age of the programme, the type of insurance, the lending methodology as well as the willingness of the organization to share information, especially the financial data. Thus Association of Social Activists, Co - operative Development Foundation, League for Education And Development and Indian Co- operative Network for Women were selected for the study11.

3.1.Details of the insurance schemes

3.1.1.Co- operative Development Foundation

Co operative Development Foundation promotes thrift co operatives. The primary organisation is the thrift co operative12(TC) functioning in the village level which consists of 250 to 750 members. The thrift co operatives are in turn formed into Association of thrift co operatives (ATC)13. Each ATC has 10 to 12 cooperatives as members and has a coverage of 3000 to 5000 individuals14. The thrift cooperatives are providing three types of financial services to the members – savings, credit and death insurance. Detailed study of the death insurance scheme was carried out in two of the oldest men ATCs15 implementing the scheme since the scheme has not stabilised in women ATCs16.

The Death Relief Assistance Scheme( DRAS) – (Life insurance)

The death relief assistance scheme has been conceived primarily to protect the loan portfolio of the co-operatives in the event of death of a member. The scheme is implemented and managed by the ATCs and the TCs are involved in each stage from recommending membership till claim settlement.

11 The microinsurance programmes have been studied by visit to the organisation, interaction with the staff, management and clients of the programme, focus group discussion with past and current clients on their likes and dislikes of the programme, scrutiny of forms and data relating to the scheme and the financial accounts.12 The thrift co – operative mobilizes the savings of its members andf ofoers credit facilities to its members.13 The main function of the Associations of Thrift Co operatives (ATCs) is to enable long term sustainability of the thrift co operatives. ATCs enable inter lending among the societies. The thrift cooperatives do not borrow/ accept grants from any external source for lending to their members. The other important functions carried out by the association are policy setting, training and extension, internal audit, conflict resolution, standards setting and management of the external legal and policy environment. 14 As on December 2000, there were 158 men thrift co operatives and 199 women thrift co operatives. These were in turn formed into 21 men ATCs and 27 women ATCs.15 The AMTCs with the largest membership were chosen to explore answers to some of the study questions such as long term sustainability, profitability and the lessons from the past experience. Thus Makdumpuram (the oldest) and Panthini (biggest in terms of membership) AMTCS were chosen for the study.16 The women thrift cooperatives have been implementing a loan insurance programme called Abhaya Nidhi since 1992. However, the scheme was not implemented with the full knowledge of the members. Since DRAS has been introduced in January 2000 in WTCs, Abhaya Nidhi has been discontinued. The deposit under Abhaya Nidhi has been transferred to the DRAS scheme. The deposit in the individual account is far less than the prescribed deposit amount under DRAS. The members have been advised to deposit the balance amount under DRAS scheme. However, the acceptance of DRAS among the women is low and this is reflected in the negative growth in the membership of the DRAS in WTCs. While the DRAS membership registered 43 percent growth in men ATCs it declined by 8 percent in women ATCs.

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Essential details Aspect DetailsInsurable event Natural as well as accidental death of a

member. Compulsory/ voluntary Compulsory for all members availing loans.

Voluntary for members who are only saving with thrift co – operatives. It is compulsory for persons taking loans since the foremost purpose of the scheme is to protect the loan portfolio of the co operative if a member dies.

Eligibility Any member of a TC who has completed 18 years of age but not 55 years at the time of admission to the scheme can become a member. Increasing the age limit can bring in older clients into the scheme and hence the age restriction. The applicant should not be suffering from any life endangering disease and should be healthy17

Sum assured Age of the member

18 to 35 36 to 50 51 to 55

Deposit to be made(Rs) is upto 500 ( $ 10)667 ( $14)1000($ 21)

Coverage( number of times deposit)20 times 15 times10 times

The higher the age more is the amount to be paid . The maximum cover is upto Rs. 10,000. The loan eleigibility is linked to the amount deposited in the DRAS account by the borrower. The amount of loan is to be up to 20 times/15 times/ 10 times, (depending on the age of the borrower), the deposit in the DRAS account18..

Claims limit Maximum of Rs. 10,000( $ 210). In the event of death of a member any loan outstanding is first adjusted and the balance is paid to the nominee.

Premium collection method The members deposit the amount of DRAS with the TC and presently, many of the TCs deduct the deposit amount from the loan amount and pay the client the net loan amount

Term Life long unless death occurs. If any member has an outstanding loan he has to continue in the scheme. However, a member can leave

17 No medical certificate needs to be produced to this effect. Since the members live in close proximity to each other, the medical history of the member is known to the villagers and the TC and this knowledge aids screening of members18 Thus if a member in the age group of 18 to 35 has made Rs. 200 as a deposit in the scheme, he is eligible for a loan of Rs. 4000. Similarly if a member in the age group of 51 to 55 has deposited Rs. 500 under the scheme, he is eligible for a loan of Rs. 5000.

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the scheme after three years in case there is no loan outstanding in his name. The three year term is fixed keeping in view the loan term which can be upto three years.

Exclusions The ATC is not liable for payment of relief/ claim amount if

• The death occurs within a month of admitting the member under the scheme.

• The death is on account of war like operations, communal disturbances, riots, natural disasters like fire, earthquake, floods, cyclone etc., and other disasters that may occur in the work place or in neighbourhood which result in massacre(more than ten deaths).

• The ATC is not satisfied that the member made all the correct declarations.

• The member has voluntarily taken a risk which has resulted in the death.

• If the member has been defaulting in depositing the compulsory thrift amount for consecutive three months and if s/he has been defaulting in loan repayments for three months.

Claims validation On the death of the member a claim has to be lodged by the nominee in a specified format enclosing a death certificate and the membership identity card. The endorsement of the concerned TC is made before forwarding the application to the ATC. ATC verifies the claim by visiting the TC and the nominee’s family

3.1.2. The Activists for Social Alternatives (ASA)ASA is a new generation microfinance institution. In 1986, ASA began operations as a facilitating agency for empowering the poorest of poor women by focusing on natural resource issues. In 1995, ASA started adapting the essentials of Grameen principles and initiated its microfinance program "Grama Vidiyal" (meaning Dawn of the Rural Poor). There are over 12,000 members in 9 branches as of February, 2001. ASA aims to enable the poor to increase their living standards by 1) saving money, 2) earning money by investing, and 3) enhancing their ability to absorb shocks and recuperate. While credit and savings help address the first two aims, the insurance product addresses the third aim.

Microinsurance productsASA currently offers three insurance products. These are enumerated in detail in this section.

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Product Nature and Brief DescriptionSocial welfare security scheme ( in house programme)

This is a life insurance product with components of Natural and Accidental death.

On the natural death of the member, the family is paid Rs. 5,000($105) while for accidental death, Rs.25, 000( $ 525) is paid.

ASA plans to cover all members by 2002.

Livestock insurance( with formal insurance company)

Asset insurance product which is compulsory with the loan Covers death (natural and accident) of animal and helps pay back the

loan outstanding (if any). Policy valid for one year

Emergency fund (in house)

Informal scheme that is operational at ASA An emergency fund of Rs.500($10.5) was initially available to all

members. This is now raised to Rs.1000( $ 21). Since 1995, 1% of the loan amount goes towards this fund. Money from this fund is used for repaying outstanding loans of

members who are unable to make their payments due to an accident, or for purchase of cattle insurance.

It is also given for funeral expenses.

Social Welfare Security Scheme

The scheme was introduced three years ago and has undergone a number of changes. The details of the scheme as is operational now are given below

ASA Product # 1 – Social Welfare Security Scheme

Aspect DetailsInsurable event • Natural Death

• Accidental Death, which includes death resulting from accident caused by outward, violent and visible means. It includes death due to snake-bite, drowning, food poisoning, fall from a height, lightning etc.

Compulsory/ voluntary • Voluntary and members take up insurance products based on their freewill.

• ASA does not compel any one to take up insurance

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Eligibility • Only Grama Vidiyal members19 between 18-50 Years of age.

• Sometimes, clients may not want loans but that is rare.

• However, they have to save before accessing insurance.

• At the time of joining, the client has to show proof of age either through a voter ID or ration card or certificate from Village Officer.

• These are further cross-checked by the group and center leaders and also randomly checked by field workers and branch managers20.

• The cost of this exercise is minimal because all the stakeholders mentioned are in very close proximity to the physical area of operation

•Sum assured • Natural Death – Rs.5000($105) (Gram

Vidiyal Micro-Finance Program). When members withdraw, they get back the deposit of Rs 500($10.5) plus interest

• Accident Death – Rs. 25000($525) (From United India Insurance)

Claims limit • Rs 5000 ($105) for natural death • Rs 25000 ($525) for Accidental Death

Premium collection method • Rs. 500($10.5) per member towards (capital fund) for life-term insurance or Rs.60($ 1.2) per member as policy premium amount (for one year).

• Members have options to enroll either for life-term insurance or for yearly life insurance.

• For life-term insurance cover, a member has to pay Rs.500 ($10.5), which can be paid in one installment or five monthly installments of Rs 100($2) each. If the premium is not paid continuously for 3 months, the member gets disqualified.

• In such cases, the previous premiums will not be refunded. In case of yearly

19 To become a Gram Vidyal member, there are set procedures including taking several tests as is common with the Grameen System. These include: Compulsory Group Training, Group Recognition Test, Mandatory Savings, access to loans and finally Insurance. Sometimes, clients may not want loans but that is rare.

20 The cost of this exercise is minimal because all the stakeholders mentioned are in very close proximity to the physical area of operation

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insurance, a member pays Rs.60 ($1.2) once a year and will be insured for that year only.

Term • Life-term insurance is for whole of the life, until death

• Yearly life insurance implies coverage for only that year

• However, insurance cover is available only as long as client continues as Gram Vidiyal member. Neither life-term insurance nor life-insurance cover will be available to clients who have ceased to be Gram Vidiyal members

Exclusions ASA is not liable for payment of claim amount if

• Death is a case of suicide• If the insured had not been performing

all aspects of Gram Vidiyal membership such as making the stipulated savings deposits, repaying loans taken, attending group meetings. and the like. Judgment on whether or not

• Death results due to breach of any law with criminal intent.

• compensation higher than the insured amount of Rs 25,000($525) is receivable by virtue of any other Law/Statute.

Claims validation • Done by the group and center leaders along with field workers and branch managers of ASA and United India Company personnel (including their agent)

• Informal checks by center members

ASA Product # 2 - Animal Husbandry Insurance

The Animal Husbandry Scheme, which was initiated in 1998, at ASA has two objectives:

a safeguard the loans given for purchase of domestic animals b protect the client from likely loss that may arise due to the death of animal

Aspect DetailsInsurable event Death of cattle.

Natural death as well as accidental death due to accidents including fire, lightning, flood and cyclone or disease contracted or occurred during the currency of the policy period are covered.

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Permanent Total Disability due to total incapacity to conceive or yield milk by paying extra premium (which varies on a case to case basis).

Compulsory/ voluntary Compulsory for all members availing loans under Gram Vidiyal Loan Scheme for purchase of livestock.

Eligibility Cattle purchased with loans availed from ASA.. Cattle defined - All indigenous/cross breed/exotic animals can be insured after duly fixing the value and along with certification of the animal’s health by a qualified Veterinary Doctor.

Sum Insured The Loan Amount (which is the purchase amount of cattle).

Claims limit The loan amount upto a maximum of limit of Rs 20,000 or deemed by the company from time to time for each specific area. This is specified in the policy

Premium collection method The client pays 5% of the loan amount for insurance cover - 4.2% of the insured amount (the same as the loan amount) is charged as insurance fee21 and. 0.8% as veterinary doctor’s fee. ASA does not get any money from the insurance company for acting as a facilitator..

Term Coverage for the loan period, of one year. This cover is made by United India Insurance, a formal sector insurance company,

Exclusions The policy does not cover the following:

Malicious or willful misconduct or neglect22, over loading, unskilled treatment or use of the animal for the purpose other than stated in the policy without the consent of the company in writing, accidents occurred or diseases contracted prior to commencement of risk, intentional slaughter, transport by air/sea and road beyond 80 kms, theft /clandestine sale, missing of insured animal, partial disablement of any type, war and nuclear perils,death of animals due to disease within 15 days from the inception of policy,death due to several diseases that are generic to different areas, death due to negligence of animal by client,

21 These are the rates fixed by the insurance company nation wide for the livestock insurance programme.22 There is cross checking by the group and center members and leaders and also random checking by field workers and branch managers. The cost of this exercise is minimal because all the stakeholders mentioned are in very close proximity to the physical area of operation.

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Death caused by poisoning, ill-treatment.

Claims Processing and Payouts For the death claim, a medical certificate must also be enclosed. An identification mark (earring), which is made on the animal’s ear, must be preserved carefully. When the animal dies, the ear should be cutoff along with the identification mark and preserved as proof. The death should be certified by the grass roots leader who is designed to do this work by the insurer and ASA.

The cheque for the claim amount is paid by the insurance company in the name of client/nominee. The cheque comes to ASA. The client repays any loan outstanding against the livestock loan and then collects the cheque. which then gives it to the client. Any loan outstanding is first paid by the client, who then collects the cheque

3.1.3. League For Education And Development

The League for Education and Development (LEAD) is involved in social as well as financial intermediation. LEAD has created various grass root level institutions through which the programmes of the organisation including microfinance are implemented. These institutions include the self help groups(SHG) at the village level, cluster level federations at the Panchayat level and Area level Trust at the block level. The core programme of these institutions is savings and credit i.e. microfinance As on 31 March, 2001, there were 1874 SHGs, 40 cluster level federations and 5 area level trusts. The structure and other details of these institutions are given in the detailed case studies in annexure 3.

Micro Finance ProgrammeSHGs mobilises the savings of the members and lend among themselves. They can also access loans from LEAD. LEAD at present borrows from Rashtriya Mahils Kosh, Small Indutries Development Bank of India and Rabo bank for lending to the members. Over a period of time the federations are expected to take over this role. Thus LEAD is acting as a temporary MFI, till federations stabilise and develop confidence and expertise in microfinance.

MicroinsuranceLEAD at present is implementing four schemes under microinsurance for its clients. The features of the schemes in brief are as under

Name of the Type of

Type of instutional

Brief details Number of policies

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scheme cover linkage writtenCattle insurance

Compulsory forBorrowers.

In house programme of LEAD

Insurance against death of cattle bought out of loans. Four percent of the sum assured(Rs.10,000)($210) is collected as premium for each of the year the loan is outstanding.

370

Social security scheme

voluntary In house programme of cluster level federations

Member pays Rs.50($1.2) premium for cover for three years.The cover is RS 500($10.5) on death and RS. 250($5.25) for hospitalization above 15 days.

The data is not available for LEAD as a whole since each of the federation implements the scheme23.

Raja RajashwariMahila Kalyana Bima Yojana

Voluntary. accident coverage

Linkage with Oriental Insurance Company

All women in the age group of 10 to 75 can become members. Covers death of husband and disablement of women due to accidents. Coverage is Rs. 25,000($525). Premium is RS. 23($0.5) per annum.

3000

Many of the formal insurance companies are approaching the organisation for selling their products and LEAD is trying to negotiate with them to get the best terms for its clientele.

Cattle insuranceLEAD’s foray into livestock insurance coincided with its entry into livestock financing in a big way. As the loan amount of Rs.10,000 ($ 210) was high as compared to the savings of the members (savings to credit ratio in some cases are as high as 1:10), LEAD thought of the cattle insurance scheme to protect its loan portfolio. The scheme was not welcomed by the clients since they felt that the mortality rate of milch cattle is low and they have had considerable traditional experience in rearing cattle. However, LEAD made the scheme compulsory to all the loans disbursed under the Rabo bank programme.

The essential features of the scheme Aspect DetailsInsurable event Death of cattle.Compulsory/ voluntary Compulsory for all members availing loans

under Rabo bank loan programme. Voluntary for the livestock purchased through other loans from the self help groups.

Eligibility Cattle purchased with loans availed through the self help group by the members of the self

23The coverage is very low in the federation level. For example, in Panchapatti field unit, there are 14 cluster level federations with nearly 6360 members. As on December 2001, only 320 members have taken social security cover. The premium collected is RS 38,400 out of which only Rs. 1500 has been the claims.

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help groups. The client has to purchase the animal within a week of disbursement of the loan. On purchase the animal will be inspected by the staff of LEAD who will check whether the animal is really worth the purchase price paid by the borrower; and more importantly whether it can be insured for the same amount. If the animal is not worth the price/ insured amount the borrower is advised to change the animal.

Premium amount 4 per cent of the sum assured 24. In addition cattle care charges is compulsoryily to be paid for the livestock purchased under Rabo bank scheme for the loan term of two years 25. For other livestock cattle care is voluntary.

Sum assured Rs. 10,000Claims limit The claim amount for the first and second

years are 75% and 80% of the sum insured respectively

Premium collection method The premium amount is deducted from the loan amount and the net amount is only paid to the borrower.

Term Loan term which is usually two years.

Waiting period The animal is kept under observation for a period of fifteen days to check whether the animal is healthy and is worth insuring. On completion of fifteen days a metallic tag is put around the ears of the animal and this is an essential step in insuring the animal. Any insurance claim of an animal without a ear tag will not be entertained.

Exclusions

24 The premioum is similar to those charged by formal insurance companies under their livestock insurance programme.25 Cattle care facilities were introduced from November 1999 to provide better care of animals, better yield of milk which would result in less loan defaults, and lesser insurance claims. The client has to pay one hundred rupees each year for cattle care. The charges for two years are deducted from the loan amount prior to disbursement in respect of animals purchased out of Rabo bank loans.The cattle care at present entails deworming of the animal three times a year and Vaccination against Foot and mouth disease and other commonly prevalent disease once in six months.The services of the paravet and the doctor are available for treating other major illnesses for which the client has to pay only for the medicine.

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Theft of animal, Sale of animal, Mass death due to wide spread contagious disease, Death due to negligence of client – not treating the animal in time, ignoring the vaccinations etc., Culling of animal, Poisoning of animal, Death occurring while entrusting the animal in someone else’s care, Death due to the carelessness of the client. Animals without ear tag, Death due to road accident, Death beyond the valid term of the insurance.

Claim validation In case the animal dies, the client should inform the organisation within two hours. The carcass will be inspected by the para vet and the doctor before disposal. Within a week of the death, the claim form should be duly filled and submitted to the organisation. The tag of the animal should also be attached.The self help group as well as the federation concerned verify and recommend the claim.

1. The claim is to be settled within a month by the organisation. In case of any delay the client will be informed of the status quo. The loan outstanding against the animal will be adjusted against the claim and only the balance will be paid to the client.

2. The animals are insured for the loan term which is two years..

3.1.4. Indian Co operative Network for Women

The ICNW, initiated in 1981 in the slums of Chennai, is an institution designed to satisfy the microfinance needs of low income women entrepreneurs. Today the organisation operates in 3 states of India covering nearly 2,59,400 clients. It has 18 branches in rural, urban and semi-urban areas. The clients are involved in 200 types of enterprises both in urban and rural areas. The ICNW model of microfinance delivery is simple and easy to operate and highly replicable. Basically, this model offers three generic products to its member clients26:

1) Credit at 18% (reducing balance) on varying installment terms and for a variety of purposes2) Savings - Voluntary Savings, which are withdrawable, and Fixed Deposits3) Insurance products designed to meet the life, accident and health needs of member clients

26 Besides the operation of such insurance packages, the training wing of WWF also sensitizes women on their health care products and advices them on occupational safety measures as well. In instances like Beedi workers ( hand rolled Indian cigarette) lobbying efforts of the Forum has enabled the women workers to take care of their families health in case of affliction with Tuberculosis, back ache and so on. They are also made aware of the precautionary measures to be taken in order to prevent such diseases that are common for such occupations like beedi rolling.

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Micro insurance products

ICNW acts as a facilitator in implementing the insurance schemes of formal insurance companies. It doesn’t have any in house micro insurance programmes. There are three insurance schemes offered to its clients – two for life and accident and one for health.

Life insurance scheme -1

This policy provides life and disability cover to the members. The details are given below

Aspect DetailsInsurable event • Natural as well as accidental death of a

member. Suicide is not coveredCompulsory/Voluntary • Completely VoluntaryEligibility • All insured need to be members of ICNW.

• They must hold at least one share and have a minimum savings balance of Rs 50( $1.1) at the time of payment of premium (normally, July of every year) and Rs 25 ( $ 0.52) in savings account at other times of the year27.

• They should be women between ages of 18 and 65 years28 and be a member of a solidarity group

• They should not have defaulted on loans taken from ICNW

• They should have undergone the various training programs at ICNW.

Sum Insured • The policyholder receives Rs.12,500($ 263) and Rs.25,000($525) in case of partial and complete disability.

• The nominee of the policy or the legal heir receives Rs.5,000($105) in the case of for natural and Rs.25,000( $ 525) for accidental death of the policy holder.

Claims limit • The maximum cover is Rs. 25,000 ($525) under any circumstances as per alternative scenarios given above

27 Since, ICNW is a very large MFI, it relies on its very sophisticated Oracle based MIS which provides “Computer Screen Prompts” to ensure this on a daily basis. At any time on any given day in any year, the system can provide a list of members who conform to above conditions as well as those who do not.28 Voter Photo ID Cards, Ration Cards, Certifcates from Village/Town Panchayats help to verify ages. These are required just once to be entered into the system and subsequently, there is a random check by organizers and area leaders. Group members and leaders also stand guarantee for such information provided by members

21


Premium collection method • Currently, the annual premium is Rs 2529($0.52).

• The premiums have to be paid in full and cannot be remitted (or paid) partially.

• Clients with Rs 50($1.1) as minimum balance in the savings account on the day of listing for social security in the scheme to become eligible for Insurance coverage for that year.

Term • Insurance against death (natural and accidental) and partial and full disability during the insured year (annual)

Exclusions Payment of claim amount will not be made if


savings obligations as required• Death results due to breach of any law with

criminal intent. • Compensation higher than the insured

amount of Rs 25,000($525) is receivable by virtue of any other Law/Statute.

Claims Processing and Validation • The field organizers notify the loan officers of the claims and visit areas (with group leaders) to discuss with the family and also to assess the situation leading to death, accident, disability etc., and ascertain authenticity of the claims (especially, disability).

• The corporation / municipality issues death certificate which is collected as a document of evidence indicating the death of the policyholder.

29 These figures as well as the claim amounts are set nationwide by LIC based on their experience.

22


• Field Organisers and Area leaders of ICNW notify the company (Life Insurance Corporation of India) on the death or accident of members.

• The organisation immediately forwards the claim form to the Insurance company.

• Between 30 to 35 days from the date of filing the claim form, the benefits (payouts) are made through ICNW to the Nominees

• All data including forwarding of claims, the date of forwarding and present status of the claim are available online in the MIS system

Life insurance scheme – 2Those opting for life insurance 1 can’t opt for this scheme and vice versa. 30

Aspect DetailsInsurable event • Natural as well as accidental death of a

member. Suicide is not coveredCompulsory/Voluntary • Completely voluntary. Eligibility • All insured need to be members of ICNW.

• They must hold at least one share and have a minimum savings balance of Rs 50( $1.1) at the time of payment of premium (normally, July of every year) and Rs 25 ( $ 0.52) in savings account at other times of the year31.



30The MIS enables tracking of this in a very efficient and effective manner. In fact, there is a screen prompt which prevents the same person from being entered for both social security schemes. This way, the scope for such errors (if any) is nil.

31 Since, ICNW is a very large MFI, it relies on its very sophisticated Oracle based MIS which provides “Computer Screen Prompts” to ensure this on a daily basis. At any time on any given day in any year, the system can provide a list of members who conform to above conditions as well as those who do not.32 Voter Photo ID Cards, Ration Cards, Certifcates from Village/Town Panchayats help to verify ages. These are required just once to be entered into the system and subsequently, there is a random check by organizers and area leaders. Group members and leaders also stand guarantee for such information provided by members

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• They should have undergone the various training programs at ICNW.

• Those opting for this scheme cannot avail social security scheme and vice versa33.

Sum Insured • On the death of the member, the nominee gets Rs.20,000($420), for normal death and Rs.50,000( $1050), for accidental death.

• In case of partial/complete disability, Rs.25,000($525) and Rs.50,000( $1050) are the compensations

Claims limit • The maximum cover is Rs.50,000 ($1050) under any circumstances as per alternative scenarios given above

Premium collection method 1. Members need to pay Rs 100 ($2.2) per year as premium to LIC through ICNW

2. This amount is paid into the savings account and transferred to the insurance company subsequently

Term • Insurance against death (natural and accidental) and partial and full disability during the insured year (annual)

Exclusions Payment of claim amount will not be made if


savings obligations (maintaining minimum savings balance) as required

• Death results due to breach of any law with criminal intent.

• compensation higher than the insured amount of Rs 50,000($1050) is receivable by virtue of any other Law/Statute.

Claims Processing and Validation • The field organizers notify the loan officers of the claims and visit areas (with group leaders) to discuss with the family and also

33 The MIS enables tracking of this in a very efficient and effective manner. In fact, there is a screen prompt which prevents the same person from being entered for both social security schemes. This way, the scope for such errors (if any) is nil.

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to assess the situation leading to death, accident, disability etc., and ascertain authenticity of the claims (especially, disability).

• The corporation / municipality issues death certificate which is collected as a document of evidence indicating the death of the policyholder.

• Field Organisers and Area leaders of ICNW notify the company (Life Insurance Corporation of India) on the death or accident of members.


• Between 30 to 35 days from the date of filing the claim form, the benefits (payouts) are made through ICNW to the Nominees


3.•

25


Health Insurance

This scheme is linked with United India Insurance Company. The JAN AROGYA BIMA POLICY, of the company has been adapted to meet the needs of ICNW’s clientele.

Aspect DetailsInsurable event • It is a low budget medi-claim insurance policy

which covers reimbursement of Hospitalisation34/Domiciliary Hospitalisation35

expenses for illness/disease or injury sustained.• Reimbursement of expenses is towards Room

rent, Boarding and Nursing expenses of Hospital/Nursing Home, Doctors fees, Medicines, Diagnostic/laboratory, including cost of materials used for surgery etc.

• One day hospitalization is considered but restricted to specific treatments like Dialysis, Chemotherapy, Radiotherapy, Eye Surgery, Dental surgery, Litho-tripsy (Kidney stone removal) Tonsillectomy, taken in the hospital/nursing home. Even if the insured is discharged on the same day, the treatment will be considered.

• Relevant medical expenses incurred during the period upto 30 days prior to and 60 days after Hospitalisation are covered.

Compulsory/Voluntary • Completely VoluntaryEligibility • All insured need to be members of ICNW.



• They should have undergone the various training programs at ICNW. Since the scheme has just taken off, ICNW provides a strong an in depth training to its clientele who have taken health insurance.

34 Hospitalisation includes treatment taken in any institution in India established for indoor care & should either have 15 beds or registered with local authority having 24 hours Professional services.35 Domiciliary Hospitalisation means any disease/illness which in the normal course would require Hospitalisation but actually taken while confined at home36 Voter Photo ID Cards, Ration Cards, Certifcates from Village/Town Panchayats help to verify ages. These are required just once to be entered into the system and subsequently, there is a random check by organizers and area leaders. Group members and leaders also stand guarantee for such information provided by members

26


Sum Insured and Coverage • Rs. 5000/- ($ 105) per person/year.• Cumulative Bonus at the rate of 5% of sum

insured will be progressively increased for each claim-free-year. However the overall amount will not exceed 50% of sum insured.

Claims limit • The maximum limit under the policy is Rs. 5000/- ($ 105) per person/year.

Premium collection method • They are paid as a one-time amount by members to ICNW as per the categorization given in Table given below.

Term • Yearly (annual)Exclusions • Expenses for the first 30 days of the policy

period unless it is due to an accident.• Expenses for treatment of disease/illness which

are pre existing at the time of taking the policy.• Expenses for the first year of policy towards

specified ailments.• Expenses for naturopathy, Pregnancy, Child

birth, Eye & Dental check up etc.Claims Processing • A preliminary notice of claim with full details

should be given to the insurance Company within 7 days from the date of Hospitalisation/Domiciliary Hospitalisation.

• Final claim along with all documents, reports, bills, receipts should be submitted to the Company within 15 days from the date of completion of the treatment.

Claims Validation • The field organizers notify the loan officers of the claims and visit areas (with group leaders) to discuss with the family and also to assess the situation leading to illness etc., and ascertain authenticity of the claims

• Field Organisers and Area leaders of ICNW notify the company (Life Insurance Corporation of India) on the illness of members.


• By 7-15 days from the date of filing the claim form, the benefits (payouts) are made through ICNW to the members


The premiums are paid as per the details given below. which has been worked out for ICNW’s clients.

Particulars Upto 45 years Rs.

46-55 years Rs.

55-65 years Rs.

65-70 years Rs.

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Head of family 70 ( US$ 1.5) 100 (US$2 .20) 120(US$ 2.60)

140(US$3)

Spouse 70 (US$ 1.50) 100 ( US$ 2.20) 120(US$ 2.60)

140(US$3)

Independent child upto 25 years of age

50(US$1.08) 50 ( US$ 1.08) 50(US$1.08) 50(US$ 1.08)For family 2+1 dependant 190( US$ 4.10) 250(US$ 5.40) 290(US$6.30) 330(US$7.20)For family of 2+2 dependant 240(US$5.20) 300 ( US$ 6.50) 340( US$ 7.40) 380(US$8.30)

The detailed case studies of the MFIs offering insurance is given in annexure 3.

3.2. Analysis of the insurance schemes of the MFIs

3.2.1.Entry strategies

The intimate knowledge of the MFIs of the needs of the rural/ urban poor, risks that they face and their psyche in buying risk cover has helped the MFIs to design the entry strategies as well as in product development. They have tried to tailor the product design to the needs of clients. None of them conducted any market research before designing the product. The choice of product lines and the actual policies offered have been driven by the risks evidenced by the MFIs in their loan business with their clients. LEAD’s foray into livestock insurance coincided with its entry into livestock financing in a big way. As the loan amount was high as compared to the savings of the members (savings to credit ratio in some cases are as high as 1:10), LEAD thought of the cattle insurance scheme to protect its loan portfolio. Similarly life insurance scheme was introduced by the CDF to protect the loan portfolio when the deaths among the members increased due to militant insurgency as well as accidents.

The organisations under study have prepared themselves by studying other similar programmes, and generating feedback from the likely users. Product development has been a result of brainstorming.

All the four case studies reveal that the foray into insurance was a logical extension of their then existing savings and credit business.

3.2.3. Types of coverage

Though the needs for insurance for the MSEs have been many the organisations have introduced one product at a time and have desisted from introducing too many products. ICNW felt that life insurance was a relatively low risk product while health and asset insurance were more risky . So it has used a phased entry strategy while adding insurance products – first life, then health. It is now planning to offer asset and property insurance. ICNW is unequivocal in that all of these (life, Health and Asset and Property) are very important for reducing the vulnerability of its clients. The organisations have first introduced the insurance product in limited geographical areas and after gaining experience have expanded to other branches/field units. ICNW first introduced the health insurance policy in Chennai and after six months of watching and learning from the experience introduced the same in other areas. Similarly the type of coverage (life, health,

28


asset etc.,) has also been increased slowly from one to more. This has helped the organizations to gain experience and make suitable modifications in product design and delivery.

3.2.4.Voluntary/ compulsory

Wherever the insurance scheme has been introduced to protect the loan portfolio, the scheme has been made compulsory for the borrowers. Thus cattle insurance has been found to be compulsory for the persons taking loans for cattle (LEAD, ASA). Life insurance has been found to be compulsory in the area where the risk to life is higher (CDF). However, the focus group interviews with the clients reveal that wherever the programmes were voluntary the clients liked them better. Compulsion increased the insured population as the borrowing clientele formed a captive market. Insurance rode piggyback on credit, but improved credit worthiness of the client in terms of eligibility of larger loans.

3.2.5. Premium FixationThe premiums have been fixed by the organization keeping in view the rates fixed by the formal insurance companies, likely costs and claims ratio. The premium rates have been modified over a period of time depending on the claims experience.

Collection mechanismLayering of savings with insurance, layering with loans and mere collection of premium are the different methods used by the MFIs to collect premium. ICNW has arrangements to collect the premium from the savings account of its members for its life insurance policies. CDF and LEAD sanction additional loan to cover the premium, and collect the premium from the original loan disbursement. ICNW’s health insurance and ASA’s cattle insurance scheme require the members to pay the premium separately. Layering with savings or loan makes the collection easy and less time consuming for the MFIs. It also reduces the chances of default in paying the premium. Clients prefer layering insurance and savings and resent to some extent layering of loan with insurance since they have to pay interest for the premium amount also. If the MFIs could offer an interest freeloan towards the premium, members would be more willing to voluntarily take up insurance cover.

Schedule of collectionThe MFIs have adopted one time collection of premium/ deposit to curtail the transaction cost. Only ASA has a plan for five monthly plan for advance collection of deposit for its voluntary life insurance.

3.2.6. Marketing of insurance and building client awareness

Many clients who have earlier obtained loans or who know other villagers who have obtained loans from banks under the subsidised Government programmes are aware of asset insurance scheme of the insurance companies. The bitter experiences of some of the villagers with insurance schemes – of unsettled claims, claims not settled in full, excessive and repetitive documentation- have made them lose confidence with the formal insurers. Most clients , especially women are not aware of the concept and details of insurance.

The organisations adopt a variety of methods to build the awareness about the insurance products among the clients. ICNW conducts mass meetings, general training workshops in which members get information on the available insurance products. ASA ensures in its aware ness campaigns that clients feel that the policy is affordable, that they are getting good value for

29


their money. ASA also convinces the opinion leaders in communities to purchase a policy or to support the product. Providing potential policyholders with clear, case-study type examples of how the product can be beneficial has also proven to be effective. In the case of CDF, the employees of the ATC in his / her periodical meetings discuss about the insurance product with the co - operative leaders and members37... LEAD discusses the need for insurance during the grass root leaders meeting as well as with the members of the SHGs. Live examples of persons benefiting from the scheme have also helped in spreading the message.

Innovative Ways of Promotion ASA conducted a comprehensive awareness campaign on insurance

and social security for the members. 12,000 information bags were prepared and given to members as they

attended the International Women's Day and SHG Conference. Large-sized information banners and posters with pictorial scenes on

insurance issues were placed around the conference venue to further motivate the members.

The branch manager of United India Insurance Company was invited to make a presentation at the conference. Insurance officers of ASA/GV also shared details of the various schemes with clients.

Involving grass root leaders and opinion leaders in the awareness campaigns is necessary for reaching the potential clients. Discussion about the existing schemes of the insurance companies and how in - house programmes differ from them will also help in building awareness and client loyalty especially from those who are aware of formal insurance schemes. The existing method of building awareness through the present mechanism of group meetings is cost effective for the organisations. However, in order to increase awareness and out reach, separate meetings and awareness camps have to be planned for. After initial awareness and penetration, sustained service quality alone could help in increasing the business. The ease of premia collection, quick claim settlement, and easy procedures and formats would go a longway in increasing clientele.

3.2.7. Staff involvement

The existing staff of MFIs are involved in product development and selling. LEAD has recruited veterinary staff to manage the insurance as well as the cattle care programme. However, the veterinary staff have to work in close co ordination with the field staff of the MFI to implement the cattle insurance and cattle care programme. The other MFIs studied were using their staff for dispensing all the financial services. ICNW sells the insurance product using field based grassroots women organisers, who educate the members on the benefits of insurance products and also enable savings mobilisation.

The success of the insurance schemes depends on high level of staff motivation and commitment. To many of them insurance is a new area of work. Their skills need to be built up in understanding insurance and in marketing the services among the clients. Unless the staff

37 However, some of the clients during the focus group discussions expressed an interest in a comparative analysis of existing insurance products of formal insurance companies and how the CDF scheme fares in comparison

30


are basically convinced about the need for insurance as well as to make it a sustainable service they may not be able to market it successfully.

LEAD started its work with welfare programmes. It has evolved into an organisation promoting financial services at the grass root level. At present the organisation is making the clients pay for financial services. However, both the clients and some of the staff resisted any move to run programmes on cost covering/ profit basis38. Some of the staff feel that cattle insurance and cattle care should be viewed as a service to the people and not as a profit stream. LEAD has through a series of workshops and continuous dialogue with the grass root leaders have made the grass root level organisations to accept the concept that financial services need to be paid for to make it sustainable. LEAD management is currently addressing the task of convincing both the staff and clients that any financial service including microinsurance needs to cover its costs in the long run to be sustainable.

Staff readily accept and comprehend the need for savings and credit facilities for the poor whereas insurance as a financial service needs to be understood and accepted by them especially if the programme is in - house. ASA has selectively trained some of their staff in insurance aspects. LEAD has engaged the services of a consultant to develop the cattle insurance product which also involves building the capacity of staff.

3.2.8. Procedural ease

All the four MFIs under study have simplified procedures to quickly process admission, premium collections and claims. The pay- out time is some what longer( 30 to 45 days) in LEAD since the organisation works with and involves the intermediate grassroots level organisations in decision making since the intermediate structure is expected to implement the scheme in due course of time. This has resulted in higher transaction costs to the client since they tend to visit the office of the organisation to know about the claim status. The formal insurance companies take a long time (one month to three months) to settle claims whether it is the case of partner facilitator model or r -e insurance.

3.2.9.Protection/ prevention against moral hazard and adverse selection

The in house programmes of MFIs face the risk of moral hazard and adverse selection. Jim has remarked- not only inhouse it just more damaging if you carry more of the risk.? Jim it is not clear.The MFIs try to face these challenges through explicit exclusion clauses as well as through checks and balances including third party proof.

The risk among different products as felt by MFIs are

38 The expectation from the clients is that LEAD should provide services free of cost. When clients pay, they demand better services and hence the power equation between the staff and the clients change which the staff find difficult to cope. Hence both the clients and some staff prefer the welfare approach.

31


Institutional Risks Across Insurance ProductsInstitutional Risks Type of Insurance

Life Health Asset and PropertyMoral Hazard Low Medium HighFraud (False Claims) Low Medium HighAdverse Selection Medium High MediumOverusage Low High-Very High Medium

According to LEAD and ASA which are implementing cattle insurance programmes( LEAD has in house programme where as ASA has tied with formal insurer for providing the services), the client can defraud the organisation at various stages as is enumerated below Stage Type of moral hazard Measures taken by

LEAD to prevent moral hazard

Measures taken by ASA and formal insurance comapny

Purchase of animal

The actual value of the animal purchased could be marginally less than the insured amount.

The claim settled is only 75% and 80% of the insured amount in the first and second year respectively.

Clients buy a low quality dairy animal cheaply at times half the insured value.

The animal is to be changed for a better one. Does this screening apply to the above Jim’s query. Explained.

ASA is a Grameen replicator. Group members, leaders, center members and leaders closely monitor any programme. The agent of the insurance company gets an independent valuation done for every animal thorugh a Governement recognised veterinarian.

The animal shown at the time of verification is exchanged for a lesser valued animal at the time of tagging.

The same set of staff who verify the animal will also tag it. It is also proposed to mark clear identification of the animal by measurements, photo etc. at the time of verification.

Photograph is taken by the insurance agent but only on a random basis.

Rearing of the

32


animal.Relying on old customs and practices for curing sicknesses which may result in serious and incurable sickness of the animal.

Client sensitization and adequate cattle care can address this problem.

Selling the animal especially in case of sickness/ barrenness and infertility and may claim insurance by declaring that the animal died.

Inspection of the carcass of the animal is a pre requisite for accepting the claim. Earlier informing the doctor was time consuming. Now, village level paravets can act as watch dogs. Usually informal enquiry in the village also throws light on the actual situation.

Claim process is through the group and center nad local verification process easily detects such happenings. ASA staff apart from insurance agent checks the details of claims. ASA also insists on a certificate as to the cause of death from village head or center leader

Death of the animal

Disposing of the animal quickly if it dies of any cause which is excluded under the insurance policy.

Same as above. Same as above.

I have also added what happens in the insurance scheme of ASA.As part of the lending programme, asset verification is carried out by the staff. The health of the cattle is further ascertained before tagging so that adverse selection is avoided.

Under life insurance schemes, the schemes have age restriction for entry level in the in house programmes of MFIs – 50 for ASA and 55 for CDF. In case of ICNW, which has linked up with a formal insurance company, the upper age limit is 65. However, there are three types of moral hazard/ adverse selection which can occur.

• Member can commit suicide thus increasing the claims. ASA does not settle claims arising out of suicides. In CDF promoted ATCs the number of suicides has been on the increase primarily due to indebtedness of the farmers, family quarrels etc., This has resulted in heavy claims under the scheme. Both the associations studied have been contemplating measures to limit the claim admission in case of suicidal deaths39.

• Member may not know the age or declare wrong age. In the villages there is no fool proof method to determine the age of the members especially the old members. The

39 Pantini AMTC has been planning to limit the claim to loan amount or half of the claim amount which ever is lower. Makdumpuram AMTC, where the suicidal deaths are higher, has been considering disallowing any claims in case of suicides. They plan to return only the DRASdeposit to the nominee.

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MFIs use the knowledge of contemporaries to ascertain the age of the members. The voters’ list and voter identity card is also checked to verify the age.

• A chronically ill person can join the scheme and a claim can occur within a short time of her/his joining. Both ASA and CDF feel that medical screening at the time of joining is not warranted since at the time of settlement a thorough enquiry is usually undertaken and if the member had withheld crucial information at the time of joining the scheme the claim is rejected40.

ASA also uses third party referrals such as the SHGs, the leaders and formal death certificates and filing of police complaints in case of accidents as third party proof of death/disability and thus tries to prevent moral hazard in claims. It also educates the clients that insurance is one of the services provided by the organisation and the clients are aware that the entire group ( of twenty persons) can lose access to other financial services in case of a false claim.

ICNW uses third party referrals such as grass root leaders’ reports in recommending claims for partial/ full disabilities. Clients rarely have the incentive to engage in fraud since they have a lot to lose. If the fraud is found out (which can be easily done), they stand to loose access to a variety of services including credit, savings and insurance from ICNW, Health Care from WWF (Working Women’s Forum, the Parental NGO) and local hospital.3.2.10. Co variance of risks

The MFIs have sought to tackle the co variant risks by explicit exclusions. LEAD has explicitly stated that claims from large scale death of cattle due to communicable disease will not be admitted. Though some of the diseases like rinder pest have been eradicated, foot and mouth disease can also take on an epidemic form and the organisation is regularly vaccinating the animals against such diseases. Similarly, through the exclusion clauses the ATCs of CDF have avoided any mass claims due to natural as well as man made calamities like massacres.

3.2.11. Risk mitigationThe MFIs could take action to mitigate the risks that are covered and thus bring down the claims. In the case of LEAD, for cattle insurance, LEAD realised that better cattle care and health services would bring down the death rates and claims. The villagers are also in need of cattle care facilities especially Artificial Insemination.(AI services) The cost of operating a basic veterinary health service would be less than the claims eventually paid if cattle care is not in place. Hence LEAD has introduced a comprehensive cattle health care programme, by employing Vets and paravets, which has won the appreciation of the people. But to effect a shift from risk cover to risk management, the organisation must be prepared to make investments and have a concern for the people who are insurance clients.

40 When the scheme was introduced in Panthini AMTC, the first member who joined the scheme died within a month. Enquiry of the villagers and the family members of the deceased revealed that the deceased had been suffering from a chronic disease and decided to join the scheme to avail the benefit. A meeting was convened and the pros and cons of admitting such members and claims were discussed. Any such laxity will result in the failure of the scheme. The Secretary of thrift society was pulled up by others for admitting such a chronically ill person into the scheme. It was unanimously decided that only the deposit under the scheme will be returned.

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3.2.12.Trade off between various services

Though there are synergies in the financial services, there are also some trade offs which the MFIs face in delivering all the services.

Cattle care requires enough number of cattle in a village or cluster of villages so that more number of animals can be covered in each of the visits be it routine vaccination or isolated cases of sicknesses. Similarly cattle loans can also be given in a cluster so that transaction cost of lending is lower and follow up and monitoring is easier. However, when an organisation is implementing the three programmes of lending, cattle care and cattle insurance, a problem in one can affect the other.

Kannamuthampatti village has eleven SHGs and some of the older groups are operating in the village. Chirumbai, a grass root leader from the village, is in the Board of LEAD. Thirty two loans for cows were sanctioned in the village. These cattle have been insured by LEAD. One cow died by falling into a well. An initial enquiry revealed that the owner had entrusted the cow to her ten year old daughter for grazing and the cow had accidentally fallen into the well. When the villagers got wind of the fact that LEAD may not admit the claim, some of them defaulted in the loan repayments. In the formal claim the owner wrote that the cow developed fits while grazing and fell into the well. This impasse of loan default continued for three months. LEAD had to finally admit the claim since not admitting the claim would have caused distrust in the scheme and also in any future programmes.

3.2.13.MIS and review mechanism

The MIS developed by organisations concentrate on aspects of outreach and amounts of premium/ deposit collected and claims settled. In case of CDF,though the ATCs are implementing the scheme, they still look to CDF for policy and operational guidelines. CDF provides the necessary inputs for running the scheme. In LEAD, the management information system for the insurance programme consists of collection of data from staff at regular intervals. The MIS arrangement is very informal. Much of the data is collected at the time of meetings. There is vast scope for formalizing the data collection, the reporting and review to enable appropriate decision making. The cattle insurance programme has crossed the nascent stage and is on the take off stage. A concise reporting and reviewing system is urgently needed. ASA has a MIS system where a variety of records are maintained and reports collected at various levels basically on outreach premium collected and claims details. ASA is now going in for a completely computerised system for its microfinance operations including micro insurance. In ICNW, very efficient and effective MIS has been developed over the years. All necessary insurance data is instantly available as it has been completely computerised and it can give all details online. In fact, all insurance products at ICNW are disbursed monitored through a sophisticated online ERP MIS. that exists there.

The MIS needs to include information on profitability of scheme, fund mobilisation and utilisation details and certain important indicators such as claims to premium ratio, operational cost to premium ratio etc., which at present is not tracked separately by the organisations.

3.2.14.Outreach

All the MFIs studied have the potential to upscale the programme by offering more coverage both in terms of number (of persons, cattle) insured as well as the amount insured.

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In LEAD, the programme at present covers the animals bought out of Rabo bank loan. The scheme has the potential to cover animals bought through any loan. However, this involves acceptance of the programme among the clients and more particularly the staff41. The organization is undertaking a survey of population of animals in the households of all the SHG members42. This exercise will help the organization to develop strategies to expand the programme. However, the staff and the clients need to own this programme. The programme has to bring in client perceptions and what they require. Making the insurance product voluntary can help the organisation to judge the acceptance of this product among clients.

In CDF, The DRAS stands to benefit if more members especially the younger members join the scheme. At present, mature TCs are delinked form existing ATCs and they in turn mobilize fresh Tcs and form another ATC. This is done to propagate co operative movement. This practice curtails the scope of increasing the outreach of the scheme in each of the ATC. ATCs presently face a trade off between covering more rural villages under thrift co operatives and ensuring profitability of the DRAS scheme.

The products offered by ICNW are voluntary. The clients like the products as has been expressed by them in client satisfaction surveys. The health insurance which is in the pilot stage now is likely to attract more clients.

3.2.15. Acceptance among the clients

Acceptance among the clients involves the following steps Assessing the need of the clients and matching it with the need of the organisation

where ever it is necessary. Changing the mindset of the clients especially women about insurance Continuous dialogue with the clients to assess their likes and dislikes about the product. Building in the desired features and flexibility as per the requirements of the staff

keeping in view the factor of efficiency and cost effectiveness.

The acceptance of microinsurance among the clients can be seen from the scale of outreach as well as the likes and dislikes expressed by some of the clients during the focus group interviews. As has been discussed in the earlier paragraphs there is vast scope to increase the outreach through needs based design of the programmes.

LEAD, has done pioneering work in cattle insurance which is a difficult, but needed service in the rural areas. The significant part of the initiative, is that of going beyond offering a simple

41 Recently the organisation decided to include all the animals bought by the members under the Rashtriya Mahila Kosh loan. RMK loans are to be used for income generating activity. The members state the purpose of the loan at the time of applying for a loan. Purchase of animals was a very common purpose stated by the women at the time of applying for a loan. However, there is no check later whether the money was used for the stated purpose. It is usual for the members to use the money for more than one purpose including the stated purpose. When the members became aware that animal loans will involve compulsory insurance, they immediately avoided giving the purpose of the loan as for purchase of animal. The field staff who are in touch with the members can easily know for what purpose the loan is actually used since they move with the villagers very closely. Looking to the tough challenge of convincing the women to take up insurance, they also chose the easy way out and stated that no one had purchased animals.42 For example, in Panchapatti field unit, the animals owned by sangha members are 2645 cows and buffaloes and 2997 goats and sheep. However, the present coverage under insurance scheme is hardly 10 percent of the animals at 258 cows and buffaloes. Thus there is vast scope of increasing the outreach under the scheme if only the number of animals owned by the clients are concerned.

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insurance product and integrating it with cattle health. By educating the cattle owner on good practices in cattle care, providing paravet and veterinary doctors’ support, LEAD has sought to manage the risk of cattle death effectively. Starting with borrowers is a logical market penetration strategy, even if it has met with some initial resistance from clients. The organization has to build the credibility of the programme among the clients. This includes assessing the client needs and building in client perceptions, client education on the programme, especially the exclusions, providing good services for cattle care and prompt settlement of claims.

The scheme could be made more participative to ensure wider acceptance of the people. LEAD has initiated formation of cattle care committees at the cluster level and this committee will have a larger role to play in the future – organizing cattle camps, loan recommendation and sanction, monitoring of utilization of loan and repayments, verify and recommend cattle death claims. It is also planned that these committees will be involved in local management43 of funds of the scheme so that they are aware of profitability or otherwise of the programme and act responsibly. The successful functioning of these committees can reduce transaction cost to the borrower, bring in client perspectives to the programme as well as ensure sustainability of the programme in the long run.

One important aspect to be considered by the organisation is to make the scheme more voluntary. As long as the clients view it as a compulsion, the scheme may not be very popular among the clients. As regards exclusions in the cover, long standing local practices need to be respected (and not excluded from cover); so that clients do not view the insurance cover as a way of collecting money from them for no valid purpose. Building in client needs into the programme is a sure way to achieve the desired results. At present the clients are in need of reliable and facile artificial insemination (AI) services for the animals. Introducing this service can be a very strategic move and can bring in more clients under cattle care and cattle insurance. Integrating cattle care and cattle insurance can be a good step in increasing the acceptability of the programme among the women.

CDF operates a life insurance scheme of for both men and women. The scheme has to be made more acceptable towomen. Awareness building among the grass root women of insurance facilities has to be under taken. Traditionally the women have undertaken savings and credit transactions . Insurance as a financial service is new to many of them. Many of them view the insurance as a no return and money losing proposition. The organisation has to build the awareness about this financial service among the women. Though the Board is fully aware that the scheme is the major contributor to the income of the AMTC, they need to strategise and plan for bringing in more members under the scheme. In the policy and operational level, decisions are to be taken by the AMTC Board. The TCs also have to play a more active role in mobilis-zing the members. Exisitng members of DRAS need to be involved in increasing the membership to DRAS.

43 The funds will be centrally monitored. However, the local committee will be informed of how much is the premium collected form the area, expenses incurred, how much are claims settled and how much is the balance left so that they are able to curb the tendency of escalating claims.

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Similarly, wherever the MFIs are entering into a partnership with existing schemes of insurance companies it has to be ensured that necessary modifications are made to suit the needs of the clients. ICNW does not accept the schemes of insurance companies in toto. It enters into prolonged dialogue and negotiations with the insurance companies to modify the product to suit the requirements of the clients. It also offers flexibility in terms of the premium amount and amount of coverage in life insurance as well as health insurance product which is appreciated by its clients.

Thus in order to make the products acceptable to the clients, the design and delivery of insurance products have to be need based and flexible to suit the clients. The MFIs should develop a review mechanism to assess the client satisfaction levels and improve the design and delivery of insurance products.

3.2.16. Financial performance

The financial performance of the schemes are given in the following table

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Name of scheme and

year of operation

PremiumUS dollar

claims ExpensesUS dollar

Profits/losses

Reserves if any.

remarks

ICNW

Life ins 197-9898-99

99-2000

1956 (-)1956 Not applicable

205442646032735

181101691913163

Not applicable

Life ins 2Started in99-2000

13258 0

HealthStarted in99 -2000

2815 444

ASALive stock insuranceStarted in

99-00 8534 2022 Not separately available

Life insurance4079 293 13117 590 nil

LEADLive stock insurance1999 -002000-01

18887908

434652

23983730

(-)384990 nil

CDFPantini AMTCLife insurance

199819992000

245138393856

108621732608

612959964

753727284

Claim fund124310661283

Makdumpuram AMTC199819992000

275637704440

130421082391

6899421110

763720939

Claim fund41627

922

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The in house schemes are registering profits after taking into account the claim performance and the expenditure. Both ASA and LEAD have received grants for meeting campaign and salary expenditure respectively. ICNW which is implementing the insurance programmes as a facilitator has incurred only losses since the expenditure incurred by the organisation is not reimbursed by the insurance companies so far.

3.2.16.1. Claims to premium performanceThe claims to premium ratio is an important measure for profitability. The ratio for the organizations under study are

Name of organisation

1995-96 1996-97 1997-98 1998-99 1999-2000 2000-2001

LEAD 23 21ASA – life 7.2CDF Pantini AMTC 47

56 54

CDF- maqdoompuramAMTC

44 56 67

ICNW (only Life Product 1 as other products are new)

45.77% 68.85% 88.15% 63.94% 40.21%

.

The ratio of claims to premium collected is highly favourable for LEAD. It also shows a decreasing (positive) trend for ICNW. In the case of AMTcs of CDF, the ratios of claim to premium are steadily increasing. ASA as of now appears to have a very favourable ratio.

3.2.16.2 Fund managementOut of threeMFIs which are implementing in house micro insurance programmes (CDF, LEAD, ASA), two of them mobilize returnable deposits and premia from the clients( CDF, ASA). LEAD retains the premia collected. They are usually deploying the deposits mobilized in lending operations since they find the return very attractive44. The funds management practices of these MFIs are examined in the following paragraph.

In CDF promoted ATCs, there are three funds( DRAS deposit, claim fund and retirement benefit fund) in operation. The funds mobilised under the scheme are kept under the DRAS deposit

44 Investing all the premia in loan business is highly risky on account of significant liquidity and default risk. Ideally the insurance funds should be invested in a diversified portfolio.

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account45. The claim fund is used for settling the claims from the scheme46. The Retirement benefit fund47 is used for providing bonus to retiring members.

All the three funds are used to lend to the TCs at 16% per annum. In case of less demand for loans from the TCs, the money is kept as a fixed deposit with the agro processing cooperative promoted by CDF, at interest rate of 15 per cent per annum. The third alternative is to invest in a fixed deposit with a bank where the rate of interest can be 10.5 per cent per annum. The interest earned is the only means of augmenting the claim fund and retirement benefit fund. The study of two AMTCs reveal that the credit availed by the TCs has been steadily decreasing over the last three years and the AMTCs are depositing their funds in low interest bearing instruments such as banks. Due to the increase in the number of deaths the claim fund has not registered a healthy growth. The fund was in a precarious position in Makdumpuram AMTC as at the end of the year 1999 - the fund was not sufficient to settle even one claim48. As at the end of the year 2000, the fund in both the ATCs was sufficient to settle only 4 to 5 claims where as the past record shows that number of deaths is definitely higher.

The present method and rate of augmenting of funds of the Claim Fund, appears to be the optimal growth rate for the funds. Even at this rate of growth, the funds are not sufficient/ there is not enough cushion to cover claims. With the likely decrease in earnings and reduction in the allocation for the claim fund on the one hand and increase in the death rate especially suicides in some pockets on the other, the long term sustainability of the operations of the scheme is under pressure. The AMTCs have to consider various options to ensure sustainability of the programme.

As far as LEAD is concerned, there is vast scope for improving the profit under the programme by deploying the insurance premium collected. At present the premium collected is kept almost idle in savings bank accounts of the field units where they earn around 4 % interest per annum. The organisation does not have any reserve for meeting a run on the programme. LEAD is planning to utilsze all the premium collected in the lending business which is risky.

The MFIs are charging interest rate of 18 to 24 percent from the clientsof their lending programmes.. This appears to be an excellent return considering other options available. However, mixing insurance and lending has its own risks. In case of natural calamities such as drought, floods, cyclone etc., the borrowers may find it difficult to repay their loans. There could be large claims made on the micro insurers at the same time on account of calamity induced asset loss and life loss. There may be demand for more loans from clients as well as a spate of

45 If any member retires/ withdraws, his deposit is repaid from DRAS account. In case of the death of the member, the deposit of the member is transferred to the Claim Fund account and the total claim amount is released from the Claim Fund.46 Each year the claim fund is augmented by the interest earned from deploying the DRAS deposits for the lending operations. Since it is difficult to calculate the exact amount of interest earned from only DRAS funds, monthly averages are worked out and the interest at the rate of 16 percent is calculated. The AMTC sets aside 4 percent as the margin for meeting its administrative expenditure. The rest of 12 percent is divided between the claim fund and retirement benefit fund in the ratio of 85 :15.47 Retirement benefit Fund is augmented each year out of the interest earned as described above. At present any person who has been a member for the last three years is eligible for a bonus of 2 percent.48 When the fund is insufficient to entertain claims Makdumpuram AMTC creates a Receivable Claim fund and settles the claims. The AMTC is very clear that neither Deposit fund nor the Retirement Benefit Fund should be used to settle the claims since they are liabilities to be repaid on demand. The other reserves of the society are used to settle the claims. At the end of the year when the Claim fund is augmented, the receivable claim fund is closed by passing necessary journal entries. Pantini AMTC has not experienced such difficulties so far.

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insurance claims. This can lead to a liquidity crunch in microinsurance programme and high client dissatisfaction. The organization may not be able to fulfill the demand of clients.

The MFIs should develop fund management policies which satisfy the needs of assured and safe returns as well as liquidity. For the purpose an investment policy has to be formulated by the MFIs detailing the proportion of premium income to be used for the risk reserve, share of investments to be made outside the business, share of investments to be made in high return assets, etc. Premium receipts need to invested soundly in high return assets and a part outside the business. As regards the finances, it is necessary to build a risk reserve out of the premium income. This might be a better alternative to reinsurance, in view of the reported difficulties and high cost involved in obtaining reinsurance cover. With the proposed expansion in the programme the MFIs should also build reserves for likely settlement of large scale claims. Donors support may be a very appropriate avenue for creating this reserve initially.

3.2.16.3. Profitability of the schemesNone of the in house programmes which were studied are monitoring the costs and benefits of the programme in detail. LEAD and ASA consider the programmes as profitable49 so far considering the amount of premium collected, staff salary paid and claims settled. The LEAD programme suffered nominal losses during the first year if the indirect costs are also included for calculation of profit. During the second year, insurance operations have resulted in profits50. If comprehensive cattle care is made part of the scheme, then it can be marketed as a general product, to non-borrowers as well, which will improve the profits and viability further.

Similarly ASA has also registered profits under the in house life insurance scheme after considering the grants it has received. In the DRAS scheme of CDF, four percent of the interest earned from the deployment of DRAS funds is set aside for meeting the expenditure (other than claims) under the scheme. The calculations indicate that the interest thus set aside is sufficient to meet the operational expenses of the scheme51.

49 The accounting details of the scheme are merged in the income and expenditure of the organisation. The details pertaining to the programme have been segregated from the annual accounts of the organization and the income and expenditure for the activity has been constructed. While arriving at the programme costs, both direct and indirect costs have been included. The direct costs include salary of the veterinary staff, fees paid to the consultants and cattle care medicines. The indirect costs include the salary of other staff and overheads. The salary of the other staff has been apportioned depending on the time spent by them for veterinary activity. The overheads have been apportioned as a proportion of staff salary.50 However, this includes cattle care fees for two years collected for which bulk of the expenditure will be incurred during the next year. Similarly the organisation has received grants for meeting the salary expenses of the vet and 20 of the paravets. Excluding the cattle care fees for the second year as well as the grants received, the profits are Rs125,210 ($ 2721)for the year 2001.Thus the programme has earned profits excluding extra ordinary income and grants.51 In case of Panthini AMTC, salary of the employee is Rs.26,000($565) per year and cost of (five days per month) salary for this programme is Rs.4300( US$94). Printing and stationary expenditure for the ATC is Rs. 5,000(US$108) and the expenditure for the scheme is likely to be Rs. 2000(US$44). Thus the total expenses for the scheme is Rs. 6,300(US$136). The income @ 4 % of interest earned by the insurance related funds is Rs.43,568 (US$947) per annum. Thus the direct expenses of the programme are met by the income by the fund.

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The value of claims to premiums is about 7.2% in ASA, which is moderately high. But, with expanding outreach and greater diversification (geographic, sectoral and clientele wise), this ratio should come down and help ASA’s program move further in its goal towards achieving sustainability and expanding outreach.

Where the MFIs are partnering with formal insurance companies for implementing the insurance schemes, there has been mixed experience. ASA and LEAD are yet to enter into an agreement with formal insurance companies to earn a commission/ to reimburse their expenses in mobilizing the premium and acting as an informal agent.

LIC has recently agreed to pay Rs. 10,000 (US$217) upto a maximum of 2500 clients for reimbursing the costs of nodal agencies like ICNW. Considering that ICNW has insured 64,801 clients last year( December 2000), the incentive they should receive at the above rate should be Rs. 2,59,000(US$ 5630). The expenses of the organisation for attending to insurance clients is Rs 90000( US$1956). If the incentive is restricted to only 2500 clients, it will not be sufficient to cover the expenses of the organisation. The nodal agents are not getting a good deal from the formal insurance companies. There is no incentive to bring in more clients as the scheme stands now. ICNW is negotiating with LIC for better terms and is poised to get it as it offers a large number of clients. United India has recently offered a 3 percent commission of total yearly premium on the health insurance..

3.2.16.4. Re insurance Re insurance is a mechanism of curtailing losses the MFI can incur. Some of the CDFpromoted AMTCs have reinsured with National Insurance Company (NIC) regarding the accidental death cover they offer52. The reinsurance has been a satisfactory experience with a limited period of six months. The organisation can consider reinsuring the entire portfolio with LIC or any other organisation offering life insurance. Some of the ATCs can also consider linking with a Formal Life Insurance Company/ Corporation as a facilitator/ agent if the past record shows that insurance can’t be a profitable line of business.

One of the formal insurance companies has approached LEAD to reinsure the insurance portfolio. LEAD is expected to pay two thirds of the premium collected to the organisation for getting the reinsurance cover. LEAD held discussions with another formal insurer for getting better terms. The second organisation felt that unless the full premium collected is passed on to them, it was not profitable for them to undertake reinsurance. It strongly advised LEAD not to re - insure with the other company since there was no guarantee that the claims admitted by LEAD will in turn be admitted by the insurance company. This will result in either loss for LEAD if it settles the claim or displeasure among the clients if it rejects the claims rejected by the insurance company. LEAD has decided to continue with the status quo (of not reinsuring) for one more year.

52 The AMTC pays Rs. 2. 60(US$.05) every year for every person under DRAS scheme to the NIC for a cover of Rs. 10,000(US$ 217) (the same as the claim amount being paid by the AMTC now). In case a member dies due to road accident, snake bite, electric shock etc., the AMTC first pays the claim to the nominee, there after sends the relevant papers to NIC for reimbursement. NIC carries out independent verification and pays the amount in three to four months. Nine AMTCs have joined the scheme and the cases they had forwarded were entertained by NIC. There has been no problem in the re insurance. However, the nominees of the clients have to incur additional expenses for certain procedures and papers to be produced for re insurance. NIC insists on FIR to be lodged with the police, medical examination report, post mortem report and death certificate from Medical Officer. Procuring all these certificates may cost Rs. 1000(US$22) to 1500(US$32) for the nominee

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Re insurance is yet to catch up as a risk management tool among the MFIs that sell insurance.

3.2.17 Lessons from partnering with formal insurance companies

Due to regulatory issues discussed in the next section, the MFIs cannot act as agents of formal insurance companies in its true sense. They are termed as nodal agencies, facilitators etc., The facilitators or nodal agencies carry out all the work of an agent but donot get recognised or remunerated as normal agents are done.The major advantages and disadvantages in this model as experienced by these MFIs are

Advantages DisadvantagesMFIs face very little risk in implementing the insurance programme.

Formal insurers have many products to suit various risk managing needs of clients.

Some of the products may work out cheaper for the clients as against in house programmes of MFIs since the formal insurers spread their costs over a large population base.

Most of the insurance products are “off the shelf products” and the MFIs have to enter into prolonged discussions to modify even a few of the features to suit the requirements of the clients. The formal insurers often have the attitude of “ This is what we have take it or leave it”.

Many of the insurance companies are yet to work out mechanism to share the costs of MFIs in implementing the programme. While dealing through the NGO/ MFI brings down the transaction cost of formal insurers, there is no formal mechanism with many companies to reimburse the costs incurred by MFIs.

MFIs spend considerable time and efforts to sensitise the insurance company staff to the needs of clients and MFIs. Frequent transfer of staff mean that each time the MFIs have to start all over again with the sensitisation.

The paper work to be done especially for claims is too lengthy and complicated for the poor to comply with.

The time taken for settling the claims is too long as per the MFIs and the clients.

The important lessons from these MFIs for partner – nodal agency/ facilitator model are -

Insurance works on large numbers and diversification of geographic areas/activities. Therefore, while negotiating with insurance companies, MFIs must ensure that the premium is worked out on the basis of all potential clients in their operational areas involved in a wide range of activities.

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The geographic dispersion of coverage along with multiple activities for group cover for a large number of clients will certainly reduce the premiums.

ICNW has been acting as a nodal agency of insurance companies for almost ten years. Some of the good practices the organization follows are

1. Every year when ICNW negotiates with the insurance company for the insurance product, they have accurate data on aspects such as the following:

Business turnover offered (both by volume in amount as well as number of clients) Premiums paid, payouts made, the ratio of payouts to premiums, generic categorization

of payouts, increase (decrease) in premiums/payouts and associated reasons and all of this by various areas (geographic, business and sectoral areas).

Good (realistic) projections of what they can offer further in terms of coverage of clients and premiums with specific targets for each quarter and forthcoming years. ICNW also project the likely risks based on solid historical data and also provide concrete evidence on how our past year projections by and large matched what actually happened. ICNW also point out to companies the various efforts (like promotion of best practices) that they undertake to reduce the risks on an on-going basis.

2. ICNW also insists and gets a good ‘deal’ by citing competitive quotes (without mentioning names) of other companies offering similar products.This helps because then the insurance company knows and understands that ICNW understands the market.

3. By doing the above and given its very large scale and high diversity in operations, the insurance major sees ICNW as a well informed and primary client and thereby negotiating becomes easier.

4. Any problems should be sorted out and roles and responsibilities are re-defined at the negotiation stage – it is far easier to do it then rather than after the contract is signed.

5. Signing bulk contracts for 3 years has also proved useful sometimes.

ICNW has a client sensitization module for the clients covered by insurance. The training module aims at imparting knowledge of the insurance schemes to the clients and also equips them to deal with claim procedures and dealing with the norms of insurance companies.

3.2.18. Regulation issues - Legal status

From a legal point of view, insurance products cannot be offered by organisations that are not licensed by IRDA. CDF has termed the insurance scheme as a welfare measure in its annual reports. In case of LEAD, the nature of this scheme should change to reflect cattle health care, rather than risk assurance. The IRDA norms might come in the way of the product being offered to the general public; it will have to remain confined to the members of LEAD’s programmes. The MFIs are not complying with any of the present norms of IRDA for minimum capital, reserves and investment of income. The capital norms are much beyond the scope of the MFIs. The legal experts these MFIs have consulted maintain that as long as the organizations term the insurance schemes as welfare measures and do not use the term insurance in the product title there may not be any serious violation of norms.

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In case of partnering with formal insurance companies, MFIs would be facilitators, and compensated for their services in providing product design support, potential client database, support for claim application procedure, marketing campaign and awareness building. As the IRDA regulations stand, MFIs who are not corporates/NGOs cannot be formal agents of insurance companies. However individual staff of MFIs and NGOs could be certified as agents after completion of examination procedures stipulated by IRDA. But the staff turnover of certified agents could rise, as it is a coveted skill, having wide application even in mainline insurance. Equity partnership does not seem likely on account of the high level of investment needed. Given the charitable nature of NGOs and the small size of operations of MFIs, finding even 10 % to 20 % of minimum equity required is unlikely.

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4.0. Risks faced by the MSEs

The present study also focuses on the risks faced by MSEs in India. Although exploratory in nature, the study has the following specific objectives:

1) To understand the risks faced by low income small/micro-entrepreneurs 2) To highlight the specific problems and situations that contribute to the various risks3) To describe coping mechanisms and strategies used by low income entrepreneurs to

manage these risks4) To explore a range of situations/contexts to understand the above in comprehensive

manner5) To ascertain (specifically) the use of micro insurance as a (possible) risk mitigating

strategy and also examine its effectiveness in various situations6) To measure intentions of these entrepreneurs to use insurance as a coping mechanism

in the future, and 7) To propose how micro-insurance could be used as a viable strategy to enable the low

income entrepreneurs to mitigate risks in their small and micro-enterprises (SMEs)53

4.1. Demographics and brief background of the MSE households

In all, 113 households were interviewed. 28 males (24.78% of the sample) and 85 females (75.22% of the sample) participated in the survey. The majority (68%) of the sample had nine years of formal schooling. Nearly 55 percent were in the age group of 30 to 45 years. Ninety of the 113 respondents were married and 14 were widows. As per the housing status, 34 % of the sample are very poor, 32.74 % are medium poor and almost 32 per cent are not so poor54. Nearly 41 per cent of the sample had five to seven members in the households.

4.2.Profile of Enterprises

Approximately 62 per cent of the enterprises were micro enterprises, 30 percent were tiny and only 6 per cent were small units. One interesting observation is nearly one third of the sample had multiple enterprises which help in diversifying their risks. The households with multiple enterprises are usually not so poor.

4.3. Access to financial services

The households surveyed had borrowed more for business purposes than consumption needs as indicated by them. Since the MFIs in which they were members had fixed a ceiling on how much each member can borrow , the respondents had borrowed from private financiers for their business needs. All the households were saving in the compulsory thrift schemes of the MFIs. The majority (75) of households saved only with the MFI whereas others had savings with other institutions such as the post office, banks etc., The majority (83 number) of the households mentioned that they were saving for managing any unforeseen crisis.

53 This aspect was also discussed with the concerned MFIs so as to explore various solutions including use of insurance and other mechanisms. These deliberations have been summarised in the case studies given in annexure 3.54 Poor as per housing status are those living in huts with thatched roofs. Medium poor are those living in tiled houses and not so poor are those living in houses with concrete roof.

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4.3.Life cycle events, setbacks and emergencies and coping mechanism

The respondents were also probed about life cycle events, setbacks and emergencies that they had faced (as a household). Information on the major expenditures associated with these in the last five years55 was also gathered. The primary objective was to understand the type of setbacks/events/emergencies that these households experienced, the effect of these on the households’ finances, other impacts and most importantly, naturally adopted coping mechanisms. Basically, the events, setback and emergencies were classified as Life Cycle Events –marriage, social functions, education, housing etc., and Setbacks/Emergencies – drought, rain/flood, cyclone and other natural calamities, loss of animals, loss of business assets, ill health, accident, death, maternity and desertion

4.4. Life cycle events

The respondents have experienced the following life cycle events during the last five years - marriage in the family, house construction, social functions and a divorce. None of the households mentioned education as a major expenditure. Marriage and house construction involve major expenditure. House holds use savings, loans56, and sometimes sell animals to cope with the expenditure. Only rarely the families dispose of fixed assets like land to meet the life cycle expenditure.

4.5. Major emergencies/ setbacks

The major setbacks experienced by the households include loss of livestock and business assets, accident and ill health. The other setbacks have been floods, maternity expenses and death of family members - these have been experienced only by a few members.

Ill health seems to have affected the maximum number of respondent households during the last five years. Analysis of data shows the incidence of illness has been more in Tamil Nadu than in Andhra Pradesh. A variety of illnesses57 have affected members belonging to various age groups. When the illness has struck the entrepreneurs, invariably the businesses have suffered. Even illness of the household member58 affects the livelihood of the entrepreneurs.

Households usually used their savings, borrowed money from a variety of sources, sought the help of relatives and sometimes pledged the household assets especially jewels to cope with the risk. None of them had taken health insurance and were not aware of its availability.

55 Only a five year period was considered since this is essentially a memory recall method technique56 Before spending for the marriage and social functions, the households estimate the cash gifts that are likely to be received and take loans in anticipation of the gifts to be received. The loans are usually for a very short term and are repaid out of the gifts received57 Sometimes the households merely mention fever as the sickness but have spent as much as Rs.10,000( $210) for treatment of the same58 Rani and her husband are involved in sickle making. Both of them have to work jointly to make the sickles. For the last three years Rani’s husband has been suffering from nervous weakness and is unable to work for almost ten days every quarter. This means complete loss of income and additional medical expenditure. Sandhyasu is a poor weaver and the household of five members is mainly dependent on his income. His father is suffering from what he refers to as “diabetic foot” for the last three months. He has to be taken to the hospital sixty kilometers away very frequently. The hospital expenditure has exceeded Rs.15,000( $310). During such visits Sandhyasu has to forego his work and his income.

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Thirty six households had lost their business assets and livestock in the last five years. The reasons have been fire, theft, accident, cheating by business partners and price fluctuations. The effect has differed from enterprise to enterprise - loss of income, scaling down operations, rebuilding the premises and enterprise and indebtedness. The house holds have usually borrowed from money lenders to cope with the risk. Only in two cases insurance has been taken – in the case of a death of a cow which was insured the respondent got compensation and another respondent has lodged a claim for compensation against fire.

Twelve households have experienced accidents59 during the last five years. Some accidents have involved the entrepreneurs. The accidents have caused, apart from mental trauma, financial burden on the families. Thus the households adopt a variety of coping strategies to deal with setbacks and emergencies and formal insurance is not very common among the households for dealing with such emergencies. Going by the incidence of emergencies and setbacks, there is vast scope for designing and selling health and accident coverage for persons, as well as insurance against loss of business assets to these households. However, the incidence of emergencies and setback is just one indicator of demand.

4.6. Risk profile of the MSEsThe risk profile of the enterprises was gathered from the respondents. In all details of 143 enterprises were gathered60. The enterprises have been classified into 7 categories. Allied activities include livestock rearing – cows, buffaloes, sheep, goats and poultry birds. Though most of the households had a few hens, one or two goats, they were more for consumption purposes. Only larger and more commercial units were included. Industry includes all manufacturing activities. Service includes tractor hiring, small businesses. Composite enterprises included an enterprise which falls in more than one classification such as cycle shop carrying out repairs, selling spare parts as well as hiring out cycles.

Serial Number Classification No. of enterprises

1 Agriculture 3

2 Allied Activities 25

3 Industry 28

59 Bikshyapati is a carpenter in Makdoompuram. He was undertook work for individuals as well as working on contract for shop owners. He constructed a new house. Within six months of house construction he met with an accident and lost his right thumb . He recovered in six months and could under take some work. Then he sprained his left hand and it took another three months to heel. He blames it all on the inauspicious time in which the house was constructed. what does this mean and why have you placed it here?. To highlight the superstitions and beliefs. Due to the accident he is unable to take up such work, which needs a fine finish.. He is able to earn only Rs.50(US$1) instead of Rs.100(US$2) per day. His son has taken up his profession leaving aside aspirations to study further. Bikshyapati is very keen that his son should be insured against accident. 60 As had been mentioned in the earlier section some of the households ran more than one enterprise and hence the number of enterprises are more than the number of households.

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4 Service 17

5 Business 32

6 Trading 32

7 Composite 6

Total 143

The risks have been classified as human risk, risk to the business asset61 and other business related risks. Human risk is any mishap to the entrepreneur and his/her employees/ household in carrying out the activity These include health hazards, accidents and loss of life. Risk to business assets can be 1)theft, fire, riots, 2) damage, repair in case of machinery and tools and disease in case of birds and animals, 3) Complete loss of assets including death of animals and 4) malfunctioning especially infertility of dairy cows. Business related risk include customers related risks( bad debts), market related risks( competition), natural calamities and technological changes.

Information on the impact of such a risk on the respondents and their businesses, likelihood of the risk occurrence, how frequently the respondent worries about the risk and whether insurance has been availed to manage the risk, was ascertained from the respondents.

4.7. Summary of observations on risks faced by MSEsFrom the study, it appears that certain risks are more generic to specific ‘categories’ of enterprises and this is summarised in the Tables below.

1. Two specific aspects need analysis :

o Given a specific risk and sub-risk, what categories of enterprises are likely to perceive this risk as a major one?

o Given a specific category of enterprise, what kinds of risks are likely to be regarded as important?

2. Both of these issues have been summarised in the Tables below with Table A focusing on the 1st question and Table B on the 2nd question.

Table A - Grouping of Enterprises Across Types of Risk

Type of Risk Largest Group of respondents were from …

2nd Largest Group of respondents were from …

3rd Largest Group of respondents were from …

Least (Smallest) Group of respondents were from …

61 The business assets are the physical assets employed in the enterprises are the machinery, tools and stock in trade in the case of industry, service, business, trading and composite enterprises. In the case of the activities allied to agriculture the assets are the animals and birds as well as the sheds

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Health Trading Business Service Agriculture, Allied Activities

Accident (H) Industry Trading Business Allied

Loss of life Industry Service Business Trading, Agriculture, Allied Activities, Composite

Loss of life Industry Service Business Trading, Agriculture, Allied Activities, Composite

Theft/Fire/Riot Business Industry Trading Agriculture

Damage/Repair/Disease Allied Activities Industry Trading Agriculture

Complete/Loss/Death Allied activities Service Agriculture Trading

Bad Debts Business Services Composite Agriculture

Market Related Industry Trading Business Agriculture

Natural Calamities Trading Industry Allied Activities Composite

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Table B - Grouping of Enterprises Across Types of Risk

Largest Group of Enterprises mentioned following risks

2nd Largest Group of Enterprises mentioned following risks

3rd Largest Group of Enterprises mentioned following risks

Least Group of Enterprises mentioned following risks

Trading Health Natural Calamities

Accident Market related

Theft/Fire/Riot Damage/Repair/Disease

Complete Loss/Death

Industry Accident Loss of life Market related

Theft/Fire/Riot Damage/Repair/

Disease

None None

Business Theft/Fire/Riot Bad debts

Health Accident Loss of life Market related

None

Allied Activities

Damage/Repair/ Disease Complete

Loss/Death

None 1.Natural calamities Health Accident Loss of life

Services None Loss of life Complete

Loss/Death Bad debts

Health None

Composite None None Bad Debts Natural calamities

Agriculture None None Complete Loss/Death Theft/Fire/ Riot

Damage/ Repair/ Disease

Bad Debts

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Market Related

Thus some of the enterprises are prone to certain risks by the very nature of their business. While designing insurance schemes for the MSEs these aspects should be borne in mind and instead of a generic insurance scheme, user specific scheme can be thought of.

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4.8. Insurance Aspects - Present and intended insurance coverage of the households

• Nearly 49.56% (56 respondents) had purchased insurance cover form formal insurance companies. An almost equal member, 57 respondents (50.44% of sample) did not have any insurance coverage. Out of the 56 households with insurance, 48 respondents (81.36%) had life coverage62 while just 11 63 (18.64%) had non-life coverage64.

• The survey also focused on clients’ ‘Intention’ to buy insurance and their preference for ‘type of insurance coverage required, possible premium to be paid etc. An overwhelming majority of clients, i.e., 94 of 113 respondents said that they would like to take insurance cover. 11 said that they would not insure while 8( the women clients) did not provide an immediate response and said they had to consult their husband.

• Of the 94 who expressed an intention to ‘buy’ insurance, a large majority, nearly 66 of them ( 70.21%) exhibited a preference for non-life products. The top five products (in terms of maximum number of respondents opting for them) were health, others, general asset insurance, life for self and accident. Almost all the households interviewed are keen to continue their present insurance coverage and take up additional coverage subject to the affordability of premium.

• The majority of respondents (nearly 64.60% or 2/3rds) said that they would be willing to pay upto Rs.500 ($ 10.5) per annum. Clearly, this represents a great business opportunity of the service provider.

The implications to the micro insurers on the client survey are The reach of non life insurance products in the MSEs is low. The households especially the male members have bought life insurance. LIC has a

very good network of agents and the products are easily bought. However, the traditional and stereotype view of many including insurance agents are that men are bread winners and they are decision makers. This has made them contact only the men in the villages. Moreover, many of the agents are men and this has also contributed to more men being covered by formal insurance than women. The present distribution channel is more male oriented.

Insurance outreach has gender dimensions. Men are seen as bread winners and hence they take insurance cover. Many of the women interviewed did not under stand the principles of insurance. Once the concept was briefly explained they expressed keenness.

Non life is viewed as no return policy.

62 An overwhelming majority (>81%) of respondents reported life coverage because of popularity of various kinds of life schemes in India currently. LIC has appointed agents in many of the rural villages and the respondents had taken insurance since they knew the agent personally. Many agents collect and pay the premium in the office of the LIC on behalf of the clients. The life insurance policies have been bought mostly from the agents of Life Insurance corporation (LIC) of India. Two respondents had taken life insurance with Peerless Finance but they had not paid more than two insurance premiums and the state of the policies is not known.63 The number of responses (59) for type of insurance coverage exceeds number of actual respondents (56) as responses are not mutually exclusive. In other words, some respondents did have multiple insurance cover64 The coverage is mostly for compensation for accidents. Two respondents have taken cattle insurance with LEAD. Two respondents had insured their households and businesses against theft and fire. Only one respondent has taken health insurance.

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Many of the households have expressed willingness to purchase insurance. However, in order to convert this desire to action the product has to be designed suitably to meet their requirements.

Adverse selection may be the important hazard the micro insurers have to plan against. Some of the households who have expressed keenness to buy insurance are those who are suffering from the risk such as ill health.

Most of the households felt that they could pay more than Rs.200 and upto Rs.500. This provides a very good opportunity for micro insurers to tap this market.

Client sensitization and product development incorporating features suited to the clients will go a long way in tapping this market.

5.0. Conclusions

The MSEs in India are prone to a variety of risks. They adopt a range of risk management and coping mechanisms to deal with uncertainties faced in their businesses as well as the household. The present study reveals that

The MSEs have access to a variety of informal financial services.

Savings is the popular instrument and many households report that they save to manage emergencies.

Borrowing is another mechanism by which they smoothen their liquidity, which is affected by risk-induced shocks. They borrow mostly from informal sources, being the quickest and timely means of raising funds.

Of formal insurance products, life insurance is more popular among the households; agents of the formal insurance company being resident in the villages facilitating easy sales of insurance policies.

Coverage of women is less even in life insurance; Sales of policies to mostly men perhaps stems from the gender stereotyping relating to finance being a men subject. The concept of insurance is still not popular among the women.

Non life insurance is usually viewed as a no return investment.

While discussing the risks these households face in carrying out their enterprises, they have expressed three types of risks – person related, business asset related and business related. It is interesting to find that certain types of risks are generic to the businesses. For example, toddy-tappers65 face life risks each day, gem cutting entrepreneurs find that their health is suffering after undertaking the activity and many of the small businesses face the problem of damage due to theft and fire. While some of these risks are insurable there are many other risks which are not currently insurable. The problem of late payments and bad debts is the most serious risk being faced by small businesses for which there is no insurance cover. Similarly the weavers and gem cutting units find technological changes seriously affecting their livelihood.

The analysis of current products available to the SMEs from the formal insurers shows that there are a number of schemes which are available to cover these risks. However, design of the products are not customer friendly and do not suit the needs of customers. Formal insurers seem to carry the (mistaken) perception that the profit potential in insurance business in rural

65 Toddy is the juice from palmyra palm which is brewed into country liquor. The palmyra palm grows to twenty feet. The toddy tappers need to climb them to collect the juice.

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areas and MSE sector is limited. Insurance both life and general, are widely recognised to lack market orientation and customer service. Non-life insurance has not touched most MSEs in any significant way, especially in the informal sector. With the advent of new players and the stipulations of IRDA to underwrite a minimum percentage of business from rural areas there might be an improvement in design and delivery of appropriate products.

The problems that exist in insurance cover for MSEs and rural sector need to be addressed to expand this market. The perception that insurance is an investment should be dispelled. The difference between risk hedging and investing for returns should be made clear to the clients. The fact that insurance does not permit the customer to undertake risk inducing behaviour needs to be clearly established. The structure and periodicity of premia should closely follow the cashflows of clients. The method of collection should enable easy transaction to the client. Incentives for continued cover, year after year needs to be built in. An element of compulsion may be necessary in the initial years for covering large numbers, which provide the strength for negotiating with insurers on product design and premia. The compulsion may be built in through the different development projects that are undertaken for the clients, or banks. The problem of lack of direct interaction between insurers and insured needs to be dealt with.

Provision of insurance services to the poor can be ridden with problems especially of moral hazard and adverse selection. The low level supervision over clients especially with those with risky behaviours can result in escalation of claims. Similarly the chances of adverse selection can also affect the insurers. For example, among the survey respondents who were to keen to take up health insurance were those who were suffering or recently suffered from illnesses. These aspects can be taken care of at the design stage. One possibility is to bunch a number of risks together and insure for the same. The second could be to cover a wider clients which results in deepening of risk pool. Thus instead of covering only the sick person in the family the entire family needs to be covered under health insurance. The group methodology adopted by the MFIs can also help in tackling this issue. The groups and MFIs can be made to work as watchdogs especially in the larger interest of the success of the schemes and future benefits especially in terms of lower premium for groups with lesser claims.

As per the present regulations of IRDA, MFIs and NGOs cannot carry out direct insurance business as principals. As per the regulations, NGOs, MFIs (except where they are incorporated as companies) cannot be certified as agents. But there is a definite opportunity for microfinance institutions and NGOs dealing with the MSEs to act as a facilitator to fulfill the insurance needs of SME households. The IRDA norms with emphasis on rural sector and the disadvantaged people and the social sector obligations would in fact help NGOs/MFIs to approach insurance companies with confidence. They would be of great help as facilitators and partners in enabling companies meet their obligations under the IRDA norms. The role of NGOs/MFIs could be very significant in product design suitable for MSEs and poor households. They could also facilitate the interface between the insurer and insured, in fulfilling the formalities of taking cover and making claims. With a large number of insurers to choose from, they can bring the best products at best premia rates to the rural areas.

Presently there are some NGOs and MFIs offering insurance products on their own to their constituents. This contravenes the IRDA act and regulations. The insurance providers must obtain a license from IRDA for which they should satisfy certain financial and organisational norms. None of the NGOs/MFIs are in a position to satisfy the norms. If the laws are stringently applied, they have to stop the insurance business and look to distributing products from registered insurers. Some of the MFIs and NGOs are currently offering insurance as

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welfare package to their constituents and are not mentioning the word insurance in their scheme details though in essence they are offering insurance services to their clients.

If contravening the law is one major aspect, being able to satisfy the conditions of the explicit/implicit contract that they have entered into with their clients is the other concern. Many of the NGO/MFIs, lack financial strength, but are in the ‘insurance’ type business, face the prospect of not being able to cover their possible claims liabilities, if the situation so demands. Given that many of these NGO/MFIs don’t have any form of re-insurance, the risk of not complying with their contractual obligations is high. In the event of defaults on the part of MFI to settle all the claims, there will be very serious repercussions for the sector as whole – while admittedly, clients will suffer (because of not being able to get their insurance), the other products offered by NGO/MFIs will also lose their credibility, thereby resulting in erosion of the good will already earned.

Thus the present problems that micro insurers face are

1. Regulation and supervision excluding their direct involvement2. High transaction costs – on account of small value policies3. Lack of significant experience with different kinds of insurance products4. Irregular household income flows5. High level of premiums 6. Limited understanding of insurance needs of clients7. Limited financing options for MFIs to make forays into micro-insurance8. Lack of technical (actuarial) expertise

This then takes us to the challenges that MFIs and NGOs face with regard to Microinsurance.

Challenges before MFIs and NGOs

Creating an awareness among their constituents regarding insurance as a risk management mechanism

Demystifying insurance related beliefs and superstitions Matching product design to customer requirements Ensuring regularity of premia collections in the face of irregular income flows of MSEs Skill building of their own staff

Given this scenario, the partner agent model seems to be best suited for NGOs and MFIs wanting to enter insurance sector. However, the present norms do not permit an NGO/MFI to become an agent unless they register a company66. Many of them are currently registered as trusts, societies and cooperatives. None of these legal forms are permitted to be agents of insurance companies. NGOs/ MFIs have to lobby for their needs with IRDA to modify the present norms.

There is a possibility that NGOs and MFIs might network and set up a dedicated insurance company to serve the sectors that they are active in. But the initial capital requirement of Rs 10 billion (US$0.22 billion) is too high; it is difficult to conclude that the volume of business in the initial years, that would be generated from these sectors would be sufficient to provide a return

66 As the movement to get NGO/MFIs to form exclusive companies for financial intermediation (savings and credit) gathers momentum, this problem should get reduced.

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on the capital to be invested. It might be difficult to find resources of this magnitude, with a very long payback period.

To sum up, what is required in microinsurance is that all major actors need to share the objective of providing sound, responsive, market-based financial services to the poor, in ways that are advantageous to both the clients and the institutions that serve them. Without question, for such an effort to succeed, the goal should be to provide access, not subsidies, to low income people, who are willing pay reasonable premium, provided the service is good. As the case studies and surveys reveal the poor can and are willing to pay for affordable and efficient insurance services. The provision of demand based insurance services to the poor could serve as the beginning for ushering in a new era in microinsurance in India, one where the bargaining power of the buyers is high and the invisible hand (of the market) regulates to its best ability.

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Bibliography

Arunachalam Ramesh S (1999), “State of the Indian Micro-Insurance Industry”, Unpublished manuscript, MCG Capacity Builder Series.

Brown Warren, Churchill Craig( 1999), Micro Insurance: Providing Insurance to low income households, Working draft, Micro enterprise best practice, USAID, Calmeadow.

Brown Warren, Churchill Craig( 2000), Insurance provision in low income communities PartII, Initail lessons from Micro insurance experiments for the poor,Draft, , USAID, Calmeadow.

FWWB News, Special Issue on Micro Insurance,Volume 2, No,2January 2001, FWWB, Ahmedabad.

Krause Patrick(2000), Non Profit Insurance schemes for the unorganized in India, GTZ.

Nunally, JC (1967), “Psychometric Theory”, Mc Graw-Hill, New York.

Pant Niranjan, Insurance Regulation and Development Bill, An appraisal, Economic and Political Weekly,6, November,1999, Mumbai.

Porter, Mike (1980), “Competitive Strategy – A Framework for Analyzing Industries", Free Press, New York.

Porter, Mike (1980), “Competitive Advantage", Free Press, New York.

Ranade Ajit, Ahuja Rajeev( 1999), Life Insurance in India: Emerging issues, Economic and Political Weekly, volume XXXIV Nos.3 and 4, January 16 –23 1999, Mumbai.

Roth Jim,( 2000),Informal micro – finance schemes:the case of funeral insurance in South Africa,International Labour Office, Geneva.

Taxmann(2000), Regulations Framed under Insurance Regulatory and Development Authority Act, Taxmann Allied Services Ltd., New Delhi.

Annual reports and Internal Documents provided by the MFIs studied.

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Annexure 1

JANASHREE BIMA YOJNA GUIDELINES

Janashree Bima Yojana has been designed by LIC , for the persons below poverty line. The salient features of the scheme are as under:

Objective

The objective of this scheme is to provide life insurance protection to the rural and urban poor persons below poverty line and marginally above poverty line.

Eligibility :

1. Persons between age 18 years and 60 years2. In addition to persons under BPL, even persons marginally above poverty line may be

covered provided they belong to identified vocational groups 3. Persons living in one area even if they belong to identified vocation s where relationship

of vocation is established like taxi drivers and auto rickshaw drivers can be grouped for the scheme, if nodal agency is one.

4. The groups will be identified and notified by LIC in consultation with State Govt/Nodal Agency.

5. Minimum Membership should 25 under, Rural poor and Urban poor

Benefits

A) In the event of death of the member Sum Assured of Rs. 20,000 will become payable. To the nominee.

B) Accident Benefit: In the event of death by accident or partial /Total Permanent Disability due to accident the following benefit shall be payable to the nominee.

i) On death due to accident Rs 50,0000 US$ 1086

ii) Permanent total disability due to accident Rs 50,0000 ‘’iii) Loss of 2 years or 2 limbs OR One eye and one limb in an accident Rs 50,0000 ,,iv) Loss of one eye or one limb in an accident Rs 25,0000 US$543

Premium• Initially, Rs 200/ -per member to be shared as under• 50% of the premium to be paid by members or Nodal Agency Or State Govt at the time

of submitting proposal and subsequently on each annual renewal date. - The balance 50% of the premium will be borne by social security Fund.

• Experience Rating Adjustment will be allowed after 3 years on the basis of claim experience, if the group is of minimum 2000 members. Even if the group is small and if the claim experience is adverse, we may review the rates.

• Premium for AB/ PDB will be debited to SSF @ Rs. 3.50 per member.

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• Nodal Agency shall mean the Panchayats NGOs, Self help Groups and any other institutionalized arrangements.

• The Nodal Agency will act for and on behalf of the insured members inall matters relating to the scheme.

Claim Procedure :

The beneficiary of the deceased members will be required to furnish the orginal death certificate to the Nodal Agency who will arrange to forward the same along with the claim papaers to LIC (ie) the Branch which has originally finalized the scheme LIC will settle the claims by sending A/C Payee Cheque directly to the beneficiary. In case of accidental claim police inquiry report will also be required to be submitted. The detailed procedure will be mainly on the lines of the procedure of Social Security Group Schemes.

Vocational/ Occupational Groups

Existing Groups-

The existing 24 occupational groups will continue in the same form for renewal of the Schemes• The existing 24 groups are • The existing Schemes

New Groups-

The vocational will be, for example, on the basis of groups like workers in i) food stuffs like khandsariii) textileiii) manufacturer of wood productsiv) manufacturer of paper productsv) printingvi) rubber & coal productsvii) chemical products like candle manufactureviii) mineral products like earthen toys manufactureix) other related cottage industries to be identified by nodal agencies and also other

groups as identified by the Nodal Agency and approved by LIC.

Approval of the Groups

The vocational groups identified by the Nodal Agencies will be approved by LIC

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Annexure - 2

List of MFIs offering insurance to the clients67

Name of the organisation

Type of insurance

Started insurance scheme in

In house or partnership with insurance company

Voluntary or compulsory

Number of clients

LEAD Cattle 1999 In house Compulsory for loanees

370

Accident 2001 Link with company

voluntary 3000

Life and accident 2001 Link with company

voluntary 500

Association of thrift co operatives promoted by CDF

life 1993 In house Compulsory for loanees

32,000

Chaitanya accident 1993 Link with company

voluntary 600

Chaitanya Cattle 1993 ,, Compulsory for loanees

250

ICNW Life and accident 1983 Link with company

Voluntary 70,900

ICNW Health 2000 Link with company

Voluntary 20,441

ASA Life and accident 2000 Link with company and in-house

Voluntary 5069

67 This list consists of some of the well known micro insurance programmes. There may be other small programmes offering social security to their members.

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cattle 1998 Link with company

Compulsory with loan

2682

SPARC Health 1998 Link with company

voluntary n.a.

Anna Purna Mahila Mandal

Old life pension 1999 Link with company

voluntary 500

Sewa Bank Life, asset, maternity, health

Link with company as well as in house

voluntary 30,000

Mulakanoor Co operative society

life 1980 In house Compulsory for loanees

NA

,, Life and accident 1975 Link with two insurance companies

The co operative society pays the premium out of its profits for all its members as a welfare measure

6,000

,, Motor pumps(damage and electrical repairs)

1990 Link with insurance company

voluntary 3200

,, Cattle insurance ,, voluntary NA

BASIX Life and Accident

2000 Link with Insurance Company

Voluntary 1450

BASIX Crop Insurance 2000 Innovative in-house effort

Voluntary 80

SIFFS Life and Accident

1992 Link with Insurance Company

Voluntary NA

Federations promoted by

Life and Accident

1993 Link with Insurance

Voluntary NA

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DHAN Foundation

Company

Federations promoted by DHAN Foundation

Health 1993 In-house and also linked with company

Voluntary NA

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Annexure 3

Case studies of Micro insurance programmes of MFIs

Co operative Development FoundationCo operative Development Foundation was founded in 1982 with the aim of promoting cooperative enterprise and developing cooperative environment. It has been registered as a Society under the Andhra Pradesh Societies Registration Act, originally under the name of Samakhya68. It has been successful in the promotion of multi purpose cooperative societies involved in agricultural production and marketing and has attempted to translate this success in promotion of thrift cooperatives. CDF has also been successfully engaged in cooperative advocacy, research and training.

Thrift co operative system

The primary organization in the thrift co operative system is the thrift co operative functioning at the village level which consists of 250 to 750 members. CDF has been in favour of such large units as it felt that the operation of smaller units is not viable. It is easier to command more resources such as staff in larger units. Each co operative has smaller groups called joint liability groups consisting of five members. These five members stand guarantee to the loans taken by each other. The thrift co operatives are registered under the Andhra Pradesh Mutually Aided Co operatives Act, 1995.

As on December 2000, the organization has promoted 158 men thrift cooperatives(MTCs) and 199 women thrift cooperatives (WTCs)69. The thrift co operatives are in turn formed into Associations of Men’s Thrift co operatives (AMTCs) and Associations of Women’s Thrift co operatives (AWTCs). The thrift co operatives within a radius of 10 to 14 Kilometers are the members of the associations. Thus each association has 10 to 12 co operatives as members and has a coverage of 3000 to 5000 individual members.

68 In Sanskrit the word Samakhya translates to speaking as equals. In the local language Telugu Samakhya means Federation.69 Exclusive women’s thrift co operatives have been formed since CDF had not been able to involve many women in the co operatives it had earlier promoted. The agricultural co operatives had an exclusive male membership. Given the social milieu it was difficult to ensure participation of women in the mixed group and there fore CDF started emphasizing on all women’s co operatives.

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CDF structure

Thrift co operative1) Size - 300 to 1000 members2) Board of Directors 12 members(with staggered terms)elected by

General Body3) Director’s term 3 years4) President Elected by the Board of members from among

themselves5) Term one year6) Staff Book keeper7) Meetings Board meets every month.General Body

consisting of all members meet once in a year.

Association1) Size - 10 –20 TCs within 10 km radius2) Board of Directors 6 members elected by General Body3) President Elected by the Board of members.4) Term one to three year5) Staff Internal auditor and book keeper

Socio economic profile of the members

The thrift co operatives include members from the whole of the village and operates on the principle of open membership. Thus CDF does not encourage caste, class or religious solidarity. They are heterogenous in nature - both poor and rich are members. Similarly the members belong to different castes and religions.

Major activities

The main activities of the thrift co operatives are mobilization of the savings of the members and disbursement of credit as per their needs. In the initial years the co operatives usually had only one savings product - the compulsory thrift deposit of the members. Every month equal amount is paid by all the members. As the co operative gained experience three more products (voluntary) have been introduced since last year – savings deposit, recurring deposit and fixed deposit.

1. Savings deposit enable the members to deposit their small savings as and when they can. The amount deposited can be withdrawn as per their needs.

2. Recurring deposits - members deposit a fixed amount each month and the period of deposit vary from one year to three years. Members can borrow 75% of their deposits under this account as a loan.

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3. Fixed deposit - members deposit a minimum of Rs. 500 and in multiples of Rs.100 there of for a fixed period of one, two or three years. As in the case of recurring deposit the member can borrow up to 75% of their deposits as a loan.

4. Death Relief Assistance Scheme ( DRAS) Deposits – The borrowers are covered under DRAS, an insurance scheme providing coverage up to Rs.10,000. The amount of coverage depends on the age of the member. Members pay a deposit as per their age and eligibility. The deposits are with drawable after three years provided no loan is outstanding in the member’s name. This scheme is covered in more detail later.

Table 3.1 Terms of deposits at thrift co operatives

Type of deposit Period of deposit Rate of interest (per cent per annum)

Compulsory thrift Each month 12Savings Any time 6 Recurring deposit 1 year 9

2 years 103 years 11

Fixed deposit 1 year 82 years 93 years 10

Lending programme

The members are eligible to borrow up to thrice the amount deposited by them in compulsory thrift and DRAS. Deposits in other products are not considered for loan eligibility. The older societies lend for short to medium term of up to 24 months. The interest rate varies from society to society. The societies are normally charging a rate of interest of 18 to 24 per cent per annum on the loans.

The membership in these societies and other key data are given below

Table 3.2. Thrift co operatives formed by CDF - an over view

Description Unit Men’s thrift co operatives Women’s thrift co operatives

1998 1999 2000 1998 1999 2000Members No. 18036 20,477 31,308 31,271 38,187 45,386Number of TCs

No. 69 91 158 100 143 199

Association of thrift co op

No. 6 9 21 12 15 27

Members with recurring depositSavings deposit

No.-

--

97

6

106

96

276

14

890

211

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Fixed deposit 17 51 - 61Borrowings from AMTC

No. N.A. N.A. 44 N.A. N.A. 63

Borrower members

No. 11,278 13,507 19,537 21,467 25,916 31,909

Regular thrift Rs.in lakhs

199 310 465.90 261 354 455

Borrrowings of members

Rs. In lakhs

219 341 506.69 298 417 578.83

Borrowings from AMTC

Rs. In lakhs

31 32 48.33 17 20 64.82

Average membership in TC

261 225 198 313 267 228

Average thrift per member

Rs. 1,103 1,513 1488 834 926 1003

Average loan outstanding per borrower member

Rs. 1,942 2,522 2594 1388 1608 1813

Average loan disbursed per member

3,471 3,709 2926 1674 1989 2163

Role of Associations

The main function of the Associations of Thrift Co operatives (ATCs) is to enable long term sustainability of the thrift co operatives. ATCs enable inter lending among the societies. The cash rich societies keep their funds with the associations. The funds are lent to the societies in need of money. The thrift cooperatives do not borrow from any external source for lending to their members. They have also not accepted any matching grants from Government or Donors for on lending or to meet their costs. Thus these institutions rely on their own savings to meet the credit needs of the members.

The other important functions carried out by the association are policy setting, training and extension, internal audit, conflict resolution, standards setting and management of the external legal and policy environment.

Each of the association has an office of its own. The office is situated in such a place which is easily accessible to all the thrift co operatives. A full time employee takes care of the .transactions, books of accounts and auditing of the societies. He also attends the monthly meetings of the co operative societies.

Sources of funds for the associationThe association mobilizes various types of deposits from the thrift co operatives. Each thrift co operative needs to pass on to the association five percent of the compulsory thrift they mobilize from the members. Apart from the compulsory thrift, the societies can open savings, recurring

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and fixed deposits with the Association. Any CDF loans to the societies are routed through the Association.

Table 3.3 - Details of deposit facilities at Associations

Type of deposit Period of deposit Rate of interest (% per annum)

Compulsory thrift Each month 14Savings Any time 7 Recurring deposit 1 year 9

2 years 103 years 11

Fixed deposit 1 year 82 years 93 years 10

The funds mobilized under the different deposits are primarily used for lending to the societies. The Associations charge 16 percent interest on the loans. The association implements the DRAS and mobilizes deposits under the scheme. This scheme is covered in detail below.

The Death Relief Assistance Scheme – (Life insurance)The death relief assistance scheme has been conceived primarily to protect the loan portfolio of the co operatives. The members deposit a fixed amount and get coverage upto Rs.10,000. In the event of death any loan outstanding is first adjusted and the balance is paid to the nominee. The scheme has been categorized as a welfare scheme by the organization in its annual reports.

Scheme details

Though the scheme mentions that the membership is voluntary, it is seen that membership to DRAS is compulsory for all the members who have borrowed loans from the TCs. The scheme is voluntary only for the savers and a member can withdraw from the scheme if s/he does not have any loans outstanding.

Who can become members?Any member of a TC who has completed 18 years of age but not 50 years at the time of admission to the scheme can become a member. The applicant should not be suffering from any life endangering disease and should be healthy. No medical certificate needs to be produced to this effect. Since the members live in close proximity to each other, the medical history of the member is known to the villagers and the TC and this knowledge aids screening of members.

Procedure for becoming a member of DRASAny person intending to join the scheme has to fill in the application form in duplicate and submit to her/his TC. All correspondence and transactions with the members of the scheme will be done through the TC. The TC on preliminary verification of the papers sends the same to the ATC. On receipt of application along with the entrance fees and deposit, the ATC issues the membership cards.

Deposit amount

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Any member of TC desirous of joining the scheme has to pay an entrance fee of Rs.10 and a deposit of minimum of Rs.50 along with the application. The deposit can be made in multiples of Rs.50 in the scheme. No interest is paid on the deposit. At present the amount of relief to be paid on the death of a member is Rs.10000 and the coverage is equivalent to 20 times the deposit amount paid by a borrower. The deposit amount varies according to the age of the borrower. Thus in order to get the coverage of Rs. 10,000 the deposit to be made is as under

Age of the member Deposit to be made

Coverage

18 to 35 500 20 times 36 to 50 667 15 times 51 to 55 1000 10 times

Since the scheme is to cover the outstanding balance of loan, the amount of loan is to be upto 20 times the deposit in the DRAS account. Thus if a member in the age group of 18 to 35 has made Rs. 200 as a deposit in the scheme, he is eligible for a loan of Rs. 4000. Similarly if a member in the age group of 51 to 55 has deposited Rs. 500 under the scheme, he is eligible for a loan of Rs. 5000.

The members deposit the amount of DRAS with the TC whose offices are opened from 10 in the morning till 5 in the evening. Presently, many of the TCs deduct the deposit amount form the loan amount and pay the client the net amount.

Withdrawal from the schemeAny member by sending an application to the ATC through the TC can withdraw from the membership after completion of 3 years in the scheme. The member’s deposit along with bonus is to be returned to the TC by the ATC within three months from the date of resignation. The bonus to be paid to the member is decided by the ATC from time to time.

The membership shall cease in the scheme in the following casesFrom the date of notice given for withdrawal of membership from the scheme,From the date the member TC withdraws/Ceases/removed from the membership of the ATC.From the date the member completes 60 years of age.From the date the member withdraws/ ceases/ removed/ expelled from the membership of his/her TC.

Settlement of claim

In case of death of a member, the maximum relief assured by the ATC isAn amount equivalent to 20 times of the deposit amount kept in the scheme before completion of 35 years of age subject to a maximum of Rs. 10,000.An amount equivalent to 15 times of the deposit amount kept in the scheme after completion of 35 years of age but before completion of 50 years of age subject to a maximum of Rs. 10,000.An amount equivalent to 10 times of the deposit amount kept in the scheme after completion of 50 years but before completion of 55 years of age subject to a maximum of Rs. 10,000.

On the death of the member a claim has to be lodged by the nominee in a specified format enclosing a death certificate and the membership identity card. The endorsement of the concerned TC is made before forwarding the application to the ATC. ATC verifies the claim by visiting the TC and the nominee’s family.

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The assured amount of relief is paid by the ATC, under intimation to the nominee, to the member TC. The deposit made by the deceased is not returned to the deceased and is credited to the DRAS claim fund. The entire claim amount is released from DRAS Claim Fund. The amount is passed on to the nominee after deducting any amount due to the TC by the deceased member.

Exclusions

The ATC is not liable for payment of relief/ claim amount ifThe death occurs within a month of admitting the member under the scheme.The death is on account of war like operations, communal disturbances, riots, natural disasters like fire, earthquake, floods, cyclone etc., and other disasters that may occur in the work place or in neighbourhood which result in massacre(more than ten deaths).The ATC is not satisfied that the member made all the correct declarations.The member has voluntarily taken a risk which has resulted in the death.If the member has been defaulting in depositing the compulsory thrift amount for consecutive three months and if s/he has been defaulting in loan repayments for three months.

Fund management of the DRAS

At present three account heads are operated for the DRAS scheme.

DRAS deposit account – the funds mobilized under the scheme are kept under this head. The funds are used to lend to the TCs at 16% per annum. In case of less demand from the TCs, the money is kept as a fixed deposit with another agro processing co operative promoted by CDF at interest rate of 15 per cent per annum. If any member retires/ withdraws, his deposit amount is repaid from this account. In case of the death of the member, the deposit of the member is transferred to the Claim Fund account and the total claim amount is released from the Claim Fund.Claim Fund Account – Each year the claim fund is augmented by the interest earned from deploying the DRAS deposits for the lending operations. Since it is difficult to calculate the exact amount of interest earned from only DRAS funds, monthly averages are worked out and the interest at the rate of 16 percent is calculated. The AMTC sets aside 4 percent as the margin for meeting its administrative expenditure. The rest of 12 percent is divided between the claim fund and retirement benefit fund in the ratio of 85 :15. The claim fund is used for settling the claims from the scheme. The claim fund is also used for lending to the society.Retirement benefit Fund account – This fund is augmented each year out of the interest earned as described above. The fund is used for providing bonus to retiring members. At present any person who has been a member for the last three years is eligible for a bonus of 2 percent. This fund is also used for lending operations.

Thus the AMTCs need to manage the funds diligently to generate income for augmenting the claims fund and also for meeting the expenditure of the AMTC.

Role of Board

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The Board of Directors of the ATC can make and amend rules under the scheme. Their decision is binding on the TCs and its members. The General Body of the ATC will review the scheme every two years. The Secretary of the ATC may admit members into the scheme and allow members to withdraw if they satisfy all the criteria laid down and place the details for ratification by the Board at its next meeting. The Secretary of the ATC in consultation with the President of the ATC can settle the claims and disburse relief amount after making a formal enquiry and record the reasons for death in writing. The details are placed before the Board for ratification at its next meeting.

The stakeholdersThe stakeholders under the scheme are the ATC and its Board of Directors, TCs, the employees of ATC and the TC, joint liability group members as well as the members of the scheme. The nominees are the other stake holders. The roles and intended benefits of the scheme are as under

Table 3.4 Role of stake holders

Role Intended benefitCDF Devised and introduced the scheme.

Conducted training to all ATC Board members and employees in the implementation of the scheme. At present CDF reviews and suggests revision in policy. Provides incentive to both association and the TCs at the rate of Rs. 1000 per Rs.1,00,000 of deposits mobilized under the scheme. The incentive of one thousand rupees in shared equally between ATC and TC.

ATC Implements the scheme including Accounting and financial management of the scheme.Carries out audit of accounts.

The funds of the scheme are deployed in the business of the ATC and is the major source of income for the ATC.

Employees of AMTC

Major work is related to the scheme. Motivate the societies and its members to join DRAS.

Their salary is drawn from the income of the ATC. DRAS is the major income earner for

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Attends the meetings of TCs and checks whether all the loanees are covered under DRAS.Maintains all the records pertaining to the scheme - membership cards, admission ledger, society wise ledger, claims and files.Verifies the claims and enables quick settlement of claims.

the ATC.

TC Helps ATC in implementing the scheme. Definite role in member admission.Facilitating quick settlement of claims.Interface between the members and the ATC.

The loan outstanding of the deceased member is repaid out of claim amount ensuring timely recovery of loans. Lengthy procedure of invoking the guarantee of the other joint liability group members as also follow up with the relatives of deceased for repayment is avoided

Members Membership to the scheme.Contributes to the success of the scheme.

S/he can take a loan up to three times the deposit made under the scheme.In case of death the loan outstanding is set off from the claim amount. Any balance claim amount after such set off is paid to the nominee.In case the member attains the age of 60, the deposit along with bonus is repaid to the member.

Operation of the scheme

As on 31 December 2000, the membership in DRAS is as under -

Table 3.5 Membership details

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Sl.no Description As on 1-1-2000 As on 31-12-2000 Changes Details of WTCs1 Number of members in

WTCs38197 46386 21%

2. Borrowers 25116 31909 27%3. Number of DRAS

members22850 21055 - 8%

4. DRAS deposits 18.93 lakhs 71.65 Lakhs Details of MTCs 5. Number of members in

MTCs20914 31308 50%

6. Borrowers 12936 19537 51%7. Members in DRAS 7966 11417 43 %8. DRAS deposits 42.18 lakhs 58.30 lakhs

The scheme is being managed by the ATCS. The admission to the scheme is open only to the members and employees of Thrift co operatives who have a membership in ATC. The women thrift cooperatives have been implementing a loan insurance programme called Abhaya Nidhi since 1992. However, the scheme was not implemented with the full knowledge of the members70. Since DRAS has been introduced in January 2000 in WTCs, Abhaya Nidhi has been discontinued. The deposit under Abhaya Nidhi has been transferred to the DRAS scheme. The deposit in the individual account is far less than the prescribed deposit amount under DRAS. The members have been advised to deposit the balance amount under DRAS scheme. However, the acceptance of DRAS among the women is low 71 and this is reflected in the negative growth in the membership of the DRAS in WTCs.

The men co operatives have been implementing the scheme since its inception. The membership in the co operatives and the number of borrowing members has increased fifty per cent where as the membership in DRAS has increased only 43 per cent. As the co operatives have many members who are more than 55 years old and are not eligible to join the scheme, this has primarily resulted in lower growth in DRAS membership.

Client viewsFocus group discussions were held with seven members of Shri Raja Rajeshwari MTC (member of Pantini AMTC) and six members of Netaji MTC (member of Makdumpuram AMTC). All of them are currently members of DRAS and six of them were holding key positions such as President, Secretary of MTCs and were Board of Directors of the AMTCs.

70 Normally bonus is declared by the WTC each year out of the profits earned during the year. A portion of the bonus of the individual member was automatically credited as a deposit of the individual member to the Abhaya nidhi account. Thus the amount contributed by each member will vary. The funds thus set aside were used in the lending operations. The interest earned was used to settle any loan outstanding in a member’s account at the time of her death. No other relief was available to the family of the deceased. Many of the members were not aware that such an insurance programme was in operation and their membership to the same.71 Makduumpuram WTC has been in operation for the last five years. Initially Abhaya Nidhi was being implemented and DRAS was introduced in 2000. The number of members, as on January 2001, are 1970, the loanees are 1650 where as the DRAS members are only 300. The society has fixed the loan eligibility of members as thrice their deposits under compulsory thrift deposit scheme. In order to mobilize more members under the scheme, the society has decided that the members not joining DRAS will be eligible for loan equivalent to their deposits under compulsory thrift.

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Aspect discussed

Satisfied Reasons for dissatisfaction if any

Suggestions for improvement

Premium amount

In general the clients were satisfied.

However, two members felt that for the amount of deposit they were paying the benefit were less. They felt that scheme subsidized by the Government and being implemented by the formal insurance companies had more coverage in terms of apects as well as amounts. This was not agreed to by others who felt there was confusion about the policies(life and accident) and the members were not aware of the full details of the schemes.

Association could collect the details of the existing schemes of the other insurance companies applicable to the members and share the details with them.

Method of collection

The clients were fully satisfied.

Amount insured

Presently Rs. 10,000 is the coverage. Pantini AMTC and its members were quite satisfied.

The older societies are increasing the loan amount to Rs. 20,000. Hence they felt that coverage should also be increased to Rs. 20,000. This was a suggestion from Makdumpuram MTC.

Period of insurance

Present age limit is 60 years.

Members live longer than 65 and hence want the age limit to be increased.

The age limit to be increased upto 70 years.

Exclusion clauses

Suicides are on the rise and the present scheme provides coverage for such cases also.

In case of suicide the amount of claim to be admitted will have to be restricted only to outstanding loan amount. Some of the members felt that only deposit should be returned and even the loan outstanding should not be covered.

CompulsoryInsurance

The scheme is compulsory for borrowers. Quite satisfied.

Pay out time Ranges between 15 days to 30 days. Satisfied.

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Easiness in transactioni) in

taking policy

ii) in claims

Easy.

Usually the TC staff help in filling the claim form for the nominee.

Client sensitisation

Many of the members are still confused about the benefit of insurance.

Client sensitization especially to enroll more of younger members into the co operative fold and into the scheme is necessary.

Further insurance needs

Members identified general insurance and medical/ health insurance as their further needs.

Study of the operation of the scheme in ATCs

The study of the scheme was conducted in the two of the oldest men’s associations implementing the scheme. The AMTCs with the largest membership were chosen to explore answers to some of the study questions such as long term sustainability, profitability and the lessons from the past experience. Thus Makdumpuram (the oldest) and Panthini (biggest in terms of membership) AMTCS were chosen for the study. The details of the two associations are as under

Table 3.6 Association details – Position as on 31 - 12 - 2000

Name of the association

Date of inception

Number of TCs as members

Number of members covered by the TCs

Number of DRAS members

Panthini 1996 12 4255 2241Makdumpuram 1996 14 4190 2458

Membership in DRAS

The growth in membership in DRAS, the drop outs and number of claims in both the Associations is analysed below.

Table 3.7 Panthini AMTC

Details 97 -98

1998 1999 2000

Number of Members in the TCs N.A. 5400 5231 4255

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DRAS members as at the end of the year 1128 1407 2185 2241% age of members in DRAS as compared to total members

26 41 52

Average number of members during the year 564 1267 1796 2213

Withdrawal from scheme 45 76 110 55 +( 462)72

% age of members who withdrew as compared to average members

8 6 6 2

Deaths. figures in ( ) denote suicides 2 ( 0) 5(0) 10 (2)

12 (4)

% of deaths as compared to average membership 0.3 0.4 0.55 0.54

Makdumpuram AMTC

Details 1998 1999 2000Number of Members in the TCs 3569 3544 4190DRAS members as at the end of the year 1591 2123 2458% age of members in DRAS as compared to total members 44.57 59.90 58.66Average number of members during the year 1495 1857 2290Withdrawal from scheme 137 120 111% age of members who withdrew as compared to average members

9 6 5

Deaths ( figures in paranthesis denote number of suicides) 6 ( 4) 12 ( 8)

11( 6)

% of deaths as compared to average membership .40 .64 .48

Both the AMTCs have increased the coverage of members under DRAS scheme over the years as can be seen from the number of members in the scheme as a percentage to the total members of thrift co operatives. However, in both the associations the coverage is less than 60 percent. The associations consist of members whose age is more than 55. This is one of the primary reasons for lesser coverage. As per the Board of Directors and employee of the associations the coverage under DRAS can be increased by mobilizing the younger members to join the TCs and subsequently in DRAS. A systematic analysis of age wise categorization of members can be helpful in working out strategies to include the younger members73.

Members withdraw from the scheme when they withdraw from the primary membership of the co operatives. Some members withdraw when they don’t intend taking a loan. The AMTCs has not gathered information for the reason of withdrawal of the members. In both the AMTCs the withdrawing members as a percentage of average members during the year is steadily decreasing indicating that the rate of withdrawal is decreasing.

72 One society was spun off during the year and hence 462 members who were members of the scheme were also reduced. A mature TC who can form new TCs in the vicinity is spun off in order to scale up the co operative coverage.73 A guesstimate by CDF is the proportion of members in the age group of 18 –35, 36 -50,51 - 55 are 30:45:25. This needs to be systematically analysed.

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The claims especially due to suicides have been on the increase. The percentage of deaths to average membership has been increasing.

Moral hazard

There are three types of moral hazard which can occur under the scheme.

• Member can commit suicide thus increasing the claims. The number of suicides has been on the increase in the AMTCs under study primarily due to indebtedness of the farmers, family quarrels etc., This has resulted in heavy claims under the scheme. The AMTCs are considering options to scale down the claim amount. Both the associations have been very concerned about this and have been contemplating measures to limit the claim admission in case of suicidal deaths. Pantini AMTC has been planning to limit the claim to loan amount or half of the claim amount which ever is lower. Makdumpuram AMTC, where the suicidal deaths are higher, has been considering disallowing any claims in case of suicides. They plan to return only the deposit to the nominee.

• Member may not know the age or declare wrong age. In the village areas there is no fool proof method to determine the age of the members especially the old members. The ATCs use the knowledge of contemporaries to ascertain the age of the members. The voting list is also checked to verify the age.

• A chronically ill person can join the scheme and a claim can occur within a short time of her/his joining. There is no systematic screening of the health of a member at the time of joining the scheme. Since the members of a cooperative live in the same village they have intimate knowledge of the other members including any chronic ailments being suffered. This knowledge proves helpful at the time of admission of members. The ATCs feel that medical screening at the time of joining is not warranted since at the time of settlement a thorough enquiry is usually undertaken and if the member had withheld crucial information at the time of joining the scheme the claim is rejected. ATC feels that it is the primary responsibility of the Committee members of the TCs to do the initial screening so that chronically ill persons donot join the scheme.

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When the scheme was introduced in Panthini AMTC, the first member who joined the scheme died within a month. Enquiry of the villagers and the family members of the deceased revealed that the deceased had been suffering from a chronic disease and decided to join the scheme to avail the benefit. A meeting was convened and the pros and cons of admitting such members and claims were discussed. Any such laxity will result in the failure of the scheme. The Secretary of thrift society was pulled up by others for admitting such a chronically ill person into the scheme. It was unanimously decided that only the deposit under the scheme will be returned.


Co variance of risk

Through the exclusion clauses the ATCs have avoided any mass claims due to natural as well as man made calamities like massacres.

Settlement of claimsThe member nominates the beneficiary under the scheme. After due verification the claim amount is passed on to the nominee. In case of any dispute the Board of the TC decides the course of action and recommends to the ATC74. The claims are usually settled between fifteen to thirty days of receipt of the papers.

Review of the schemeAt present the scheme progress and financial performance is reviewed by CDF every month in the committee meeting of ATC, the meeting of employees of the societies and in the monthly meeting of the Board of Directors of ATCs. However, discussions with the staff and Board members of the ATCs show that CDF is seen as the organization which reviews the progress. Thus CDF plays a crucial role in reviewing the scheme.

Income and expenditure of the schemeThe major expenditure under the scheme are the staff salary and printing and stationary charges. The ATC has only one staff who devotes nearly five days for this work. The admission fee of Rs.10 takes care of the usual printing and stationary charges. At present these data are merged with the overall income and expenditure statements of the ATCs. Four percent of the interest earned from the deployment of DRAS funds is set aside for meeting the expenditure

74 In Usurabad ATC a member died. His wife had been designated as the nominee. Within a month of his death the wife started living with another man in another village and their two children were left behind in the care of grand parents. While settling the claim amount, the TC members were perplexed as to who should receive the benefits. A village meeting was arranged in which ATC representative also attended. It was decided that the children should benefit from the scheme. The amount was deposited in the name of the children as a fixed deposit to be claimed after they become majors.

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under the scheme. The calculations indicate that the interest thus set aside is sufficient to meet the operational expenses of the scheme75.

Operations of the fundsThe deposits under DRAS and the Claim and Retirement Benefit Funds are primarily used for lending operations. The interest earned is the only means of augmenting the claim fund. The assets and liabilities of the AMTCs were analysed for three years to look at long term sustainability of operations.

Major heads in assets and liabilities

Table 3.8 assets and liabilitiesPanthini AMTC

RupeesAssets 1998 1999 2000

Loans to Societies 10,89,500 5,51,200 6,13,000Fixed deposit with agro processing society/bank 1,91,000 12,95,000 17,34,017Building loan to societies - 3,34,000 1,50,000

LiabilitiesCompulsory thrift 2,86,546 4,52,188 5,05,036DRAS deposit 7,04,800 11,03,850 11,40,650Claim Fund 57,192 49,067 59,038Retirement Benefit fund 18,581 34,688 47,521Savings deposit from Societies 2,06,000 1,88,165 Fixed deposit 66,180 2,91,102 2,28,995Reserves and surplus 28,377

Makdumpuram AMTC

Assets 1998 1999 2000

Loans to Societies 5,84,720 5,41,877 12,37,165Fixed deposit with agro processing society 3,00,000 8,75,000 9,00,000Savings deposit with agro processing society 1,09,603 198860 113813

LiabilitiesCompulsory thrift 2,14,156 4,24,557 4,65,604

75 In case of Panthini AMTC, salary of the employee is Rs.26,000 per year and cost of (five days per month) salary for this programme is Rs.4300. Printing and stationary is Rs. 5,000 and the expenditure for the scheme is likely to be Rs. 2000. Thus the expenses is Rs. 6,300. The income @ 4 % of interest earned by the funds is Rs.43568 per annum. Thus the direct expenses of the programme are met by the income by the fund.

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DRAS 7,92,620 10,84,020 12,76,820Claim Fund 19,169 1,246 42,421Retirement Benefit fund 27,518 45,511 66,898Savings deposit from Societies - - 7,22,743Fixed deposit - - 55,000Reserves and surplus 37,459 54,873 95,035

The major source of funds for the AMTCs has been the DRAS deposits and related funds. The other sources are the compulsory thrift deposits, followed by savings and fixed deposits from the societies.

The funds are deployed in lending to the TCs where the rate of interest earned is 16 per cent. In case of less demand for loans the funds can be deposited with the agro processing society where they earn an interest of 15 per cent. The third alternative is to deposit as a fixed deposit with a bank where the rate of interest can be 10.5 per cent per annum.

In the case of Panthini AMTC, the credit off take from the TCs has been steadily decreasing over the last three years. The AMTC has deposited funds with the agro processing society. It has deposited in fixed deposits with a bank since 1999. Thus the income earned on the assets deployed are on the decline.

Mukdoompuram AMTC has had a spurt in loan off take from the societies during the year 2000. Increase in the loan size per borrower is the major reason. However, the AMTC continues to keep nearly 40 per cent of the funds as fixed deposit with agro processing society. The association is also concerned about increasing credit absorption capacity of members, which can increase the loan offtake from the TCs and in turn from AMTCs.

Due to the increase in the number of deaths the claim fund has not registered a healthy growth. The fund was in a precarious position in Makdumpuram AMTC as at the end of the year 1999 - the fund was not sufficient to settle even one claim. As at the end of the year 2000, the fund in both the ATCs was sufficient to settle only 4 to 5 claims where as the past record shows that number of deaths is definitely higher.

When the fund is insufficient to entertain claims Makdumpuram AMTC creates a Receivable Claim fund and settles the claims. The AMTC is very clear that neither Deposit fund nor the Retirement Benefit Fund should be used to settle the claims since they are liabilities to be repaid on demand. The other reserves of the society are used to settle the claims. At the end of the year when the Claim fund is augmented, the receivable claim fund is closed by passing necessary journal entries. Pantini AMTC has not experienced such difficulties so far.

The present method and rate of augmenting of funds of the Claim Fund, appears to be the optimal growth rate for the funds. Even at this rate of growth, the funds are not sufficient/ there is not enough cushion to cover claims. With the decrease in earnings and reduction in the allocation for the claim fund, increase in the death rate especially suicides in some pockets the long term sustainability of the operations of the scheme is under pressure. The AMTCs have to consider various options to ensure sustainability of the programme.

Reinsurance

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The AMTCs have reinsured with National Insurance Company (NIC) regarding the accidental deaths. The AMTC pays Rs. 2. 60 paise every year for every person under DRAS scheme to the NIC for a cover of Rs. 10,000 (the same as the claim amount being paid by the AMTC now).76 Both the AMTCs had lodged a claim each with the reinsurer and received the claim during the year.

Sustainability of the scheme

Scale of operationsAs in any insurance scheme, the scheme can be viable only if the risk is spread over a large number of insurables. The DRAS stands to benefit if more members especially the younger members join the scheme. With the present policy of spinning off mature TCs to propagate co operative movement, the scope of increasing the outreach of the scheme in each of the AMTC is low. AMTCs presently face a trade off between covering more rural villages under thrift co operatives and ensuring profitability of the DRAS scheme.

Premium collection

The AMTC needs to analyse more scientifically the deposit to be collected for providing insurance cover. Instead of three categories, two may be sufficient as has been expressed by some of the clients. Based on the actuarial knowledge of a AMTC, the deposit and coverage rates could vary from AMTC to AMTC.

ExclusionsWherever the incidents of suicide is on the increase the AMTC have to restrict the claim amount to loan outstanding/ deposit of the client.

Re insurance The reinsurance has been a satisfactory experience. The organization can consider reinsuring the entire portfolio with LIC or any other organization offering life insurance product.

Some of the ATCs can also consider linking with a Formal Life Insurance Company/ Corporation if the past record shows that insurance can’t be a profitable proposition.

Ownership of the Scheme

Though the AMTCs are implementing the scheme, they still look forward to CDF for policy and operational guidelines. Though the scheme provides that the Board of Directors will review the scheme for making improvements, it is obvious while interacting with Board as well as employees of the AMTC, that CDF only provides the necessary inputs for running the scheme.

76 In case a member dies due to road accident, snake bite, electric shock etc., the AMTC first pays the claim to the nominee, there after sends the relevant papers to NIC for reimbursement. NIC carries out independent verification and pays the amount in three to four months. Nine AMTCs have joined the scheme and the cases they had forwarded were entertained by NIC. There has been no problem in the re insurance. However, the nominee of the clients have to incur additional expenses for certain procedures and papers to be produced for re insurance. NIC insists on FIR to be lodged with the police, medical examination report, post mortem report and death certificate from Medical Officer. Procuring all these certificates may cost Rs. 1000 to 1500 for the nominee.

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Though the Board is fully aware that the scheme is the major contributor to the income of the AMTC, they need to strategise and plan for bringing in more members under the scheme. In the policy and operational level decisions are to be taken by the AMTC Board. The TCs also have to play a more active role in mobilizing the members. The involvement of clients especially to increase the membership has to be thought of.

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THE ACTIVISTS FOR SOCIAL ALTERNATIVES (ASA)

Strategic Context

ASA is a new generation micro-finance institution located in Tiruchirappalli, which is the geographic center of Tamilnadu State in India. ASA’s operational area , Tiruchirapalli and its neighboring districts, witness a vicious cycle of poverty due to persistent conditions of drought and decreasing soil productivity. Migration, bonded labor, contract labor, and child labor are highly prevalent.

In 1986, ASA began operations as a facilitating agency for empowering the poorest of poor women by focusing on natural resource issues. ASA began by organizing villagers around the issue of drought. ASA had a vision of human liberation and justice, to be achieved through organizing men and women into sanghas. The sanghas were formed through a process of motivating people, providing literacy, identifying issues of common concern and taking collective action on particular issues such as campaigning for increased wages for agricultural labour. Thrift and savings were also encouraged.

To formalize its thrift and savings program, ASA began experimenting with various credit models in 1993 with only limited success. In 1995, ASA started adapting the essentials of Grameen principles and initiated its microfinance program "Grama Vidiyal" (meaning Dawn of the Rural Poor).

Today, there are over 12,000 members in 12 branches. Micro credit has become the core development intervention strategy for ASA. Within micro-credit, ASA has a range of products, including savings, credit, insurance and non-financial services, tailored to the unmet needs of its poor clients. In other words, ASA aims to enable the poor to increase their living standards by 1) saving money, 2) earning money by investing, and 3) securing their life. While credit and savings help address the first two aims, the insurance product addresses the third aim. It is, therefore, a natural complement to the existing products in the micro credit program. Vision and Mission of ASA

Overall, ASA has developed a vision to create:

“A value based, poverty free, productive, prosperous, humane and sustainable “Grama Vidiyal” family.”

To achieve it’s vision, ASA’s has also developed a consistent mission statement:

“to alleviate poverty among the poorest of poor families, especially women, in and around Tamil Nadu with an effective micro-finance program that adapts the essentials of the Grameen model.”

ASA’s present outreach is summarized in Table.

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Table 3.9 Grama Vidiyal Micro- Finance Program Status (December 2000)

Parameters ValuesOutreachBranches 9Staff 98Districts covered 2Total members 12,020Total SHGs 2,404Total centers 498Credit performanceLoans 20,495Active borrowers 10,770Average loan term 50 weeksAverage initial size US$80Repayment rate 99%Portfolio at risk 0.19%Savings performance Active savers (compulsory) 12,020Total compulsory savings US$14,244Active savers (voluntary) 780Total voluntary savings US$6,041Insurance performanceNumber of member insurance 5069Number of livestock insurance 2682EfficiencyMembers per field officer (average) 365Members per branch (average) 1,335Loans outstanding per field officer US$14,783SustainabilityOperating self-sufficiency 96%Financial self-sufficiency 54%OthersClientele characteristics – gender, rural/urban, old/young (Market Segmentation)

100% womenRural areaAge between 18 to 45

Geographic Coverage (Strategic Context and its diversity)

Two districts of Tamilnadu (Trichy and Pudukkottai Districts). Expanding toanother Two districts of Tamilnadu (Dindigul and Madurai Districts)

Organizational Structure – Franchise model

ASA has promoted a decentralized (franchise) structure with division of responsibility, accountability and decision–making to various geographic levels in the program. This is

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outlined below

Level of Analysis

Entity Description

Level 1 Woman At the foundation is the poor woman saver and borrower.

Level 2 SHG She must form a “Self help group” (SHG) of five women who jointly guarantee each other’s commitment and ability to repay loans.

The women in this small peer group also provide advice and support to each other on various issues.

Level 3 Centre A center is a group of four SHGs comprising of five women each and there is usually one center per village. ASA’s methodology is clearly village oriented.

A field officer attends each village’s weekly center meeting to monitor the transactions of savings collection, loan disbursements and repayments and discussions regarding any problems.

The women members themselves make decisions regarding loan sanctions.

Level 4 Cluster For the purpose of effective governance groups of villages/centers are combined into a geographic cluster made up of 20 centers.

Each field officer manages one cluster or 20 centers serving 400 women.

Level 5 Branch There are 5 geographic clusters of villages comprising a Grama Vidiyal branch.

The branch has an administrative office staffed by seven persons: a branch manager, accountant and the five field officers.

Thus, a branch covers nearly 2000 women and this is a basic requirement for sustainability

Level 6 Franchise At the next level, six branches form a franchise, covering approximately 12,000 women.

At the head office, the franchise is managed by a CEO, internal auditor, accountant/computer officer and a personnel officer.

The franchise administration combined with the program staff from six branches yield a total of 46 staff persons to operate one franchise.

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Franchise – some details

ASA’s Grama Vidiyal micro-finance program currently has two franchises with 9 branches covering over 12,000 clients in 2 districts.

More franchises are to be added and membership increased ASA’s target is establishment of 16 franchises serving 200,000 women by 2008. Each franchise will be affiliated to ASA.

At the ASA headquarters, five staff in addition to the franchise CEOs manage the entire GV micro-finance franchise system.

Target community and client profile

ASA targets the poorest of the poor rural women who are not currently serviced by alternative micro-finance programs. The target villages and women participants are identified through a combination of qualitative and quantitative criteria:

• Participatory rural appraisal (PRA) techniques, especially, wealth ranking

• Sixteen – point housing index.• Land holdings of less than 0.5 acres of wetland or 1.5 acres of dry land.• Maximum annual income Rs 18,000

As with the Grameen methodology, ASA’s emphasis is on contiguity of geographic areas in micro-finance operations. Hence, the poorest of the poor are first exhaustively covered in a village, block, district and so on.

Products and services

The ASA micro-finance program offers a diversified set of both financial and non-financial products and service as summarized below:

Type of Product Description Savings i. Compulsory savings.

ii. Voluntary savings.iii. Center fund savings etc.

Loans i. Income generation loans.ii. Agricultural loans.

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iii. Essential loans. Insurance i. Member insurance.

ii. Livestock insurance Non-financial services i. Marketing linkages: internal and external

(Vidiyal Shandi).ii. Network federation: issue – based and local

governance.

Loan products

Loan products were introduced in 1995. Currently, there are three types of loans: for income generation, agriculture (AL) and essential loans (EL). The first loan size is up to Rs.3,000 for all loans. All three loans are payble in weekly installments.

Description Income Generation Program (IGP)

Agriculture Loan (AL) Essential Loan (EL)

Eligibility Regular savings for three consecutive months

a. Upon full repayment of the first loan b. Six months of voluntary savings.

a. After being a member for a year.b. Only for health and education.

Maximum size77 Rs.15,000 15,000 Rs.10,000Term 1 year 3 months 1 yearInterest rate (flat) (service charge)

24% p.a. 24% for 3 months 24% p.a.

Need for Insurance Products at ASA

Many insurance schemes exist in the formal sector. But poor clients, such as those at ASA, could not directly access formal insurance schemes that are prevalent in India. Hence, ASA’s clientele demanded delivery of alternative insurance products and this has now been taken up by ASA.

Two reasons for ASA’s foray into insurance require specific mention:

First, ASA, despite having a repayment record of nearly 98%, recognized that due to natural calamity, death, accident and other unavoidable circumstances, some members may be unable to repay their loans. Out of ASA's total loan portfolio, approximately 60% is utilized for the purchase of livestock, a natural calamity like severe drought or outbreak of animal disease, can put the entire loan portfolio at risk.

77 The amount of loan is 10 times the compulsory savings balance.

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Second, ASA was also aware that women members lacked a sense of security in their lives and were basically ignorant about the value of their life to their family's continued welfare. If she dies or meets with serious accident, then the family, especially children, face additional difficulties with the loss of the major caregiver. These are the prime reasons that have resulted in ASA introducing a life product with coverage of accidental death.

ASA went about developing insurance products very methodically over a 15 month period.

Insurance products78

ASA currently offers three insurance products. These are enumerated in detail in this section

Product Nature and Brief DescriptionSocial welfare security scheme ( in house programme)

This is a life insurance product with components of Natural and Accidental death.

On the natural death of the member, the family is paid Rs. 5,000 while for accidental death, Rs.25, 000 is paid.

Policy is typically valid for one year and should be renewed. ASA plans to cover all members by 2002.

Livestock insurance( with formal insurance company)

Asset insurance product which is compulsory with the loan Covers death (natural and accident) of animal and helps pay back the loan

outstanding (if any). Policy valid for one year

Emergency fund (in house)

Informal scheme that is operational at ASA An emergency fund of Rs.500 was initially available to all members. This is

now raised to Rs.1000. Since 1995, 1% of the loan amount goes towards this fund. Money from this fund is used for repaying outstanding loans of members who

are unable to make their payments due to an accident, or for purchase of crop and cattle insurance.

It is also given for funeral expenses.

Social Welfare Security SchemeBased on the discussion of the merits of various schemes studied a life insurance product- the Social Welfare Security Scheme (SWSS) - was designed so that it is suitable to members. The scheme was introduced three years ago and has undergone a number of changes. The details of the scheme as is operational now are

78 This product is dealt in detail later. This Table is just meant to be an overview.

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1. Members have options to enroll either for life-time insurance or for yearly insurance.

2. For life-time insurance, a member has to pay Rs.500, which can be paid in five monthly installments of Rs 100 each.

3. If the premium is not paid continuously for 3 months, the member gets disqualified.

4. In such cases, the previous premiums will be rejected and will not be refunded. 5. In case of yearly insurance, a member pays Rs.60 once a year and will be

insured for that year only. 6. On death during the coverage period, the nominee is given Rs 5,000 (natural

death) or Rs 25,000 (accidental death).

The various details concerning the scheme have been summarized in Tables below.

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Table 3.10 Particulars of SWSSParticulars SWSS

Capital Fund for Insurance

Rs. 500 per member toward capital fund for insurance (lifetime contribution refundable when the member drops out) or Rs.60 per member as policy premium amount (for one year)

Exclusions1. Age Limit 18-50 Years2. Membership Grama Vidiyal members only3. Coverage Does not suicide Sum Insured Natural Death (Member only) – Rs.5000 (Gram Vidiyal Micro-Finance Program).

When members withdraw, they get invested Rs 500 plus interestAccident Death (Member only) – Rs. 25000 (From United India Insurance)

Duration Up to the membership period onlyLinkage M/s. United India Insurance Company Ltd., (United India Insurance) only for

accident insurance79. It is re insurance. Coverage Natural Death and Accidental DeathCapital Fund Usage

The capital fund will be utilized for on-lending and the interest from the capital fund will be paid as a premium.

The start to finish activity schedule for the staff and the members is given below

Start to Finish Chart (Staff)ASA

Start to Finish Chart in ASA’s Micro Finance System (in General) and Insurance Products (in Particular) for Various StakeholdersNo Step Stakeholder Time1 Area Survey Branch Manager/Field

Officer1 Month

2 Compulsory Group Training

Field Officer 4 days

3 Group Recognition Test Branch Manager/Area Manager

1 day

4 Savings & Center Fund Field Officer 1 day5 Loan Disbursement Field Officer and Branch

Manager2 days/week

6 Accounting Accountant Every day7 Premium Paid Branch Manager/Insurance 1 day/month

79 All the persons in the age group of 18-50 years who are earning members of poor families are covered. Accidental death means death resulting from accident caused by outward, violent and visible means. It includes death due to snake-bite, drowning, food poisoning, fall from a height, lightning etc. The claim is not payable when Death arising or resulting from breach of any law with criminal intent. When compensation higher than the insured amount of Rs 15,000 is receivable by virtue of any other Law/Statute.

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Officer8 Policy Received Insurance Officer 3 daysIf Death Occurs, 9 Information to the

Insurance companyBranch Manager 1 day

10 Claim form received Branch Manager 1 day11 Signature of the

Member / NomineeField Officer 1 day

12 Claim form sent to the company

Branch Manager 1 day

13 Cheque received Accountant 10 – 20 days14 Cheque Clearance Accountant 3 days15 Amount Withdrawal Accountant 1 day16 Amount to Member Branch Manager 1 day

The membership details as on 31 March 2001 is given as under Table 3.11 Member Insurance Premiums and Clientele

ASA's Insurance Program - Statement as on March 2001

SlNo Description Value of premium in RS Number of clientele1 Kovilpatty 91850 4282 Kallupatty 87240 5043 Manigandam 211296 7954 Viralimalai 147410 7255 Keeranur 76660 7986 Annavasal 35080 5687 Manaparai 19240 3048 Vaiyampatty 15720 2629 Pudukottai 23280 38810 Chozan Nagar 74040 297 Total 781816 5069The procedure to making claims and settlement thereof is given below

Table 3.12 - Claim Procedures and Certificates80 for Member InsuranceAspect DescriptionClaim Procedures When the death or accident occurs, the information

should be immediately given to the Gramavidiyal Branch manager, ASA’s Insurance officer, and United India Insurance where applicable by telephone and the telegram.

Center leader certificate The certificate should be given by the Center leader,

80 For Reducing False Claims and overcoming moral hazard type of problems etc

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which should indicate the member’s name, husband’s name, address, seniority of the member, causes for death, family background.

Field Manager/Branch Manager certificate

The Field manager and Branch Manager should take necessary actions on this. Both officials should visit the center and place of accident/death, verify it and give the certificate indicating the members loan/savings details and the filled in claim forms and the related certificates.The death/accident should be given as a petition to the Police station. The FIR report is also needed.

Doctor certificate Whenever the accident/death occurs, the body should be admitted in the nearest Government Hospital, for treatment and postmortem. The certificate from the government doctor for postmortem or accident is needed for claiming the sum insured from the United India.

Death Certificate The death certificate from the Thasidhar of the respective area is to be submitted for claiming the sum insured from the United India.

The claim details for the year ending march 2001 is as underTable 3.13 claim details ASA's Social Welfare Security Scheme

Member Insurance claims details

Statement as on March 2001

SlNo DescriptionValue of claims/Withdrawals Number of clientele

1 Kovilpatty 6000 32 Kallupatty 2000 43 Manikandam 5000 15 Keeranur 500 1 Total 13500 9

Protections against Moral Hazard, Fraud, and Adverse Selection

1) Age is a factor, as clients over 50 are not insured and hence, this to a great extent reduces the aforementioned problems.

2) Use of a strong peer group process in insurance delivery is another aspect3) Certification by Centre Leader, referrals by the SHGs, presentation of formal

death certificates, complaints to the police including filing of an FIR are required. All of these are third party proof of death/disability

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4) Actual Field Visits by various levels of ASA staff for any specific claim (randomly scheduled in a surprise manner)

5) Finally, insurance is only one among the various services provided to clients. Clients recognize and realize the fact that access to Loans, Savings, micro-enterprise support and other services would be lost (for the entire center of about 20 people) in case of a false claim. This is perhaps the single biggest reason for reduction of the moral hazard problem.

The financial details on the performance of the scheme is given below

Table 3.14 The Activists for Social Alternatives (ASA)Insurance Products, Income & Expenses for 1 year, From April'00 to March'01

Income INR Expenses INR

Income from Grants456390 Salary for Field Officers 135000

Investment Income - Premium

187636 Admin Expenses 12000

Training & Campaign 456390 Claims Paid 13500

Total Income644026 Total Expenses 616890

Net Profit 27136 DetailsFO salary per month 3000 Per day 1 hour 15Per month 25 hours 375Per Year/F.O 4500Per Year/5 F.Os 22500Per year/6 Branches 135000 Investment Income

Total Premium Collected781816

Invested @24%187636

From the above statement, it can be said that, though it is early days, ASA’s insurance program is sustainable from a finance and accounting perspective. And with more outreach and products, ASA’s insurance program could be become a ‘money spinner’ because of several factors: (1) As is with the Grameen model, the resource sharing between products like credit, savings and insurance is very optimal; (2) unlike most other MFIs, ASA seems to be very adept at investing money and getting returns –

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returns @24% would rate as among the highest in any industry. Clearly, rotating the premium among the groups as a loan is a high return investment; and (3) the value of claims to premiums is about 7.2%, But, with expanding outreach and greater diversification (geographic, sectoral and clientele wise), this ratio should come down and help ASA’s program move further in its goal towards achieveing sustainability and expanding outreach.

Animal Husbandry Insurance Product

1. The Animal Husbandry Scheme, which was initiated in 1998, at ASA has two objectives:

c safeguard the loans given for purchase of domestic animals d protect the client from likely loss (that may arise due to the death of animal

2. This cover is made by United India Insurance, a formal sector insurance company, for the loan period, 1 year.

3. 4.2% of the insured amount (which is the loan amount) is charged as insurance fee. 0.8% goes to the doctor now and ASA does not get anything from the insurance company. In other words, the client pays 5% of the loan amount for insurance cover from United India through ASA.

4. For insurance amounts exceeding Rs. 7,500/-, the photograph of the animal should be provided. The average loan size would be around Rs 12,000 or so.

5. A medical certificate should also be enclosed.6. An identification mark (earring), which is made on the animal’s ear, should be

preserved carefully. 7. If the earring is lost, the ASA official should be notified and a new identification mark

will be provided.8. When the animal dies, the ear should be cutoff along with the identification mark and

preserved as proof.9. The death should be certified by the leader of the center (please see Table next

page for other procedures/aspects)10.The policy is applicable only for a year (loan period at ASA is by and large 52

weeks)11.The pay-out is made in accordance with the norms of the insurance corporations.

While money is in the name of client/nominee, the cheque comes to ASA which then gives it to the client. Any loan outstanding (from client to ASA) is first paid by the client, who then collects the cheque.

Table 3.15 Animal Insurance Premiums and ClienteleStatement as on March 2001

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SlNo Description Value of premium in RS Number of clientele1 Kovilpatty 51800 3252 Kallupatty 43125 3373 Manigandam 128675 8694 Viralimalai 61150 4145 Keeranur 43223 2926 Annavasal 26150 1827 Manaparai 25400 1768 Vaiyampatty 12450 839 Pudukottai 600 410 Chozan Nagar 0 0 Total 392573 2682

ASA’S CATTLE INSURANCE SCHEME – SOME SALIENT FEATURES OF THE SCHEME

What are the prerequisites for insuring? All indigenous/cross breed/exotic animals in the prescribed age groups can be insured after duly fixing the value and along with certification of the animal’s health by a qualified Veterinary Doctor.

What is insured? a) Death due to accidents including fire, lightning, flood and cyclone or disease

contracted or occurred during the currency of the policy period. b) Permanent Total Disability due to total incapacity to conceive or yield milk by

paying extra premium (which varies on a case to case basis).

When Policy will not pay? The policy does not cover the following:

a) Malicious or willful misconduct or neglect, over loading, unskilled treatment or use of the animal for the purpose other than stated in the policy without the consent of the company in writing.

b) Accidents occurred or diseases contracted prior to commencement of risk. c) Intentional slaughter. d) Transport by air/sea and road beyond 80 kms. e) Theft /clandestine sale, missing of insured animal. f) Partial disablement of any type. g) War perils. h) Nuclear perils i) Consequential loss j) Death of animals due to disease within 15 days from the inception of policy. k) Death due to several diseases that are generic to different areasl) Death due to negligence of animal by client (lack of proper care of animal)

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m) Death caused by poisoning, ill-treatmentn) Death beyond the valid term of the insurance, which is one year

What will policy pay and how much? Sum insured or market value prior to illness subject to production of following documents.

a) Duly completed claim form. b) Death certificate from a qualified veterinary surgeon/center leader/ASA.c) Policy/Certificate. d) Ear tag.

Table 3.16 – Claim Procedures and Processes for Livestock InsuranceProcedure at the time of insurance

1. The animal should be tagged by the Veterinary Doctor and the schedule to be prepared by him as per the Insurance company form.

2. In the schedule form, the Branch Manager also should co-sign.

Procedures for claim

3. When the animal dies, intimation should be given to the Insurance company by Telephone and telegram immediately.

4. The doctor should verify the livestock and give the certificate for claiming from the company.

Table 3.17 Animal Insurance claims detailsASA's cattle insurance scheme

Statement as on March 2001 (cumulative)SlNo Description Value of claims Number of clientele 1 Kovilpatty 20000 92 Kallupatty 23000 33 Manigandam 33000 184 Viralimalai 15000 115 Keeranur 2000 2 Total 93000 43

Difficulties in Livestock insurance

Members purchase the animals in different times and places. The process of tagging the animals at one particular time is therefore difficult. Some animals that are not tagged remain uncovered by insurance. They are at risk for a period of time until they can be tagged and a policy form completed.

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Coverage should be made available from the date of loan received. Policy processing should begin after submitting the borrower list – purpose of loan, loan amount, and premium.

The veterinary doctors are frequently transferred to other places, thereby negatively affecting the on-going relationship and understanding with ASA staff.

For ASA members, there is no subsidized premium of 2.25 % as in other government schemes. Instead, the company collects 4.2% premium from ASA members creating, a problems in the field as clients cite the lower premium available in the market frequently.

The time taken for settling a claim (requesting a form, receiving, it, completing it, obtaining certificates, processing them and receiving compensation) is too long. Members suffer in the meantime and may be forced to borrow from usurious moneylender and other sources81.

ASA’s does in fact do a lot of the work that technically is to be done by the insurance company. It is however not compensated at all by United India.

Client Views on Both Insurance Products

Focus group discussions were held with 18 clients in ASA’s micro-finance program to understand client views with regard to the two insurance products These have been summarized in the Tables below

Table 3.18 ASA – Member Life Insurance ProductProgram Feature

Likes/Strengths Dislikes/Suggestions Response of ASA

Premium amount

Reasonably priced


Flexibility is good.Collected in 1-5 installments (of Rs 500 or Rs 100, 5 times) for life orRs 60 annually

Makes it easy for us to pay as we are already paying savings and loans on weekly basis

ASA’s is still looking at other alternatives for premium payment based on strategic needs of clients

Amount insured

Coverage can be increased for natural death

Endowment feature can also be added

Exploring possibilities

81 To carry on livelihood activities and take care of expenses as there is no other livelihood.

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Table 3.18 ASA – Member Life Insurance ProductProgram Feature


Period of insurance

No comments No comments No comments

Exclusion clauses

Should cover suicide as well if based on genuine reasons

Cannot do so because of potential for mis-utilization

Nature ofInsurance

Like it because it is voluntary and money is never deducted from loans disbursed

Pay out time Excellent. Sometimes it is as quick as 3-4 hours for natural death

Can be improved for accidental death

There is a lot of enquiry that is required for accidental death and a number of formalities have to be completed. But, we will try and reduce time by sensitizing other local stakeholders involved

Ease of transaction

Policy can be easily taken

Claim process is also very easy for natural death. For accidental death, it can be improved

ASA is planning to take on specific roles to facilitate the efficiency of Accidental death part of the policy by streamlining aspects with formal insurers like United India

Training in health care, nutrition etc. and Support services

None are being provided currently

Will be very helpful Is too broad an area to get into but ASA can link up clients for referral services to care of medical emergencies and routine illnesses

Most members were satisfied with the fact that premium is refunded for the lifetime insurance at the time of withdrawal from membership. They also appreciated that premium is not deducted from loan and hence was convenient. Some members had enrolled in the second scheme only because they could not afford to pay Rs.500 though they preferred lifetime insurance. One member suggested that ASA provide a loan of Rs.500 in addition to their actual loan so that they can enroll for lifetime insurance.

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Moreover, more training or information should be provided to the new members about the benefits and the drawbacks of each of the schemes so that they can make more informed decisions.

Table 3.19 ASA – Animal Husbandry Insurance ProductProgram Feature


Premium amount

Manageable

Reasonable

ASA can try to get United India to reduce premium for clients with good track record of dairy management

Will try to lobby with United India


Collected in one installment

Makes it easy for us to pay

Really attractive because ASA does not reduce loan amount by this. Rather we pay 4.2% and 0.8% to ASA from our money.

Amount insured

Coverage can be increased

Will try and ask United India to do so

Period of insurance


Exclusion clauses

The time taken to apply the tag could become a problem and hence, where tags are not properly put on the animal in time, in the event of a genuine problem like death/accident to animal, the client suffers.

The tags should be put on time to avoid an serious difficulty to clients

Have taken this up seriously with United India in several ways

1) Asking them to monitor agents’ work more closely including application of tags

2) Getting good agents appointed

3) Providing periodic reports on agents’ performance

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Table 3.19 ASA – Animal Husbandry Insurance ProductProgram Feature


Nature of Insurance

Very much required as it protects the interest of client

Pay out time The time can be reduced further in a significant mannerGood agents need to be appointed by United India

This has been taken up with United India

Easiness in transaction


Claim process can be made less difficult. It takes too much paper work and a lot of time to get the claim. United India is the cause here rather than ASA

ASA is planning to take on specific roles to facilitate the efficiency of the United India agent

ASA, in the future, could become an agent itself. This is reportedly under consideration of ASA’s management

Training in cattle care, health care etc.,


Will be very helpful ASA is planning on this as a serious strategy in the future, based on its notion of incremental expansion

Clients had a varied level of awareness on care of animals and associated best practices

Support services


Greater access to Vets (Doctors) requiredAnimal care TrainingVaccination information etc can be provided

ASA is planning on this as a serious strategy in the future, based on its notion of incremental expansion

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MIS

ASA has a MIS system where a variety of records are maintained and reports collected at various levels. The major records/reports, especially those relevant for micro-insurance include:

MIS Records and Reports (Insurance Included) at ASA (Not Exhaustive)Level of Analysis of Records/Reports

Type of Records

Records for the centers(updated on daily basis and checked weekly)

Savings, Loan and Insurance ledgers, Copy of the formats, Copy of the Denomination slips

Records for the branch(updated on daily basis and checked weekly)

Day book, Cash book, General ledger, Checking register, Fund balance register, Insurance register (Member/Livestock)

Reports by Branch Manager(Weekly)

Staff wise performance statement, Staff wise new product abstract (insurance included)

Reports by the Accounts Manager(Weekly)

Receipts & Payments statement

Reports by the Field manager(Weekly)

Center wise new product statement (insurance included)

All reports provide information for this period and also cumulative, as on that date. ASA is now going in for a completely computerized system for its micro-finance operations including micro-insurance.

Linkage of Insurance with other ProductsThe following discussion explores the linkages between Insurance and other products like credit and savings

Credit & Insurance Linkage

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Only credit program members can join in the Insurance/Social security scheme The social security capital fund (Rs.500) is used for on-lending to the Grama

Vidiyals – this enables maximization an of returns to depositors The sum insured can be used for unpaid loan outstanding, in case of death The first and second loan borrowers can pay the premium of Rs.60 The 3rd and above loan borrowers can pay Rs.500 at one time or they can pay

Rs.500 in 5 installments (according to the liquidity/capacity of the member).

Savings & Insurance Linkage

The social Security Capital fund is the savings kept in a fixed deposit The amount (Rs.500) can be withdrawn at the time of leaving the program The Rs. 60 cannot be withdrawn by the member as it is a direct premium

Some good practices from Experience

Improve the perceived or actual value for clients

1) Clients need to feel that the policy is affordable, that they are getting good value for their money.

Enlist opinion leaders 2) convincing opinion leaders in communities to purchase a policy or to support the product. This is what ASA has done

Use examples in describing the benefits of the product

3) Providing potential policyholders with clear, case-study type examples of how the product can be beneficial has also proven effective.

Innovative Ways of Promotion ASA conducted a comprehensive awareness campaign on insurance

and social security for its Grama Vidiyal members. 12,000 information bags were prepared and given to members as they

attended the International Women's Day and SHG Conference held in Trichy on March 8, 2001.

Large-sized information banners and posters with pictorial scenes on insurance issues were placed around the conference venue to further motivate the members.

The branch manager of United India Insurance Company was invited to make a presentation at the conference. Insurance officers of ASA/GV also shared details of the various schemes with clients.

.

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Staff Roles and Responsibilities in delivery of Insurance

The roles and responsibilities of the different staff, vis-à-vis micro-insurance at ASA is given below

Staff Description Roles and ResponsibilitiesField Officers 1. Collect the premium from the member

2. Inform the manager/company of the death/accident of the member

3. Obtain all documents/certificates from the policy holder4. Explain to the member and motive them to cover the risks. 5. Point out the benefits of the insurance schemes6. Circulate the pamphlet describing the schemes to the

member7. Assist in tagging the animals etc.

Accountant and Branch Manager

1. Participate in designing the insurance products2. Consolidate the premium amount reports and send it to the

Head Office.3. Prepare and send the claim forms and documents to the

company4. Inform the company regarding deaths and accidents of

insured members. Send the requisition letter to the company to obtain the claim form.

5. Prepare financial statements, abstracts, Pay-off/claims, list/details provide policy certificates etc.

6. Promote awareness among the members and staff regarding the risks that members and their families face and also highlight the benefits of the insurance scheme (in insuring against these risks).

7. Tag the insured animal. 8. Settle the claim amount to the member.

Insurance officer 1. Coordinate and negotiate the implementation of the scheme with the insurance company.

2. Consolidate all the branch statements updates3. Analyze the viability of the scheme. Assist in policy level

changes with regard to the design and implementation of the schemes.

4. Prepare the operational manual, program manual, insurance manual, pamphlet, forms and formats

5. Prepare a future (business) plan for the scheme6. Give training to the staff/Executive Members7. Arrange the visits of doctors to the branches8. Transfer the money, and also send cheques to the company9. Attend national/international workshops on insurance. Study

different insurance models.10. Institute proper legal framework suited to needs of the

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Staff Description Roles and ResponsibilitiesInsurance Company.

11. Obtain feed back from the members/staffs regarding the implementation of the schemes and their coverage

Challenges in Delivery of Insurance Products

The period between collecting the premium and issuing a policy can sometimes be too long. If any death occurs during this time, settling the claim becomes very difficult. This is for the United India Accident scheme as well as Animal husbandry scheme.

When the linkage for Natural Death/Accident Death/Medical reimbursement is through multiple policies or companies, then operationalizing the strategy becomes very difficult. Even now, dealing with an internal system for natural death and United India for accident requires staff to constantly shift gears when working on these different sources of insurance. Add to this, the animal husbandry insurance scheme, then the whole insurance program becomes somewhat complicated and challenging. But, with passage of time and a good organizational learning system (OLS), these complexities can be better managed, if not reduced.

Preparing different statements, coverage lists, issuing claim forms, etc., for different and multiple companies creates confusion and calls for greater administrative effort.

Increased Coverage always means Greater Complexity. Although there is a strong desire to increase the amount of protection offered to clients, increased protection generally requires greater expertise and investment to succeed - ASA has experienced this aspect of dealing with life, accident and asset insurance, all at the same time – which is a serious challenge indeed. As the Table below highlights, all types of products can be found at ASA other than health insurance.

Type of Micro-Finance Services/Products

Purpose Example at ASA

Cash Flow Management Services

Income and Consumption Smoothing

Variety of (liquid) savings and consumption loans

Micro-Enterprise Services

Assist micro/small businesses with their financial needs

Regular micro-finance loans and asset insurance

Investment Management Services

Maintain, if not increase, the purchasing power of savings/related assets

Fixed deposits and housing and other asset loans

Risk Management Mitigate effect of Personal life (death, accident

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Services economic/other shocks and reduce clients vulnerability to these uncertain events

and disability) insurance and emergency credit. What is perhaps missing is Health Insurance.

Another key challenge ASA faces in Life insurance is how to treat older clientele as currently, it restricts coverage as per clients age. In other words, clients > 50 are not taken into the insurance program. The question is, as a policyholder ages, what are the best options to account for the increased probability of death. ASA is evaluating the use of the following options:

a) Increase Premiums: b) Hold Premiums Constant and Reduce Coveragec) Set a Maximum Age for Coverage (Current practice)d) Sell Long-Term or Permanent Policies (Current Practice)

What others can learn form ASA’s experience?

Further, based on ASA’s experience, crucial factors that need to be considered in the delivery of insurance products have been elaborated in Table (next page). This should prove useful to new MFIs that desire to initiate insurance products for the benefit of their clientele.

Table 3.20 Learning from ASA

S No Factors to Considerin Insurance Product Design

Description

1. Number of members in the organization

Maximizing coverage is crucial to reach scale in operations as well as diversify risks. The larger the numbers, better the deals that one can get from formal insurers

2. Probability assessment of various risks

Understanding what the various risks are and using historical data to assign likelihood of risk occurrence is a must

3. Ability of the member to pay the premium

Any insurance product will succeed and achieve market penetration, if and only if, sets and collects premiums, in a manner that is acceptable to its various clients. Sensitivity to this issue is very important

4. Expectation of the member in Product design should address unmet needs

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Description

terms of benefits and not be a ‘what is possible’ product5. Operational strategy at the

branch & head office level Clearly geared towards commercialization of

insurance as a product because it has to stand on its own feet.

Sharing of resources with other products is a must

6. Form of formats/reports/documents required.

Crucial to have a proper MIS. Without this, it would not be possible to manage the product, especially when volumes increase.

Also, paperwork and administrative load should decrease rather than increase because of this

7. Linkages, with Insurance Companies, that can be built.

Where it is possible, it should be taken-up. But, one must clearly spell out the roles and responsibilities and also ensure that these are effectively carried out. Proper arbitration mechanisms must be in place to resolve conflicts that may arise from time to time

8. Risks in implementing the scheme – especially, financial disability and all related aspects.

A clear understanding of the various risks is absolutely essential as it can help one understand which (aspects) can be managed and controlled and which cannot be.

9. Nomination by the members – whom they nominate? There is a serious aspects here when women put down men as their nominees.

Very crucial. Especially, the gender ramifications must be closely examined as otherwise adverse selection aspects may affect the program later.

10. Premium collection period/ payment period

Should be easy for clients Should not unduly increase transactions for

the organization11. Viability of the scheme – all types Very important as otherwise, in the long-run,

the scheme cannot survive. 12. Age limit Must be appropriately set in relation to the risk

being covered13. Eligibility Criteria must be very clear to avoid problems

later – especially, during claim stages and also to reduce/mitigate adverse selection and also moral hazard issues

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Description

14. Duration of the policy coverage Appropriate durations must be chosen, packaged and priced accordingly

Summary Discussion

ASA, a new generation MFI, is as serious about its insurance products as it is about its savings and credit products.

ASA sees a good business opportunity for its insurance products and it has also initiated cost recovery procedures, from the insurance companies that it links up (United India is reportedly offering between 3-7.5% commission on the annual turnover, based on slab rates for agencies) with as well as clients.

ASA intends to expand its coverage to include other schemes such as Health Insurance

It is also planning to increase the insured amount and extend the coverage to family members .

Proposed Schemeof SWSS (Future)Capital Fund Payment Rs. 500(Once or in 5 consecutive

installments of Rs. 100 each)Premium Payment Rs. 60 (Annual, One – time)Coverage Member natural death: Rs. 20,000

Member permanent disability/accidental death: Rs. 50,000Medical (family): Rs. 10.000/ yearSpouse natural death: Rs. 10,000Spouse permanent disability/accidental death: Rs. 25,000

Linkages Linkage with any insurance company

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League For Education And Development

IntroductionLeague for Education and Development (LEAD) started in the year 1987 as a women's initiative for the betterment of women. The main objectives of the organisation are to provide a common forum for social, economic, legal and political advancement of rural poor especially women and to help them towards self-reliance through voluntary action. LEAD is working in four districts in Tamil Nadu.

The organization works with • Dalits82.• Women, marginal farmers, poor non dalits, disabled, working children and

other children• Liberated bonded quarry workers and other quarry workers.

Thus it works with about fifty thousand women, men and children. However, in terms of coverage, women are more and the organization strongly identifies itself with women empowerment.

The various programs being implemented by the organization for the benefit of the community are

• Savings and credit management.• Life saving hygiene education.• Infrastructure development• Environment – natural farming, kitchen herbal gardens, soil conservation.

LEAD is also involved in networking of organizations working on different programmes like micro finance, water hygiene, empowerment of disabled and women.

Grass root level institutionsLEAD has promoted various grass root level institutions through which the programmes are implemented. These institutions include the self help groups at the village level, cluster level federations at the Panchayat level and Area level Trust at the block level. The core programme of these institutions is savings and credit i.e. micro finance.

Self Help Groups ( sangam)LEAD promotes self help groups (SHG) of the different target groups it is working with. The self help groups are voluntary associations of the poor. The membership ranges between 15 to 20. The members meet regularly. They save fixed amounts each month. The savings are used for lending among the members. The credit eligibility is linked to the savings and the savings to credit ratio is kept at 1:1 initially. There after the ratio increases upto 1:10 over a period of time. On successful operation for six months the groups are eligible for linkage with formal financial

82 Dalits are socially backward and excluded community. They are socially at the lowest rung. Dalits have different sub sects and each is identified by their occupation. While cobblers are usually scavengers, blacksmiths are skilled in making iron equipment. Most of the women tend to work as agricultural workers.

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institutions like commercial banks. Apart from savings and credit the SHGs also implement various need based social programmes.

Cluster level federations( Mahasabhai)The SHGs functioning in a cluster of villages are formed into a cluster level federation. The federations expect to pave way for the eventual withdrawal of the NGO from the villages. They play an important role in assessing the demand for loans and recommending credit to the SHGs, in monitoring the functioning of the groups and in implementing the various social and other developmental programmes in the villages.

Area level trusts Area level trusts are federations of SHGs working in a block – up to 150 SHGs form area level trust. These are legally registered organizations. Their functions are similar to those of cluster level federation. In the long run they are expected to work as full fledged Micro Financial Institution (MFI), mobilizing the savings of cash rich SHGs, sourcing loans from formal financial institution and on lending to the needy self help groups.As on 31 March, 2001, there are 1874 SHGs, 40 cluster level federations and 5 area level trusts functioning.

Micro Finance ProgrammeSHG mobilizes the savings of the members and lend among themselves. They can also access loans from LEAD mobilized from other sources such as Rashtriya Mahila Kosh, Rabo Bank, SIDBI, Ashram International and commercial banks through the groups.The sources of loan fund83 and the role of various institutions in sanctioning of the loan is as under.

Source of loan fund

Purpose of loan

Type of loan

Institutions involvedSangam Cluster fed Area level

trustLEAD’s role

Savings Mostly consumption

group Sanctions to member

No role No role Observer

Commercial bank

Both consumption and income generation(more of latter)

group Sanctions to member

Assesses and Consolidates demand

Recommends to bank

Facilitator

Rashtriya Mahila Kosh

Only income generation

group sanctions Assesses and Consolidates demand

Recommends to LEAD

SanctionsTo groups

83 The groups refer to each loan by the source of the loan fund. Thus one hears of SIDBI loan, Ashram loan and RMK loan while interacting with staff and borrowers.

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Rabo bank Milch cattle individual

recommends


Recommends to LEAD

sanctions To members

SIDBI Off farm activities

individual

recommends


Recommends to LEAD


Ashram International

Housing individual

recommends

Consolidates demand

Recommends to LEAD


The groups play different roles for different loan products. Wherever individual loans are sanctioned the groups have to recommend the loans and monitor repayments. The primary responsibility for repayment is that of individual borrower. In case of group loan, the primary responsibility for repayment is that of the group. LEAD at present borrows from RMK, SIDBI and Rabo bank for lending to the members. Over a period of time the federations are expected to take over this role. Thus LEAD is acting as a temporary MFI, till federations stabilize and develop confidence and expertise in micro finance.

The micro finance programmes at the grass root level is as under:

Table 3.21 Savings mobilizedYear Number of groups Number of members Savings mobilized during

the year( rupees)1998 -99 790 9603 1,601,1851999 -00 1069 12881 4,736,775December2000

1613 na 3,861,149

Source – Annual reports for the years 1998-99 and 1999-2000 and progress report.

Table 3.22 Loan disbursed to the members

Purpose of loan 1998-99 1999-2000 Dec2000Agriculture 8988188 13564940Non agriculture84 3953439 5282070Food 2998324 4197010Medical/education 2018679 2952040Social 4770043 6654960Total 22,728,673 32,642,010 45,045,405

84 Includes all income generation activities other than agriculture.

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Micro insuranceLEAD at present is implementing four schemes under micro insurance for its clients. The brief details of the schemes are as under

Name of the scheme

Nature of scheme

Type of instutional linkage

Brief details Number of members / cattle covered

Cattle insurance

Compulsory for loanees.

In house programme of LEAD

Insurance against death of cattle bought out of loans and cattle care. (Covered in detail later)

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Social security scheme

voluntary In house programme of cluster level federations

Member pays Rs.50 premium for cover for three years.The cover is RS 500 on death and RS. 250 for hospitalization above 15 days.

It is not available for LEAD as a whole since each of the federation implements the scheme85.

Raja RajashwariMahila Kalyana Bima Yojana

Voluntary. accident coverage

Linkage with Oriental Insurance Company

All women in the age group of 10 to 75 can become members. Covers death of husband and disablement of women due to accidents. Coverage is Rs. 25,000. Premium is RS. 23 per annum.

3000

HDFC life assurance policy

Voluntary.Life and accident

Linkage with HDFC Standard life Insurance company

500

Many of the formal insurance companies are approaching the organization for selling their products and LEAD is trying to negotiate with them to get the best terms for its clientele.

Future insurance programmesThe organization is contemplating insurance coverage for its members for other aspects as well. Health is major concern in its operational area as seen from the loan utilization pattern of the members. The present survey of its clients also revealed the enormity of the problem. Another concern of the clients is asset insurance other than cattle. LEAD will be interacting with the members on these aspects to develop suitable schemes for them.

Cattle insurance

85The coverage is very low in the federation level. For example, in Panchapatti field unit, there are 14 cluster level federations with nearly 6360 members. As on December 2001, only 320 members have taken social security cover. The premium collected is RS 38,400 out of which only Rs. 1500 has been the claims.

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LEAD’s foray into livestock insurance coincided with its entry into livestock financing in a big way. Since each member was to be given a loan of Rs. 7000 to 11000, LEAD decided to treat the loans as individual loans. As the amount involved was high as compared to the savings of the members (savings to credit ratio in some cases are as high as 1:10), LEAD thought of the cattle insurance scheme to protect its loan portfolio.

LEAD while introducing the scheme prepared itself by studying the scheme of ASSEFA (NGO operating in a nearby district.) The scheme was not welcomed by the clients since they felt that the mortality rate of milch cattle is low and they have had considerable experience in rearing cattle. However, LEAD made the scheme compulsory to all the loans disbursed under the Rabo bank programme. The loan amount disbursed to the borrower is net of insurance premium.

The essential features of the scheme

1.The livestock to be covered under the scheme are the cows, buffaloes, goats and sheep. The animals bought through LEAD’s loans – either group loan or individual loan - can be covered.

2. The premium to be paid per year is Cows and buffaloes – 4%Goats and sheep – 5%

3. The premium amount is deducted from the loan amount and the net amount is only paid to the borrower.

4. The client has to purchase the animal within a week of disbursement of the loan. On purchase the animal will be inspected by the staff of LEAD who will check whether the animal is really worth the purchase price paid by the borrower; and more importantly whether it can be insured for the same amount. If the animal is not worth the price/ insured amount the borrower is advised to change the animal.

5. The animal is kept under observation for a period of fifteen days. This is also the quarantine period to check whether the animal is healthy and is worth insuring.

6. On completion of fifteen days a metallic tag is put around the ears of the animal and this is an essential step in insuring the animal. Any insurance claim of an animal without a ear tag will not be entertained.

7. When an animal falls sick the client should immediately inform the village para veterinarian who in turn will inform the veterinary Doctor.

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Procedure for claimsIn case the animal dies for whatever reason, the client should inform the organization within two hours. The carcass will be inspected by the para vet and the doctor before disposal.

8. Within a week of the death, the claim form should be duly filled and submitted to the organization. The tag of the animal should also be attached.

9. The claim should be settled within a month. In case of any delay the client will be informed of the status quo.

Claim amountThe animals are insured for the loan term which is two years.The claim amount for the first and second years are 75% and 80% of the sum insured respectively. The loan outstanding against the animal will be adjusted against the claim and only the balance will be paid to the client.

ExclusionsThe following types of claims will be excluded from coverage • Theft of animal.• Sale of animal• Mass death due to wide spread contagious disease.• Death due to negligence of client – not treating the animal in time, ignoring the

vaccinations etc., • Culling of animal.• Poisoning of animal.• Death occurring while entrusting the animal in someone else’s care.• Death due to the carelessness of the client.• Animals without ear tag.• Death due to road accident.• Death beyond the valid term of the insurance.

Cattle careLEAD has initiated the scheme of cattle care from November 1999. Cattle care facilities were introduced to provide better care of animals, better yield of milk which would result in less loan defaults, and lesser insurance claims. The client has to pay one hundred rupees each year for cattle care. The charges for two years are deducted from the loan amount prior to disbursement.The cattle care at present entails

• deworming of the animal three times a year.• Vaccination against Foot and mouth disease and other commonly prevalent disease

once in six months.

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The services of the paravet and the doctor are available for treating other major illnesses for which the client has to pay only for the medicine.

The present study In order to study the implementation of the scheme, the Head office of LEAD and three field units were visited. Discussions were held with the management and staff of LEAD who are involved in the cattle insurance scheme. The aspects of discussion included the present scheme, requirements of the clients, the scope for expansion, important lessons learned so far and the measures to be taken to further improve the scheme. Similar discussions were also held separately with some of the para veterinarians during the filed visit and the veterinary doctors. Data on coverage, income and expenditure and transaction costs to both the clients and the organization were gathered. Focus group discussions with the present and past clients were held to understand their views on the scheme.

Staff involved in the programme

LEAD operates through seven field units. Each field unit has a programme co-ordinator who is primarily responsible for the working of the self help groups and the lending programme. He is assisted by the field staff who have responsibility for specified number of self help groups. LEAD has engaged the services of a veterinary doctor to oversee the implementation of the cattle care and insurance programme. Recently village level youth have been recruited as bare foot veterinary care staff. The para veterinary staff are part time employees. A paravet takes care of the animals, purchased through loans, in ten to fifteen villages which fall under a cluster level federation.

The job responsibilities of the different category of staff is as under

Staff category

Responsibilities under the cattle insurance

Executive Director

Fund raising for loan programme, policy deicisions on insurance and cattle care, recruitment of staff under the programme and regular review of the programme.

Veterinary doctor

Training of bare foot vets, training of clients in cattle care, attending to sick animals, supervising the work of barefoot vets, coordinating and supervising the organizing of cattle care camps, all matters relating to insurance of animals – verification of animals, documentation, death verification, finalizing the claims etc., and over all review of the programme of cattle insurance and cattle care.

Field coordinators

Implementing the insurance scheme through the community workers, recommending insurance claims and over all

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responsibility for proper accounts maintenance.accountants Maintenance accounts relating to insurance premium, claims

settlement, and cattle care.Community workers

Complete charge of the loan programme, co ordination with barefoot veterinarians for arranging cattle care.

Bare foot veterinarians

cattle care of animals including vaccination, deworming,tagging of animals covered under the insurance., coordinating with the doctor in case of sickness of the animal, facilitating inspection of animal after death and organizing cattle care camps. close coordination with the clients.

Views of Clients

Client satisfaction assessment was carried out with the current clients as well as past clients of the programme. The focus group discussions were held in three villages and covered seventeen clients on the different aspects of the programme.

Programme feature

Likes Dislikes Response of LEAD to the dislikes

Premium amount

The amount is not returned after the loan is repaid.

LEAD can consider the reduction in premium in due course provided risk pooling is facilitated by more coverage, client education on cattle care and improvement in cattle care. Members have also to be educated on the modalities of non life insurance.


It is collected in one installment. Easy transaction.

The loan amount is increased by the amount of insurance. The client has to pay interest at the rate of 2 per cent per month on the insurance

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amount also.Amount insured

The claim amount should be 100% of the insured amount.

Period of insurance

No specific comments

Exclusion clausesi) sale of animal

ii)accident

iii)

When we pay premium for an animal (especially those not purchased out of loan), we are not able to sell the animal during the insured period. We tend to lose the premium if we sell the animal.

If the animal is sold to another member of the SHG transfer of premium benefit can be considered or refund of proportionate premium for the unexpired period of cover may be given.

CompulsoryInsurance

It safe guards against likely loss and resultant overdues.

Pay out time

It is reasonable as compared to other Government programmes.

The time can be reduced further.

Easiness in transactioniii) in

taking policy

iv) in claims

Easy in taking policy.Relatively easy in claims also.

Training in good training for .

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cattle care, health care etc.,

two days. The aspects on how to check for quality, milk yield and sickness before purchase is highly appreciated.

Client sensitisation

Reasonable. Has to be improved further

Support services

AI can be provided. The veterinary doctor should be available for treatment of animal apart from vaccinations.

As against one doctor LEAD has recently recruited two doctors and 27 bare foot veterinarians. LEAD can consider AI after a market survey to assess the demand.

The present issues in cattle insurance

Operation of the schemeThe animals purchased under the Rabo bank scheme are at present covered under the insurance scheme86. Though LEAD is planning to extend the scheme to all the animals bought by the clients through loans, it is yet to take a definite shape. Thus the coverage under the scheme is as under.

Table 3.23 Coverage under cattle insuranceYear Loan amount

Per animalPremium Amount of

premiumNumber ofloans

PremiumCollected( in rupees)

99 – 2000 7000 to 9000 5 % of loan amount: changed to 4% later.

Rs. 350 to 450 per animal per year

245 86,850

2000-2001 11000 4% of loan amount subject to value of the animal animal actually purchased.

Rs. 840 per animal for two years.

370 289,800

86 The self help groups normally pool together their own savings, loans from RMK and commercial bank and decide to lend to the members as per their needs. Members of self help groups purchase cows, buffaloes and other small animals by taking loans from their self help groups also.

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Claims admitted There have been eleven cattle deaths and consequent claims since the inception of the scheme - four in the first year ending March 2000 and seven in the current year. While all the claims have been settled in the first year, one claim has been rejected in the second year. Out of the six claims admitted in the second year, four have been settled and two are likely to be settled.

The formal insurance companies have actuarial knowledge on the mortality rate of livestock and according to them the mortality rate of 4 per thousand is the national average. However, the mortality rate in case of LEAD is high at almost 16 per thousand. This is due to the small number of animals covered.

Prevention of moral hazard

The client can cheat the organization at various stages as is enumerated below

Stage Type of moral hazard Measures taken by LEAD to

prevent moral hazardPurchase of animal

The actual value of the animal purchased could be less than the insured amount of Rs.10,000 to 11000.

The claim settled is only 75% and 80% of the insured amount in the first and second year respectively.

Clients indulge in blatant cheating by buying a cow worth Rs. 5000.

The animal is to be changed for a better one.

The animal shown at the time of verification is exchanged for a lesser valued animal at the time of tagging.

The same set of staff who verify the animal will tag the animal also. It is also proposed to mark clear identification of the animal by measurements, photo etc. at the time of verification.

Rearing of the animal.

Negligence of the animal if it is barren/ dry/ not yielding enough milk.

Cows are worshipped as goddess and hence are not so much neglected. Risk is more in the case of buffaloes. Employment of para vets and adequate cattle care especially AI can address this problem to some extent.

Relying on old customs and practices for curing sicknesses which may result in serious and

Client sensitization and adequate cattle care can address this problem.

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incurable sickness of the animal.Selling the animal especially in case of sickness/ barrenness and infertility and may claim insurance by declaring that the animal died.

Inspection of the carcass of the animal is a pre requisite for accepting the claim. Earlier informing the doctor was time consuming. Now, village level paravets can act as watch dogs. Usually informal enquiry in the village also throws light on the actual situation.

Death of the animal

Disposing of the animal quickly if it dies of any cause which is not claimable under the insurance policy.

Same as above.

Covariance of risk

The organization has explicitly underwritten that claims from large scale death of cattle due to communicable disease will not be entertained. Though some of the dreaded diseases like rinder pest has been eradicated, foot and mouth disease can also take on an epidemic form and the organization is regularly vaccinating the animals against such diseases.

Adverse selectionAsset verification is carried out by the staff as part of the lending programme. The health of the cattle is further ascertained before tagging so that adverse selection is avoided.

Trade off between cattle insurance, cattle care and lending programmeCattle care requires enough number of cattle in a village or cluster of villages so that more number of animals can be covered in each of the visits be it routine vaccination or isolated cases of sicknesses. Similarly cattle loans can also be given in a cluster so that transaction cost of lending is lower and follow up and monitoring is easier. However, when an organization is implementing the three programmes of lending, cattle care and cattle insurance, a problem in one can affect the other.

Kannamuthampatti village has eleven SHGs and some of the older groups are operating in the village. Chirumbai, a grass root leader from the village, is in the Board of LEAD. Thirty two cow loans were sanctioned in the village. These cattle have been insured by LEAD. A cow died by falling into a well. Initial enquiry revealed that the owner had entrusted the cow to her ten year old daughter for grazing and the cow had accidentally fallen into the well. When the villagers got wind of the fact that LEAD may not admit the claim, some of them defaulted in the loan repayments. In the formal claim the owner wrote that the cow developed fits while grazing and fell in the well.. LEAD had to finally admit the claim since loan repayments were falling and not admitting the claim would have caused distrust in the scheme and also in any future programmes.

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MIS The management information system for the insurance programme consists of collection of data from staff at regular intervals. The MIS arrangement is very informal. Much of the data is collected at the time of meetings. There is vast scope for formalizing the data collection, the reporting and review to enable appropriate decision making. The stages of MIS, staff involved and the present position is as under

Serial no.

Aspect Periodicity of data collection

Method of collecting information

Staff involved

What needs to be done

1 Insurance of animals -programme progress

Once in a month

Meetings of ED with Co ordinators, of ED with doctor and para vets.

Para vet and veterinary doctor, field co ordinators.

Has to be made more systematic with formal reporting and consolidation of data. The data collected need to be made into reports and reviewed by executive director.Special care needs to be taken to judge the efficiency of the system. For example,Time taken to tag the animals, time taken to process and settle claims etc.,

2. Cattle care programme

As and when camps are planned and conducted

Report on cattle camps and meetings as mentioned above.

Para vet and doctor

Formalised and made systematic both at planning and execution stage to track monthly progress in terms of each component such as vaccination, deworming, number of animals covered.

3. Sickness of animal

Nil Meetings and discussions between

As in 1. Sickness reported and treated needs to be collected in the field unit level to track any

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para vets and doctor.

epidemic outbreaks. This information can also be used to assess demand for cattle care and starting a dispensary if need be in some of the areas.

4. Death ImmediateInformation about death.

Telephone Paravet, doctor, field unit coordinator and executive director.

Needs to consolidate the details regarding the cause and number of deaths at each field unit level and also at Head office level to build actuarial knowledge.

5. Accounts Every month

Deposit receipts in banks for insurance amount deposited.

Accounting staff in the field unit and Head office.

Each field unit is adopting different system to maintain accounts. Separate accounting heads need to be opened to track information on income and expenditure in field unit as well as Head Office level.

6. Profitability Once in a quarter

Premium collected and claims settled

Accounting staff and veterinary doctor

Since the programme is to be expanded, there is a need to look at the programme as a separate profit center and look seriously at the costs and benefits.

7. Client satisfaction

Periodical/ sporadic.

On various aspects of

ED’s meetings

Very informal. More of problem redressing than

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the scheme. with staff, grass root women, staff meeting with clients.

assessing the client satisfaction. Needs to be strengthened to enable expansion of the programme.

Thus there is vast scope for improving the MIS. The cattle insurance programme has crossed the nascent stage and is on the take off stage. A concise reporting and reviewing system is the need of the hour.

Transaction cost to the organization and the client

The transaction cost of the programme for LEAD and the clients were gathered from staff and the clients. No Activity Institution

involvedPersons involved

Cost To LEAD (for a set of 15 clients)

Cost to the client

1 Selection of borrower for cattle loan

Sangam LEAD field staff and the group members

nil

2 Preparation of loan documents

Sangam LEAD field staff and client

Rs.300(For 1&2)

Rs.30

3 Interview by Project co ordinator

Project co ordinator and client

Rs.160 nil

4 Client list and loan

LEAD staff Rs.240 nil

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requirements sent to HO

5 Sanction and disbursal of loan amount to field office

LEAD staff

6 Disbursal of loan amount net of insurance premium and cattle care fees.

Client, two leaders of the concerned SHG and the accountant and staff of LEAD.

Rs.600(5&6)

Rs.30

7 Training on cattle selection and cattle care

.LEAD vet. Staff, all clients in the cluster.

Rs.200

8 Inspection of purchased animal

LEAD vet. Doctor, para vet and concerned field staff

Rs.200 nil

9 Tagging of the animal

Para vet and field staff

Rs.200 nil

10 Cattle care Para vet and doctor

Rs.1500 Rs.100 per year

11 Sickness of animal

Para vet and field staff

Rs.100Per animal

Rs.50 for medicines on an average.

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12 Death of animalIntimation of death

Sangam, LEAD field office and Head office.

Client, para vet, field staff, Project coordinator, vet. Doctor and executive Director LEAD

RS.10

13 Inspection and post mortem

Veterinary doctor NIL

14 Claim papers Sangam, mahasabhai, LEAD

Sangam members, mahasabhai leaders, veterinary doctor and project co ordinator.

Rs.30

15 Claim sanction LEAD Executive Director and veterinary doctor

Rs 60( follow up)

16 Claim settlement LEAD, sangam Client, sangam and field staff

12 to 16Rs.250For one animal.

nil

Thus the transaction cost for the organization is Rs. 135 for loan sanction and insuring the animal, Rs.100 for routine cattle care, and Rs. 250 for claim settlement. Thus as a percentage of insured sum of Rs.10,000, it amounts to 1.35, 1, and 2.5 per cent respectively. The transaction cost includes only the direct costs87 such as salary and travel costs of staff, stationary, phone charges, tag charges and cattle care medicines. The transaction cost to the client is Rs. 60 for obtaining the loan and insuring the animal. The cost of cattle care for the client is likely to be RS.150 per animal including the Rs.100 payable to LEAD. The transaction cost for obtaining the claim is Rs.100. These costs include the direct cost for travel, stationary and also opportunity cost of wages88

lost in traveling to the office of LEAD. The transaction costs as a percentage of insured sum amounts to 0.6%, 1.5%, 1.0% for taking a loan and insurance, cattle care and claim respectively.

Settlement timeAt present the settlement of claims takes between one to two months. This is due to the lengthy procedure and involvement of a number of institutions in the process. LEAD is involving the intermediary structures keeping in view the long term objective of management of the programme by the federations. This results in additional transaction cost to the clients who visit the field offices to expedite the matter.

87 The indirect costs in terms of overheads will be minimal and hence not calculated.88 Cost of labour is taken as RS.30 the prevailing rate.

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Cattle CommitteesLEAD has initiated formation of cattle care committees at the cluster level. In each SHG/village one member is chosen as the member of the committee. The member should have knowledge of cattle rearing and command respect of the women. Thus a ten member cattle committee is formed. It is planned that this committee will have a larger role to play in the future – organizing cattle camps, loan recommendation and sanction, monitoring of utilization of loan and repayments, verify and recommend cattle death claims. It is also planned that these committees will be involved in local management89 of funds of the scheme so that they are aware of profitability or otherwise of the programme and act responsibly. The successful functioning of these committees can reduce transaction cost to the borrower, bring in client perspectives to the programme as well as ensure sustainability of the programme in the long run.

Profitability of the programmeThe organization considers the programme as profitable so far considering the amount of premium collected, staff salary paid and claims settled.

The accounting details of the scheme are merged in the income and expenditure of the organisation. The details pertaining to the programme have been segregated from the annual accounts of the organization and the income and expenditure for the activity has been constructed. While arriving at the programme costs, both direct and indirect costs have been included. The direct costs include salary of the veterinary staff, fees paid to the consultants and cattle care medicines. The indirect costs include the salary of other staff and overheads. The salary of the other staff has been apportioned depending on the time spent by them for veterinary activity. The overheads have been apportioned as a proportion of staff salary.

Table 3.24 Income and expenditure for the programme

99-00 Income 2000-01 99-00 Expenditure 2000-0186,850 Premium

collected2,89,800

40,000

24,000

SalaryVeterinary doctorParavetsOther staff

55,00033,30029,000

Cattlecare fees 74,000 42,000 Honorarium for consultant

38,500

40,000 Grants received for veterinary staff salary

67,350 20,000 Claims settled 30,000

2600 Over heads 4790Medicines 11,000

89 The funds will be centrally monitored. However, the local committee will be informed of how much is the premium collected form the area, expenses incurred, how much are claims settled and how much is the balance left so that they are able to curb the tendency of escalating claims.

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1750 Loss Profit 229560128600

431150 128600 431150

The programme suffered nominal losses during the first year if the indirect costs are also included for calculation of profit. During the second year the profits have increased. However, this includes cattle care fees for two years collected in November and bulk of the expenditure will be incurred during the next year. Similarly the organization has received grants from Rabo bank and German Agro Action for meeting the salary expenses of the doctor and 20 of the paravets. Excluding the cattle care fees for the second year as well as the grants received, the profits are Rs125,210 for the year 2001.

ReinsuranceOne of the formal insurance companies has approached the organization to reinsure the insurance portfolio. LEAD is expected to pay 62 .5 per cent of the premium collected to the organization for getting the re insurance cover. LEAD held discussions with another formal insurer for getting better terms. The second organization felt that unless the full premium collected is passed on to them, it was not profitable for them to undertake reinsurance. It strongly advised LEAD not to re insure with the other company since there was no guarantee that the claims admitted by LEAD will in turn be admitted by the insurance company. This will result in either loss for LEAD if it settles the claim or displeasure among the clients if it rejects the claims rejected by the insurance company.LEAD has decided to continue with the status quo for one more year.

ObservationsProfitabilityThere is vast scope for improving the profit under the programme by deploying the insurance premium collected. At present the premium collected is kept almost idle in savings bank accounts of the field units where they earn around 4 % interest per annum. The best opportunity for the organization is to on lend the money to the groups at 24 % interest per annum. In order to meet the claims and unforeseen expenses a small balance may be kept in savings deposit.

The organization does not have any reserve for meeting a run on the programme. With the proposed expansion in the programme the organization should build reserves for likely settlement of largescale claims.

Welfare orientation LEAD started its work with welfare programmes. It has evolved into an organization promoting financial services at the grass root level. At present the organization is making the clients pay for the financial services. However, both the clients and some of the staff resist any move to run programmes on cost covering/ profit basis. The expectation from the clients is that LEAD should provide services free of cost. When clients pay, they demand better services and hence

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the power equation between the staff and the clients change which the staff find difficult to cope. Hence both the clients and staff prefer the welfare approach. The organization is trying hard to break this mindset and make people pay up the cost of services. Some of the staff feel that cattle insurance and cattle care should be viewed as a service to the people and not as a profit center. LEAD management is currently addressing the uphill task in convincing both the staff and clients that any financial service needs to cover its costs in the long run to be sustainable.

Increasing the out reach The programme at present covers the animals bought out of Rabo bank loan. The scheme has the potential to cover animals bought through any loan. However, this involves acceptance of the programme among the clients and more particularly the staff90. The organization is undertaking a survey of population of animals in the households of all the SHG members. For example, in Panchapatti field unit, the animals owned by sangha members are 2645 cows and buffaloes and 2997 goats and sheep. However, the present coverage under insurance scheme is hardly 10 percent of the animals at 258 cows and buffaloes. Thus there is vast scope of increasing the outreach under the scheme. The animal census exercise is going on and is expected to be completed by April. This exercise will help the organization to develop strategies to expand the programme. But the staff and the clients need to own this programme.

Voluntary scheme - addressing the client needsOne important aspect to be considered by the organization is to make the scheme more voluntary. As long as the clients view it as a compulsion, the scheme may not be very popular among the clients. Building in client needs into the programme is a sure way to achieve the desired results. At present the clients are in need of reliable and facile artificial insemination (AI) services for the animals. Introducing this service can be a very strategic move and can bring in more clients under cattle care and cattle insurance. Integrating cattle care and cattle insurance can be a good step in increasing the acceptability of the programme among the women.

Building credibilityThe organization has to build the credibility of the programme among the clients. This includes client education on the programme, especially the exclusions, providing good services for cattle care and prompt settlement of claims.

90 Recently the organisation decided to include all the animals bought by the members under the Rashtriya Mahila Kosh loan. RMK loans were to be used for income generating activity. The members state the purpose of the loan at the time of applying for a loan. Purchase of animals was a very common purpose stated by the women at the time of applying for a loan. However, there is no check later whether the money was used for the stated purpose. It is usual for the members to use the money for more than one purpose including the stated purpose. When the members became aware that animal loans will involve compulsory insurance, they immediately avoided giving the purpose of the loan as for purchase of animal. The field staff who are in touch with the members can easily know for what purpose the loan is actually used since they move with the villagers very closely. Looking to the tough challenge of convincing the women to take up insurance, they also chose the easy way out and stated that no one had purchased animals.

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Awareness building Awareness building among the grass root women for insurance facilities has to be under taken.Traditionally the women have been undertaking savings and credit operations and are aware of the nuances of these transactions. Insurance as a financial service is new to many of them. Many of them view the insurance as a no return and money losing proposition. The organization has to build the awareness about this financial service among the women.

Conclusion

LEAD has done pioneering work in microinsurance. Cattle insurance is a difficult, but needed service in the rural areas. The significant part of the initiative, is that of going beyond offering a vanilla insurance product and integrating it with cattle health. By educating the cattle owner on good practices in cattle care, providing paravet and veterinary doctors’ support, LEAD has sought to manage the risk of cattle death effectively. Starting with borrowers is a logical market penetration strategy, even if it has met with some initial resistance from clients.

The scheme could be made more participative to ensure wider acceptance of the people. As regards exclusions in the cover, local practices in grazing, feeding need to be respected; so that clients do not view the insurance cover as a way of collecting money from them for no valid purpose. Cattle care could be offered more comprehensively, by including AI facilities, so that there is greater voluntary participation. If comprehensive cattle care is made part of the scheme, then it can be marketed as a general product, to non-borrowers as well, which will improve the viability.

As regards the finances, it is necessary to build a risk reserve out of the premium income. This might be a better alternative to reinsurance, in view of the reported difficulties and high cost involved in obtaining reinsurance cover. Premium receipts need to invested soundly in high return assets and a part outside the business. For the purpose an investment policy has to be formulated by LEAD detailing the proportion of premium income to be used for the risk reserve, share of investments to be made outside the business, share of investments to be made in high return assets, etc.

From a legal point of view, insurance products cannot be offered by organizations not licensed by IRDA. The nature of this scheme should change to reflect cattle health care, rather than risk assurance. The IRDA norms might come in the way of the product being offered to the general public; it will have remain confined to the members of LEAD’s programmes.

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INDIAN COOPERATIVE NETWORK FOR WOMEN (ICNW)

Background

The ICNW, initiated in 1981 with 800 women in the slums of Chennai, is an institution designed to satisfy the micro-finance needs of the poor women entrepreneurs. Most of these women entrepreneurs, despite long and arduous hours of work have low access to technology and are forced to provide high labour inputs. The conditions of work of these women workers and entrepreneurs in the unorganized sector is not only exploitative but also highly oppressive. Non-availability of low cost credit and subsequent borrowing from money lenders and middlemen push these poor women into the vicious cycle of poverty, indebtedness and ill health. In situations, where male contribution to the family is low due to alcoholism and acute unemployment, women and children’s' income become very crucial for the family's very survival.

Prioritizing poor women's needs

It is in such a grim scenario, that the needs assessment by the initiators of ICNW in the late 70's, led to poor women voicing their need for low cost credit. Realizing that the formal banking institutions and their procedures simply do not comply with the needs of poor and illiterate borrowers, ICNW’s leaders resolved to create a banking system of their own which was to be both informal and easy to operate.

2,500 leaders who earlier had a proven experience with the nationalized banks with a share capital of Rs.20 each, constituting an initial seed capital of Rs.50, 000 initiated the ' Working Women's Cooperative Society ' in 1981. Henceforth, they promoted a series of cooperatives in all its areas of replication, registering them under the respective State Cooperative Act. However these co-operatives had to most often face problems of their Board being superceded. In 1994 in order to bring the co-operatives into a single administrative network and relieve themselves from the anomaly of their board being superceded, the co-operatives were registered under the central laws as the " Indian Cooperative Network for Women ". This is a legally registered autonomous financial network. This facilitated better coordination of its large-scale operations and gave freedom for countrywide operations.

Not only poor women adopted cooperative as way of credit extension but also these institutions are being run and managed by the poor women themselves who are the share-holders, directors and field personnel of the ICNW. 95% of the office bearers live in the slums/villages and have risen through the ranks of the organization. This strategy of promoting grassroots leadership has had a multiplier effect, contributing to the micro finance institution's long-term sustainability, through viable program initiatives and field oriented micro-finance policies.

Profile of ICNW Clients

Women in ICNW are involved in 200 different enterprises both in the urban and rural areas. The occupational characteristics of these members vary with different cultural contexts.

Place Type of Occupation

Chennai (3 Branches) hawkers, vendors, service specialists and petty shopkeepers,

Dindigul Agricultural labourers and shandy (Rural market) vendors

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Adiramapattinam fisher women. Vellore Beedi rolling. Kanchipuram silk weaversDharmapuri handloom weavers in Bangalore agarbathy rollers Bidar non-farm agricultural labourers Bellary Cigar rollers and devadasis Chenapatna seri-culturists, entrepreneurs and toy makers Narsapur, Palakol, Bhimavaram lace artisans Malkipuram coir makers and agricultural workers Hyderabad handicraft workers, chamki workers and micro

entrepreneurs.

ICNW's Products, Outreach and Financial Profile

The ICNW model of micro finance delivery is simple and easy to operate and highly replicable. Basically, this model offers three generic products to its member clients:

4) Credit at 18% (reducing balance) on varying installment terms and for a variety of purposes5) Savings - Voluntary Savings, which are withdrawable, and Fixed Deposits6) Insurance products91 designed to meet the life, accident and health needs of member

clients

Today the ICNW, operates in 3 states of India covering nearly 2,59,400 clients in 18 different branches with a good mixture or rural, urban and semi-urban branches. The key financial indicators of the ICNW are given in Table 3.25

91 Besides the operation of such insurance packages, the training wing of WWF also sensitizes women on their health care products and advices them on occupational safety measures as well. In instances like Beedi workers (Country-cigar) lobbying efforts of the Forum has enabled the women workers to take care of their families health in case of affliction with Tuberculosis, back ache and so on. They are also made aware of the precautionary measures to be taken in order to prevent such diseases that are common for such occupations like beedi rolling.

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Table 3.25 - Key Financial Indicators of ICNW

1. Percentage of women clients - 100%2. Percentage of Rural clients - 74%3. Percentage of Urban clients - 26%4. Percentage of women staff - 100%5. Share holders - 2,59,4006. Working Capital - 46 Million 7. Members Share Capital - 190 Million8. Members Savings Collected - 320 Million9. Loan portfolio - 540 Million10. Average Cost of funds - 11%11. Interest rate on Savings deposit - 7%12. Interest rate on Fixed deposits - 8 - 11%13. Cumulative repayment rate - 97.09 %14. Onlending interest rate - 18% on declining balance15. Average Repayment period - 10 months16. Average portfolio per branch - 79,17,48017. Average portfolio per staff - 9,20,38918. Average caseload per field org. (clients) - 1,28219. Average caseload per field org. (groups) - 16720. Portfolio in arrears - 1.62 %21. Portfolio at risk - 6.4 %22. Operating Self Sufficiency - 206%23. Financial Self Sufficiency - 125%24. Percentage of voluntary Savings - 100%25. SDI - 37.7

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2 INSURANCE PRODUCTS

Insurance Product # 1 Group and Social Security Schemes

Background

1. The Group Insurance scheme of ICNW was initiated in the year 1981. Under this group Insurance Scheme members’ life was insured.

2. Later, it was converted into the social security scheme covering life, partial or full disability and Accidental death of the policyholders in 1998. The social security scheme was introduced in some of the branches in 1998 and few others in 1999.

3. The statistical details pertaining to the social security and group insurance schemes can be found in the Tables 1-2, at the end of this section.

Benefits

1. The policyholder receives benefit in cash if it is partial/full disability. The nominee of the policy or the legal heir receives the benefit in the case of natural / accidental death of the policy holder.

2. Life Insurance Corporation of India provides the benefits based on the policy holder referral list and premium amount collected by ICNW under the social security scheme.

3. Currently, for the social security scheme and the group insurance schemes, the benefits are as follows:

Group Insurance Scheme Social Security Scheme

• On the death of the member, her nominee gets Rs.5,000.

• On the death of the member, the nominee gets Rs.5,000, if it is a normal death and Rs.25,000, if it is due to accident.

• In case of partial and complete disability, Rs.12,500 and Rs.25,000 are the respective compensations provided by LIC to the nominee.

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Premiums

1. With reference to the social security scheme operational currently, the annual premium of Rs 25 was fixed at the time of initiating of the scheme and it is the same for all policyholders.

2. The group Insurance Scheme however had premium amount varying according to the age of the policyholders.

3. The premiums have to be paid in full and cannot be remitted (or paid) partially.4. LIC underwrites and sets prices for the insurance product. The table below provides a range

of premiums that have been paid under the two schemes:

Group Insurance Scheme Social Security Scheme

• The group insurance scheme that is being extended to members in some of the ICNW branches entails each member paying a nominal annual premium.

• This amount (usually between Rs 4 - Rs.35) is transferred from the member’s savings account with their consent and remitted to LIC by the ICNW.

• The social security scheme, which is operational in most of the ICNW branches is a scheme in which each member pays about Rs.25 as annual premium (it is 50% subsidized by the LIC).

Linkages with Other Products

1. This Life Insurance product of ICNW is layered on voluntary savings. 2. The yearly premium is taken from the Savings Account of the client and referred to

Insurance Company92. 3. Clients with Rs 50 as minimum balance on the day of listing for social security scheme

become eligible for Insurance coverage for that year. 4. In the subsequent year, if they fall below minimum balance they may not be eligible for

Insurance referral and coverage. 5. Similar to savings being voluntary at the ICNW, Insurance Coverage is also a voluntary

effort by the members.

92 Premiums are deducted from the clients Savings Account, after their concurrence, on a yearly basis. The collected premiums are sent to the Insurance Company on behalf of that year's policyholders being referred.

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Eligibility

1. All insured need to be members of ICNW2. They should be women between ages of 18 and 65 years and be a member of a solidarity

group3. They must hold at least one share and have a minimum savings balance of Rs 50 at the

time of payment of premium (normally, July of every year) and Rs 25 in savings account at other times of the year

4. They should not have defaulted on loans taken from ICNW5. They should have undergone the various training programs at ICNW

Claims

1. Field Organizers and Area leaders of ICNW notify the company on the death or accident of members.

2. The organization immediately forwards the claim form to the Insurance company.3. Between 30 to 35 days from the date of filing the claim form, the benefits (payouts) are

made.

Claims Verification

1. The field organizers notify the claims and loan officers visit areas (with group leaders) to discuss with family to assess the prevalent condition and ascertain authenticity of the claims (especially, disability)

2. Also the corporation / municipality issues death certificate which is collected as a document of evidence indicating the death of the policyholder.

3. A detailed list of procedures, adopted for the Social Security Insurance product, is provided below

PROCEDURES FOLLOWED AT ICNW FOR LIFE SCHEMES1. Member gets to know about the organization either in an area meeting in

her neighbourhood or through any media. 2. The member approaches the office staff at ICNW and leaves her address.3. She is linked to an organisor (field worker) who is already working closely in

her area. The organisor briefs the member about the structure and functioning of the organization.

4. The need for group concept is emphasized and the member intimates the organization (ICNW) about the formation of her group.

5. The organisor informs the staff about the formation of the group. She is then allotted a schedule to visit the newly formed group on a particular day and time.

6. After the organisor visits the group both in the field and at her home, she explains the member about the loan procedures/micro-finance program and the importance of attending the training session.

7. This is followed by the field visit that the staff undertakes.8. The member if found eligible is intimated through the organizer to get

registered with the organization by enrolling herself along with her group by paying a membership fees of Rs.24/ annually towards membership.

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9. The staff schedule a day in the following weeks for the member to attend the training session along with her group. This is disseminated through the organisor during the Saturday meetings.

10. The member is also assigned a day for taking her first loan.11. After ensuring that the member has attended the training program she is registered

as a shareholder with the ICNW.12. A loan 10 times that of her share amount is issued to the member on the appointed

day. At ICNW for the convenience of the members who are poor, the share amount is paid by them when they come to take their loans.

13. At the time of loan disbursement, the member is educated about the importance of savings and is encouraged to open an savings account.

14. She is also given a passbook and the Credit training session during the training program throws light on the aspects of how useful the savings will be at times of emergencies.

15. During the training program the members are also briefed about the various other services such as insurance benefits that are available through ICNW.

16. Once the savings account is opened and a passbook issued for the member, such of those members who have a minimum of 50+ are identified yearly once and a separate list is extracted. Their consent is again sought to participate in the insurance program.

17. The list of members with this minimum balance is referred to the LIC as the policyholders for that period.

18. During the next visit of the member to the bank, the bank staff updates the record in her passbook accordingly.

19. In case of any emergency, the member or her neighbor intimate the area leader or the organisor about the natural death/accidental death/ disabilities and enquire her about the procedures to make the claim.

20. The organisor who is already notified about the details in case of making claims suggests the informer on what are the documents needed as support for making the claims.

21. The member or her nominee arrange for the supporting documents and furnish it to the staff of ICNW for further processing.

22. The ICNW staff verify with their records for the referral of this member to LIC during that period. If found eligible, the supporting documents along with claim application are forwarded to the LIC office.

23. The LIC release the claim in the name of ICNW/NUWW (National Union of Working Women) and this is then issued to the member or to her legal heir as the case may be.

24. In case the nominee or the heir is of minor age group and if the claim is suspected to be misappropriated by the relations, the amount is safely tied up with a fixed deposit account of the member and the deposit along with the mature amount is issued to the nominee once when they are grown up or to meet their educational expenses.

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TABLE 3.26 - VALUE OF INSURANCE CLAIM PER POLICYHOLDER (IN ICNW) OVER THE YEARS All figures in INR unless otherwise specified

Premium Amount Insurance Amount

1.76 - 4.3, Group Scheme

1000

8.85, Group Scheme

1500

25 – 35, Group Scheme

5000

25 (Currently), Social Security Scheme

5000 (Natural Death),25,000 (Accidental Death),12,500 (Partial Disability),25,000 (Full Disability)

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TABLE 3.27 - SUMMARY SOCIAL SECURITY LIFE INSURANCE DATA FOR ICNW

All Aspects 95-96 96-97 97-98 98-99 99-2000 Dec Total

1. No. of Policy Holders List 35,497 40,959 48,684 49,134 64,801 2,39,075

2. No. of Insurance Claims Made 103 122 155 154 132 666

3. Value of Insurance Claim per policyholder (INR) 1000 - 1500 1000 - 5000 1000 - 5000 1500 - 5000 5000 - 25000 -

4. Total Value of Insurance Claims made (INR) 3,52,442.00 5,71,221.00 8,33,075.00 7,78,262.00 6,05,502.00 31,40,502.00

5. Value of Total Insurance Premium Paid (INR) 7,70,093.60 8,29,662.00 9,45,019.00 12,17,162.00 15,05,827.00 52,67,763.60

6. Value of Premium per Policyholder (INR) 4.25 - 30 2.02 - 35.5 1.76 - 33.39 8.85 - 35.34 25* -

7. Value of Premium subsidized (INR) 15,975.00 25,893.00 48,809.00 23,779.00 - 1,14,456.00

*Under Group Insurance Scheme subsidized by Social Security Fund the annualized premium by the member is Rs. 25

and Rs. 25 is contributed by LIC

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Insurance Product # 2 2nd Life Insurance

All conditions for this life product are similar to insurance product # 1, except following:

4. Members need to pay Rs 100 per year as premium to LIC through ICNW5. This amount is paid into the savings account and transferred to the insurance

company subsequently6. Those opting for this scheme cannot avail insurance product # 1 and vice versa7. The benefits under this scheme are as follows (between 2-5 times the social security

scheme benefits under different categories)

Insurance Scheme• On the death of the member, the nominee gets Rs.20,000, if it is a normal death • It is Rs.50,000, if death is due to accident. • In case of partial/complete disability, Rs.25,000 and Rs.50,000 are the compensations • While ICNW facilitates the life insurance process with its clients, the payouts are provided by

LIC, through ICNW to the nominee.•

TABLE 3 .28 - RS. 100 2nd LIFE INSURANCE DETAILS AS ON 31.3.2001 (IN ICNW)

Branch NameDate of Membership

No. of Members

Amount Collected(INR)

Claim

No. of members

Amount (INR)

Vellore 24.03.2001 1000 100000

Kancheepuram 12.03.2001 692 69200

Dharmapuri 157 15700

Hyderabad 86 8600

Bangalore 31 3100

Dindigul 50 5000

Bellary 29.03.2001 180 18000

Bidar 10 1000

Adiramapattinam 705 70500

Palakol 67 6700

Malkipuram 31 3100

Bhimavaram 149 14900

Chennapatna

Narasapur 21.03.2001 164 16400

South Madras 18.12.2000 1231 123,100.00

North Madras 844 84,400.00

Central Madras 702 70,200.00

Total 6,099 609,900

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Client Satisfaction with Life Insurance Products

Focus group discussions were held with nearly 120 clients of ICNW spread across 7 branches. Salient points from these discussions are summarized below:

ICNW – Life Insurance Products

Program Feature Likes/Strengths Dislikes/Suggestions Response of ICNW

Premium amount There are several products and that is really likeable. This flexibility in premium, Rs 25 to Rs 100, suits the needs of different clientele

Method of collection The voluntary nature of this insurance is good. As clients see other clients benefiting, they themselves realize and take up insurance. No one is forced to take up insurance.

Basically, the method of collection is depositing to the savings account and this is then paid to the insurance company. The flexibility available is very useful

Amount insured Coverage can be increased for natural death and partial disability under the social security scheme

A strong endowment feature can also be added to both life schemes

ICNW is still trying to get the best deal from LIC and they have cooperated very well so far. It will try to enhance coverage under the social security scheme

Period of insurance No comments No comments No commentsExclusion clauses No comments No comments No comments

Nature ofInsurance

Like it because it is voluntary and money is never deducted from loans disbursed

Pay out time Can be improved ICNW is taking all the

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ICNW – Life Insurance Products

Program Feature Likes/Strengths Dislikes/Suggestions Response of ICNW

significantly possible efforts to speed up the payouts. It is negotiating with LIC to reduce the bureaucratic work



Claim process is little difficult but it has improved considerably in the last few years. Can be speeded up and simplified further. Problem is with LIC and not ICNW.

ICNW is taking all the possible efforts to speed up and simplify the process. It is negotiating with LIC to reduce the bureaucratic work. It is also looking to private suppliers of life insurance to provide better and more efficient services.

Client Sensitization on Insurance

ICNW training programs are very good and they clearly provide the information needed to make a choice on joining insurance

New ProductSuggestions/feedback

Can include an endowment component and money back component in Life insurance. This will make clients see greater value

ICNW is taking this up with private insurers and should link-up their savings to a Life insurance endowment policy

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Insurance Product # 3 Health Insurance

General Aspects

1. This scheme is run in partnership with UNITED INDIA INSURANCE CO. LTD. It is called the JAN AROGYA BIMA POLICY, which has been adapted to meet the needs of ICNW’s clientele

Coverage

2. It is a low budget medi-claim insurance policy which covers reimbursement of Hospitalisation/Domiciliary Hospitalisation expenses for illness/disease or injury sustained.

3. The maximum limit under the policy is Rs. 5000/- per person/year.4. Reimbursement of expenses is towards Room rent, Boarding and Nursing

expenses of Hospital/Nursing Home, Doctors fees, Medicines, Diagnostic/laboratory, including cost of materials used for surgery etc.

5. Hospitalisation includes treatment taken in any institution in India established for indoor care & should either have 15 beds or registered with local authority having 24 hours Professional services.

6. Domiciliary Hospitalisation means any disease/illness which in the normal course would require Hospitalisation but actually taken while confined at home.

7. One day hospitalization is considered but restricted to specific treatments like Dialysis, Chemotherapy, Radiotherapy, Eye Surgery, Dental surgery, Litho-tripsy (Kidney stone removal) Tonsillectomy, taken in the hospital/nursing home. Even if the insured is discharged on the same day, the treatment will be considered.

8. Relevant medical expenses incurred during the period upto 30 days prior to and 60 days after Hospitalisation are covered.

9. This insurance is available to persons between the age of 5 years and 70 years. Children between the age of 3 month and 5 years of age can be covered provided one or both the parents are covered concurrently.

10. Cumulative Bonus at the rate of 5% of sum insured will be progressively increased for each claim-free-year. However the overall amount will not exceed 50% of sum insured.

Claims

11. A preliminary notice of claim with full details should be given to the insurance Company within 7 days from the date of Hospitalisation/Domiciliary Hospitalisation.

12. Final claim along with all documents, reports, bills, receipts should be submitted to the Company within 15 days from the date of completion of the treatment.

Premium

The Sum of insured is Rs. 5,000/-.The premiums are paid as per the Table below, which has been worked out for ICNW.

Particulars Upto 45 years 46-55 years 55-65 years 65-70 years

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Rs. Rs. Rs. Rs.

Head of family 70 100 120 140Spouse 70 100 120 140Independent child upto 25 years of age 50 50 50 50For family 2+1 dependant 190 250 290 330For family of 2+2 dependant 240 300 340 380

Exclusions of the policy

The scheme shall not be liable under the following circumstance.

1. Expenses for the first 30 days of the policy period unless it is due to an accident.2. Expenses for treatment of disease/illness which are pre existing at the time of

taking the policy.3. Expenses for the first year of policy towards specified ailments.4. Expenses for naturopathy, Pregnancy, Child birth, Eye & Dental check up etc.

Since the scheme has just taken off, ICNW provides a strong training to its clientele who have taken health insurance. This is given in Box 1 at the end of this section.

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Client Satisfaction with Health Insurance

Focus group discussions were held with nearly 90 clients of ICNW spread across 3 branches. Salient points from these discussions are summarized below:

ICNW – Health Insurance Product

Program Feature

Likes/Strengths Dislikes/Suggestions Response of ICNW

Premium amount

Range of premiums from Rs 70 – Rs 150 are very useful. They make it very easy for different type clients to subscribe.


Collected in one installment or can withdraw from savings and pay

Easy to pay, especially given the benefits

Amount insured

Coverage is very good

Period of insurance


Exclusion clauses

Very early to say as the scheme is new

Nature of Insurance

Very much required as it protects the interest of poor

Pay out time The time can be reduced further from what they have seen

This has been taken up with United India and also, to be fair to United India, it is a new area where very few companies have ventured into. Hence, overtime, such things can be sorted out.


Policy can be easily taken Claim process can be made less difficult. It takes too much paper work and a lot of time to get the claim. United India can simplity it.

This has been taken up with United India Andover a period of time, this should be sorted out.

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ICNW – Health Insurance Product

Program Feature

Likes/Strengths Dislikes/Suggestions Response of ICNW

Training in health care etc.,

Excellent. WWF’s organizers provide us all the back-up support. They have been with us for many years now

Support services

In Child Care, MCH and related areas, there is very strong support from WWF

New Products No comments

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TABLE 3.29 - HEALTH INSURANCE DETAILS AS ON 31.3.2001 (IN ICNW)

Branch NameDate of Membership

No. of Members

Amount Collected (INR)

Claim

No. of members

Amount (INR)

Vellore

Kancheepuram 29.01.2001 15 870

Dharmapuri

Hyderabad

Bangalore

Dindigul

Bellary

Bidar

Adiramapattinam

Palakol

Malkipuram

Bhimavaram

Chennapatna

Narasapur

South Madras 01.04.2000 426

North Madras 932

Central Madras 322

128,625

2 6656

8 13785

Total 1,695 129,495 10 20,441

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DO'S AND DONT'S IN HEALTH INSURANCE (USED IN ICNW’S TRAINING)

On Admission(1) Intimate Insurance Company immediately after being admitted to the hospital or nursing home. It is

preferable that this done earlier (before or at time of admission)

(2) Make sure that the hospital or nursing home complies with the minimum requirements as laid down under the policy/contract

(3) Ensure that the previous medical history and condition on admission are correctly entered by the hospital authorities in their case-sheet so that no wrong impression is conveyed about the ailment for which treatment is taken.

(4) As prehospitalisation medical expenses during the period of upto 30 days prior to hospitalisation are also reimbursed. collect and preserve such bills in the above regard.

During Treatment

(1) Explain the nature of the ailment and details of treatment correctly to the investigator, if any, depyted by the Insurance Company who may call on you even during the period of admission.

(2) Collect and preserve all bills and receipts if payments have been made periodically to the hospital during any extended period of admission in the hospital

(3) Always act as if you are uninsured and do not allow existence of the policy to cloud your thinking about taking out costly rooms and extra facilities during the stay in hospital. Such a mental disposition would definitely stand you in good stead in getting your claim from the Insurance Company.

(4) Obtain detailed discharge summary from the hospital at the time of getting discharged and check on the accuracy of the main details therein.

After Discharge

(1) Submit the Claim Form with final bills copy of the discharge summary and all other medical reports to the Insurance Company within 30 days of discharge.

(2) As post hospitalisation medical expenses during the period of upto 60 days after discharge from hospital are also reimbursed, collect and preserve all such bills in the above regard.

(3) In case of difference between amount claimed and amount offered for settlement, ascertain. details of working (calculations) to find out the reasons for short settlement.

(4) In case of satisfaction over settlement submit voucher duly discharged and collect your claim cheque.

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Insurance Product # 4 Voluntary Savings

1. ICNW considers voluntary savings as an insurance product because clients use it as a buffer to meet crisis and emergency situations.

2. As on 31st December 2000, Total Voluntary Savings collected at ICNW stood at Rs. 320 Million. The savings balance as per balance sheet, for year ending March 2000, stood at Rs.10.7 Million. This represents an increase of nearly 45 – 50% over the previous years savings balance.

3. Apart from the savings facility available at ICNW (like in a Bank) for which 7% annualized interest is paid to clients, a range of fixed deposit schemes are available.

Fixed Deposit (Days) Interest<45 days 8%

45 – 90 days 9%120 days 9.5%180 days 10%240 days 10.5%365 days 11%2 years 11.5%3 years 12%

Member’s fixed deposits stood at Rs.1,16,500.00 – this is a new product introduced during the year 2000. ICNW expects this to grow significantly during the next few years.

As indicated by the Table, the data from ICNW for a year clearly indicates that where available, voluntary savings facilities, do serve the short-term (crisis or other) needs of the poor. In fact, the range of withdrawals to deposits is 15-93% with an average of 46%. The average shows that, on the whole, clients at ICNW, do withdraw as much as 46% of their deposits in a given year. This clearly suggests that MFIs which are desirous of experimenting with insurance must also develop voluntary savings products .

Table 3.30 Savings Details as on March'2001Indian Cooperative Network for Women Limited

Branch NameOB (as on Mar'2000)

Receipts (April'2000 - March'2001)

Payments (April'2000 - March'2001)

Balance (as on Mar'2001)

Ratio of Savings Withdrawals to Deposits (in %)

Head Office 31,797.55 6,427,768.45 2,315,744.00 4,143,822.00 36%

North Madras 1,377,026.77 1,203,846.40 766,003.45 1,814,869.72 64%

South Madras 1,539,176.71 1,328,504.50 676,149.75 2,191,531.46 51%

Central Madras 1,028,224.58 871,127.60 409,049.30 1,490,302.88 47%

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Bangalore 478,678.85 326,800.00 258,153.20 547,325.65 79%

Palakol 450,358.75 380,502.00 288,329.45 542,531.30 76%

Bellary 454,316.60 308,244.00 148,712.90 613,847.70 48%

Adirampattinam 1,063,745.43 875,880.00 460,510.10 1,479,115.33 53%

Dharmapuri 318,097.22 198,752.00 150,015.20 366,834.02 75%

Bhimavaram 319,294.25 270,204.00 134,101.80 455,396.45 50%

Malkipuram 177,624.15 75,322.20 62,334.00 190,612.35 83%

Dindigul 1,062,749.86 823,967.40 462,733.20 1,423,984.06 56%

Chennapatna 266,252.15 217,637.00 191,680.95 292,208.20 88%

Vellore 677,515.40 436,439.00 407,937.76 706,016.64 93%

Narsapur 349,607.28 452,993.00 311,109.22 491,491.06 69%

Hyderabad 226,833.70 1,172,579.00 180,526.05 1,218,886.66 15%

Bidar 186,276.25 135,226.00 69,376.30 252,125.95 51%

Kancheepuram 730,839.80 866,635.60 259,436.21 1,338,039.19 30%

Total 10,738,415.30 16,372,428.15 7,551,902.84 19,558,940.62 46%

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3 INSTITUTIONAL AND SUSTAINABILITY ASPECTS

Institutional Structure

1. While, ICNW, a cooperative, acts as a SURROGATE sales and marketing agency for its specialized insurance partner (LIC/United India Insurance), in reality, the insurance contract is a two level one – one between clients and ICNW and the other between ICNW and the insurance company. The cheques are issued in the name of ICNW, who in turn pay the clients.

2. It is legally permitted to do so and there is no violation as the schemes promoted are linkage schemes

3. It shares operations/management of the product with LIC/United India Insurance.

4. Specifically, the operation and Management of premium payments is handled by ICNW. The list of policyholders is referred for the year along with the cheque for premium payment on behalf of the policyholders.

Selling of Insurance Products

1. ICNW sells the insurance product using field based grassroots women organizers, who educate the members on the benefits of Insurance products and also enable savings mobilization. Please see Box for role of various staff with regard to Insurance at ICNW.

2. Moreover mass meetings, training workshops are also held in general in which members get to know information on the available insurance products

3. The choice of subscribing to a product is voluntary and is not based on any mandatory norm

ROLE OF KEY STAFF IN THE INSURANCE PROGRAM

STAFF DESCRIPTION ROLES AND RESPONSIBILITIES

Leaders 1. Motivate the members to join the schemes. 2. Intimate the office staff or the field organisors whenever there

has been a crisis, say an accident or death.

Organisors 1. Motivate the leaders and inform them about the various insurance schemes available with the organization.

2. They help in verifying the genuinity of the claim made by visiting the deceased member’s house or her working place and enquiring about the crisis from the neighborhood members.

3. Impart training to the members and leaders on the various benefits of the insurance schemes.

ICNW Staff 1. Motivate the organisors to inform clients about the insurance

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schemes. 2. They scan through the records to identify the members with

minimum balance amount and then refer their names to the LIC. 3. Since the insurance is linked to savings, the staff of ICNW

undertake the paper work on behalf of the member. 4. At a time when the member is faced with any crisis, the staff

educate her about the details of documents that are required as supporting statements to substantiate their claim.

5. They forward the documents along with the claim proposal to the LIC and make a follow up of the claim.

6. They send reminder to the LIC office whenever there is a delay in the claim to be processed.

7. The staff take care to see that the claim is reimbursed to the legal nominee of the deceased member.

8. In case of nominee being minor children who are prone to be cheated by their kiths and kins for their claim amount, the ICNW staff also ensure that the money is tied up safely with the Fixed deposit account so that it could be utilized by the nominee when it is required by them.

The same roles are followed with some adaptation for the Health Insurance Scheme.

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Costs and Revenues

1. The insurance company does not cover any of the cost incurred by ICNW in referring clients to the insurance company.

2. Keeping in mind the poorest nature of the clients and the dire necessity for Security of the poorest, ICNW bears the entire cost. The benefits from insurance to ICNW has been the phenomenal increase in voluntary savings (linked with insurance), which, in turn, has resulted in higher levels of sustainability (as measured by stringent measures like the SDI).

3. However, LIC has now offered 10% of the premium towards reimbursement of expenses of the agency and this is being finalized. United India is not willing to provide any fees as on date.

4. Allocation of Costs - At ICNW, all 3 products – i.e., Credit, Savings and Insurance come under the cooperative structure. As indicated by ICNW, the proportion of staff time across these 3 products is as follows:

Products TimeCredit 50%Savings (growing) 35%Insurance (growing) 15%

5. LIC pays Rs 10,000 per year for every 2500 clients insured, which works out to Rs 4 per client. The cost of attending to insurance aspects at ICNW is Rs 7500 per month and LIC fees alone today provides a significant profit. For example, as per last year’s data, a total of 64,801 clients were insured (till December 31st). Thus, LIC’s fees is Rs 2,59,000 (approximately) and the expenses of ICNW till December 31st (9 months) were only Rs 45,000.

4 PROBLEMS FROM EXPERIENCE AND SOLUTIONS THAT HAVE WORKED

Early lessons• Despite the fact that the social inter-mediation component in ICNW was very strong

in the early days of the insurance scheme, ICNW had to struggle a lot in convincing its poorest clients to contribute a portion of their income towards the insurance scheme.

• Although the premium amount was annual and the amount nominal, the poor women clients found it difficult to set aside a portion of their income for the future.

• The insurance products required significant education and information dissemination to convince the women to participate in the insurance program (on a voluntary basis especially).

• Even today, many of them are somewhat unhappy with the lead time for payouts, which averages about a month. ICNW is therefore talking to other potential insurers as it has one of the largest outreaches in India.

The following are the main difficulties that ICNW is facing while implementing the various insurance schemes.

• The frequent transfer of the section officers at LIC causes undue delay in releasing of the claim amount. This is of course a recent occurrence; still ICNW feels that it would be better if something is done in this regard.

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• The regional offices of LIC take some decisions independently and are not in compliance with that of the Head office LIC. This causes lot of problems in specific areas/branches of ICNW. For instance, at the Vellore LIC office they have refused taking the members after 31st March 2001. The branch office has issued no valid reason so far. Even when the staff of ICNW have insisted that around 320 members have been already enrolled in the scheme by ICNW, the LIC does not still consider the case.

• With regard to the Health Insurance Scheme, a majority of the hospitals that are in the nearby vicinity for the members, have been blacklisted by the insurance company. However, these are the hospitals that are easily accessible to the members, Hence, members have to go to far away places to get treatment and be eligible to receive insurance.

• At times, the banks in which ICNW maintain accounts for the LIC claims, deduct the DD Commission amount from the claim. As a result the member does receive the entire coverage amount – this has also been discussed and it should be sorted out to mutual benefit for all parties concerned.

• Formal insurers, especially as they are a nationalized and centralized set up, deliver products in a more target/organization driven manner rather than client driven manner. There is little choice for the client. The set up is way off from being client (poor and women) friendly and the attitude is like “this is what we have, take it or leave it ”. Therefore, the major hurdle lies in getting the right kind of product suitable to the conditions of poverty group in question and this is the responsibility of the MFI. After much negotiation, ICNW has achieved a significant breakthrough with regard to health insurance.

• The procedures and formalities seem different from one branch office to the other, resulting in non-uniform benefits to the clients. Again, our scale and outreach and strong threat to shift to others (competitors) helped in standardizing benefits across branches and clients.

• Another major hurdle lies in renewal of existing policy. There is little incentive to remind the clients of their responsibility to renew their policy, whereas in the case of affluent clients, such company’s send a notice informing them of the term ending for the existing policy. The poor are always given a raw deal. This responsibility is solely left to the agency referring clients and no effort is there from the insurance company. This is again changing with burgeoning competition.

• Compensating the cost of time/resources for processing of claims etc, is a major hurdle, particularly when the vision is to keep the insurance premium at a affordable cost to the poor. This is particularly felt by a large organization like the WWF/ICNW when everyday about 100-120 applications have to be processed, queries to be answered including premium/claim amounts, etc. The formal insurer has now agreed to provide Rs. 10,000 for every 2500 clients due to competition.

• Another hurdle is that the formalities for making claims, particularly in the case of health insurance, is much beyond the comprehension of women who are largely illiterate. Negotiations are underway to simplify the procedures.

5 DISCUSSION

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Several factors appear to have played a crucial role in enabling ICNW to build a strong financial position and move towards its twin goals of achieving sustainability and expanding outreach:

a. High level of appropriate resource sharing across products.b. Very efficient and effective MIS that has developed over the years. In fact, to day, at

ICNW, all necessary insurance data is instantly available as it has been completely computerized.

c. Need based (Demand) oriented products93 (please see Table below)

Table 3. 31 Demand Based Insurance Products at ICNWS No. Type of Insurance Available1 Life Yes2 Accident-Death Yes3 Accident-Disabilities Yes4 Health Yes5 IGA-Asset No but to be introduced shortly6 Credit Guarantee No but to be introduced shortly7 Other-Housing Insurance No but to be introduced shortly

Risk among Products – Perception of Staff at ICNW

Institutional Risks Across Insurance Products – Perceptions of ICNW StaffInstitutional Risks Type of Insurance

Life Health Asset and PropertyMoral Hazard Low Medium HighFraud (False Claims) Low Medium HighAdverse Selection Medium High MediumOverusage Low High-Very High Medium

Overall, ICNW feels that Life insurance is a relatively low risk product while health and asset insurance are more risky for the institution. So it has used a phased entry strategy while adding insurance products – first life, then health and finally, asset and property insurance. ICNW is unequivocal in that all of these (life, Health and Asset and Property) are very important areas for reducing the vulnerability of its clients. It advocates offering insurance as an incremental strategy and building institutional capacity to handle products. Finally, according to ICNW, one of the key lessons from its experience, with regard to effective management of its insurance program is ‘having a sound strategy to reduce risk in insurance”. The strategies that ICNW is adopting in this regard are given below:

1 Increase Area and Livelihood Diversity to Reduce Risk

• Insure across Diverse Areas (geographic)

• Insure across Diverse Livelihoods (sectors)

• Promote Multiple Related Livelihoods (combination livelihoods)

2 Have a Larger Number of Clients to Spread Risk Base

• Ensure larger Number of clients

93 When the products are need based, clients see a value in them and hence, aspects of moral hazard are reduced. Likewise, when insurance is part of multi-product program, moral hazard is reduced.

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• Insure across strategic contexts and states

3 Provide Strong Micro-Enterprise/other support

• Promote Best Practices in all areas

4 Ensure that MFIs assume an Active Role in Insurance Delivery

• Local Institution to Accept Moral Responsibility

• Insurance to be treated as a commercial Proposition

• Eliminate Subsidies in the long run.

Specific Lessons from the ICNW experience are given below

Lesson 1 – It is better to layer Insurance on savings rather than credit

Clients don’t want to be in debt all of the time. There are many at ICNW who save and take insurance rather than merely take loans. Over years, the number of savers has been going up considerably. Therefore, linking insurance to savings is very crucial as it provides wider coverage of clients. Capitalization also occurs for the MFI. When layered on credit, MFI will not have coverage of clients who do not have a loan outstanding Products tied to credit cover little more than the outstanding balance – providing little assistance in reducing the financial burden of the surviving family. Therefore, in the long run, clients perceive less value in the insurance product.

Lesson 2 - Insurance Products should service unmet needs rather provide what is possible.Clients voluntarily pick up products when it satisfies an unmet need which depends a lot on the context. Many unmet needs exist and insurance service providers need to unearth them and understand these and design suitable products and package them in an appropriate fashion - then generating demand will not be a problem. Otherwise, both the product and service provider will be rejected, a trend that may be difficult to reverse as word of mouth is very strong among the kind of target clientele that micro-insurance is targeting. The positive aspect of this experience is something that we have had at ICNW where we have ensured that for health and life insurance, there is a great flexibility in product packaging so that ‘unmet needs’ of clients are met. Therefore, the combinations of product, pricing, delivery etc are chosen by the clients, who then perceive a greater value in the product.

Lesson 3 – Be Professional and Well Prepared when negotiating with Formal Insurers

A good understanding of the situation include past track record helps. For example, every year when ICNW negotiates with the Insurance company, they have accurate data on aspects such as the following:

1) Business turnover offered (both by volume in Rs as well as number of clients)2) Premiums paid, Payouts made, the ratio of payouts to premiums, generic

categorization of payouts, increase (decrease) in premiums/payouts and associated reasons and all of this by various areas (geographic, business and sectoral areas).

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3) Good (realistic) projections of what they can offer further in terms of coverage of clients and premiums with specific targets for each quarter and forthcoming years. ICNW also project the likely risks based on solid historical data and also provide concrete evidence on how our past year projections by and large matched what actually happened. ICNW also point out to companies the various efforts (like promotion of best practices) that they undertake to reduce the risks on an on-going basis

4) Finally, ICNW also insists and gets a good ‘deal’ by citing competitive quotes (without mentioning names)

5) This really helps because then the insurance major knows and understands that ICNW understand our job well.

6) By doing the above and given its very large scale and high diversity in operations, the insurance major sees ICNW as a well informed and primary client

7) Thereby NEGOTIATING becomes easier. 8) Finally, any problems are sorted out and roles and responsibilities are re-defined

at the negotiation stage – it is far easier to do it then rather than after the contract is signed.

9) Signing bulk contracts for 3 years has also proved useful sometimes

Key Point

Insurance works on large numbers and diversification of geographic areas/activities. Therefore, while negotiating with insurance companies, MFIs must ensure that the premium is worked out on the basis of all potential clients in their operational areas involved in a wide range of activities. The geographic dispersion of coverage along with multiple activities for bulk (group) cover for a large number of clients will certainly reduce the premiums drastically, than, if insurance, were sought individually by the clients themselves. Additionally, the adoption of best practices should help convince insurance companies and thereby reduce premiums

Lesson 4 – Savings with Withdrawal will be more Effective Against Smaller Losses Lesson 5 – Do not design a single Insurance Product to cover all risks

Designing insurance coverage against all risks faced by poor households is impractical. The premiums required for sustainable coverage would be beyond the means of most poor families. Savings products may provide more effective risk protection than insurance. If households can withdraw their savings at any time, they can “self-insure” against any/all unexpected losses up to the amount that they have accumulated in their savings account. Thus for risks that result in smaller losses, voluntary savings may be a better option than insurance.

Lesson 6 - Flexibility in Scheduling Premiums and Coverage

Maximum flexibility in making premium payments must be provided to the clients. Many insurance policies require premiums to be paid in fixed amounts according to a regular schedule. For low-income households with irregular income flows, such a schedule may be difficult to maintain. Tieing up the premiums with savings helps facilitate payments as per income flows.

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Flexibility in size of coverage is crucial - Flexible insurance policies allow households to choose the amount of coverage they wish to purchase. This has really helped ICNW to penetrate the market better.

Lesson 7 – Mitigate Risk by providing combination loans

ICNW has a large concentration of loans in Agriculture and Animal Husbandry and both these activities carry a high degree of risk in terms of failure of IGAs. Therefore, ICNW has tried to reduce the risk by getting the (clients) to opt for inter-related multi-purpose combination type activities.

The advantages to having such a combination (type) loan are many:

(a) Returns are available from many activities, resulting in a stream of cash flows, which is otherwise not possible in Agriculture or Animal Husbandry.

(b) The utility of long term horticulture (crops) is immense in that clients, after a few years, may not (even) have to engage in daily agriculture. Additionally, the scope for clients getting involved in Agriculture Processing at a later date (which is a value addition activity) also increases.

(c) Not all activities have the probability of failing at the same time and hence, the original risk is certainly reduced.

(d) The outputs of one activity serve as inputs for the others, thereby reducing cost, increasing productivity, and overall profitability.

Thus, by promoting multi-purpose loans, which reduce risk, regularize cash flows, permit cost reduction through synergies and increase profitability, ICNW has produced a loan product, that should be of immense value and use to clients, especially in the absence of appropriate insurance schemes for agricultural activities.

Lesson 8 - Detailed Information Tracking is a Prerequisite for the On-Going Success of an Insurance Scheme (particularly for health schemes).

Lesson 9 - To reduce the potential for moral hazard, insurance schemes need to be able to clearly identify who is insured and who is not (this again calls for a good MIS).

Lesson 10 - Take advantage of the demonstration effect. One can significantly increase client interest in insurance if one can demonstrate that as per the experience of other households in an area, the product really works. This can be accomplished by ensuring that claims are handled efficiently and professionally, publicizing claims payments and also, designing tangible, short-term benefits into the product.

Lesson 11 - Good client sensitization is a very important aspect. Right from the beginning, ensure that complete information is available with clients with regard to various factors. This eliminates all problems later. At ICNW, while it has meant being rigorous, they have ensured that the information as per the Box is always available at all times in the field and also with clients. It has clarified aspects upfront and prevented problems from occurring later

Lessons with regard to Insurance Companies

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1. Insurance companies are capable of drawing - up flexible procedures, on being convinced of the genuineness and vision of operating organization and in wake of competition.

2. Strong interpersonal relationships result in good customer care (by insurer) from the point of view of MFI. One should never fight with them – getting things done is crucial

3. Competition in the Insurance environment results in the very best product at affordable rates and increased negotiating power for the MFI – this is very very true for ICNW, over the last year.

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