Micro-insurance refers to protection of assets and lives against insurable risks of target populations such entrepreneurs, small farmers and the landless, women and low-income people through formal, semiformal and informal institutions. Such products are often bundled with micro- micro- savings and micro-credit, thereby allocating scarce resources to micro-investments with the highest marginal rates of return. 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 micro insurance programmes and some others to act as facilitators between the formal insurance companies and their clients.
Micro-insurance is a key element in the financial services package for people at the bottom of the pyramid. The poor face more risks than the well-off, but more importantly they are more vulnerable to the same risk. Usually, the poor face two types of risks namely idiosyncratic (specific to the household) and covariate (common, e.g., drought, epidemic, etc.). To combat these risks, the poor do pro-active risk management grain storage, savings, asset accumulation (especially bullocks), loans from friends and relatives, etc. However, the prevalent forms of risk management (in kind savings, self-insurance, mutual insurance) which were appropriate earlier are no longer adequate.
Poverty is not just a state of deprivation but has latent vulnerability. Micro insurance should, therefore, provide greater economic and psychological security to the poor as it reduces exposure to multiple risks and cushions the impact of a disaster. There is an overwhelming demand for social protection among the poor. Micro insurance in conjunction with micro savings and micro credit could, therefore, go a long way in keeping this segment away from the poverty trap and would truly be an integral component of financial inclusion.
The draft paper prepared by the Consultative Group to Assist the Poor (CGAP) working group on micro-insurance defines micro-insurance as “the protection of low income households against specific perils in exchange for premium payments proportionate to the likelihood and cost of the risk involved.”
The paper deliberates on the key roles to be played by all stakeholders – insurers, regulator and the Government. The working group also agrees that the cost of such cover should be affordable.
Micro-insurance, the term used to refer to insurance to the low-income people, is different from insurance in general as it is a low value product (involving modest premium and benefit package) which requires different design and distribution strategies such as premium based on community risk rating (as opposed to individual risk rating), active involvement of an intermediate agency representing the target community and so forth. Insurance is fast emerging as an important strategy even for the low-income people engaged in wide variety of income generation activities, and who remain exposed to variety of risks mainly because of absence of cost-effective risk hedging instruments.
Micro insurance is a term increasingly used to refer to insurance characterized by low premium and low caps or low coverage limits, sold as part of atypical risk-pooling and marketing arrangements, and designed to service low- income people and businesses not served by typical social or commercial insurance schemes. Micro insurance is a financial arrangement to protect low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved.
Micro insurance is insurance with low premiums and low caps/ coverage. In this definition, “micro” refers to the small financial transaction that each insurance policy generates. The Micro insurance Regulations, issued in 2005 by the Indian Insurance Regulatory and Development Authority Micro insurance, like regular insurance, may be offered for a wide variety of risks. These include both health risks (illness, injury, or death) and property risks (damage or loss).
A wide variety of micro insurance products exist to address these risks, including crop insurance, livestock/cattle insurance, insurance for theft or fire, health insurance, term life insurance, death insurance, disability insurance, insurance-for- natural disasters, etc.
Features of micro insurance
- Micro-insurance is a key element in the financial services package for people at the bottom of the pyramid. That means the term is used to refer to insurance to the low- income people.
- It has low premium.
- It has low coverage limits.
- These include both health risks (illness, injury, or death) and property risks (damage or loss).
Need for Micro Insurance
- Poor also need insurance protection
- Inclusive growth is the only way to ensure sustained growth
- Trickledown effect of the process of economic growth benefiting the poor belied
- Poor get excluded unless special effort is made to bring them into the development process
- Mandate insurers to devote attention to this segment of the population
- Monitor it effectively
Development of Micro-insurance in India
Historically in India, a few micro-insurance schemes were initiated, either by nongovernmental organizations (NGO) due to the felt need in the communities in which these organizations were involved or by the trust hospitals. These schemes have now gathered momentum partly due to the development of micro-finance activity, and partly due to the regulation that makes it mandatory for all formal insurance companies to extend their activities to rural and well-identified social sector in the country (IRDA 2000). As a result, increasingly, micro-finance institutions (MFIs) and NGOs are negotiating with the for-profit insurers for the purchase of customized group or standardized individual insurance schemes for the low-income people. Although the reach of such schemes is still very limited-anywhere between 5 and 10 million individuals their potential is viewed to be considerable. The overall market is estimated to reach 250 billion by 2008 (ILO 2004).
The Micro-insurance Regulations, 2005
Regulations on micro-insurance were officially gazette by the IRDA on 30 November 2005. The salient features of the regulation are presented below.
The regulation defines micro-insurance products
The regulation provides definitions of micro-insurance products covering life and general insurance.
General micro insurance product:
General micro insurance product means any health insurance contract, any contract covering the belongings, such as, hut, livestock or tools or instruments or any personal accident contract, either on individual or group basis, as per terms stated in Schedule-l appended to these regulations.
Life micro insurance product:
Life micro insurance product means any term insurance contract with or without return of premium, and endowment insurance contract or health insurance contract, with our without an accident benefit rider, either on individual or group basis, as per terms stated in Schedule-ll appended to these regulations.
(a) “micro-insurance policy” means an insurance policy sold under a plan which has been specifically approved by the Authority as a micro insurance Product.
(b) “micro-insurance product” includes a general micro- insurance product or life insurance product, proposal form and all marketing materials in respect thereof.
c) Every insurer shall be subject to the “file and use” procedure with the IRDA.
(d) No one other than insurer be it a micro-insurance agent or anyone else-can underwrite a micro-insurance proposal.
(e) Rural business transacted under micro-insurance by an insurer will be counted for quota fulfillment both for rural as well as social sector obligations.
The micro-insurance regulations promote extensive use of intermediaries by the insurers for selling and servicing various micro-insurance products. The regulation also creates a new intermediary called the micro-insurance agent. The regulation clearly defines Micro Insurance agents and has imposed minima in terms of the number of years of experience (at least 3) of working with low income groups. It also emphasizes the need for such agents to have appropriate aims and objectives, a good track record, transparency and accountability stated in the bye-laws with demonstrated involvement of committed people. This has been done in order to prevent the engagement of dishonest operators in the activity. However, the responsibility for the selection of appropriate Micro Insurance agents and their capacity building lies with the insurance company.
The micro insurance agent can be a Non-Governmental Organization (NGO), MFI or other community organization such as Self Help Groups (SHG) appointed by an insurer to distribute micro-insurance through specified persons. Micro-insurance agents enter into a “deed of agreement with the insurer. They abide by the code of conduct defined by the IRDA and attend 25 hours of training (down from 100 hours originally required for conventional insurance agents but now reduced to 50 hours) in the local language at the expense of the insurer. There is no qualifying examination, unlike the case of ordinary insurance agents.
According to the regulation,
(a) Non-Government Organization (NGO) means a non- profit organization registered as a society under any law, and has been working at least for three years with marginalized groups, with proven track record, clearly stated aims and objectives, transparency and accountability as outlined in its memorandum, rule, by- laws or regulations as the case may be, and demonstrates involvement of committed people.
(b) Self Help Groups (SHG) means any informal group consisting of ten to twenty or more persons and has been working at least for three years with marginalized groups, with proven track record, clearly stated aims and objectives, transparency and accountability as outlined in its memorandum, rules, by-laws or regulations, as the case may be, and demonstrates involvement of committed people.
(c) Micro-Finance Institutions (MFI) means any institution or entity or association registered under any law for the registration of societies or co-operative societies, as the case may be, inter alia, for sanctioning loan/finance to its members.
IRDA has recognized four categories of intermediaries: brokers, agents, corporate agents, and Micro-insurance (MI) agents. Categories other than MI agents may sell micro- insurance but they do not benefit from the concessions allowed for the MI agents. However, a micro-insurance agent shall not distribute any product other than a micro insurance product.
The regulation provides for MI agents to perform the following functions
- Collection of proposal forms
- Collection of self-declaration from the proposer that he/ she is in good health.
- Collection and remittance of premium
- Distribution of policy documents
- Maintenance of registers of all those insured and their dependents covered under the micro insurance scheme, together with details of name, sex, age, address, nominees and thumb impression/signature of the policyholder.
- Assistance in the settlement of claims
- Ensuring nomination to be made by the insured
- Any policy administration service
Key features of the micro-insurance market in India
Micro-insurance products in the market have short policy contract terms and are overwhelmingly (but no longer exclusively) underwritten on a group basis. A number of the new products offered by formal insurers may be individually underwritten but the numbers of such policies is still minuscule even relative to the low overall outreach of micro-insurance.
Formal insurers are required either to provide life or non-life insurance exclusively though health insurance may be provided by either category of insurer. Community-based insurance systems are largely limited to health cover.
Health insurance is important in community-based systems because health risk is generally seen as potentially the most overwhelming type of systemic risk likely to upset the lives and economic livelihoods of the low-income population. Formal micro Insurance schemes are yet to cover health in any significant way on account of the difficulties of ensuring service delivery and the dangers of moral hazard in a highly informal health service provision network.
Low outreach of community-based insurance:
Community-based health insurance systems managed by NGOs are available but, except in a couple of cases, has minute outreach.
Dominance of loan linked products:
This is the largest product in the market driven by the compulsion of borrowers to purchase insurance schemes mainly to provide protective cover to the MFIs.
The beginning of separate micro-insurance guidelines provided by the Insurance regulator has seen the launch of new micro-insurance products in the formal market.
New distribution models:
Rural and social sector obligations imposed on formal insurers by the market regulator have compelled insurance companies to Experiment with new distribution models through NGOs, MFIs and the rural banking network.
Advice less selling:
Micro-insurance is sold overwhelmingly without advice while the higher end of the insurance market is served by brokers providing advice. Micro-insurance agents are specifically restricted to working with a single life and single non-life insurer.