Micro-insurance in India Practices & Prospects
Premasis Mukherjee
The Storyline
• Introduction to micro-insurance
• Micro-insurance products & challenges
• Delivery channels in micro-insurance
• Micro-insurance in India
• Micro-insurance regulation and its‟ impact
• Trends in micro-insurance industry
• Some Experiments by MFIs/ companies
• Possible engagements of MicroSave
Risk Management by the Poor
Self Insurance
• Liquidation of assets
• Informal /semi-formal borrowing
• Informal savings (ROSCA/ASCA)
Informal Group Insurance
• Funeral/burial societies
• Multiple membership
• High transaction cost
• Mostly covering specific life risks
Social Security
• Gap in intent and practice
• In-efficiency of formal economy
• Resource stress on developing
nations
Micro-insurance
Defining micro-insurance
• “Protection of low-income people……………. (not having
access to commercial insurance or social protection)
……………………… … ………against specific perils (that
causes vulnerability in their livelihood) ……..in exchange for
regular payment of premiums proportionate to the likelihood
and cost of the risk involved.”
--- Craig ChurchillMicro-insurance working group, CGAP
Social Finance Programme, ILO
Fundamental Principles of Insurance
Insurance
Utmost Good Faith
Event
Indemnity
Insurable Interest
Life : at inception
General: at occurrence
Full material disclosure
Clear communication of product
At the time of inception
Creditor- Debtor (Loan
amount)
Proposer – Nominee
Low probability
Randomness
Independence
Uncontrollability
Unequivocal
Micro-insurance Scenario : World
Micro-insurance Product types
• Loan linked insurance (Credit-life or credit-life +)
• Health insurance
• Long term insurance
• Annuity
• Pension
• Endowments
• Agriculture insurance
• Rain fall insurance
• Livestock insurance
Loan Linked Insurance
• Benefit :Credit- life/Accidental disability
• Added benefits:
• Illness cover
• Funeral cover
• Spouse cover
• Risk borne by: MFI/Insurance company (as re-insurer)
• Sum Assured: Outstanding loan / include accrued interest
• Price:
• 0.2% to 8% of loan portfolio (group price)
• Profit-sharing model
• Term : Renewed only if loan renewed (optional)
• Nominee : The MFI
• Subscription : Mostly mandatory with loan
Loan Linked Insurance: Focus
• Product
• Group based
• Term : loan schedule
• Flexible Sum Assured
• Price
• Affordable
• Competitive
• Annual review of price
• Promotion
• The opportunity benefit
• Place
• Mandatory
• Physical Evidence
• Process
• Easy claim settlement
• Least paper work
• Group underwriting
• Service agreement • Issuance
• Addition/Deletion
• Claim
• Positioning
• Least cost insurance
• People
• Research about options
The benefit of insurance is best communicated through claims
Health Insurance
Client
InsurerHealth
Service
ProviderSpecific benefit package
Premium : frequency &
quantum
Fund management
High claim ratio
High cost, low frequency
events
Claim servicing
Adverse selection
Moral hazard
Fraud
Pre-existing criteria
Low cost-high frequency events
Relevant
Fraud
Relationship
Payment
Long term Insurance
• Annuities
• High actuarial expertise
• Efficient financial management (asset-liability management)
• Defined contribution & defined benefit pension
• COMPFED
• Endowments
• Horizon issue
• Stability and brand
• Financial sector performance
Long term Insurance
• Challenges with clients
• Migration
• Matching with transaction patterns
• Assurance of return
• Challenges with intermediaries
• High cost – high involvement proposition
• High admin cost + distribution cost
• Standalone MI is becoming non-profitable
• Transfer of actuarial risk and distribution cost to companies
• Resource intensive
• Brand / imagery risk
• Long term tracking of clients
The Micro-insurance Supply Chain
Insures the insurer against catastrophic risks
e.g. Munich Re
Re-
insurer Insurer Delivery
Channel
Policy
Holder
Covered
Lives
• Receives
premium
•Carries risk
•Manage
regulation
•Pays claims
e.g. Insurance
companies, CBOs,
Mutual
•Sells the
product
•Collects
premium
•Aids the client
in settling claims
e.g., MFIs, NGOs,
CBOs, retailers , agents
•Buys the
product
•Proposer
e.g. Individuals, Groups
•Those who have
a premium paid
to cover them
e.g., family members,
group members
Partner-Agent Model
• Selecting partner (Insurer)
• Bidding
• Role clarity
• Staff training
• Underwriting
• Premium collection
• Claim processing
• Financial Arrangement
• Commission
• Profit sharing
• Premium mark-ups
• Benefits
• Simple & quick
• No need for specialised
manpower
• No capital requirement
• Additional income source
• Constraints
• Income only from commissions
• Service in third party hands
• Limitation on product offering
• Incentive structure for staff
Micro-insurance Scenario : World
Agents
10%
Brokers
0%
NGOs/CBO
s
33%
Employer
Groups
0%
Government
15%
Mutuals
17%
MFIs
22%
Retailors/Fu
nerl Parlors
2%
Un-
organized
1%
Distribution Channels
Life
36%
Health
20%
Accident
&
Disability
23%
Property
21%
Product wise Distribution
The Life Insurance Preference
Credit-
Life
36%
Credit-
Life
Plus
0%
Endow
ment
2%Funeral
5%
Investm
ents
0%
Pension
55%
Term
2%
Life Insurance Sub
Category
• Can be easily linked with other products
• Not dependent on other infrastructure
• The insured event is a clear cut fact
• Easy to price
• Resistant to moral hazard & fraud
• Claim settlement is relatively easy
Indian Micro-insurance : Regulation
Rural sector obligation
Life Insurance
Year of
operation
% of total NOP
1st 5
2nd 7
3rd 10
4th 12
5th 15
6th – 10th year 18 -20
General Insurance
Year of
operation
% of total NOP
1st 2
2nd 3
3rd - 5th 5
6th – 10th year 7 -10
Indian Micro-insurance : Regulation
Social SectorUnorganized workers, economically vulnerable or backward classes in urban /rural
Year of operation Number of policies
1st 5,000
2nd 7,500
3rd 10,000
4th 15,000
5th 20,000
6th to 10th year 25,000 to 55,000
Indian Micro-insurance Framework
Client
MI Product
[1-1.5% of SA]Group Insurance
[Rs.3-5/1000SA]
Insurance Company
Portfolio Security/Funder
Obligation
Sales Force of Insurance
Comp.
Commission Value addition
Rural
sector
Obligation
Social
Sector
Obligation
Risk Mitigation Savings
Issues in Indian Micro-insurance
Client
MI Product
[1-1.5% of SA]
Group Insurance
[Rs.3-5/1000SA]
Insurance Company
Funder ObligationSales Force of
Insurance Comp.
Commission Value addition
Rural
sector
Obligati
on
Social
Sector
Obligati
on
Risk Mitigation Savings
•Acquisition cost + Distribution cost
•Mortality data not available
•Rural channels upcoming
•„Cost of Simplicity‟
•Credit linkage insures portfolio
•Value addition not realised (latent demand)
•Better Service Level Agreement
•Not profitable due to resource intensiveness
•The low commission is insignificant income
•Client‟s family not getting benefit
•Limited flexibility
•Horizon problem/ commitment
•Endowment product not available
•Seen as cost of credit
•Un-availability of integrated product
Micro-insurance regulation
Enabling features
• Higher commission for
prolong association
• 20% in life, 15% in general
• Greater responsibility for
MI agents
• Qualify for both rural and
social sector numbers
• Benign negligence towards
community based micro-
insurance schemes
Critiques
• Definition of MI agent
• Issues with NBFCs/Sec.25
• 80% of clients belong to them
• Capacity building cost less
• Commission capping
• Lapsation rate is high
• NBFCs associate for long term
• Companies prefer not to renew
• Showing premium in books
• Single Life & General insurer
• Bias towards partner-agent
model
Trends Derived from MI Regulation
• All companies have MI product (24 MI products)
• Composite insurance absent in formal platform
• Companies wait for better opportunity (regulatory risk)
• Negotiation cost do not suffice benefit (wariness)
• NBFCs not forthcoming to become MIA
• Just in target approach by companies (Growth stagnant)
• Apprehension of IRDA for brokering in MI space
• Greater responsibility for MIA
• Community health insurance increasing (benign neglect)
• Concentration in south India
Recent trends in micro-insurance
• MI through Bancassurance
• Profit sharing & shared responsibility
• Focus on savings linked products (micro-pension)
• Service and technology focus
• Competition parameter
• Increasing awareness of BoP risks by actuaries
• Re-negotiation of price
• Spouse cover for diversifying risks
• Community health insurers tie up with re-insurers
Indian Examples: VimoSEWA
• Composite product
• Life and non-life
• Individual policies
• Health claim
• In house claim assessment
• Cash paid in emergency
• Preventive health care
• TAT of 9 days
• High claim ratio in urban
areas (172% in 2008)
• Sells to other NGOs
Coverage 3 months to 55 years
Sum Assured Rs.2,000-Rs.6,000
Min. criteria
for claim
24 hr hospitalisation
(ex. cataract/fracture
Premium •Rs.325-550 for comp.
•Rs.100-150 for health
Backward
integration
ICICI Lombard,
Reliance , Kotak
Mahindra, LIC, Bajaj-
Allianz
Benefit Life membership
Indian examples: Yeshaswini
Indian Examples: Micro-pension
• UTI Micro-pension
• Rs.50 p.m as premium
• Savings upto 55 years, payout from 58 years
• Account convertible to annuities (SWP for UTI)
• Invested in 60% debt+40% equity instruments
• Aam AdmiVima Yojna (GoI initiative)
• Horizon problem + long term tracking of clients
• Cost for intermediary not met
• Match with transaction pattern
• No guarantee of return
• Demand of insurance cannot be met (COMPFED)
Indian examples: Max Vijay
• Investment in government securities• 60% of 1st year premium
• 90% of subsequent premiums
• Investment once credited, will not reduce
• Premium from Rs.1,000-Rs. 2,500• Subsequent premiums Rs.10
• No deadline of renewal , No lapsation
• Death benefit • 5 X/10X annual pr.+ account value (normal)
• Term :10 years
• Partial withdrawal after 3 years
• Retailer channel exploited
•
Donor Activities in Micro-insurance
Gates +
ILO, 15
DFID
(UK),
3.96
ADB,
1.35
AIG, 1.50
GTZ
(Germany
), 1.17
Opportuni
ty
Internatio
nal, 0.85
Top Micro-insurance donors (in
mn US$)
Thank You
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