Micro Insurance for basic
Micro Insurance for basic knowledge and protected: Micro-insurance is a big opportunity for life insurers. At the same time, it poses many challenges too. The rural market is very different from the urban market, and hence, insurance. You can search for google.
Learning Objectives :
In this chapter, we will learn about:
- Basics of micro-insurance and need for micro-insurance
- IRDA regulations of life micro-insurance
- Marketing of micro-insurance products
1. BASICS OF MICRO-INSURANCE : Micro-insurance is a financial arrangement to protect low-income people against specific perils in exchange for regular premium payments. The premium is devised using calculations involving the likelihood and cost of the risk involved. Micro-insurance is similar to conventional insurance (as defined in the first Chapter) except that there is a clearly defined target market for the micro-insurance product. Micro-insurance is insurance designed only for the low-income section of the society keeping in mind their specific needs. The term micro-insurance was coined by the International Labour Organization (ILO) in
19992 for insurance products specifically designed and sold to the lower economic section of the society.
Micro-insurance is characterized by low premium and low coverage limits. It is designed to service low-come people and businesses which are typical and not served by social security schemes of commercial insurance schemes. The three main features.
micro-insurance is as follows:
(i) Low-cost transactions on a voluntary basis for individuals of a group
(ii) Low-net-worth clients (although they may have varying income levels)
(iii) Operating through networks of self-help community-based organizations enhance reach and risk pooling ability (can be directly driven by government or to corporate as well)
Micro-insurance schemes around the world are offered by the government, non-government organizations or companies. The size of the risk-carrier (insurance companies) ranges from small and even informal to very large companies. Micro-insurance is sold and marketed through many channels of distribution including small community-based schemes, credit unions or other types of microfinance institutions or by large multinational insurance companies. 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).
Life and nonlife insurance companies offer a number of micro-insurance products to address these risks. Some common products sold in the micro-insurance format are crop insurance, livestock/cattle insurance for theft or fire, health insurance, term life insurance, endowment insurance, disability insurance, insurance for natural disasters, etc. The low-income group with no cash or contingency reserve and disposal income are more vulnerable to the risks of death, illness, and disability. The. uncertainty of risk and lack of means to manage them when they occur, make it difficult for the poor to make use of income-generating opportunities that can alienate the economic crises.
Poverty measures of countries and individuals cannot be complete without using’ micro-insurance as one of the ways to transfer the risk through insurance. Though the financial impact of risk per individual is relatively small, for the individual
affected by it, it is a significant risk that can seriously damage their livelihood or standards of living. Conventional insurance sold by the large insurance companies in urban areas is targetted at the middle to high-income level. These products are not suitable for the low-income group of people. Many of the products sold to the middle-class urban population are designed keeping certain
mortality risks in mind. Such products are considered inappropriate to low-income groups perceived to be at a higher risk with
lower lifespans and higher mortality.
The minimum premium and coverage amounts for many of these products are unaffordable to the poor. Underwriting policies exclude many low- income groups of people engaged in casual labor or other such professions from obtaining conventional insurance products at standard premium rates. The requirement for a number of documents like identity proofs, income proof, etc., at the time of application and claims, discourages them from applying for such insurance policies. Another reason
for the development of micro-insurance, as a separate stream, is the complex benefit features and policy conditions in regular insurance products. Simple products with straightforward benefits and requirements are designed for micro-insurance purposes.
Micro-insurance policies are therefore designed with lower premiums and coverage levels. These policies also have simpler policy features and benefits. For an insurance company, the objectives of a viable micro-insurance scheme are three-fold. Firstly, it should serve the needs of the target population. Secondly, they should minimize operating costs for the insurance company, and thirdly they should minimize price to ensure affordability and enhance accessibility. In India, micro-insurance schemes were initially started by non-governmental organizations (NGO) in specific communities where some of them operated. increasing focus on the development of micro-finance and the liberalization of the insurance sector in India has brought micro-insurance into the limelight. IRDA issued a regulation in 2000 making it mandatory for all insurance companies to address the insurance needs of rural and social sectors in the country.
This has provided the impetus to this sector. Many micro-finance institutions (MFIS), Self-help Groups (SHG) and NGOs along with insurance companies are aggressively exploring this sector. To ensure coverage for a wider group of people MFIS and NGOs negotiate with insurers for the purchase of customized group or standardized individual insurance schemes for the low-income group of people, thus, creating a healthy competition in the market.
2 IRDA GUIDELINES ON LIFE MICRO-INSURANCE
IRDA issued the obligations of insurers to rural or social sectors regulations in the year 2000. These regulations specify that a portion of the entire new business of a life insurance company has to belong to the rural and social sector. As per the latest census, the regulations define the rural sector as a place that has a population of not more than five thousand; a density of population of not more than four hundred per square kilometer; and at least 75% of the male working population engaged in agriculture. The social sector is defined as unorganized economically vulnerable or backward classes and other categories of persons, both in rural and urban areas.
It includes self-employed workers such as agricultural laborers, workers working in bidi factory, brick kiln workers, carpenters, cobblers, construction workers, fishermen, hamals, handicraft artisans, handloom and khadi workers, ladies tailors, leather and tannery workers, papad makers, power loom workers, physically handicapped self-employed persons, primary milk producers, rickshaw pullers, safari karma charms, salt growers, sericulture workers, sugarcane cutters, tendu leaf collectors, toddy tappers, vegetable vendors, washerwomen, working women in hills, and such other categories of persons.
The economically vulnerable or backward classes refer to people who live below the poverty line while other categories of persons
include persons with disabilities as defined in the Persons with Disabilities Act, 1995 and who may not be gainfully employed. It also includes guardians who need insurance to protect spastic persons or persons with disabilities.
The life insurance companies have to undertake thé following percentage of total policies written in that year during the first
five financial years of its operations:
For the rural sector,
i) five percent in the first financial year
i) seven percent in the second financial year
(iii) ten percent in the third financial year
(iv) twelve percent in the fourth financial year
(v) fifteen percent in the fifth year. The percentage increases to twenty percent in the tenth year of its operation.
For the social sector, the following obligations need to be undertaken by the insurers:
i) five thousand lives in the first financial year
(11) seven thousand five hundred lives in the second financial year
(ii) ten thousand lives in the third financial year
iv) fifteen thousand lives in the fourth financial year
(v) twenty thousand lives in the fourth financial year
The obligation increases to fifty-five thousand lives in the tenth financial year of its operation. Taking further steps to develop the micro-economic requirements of the country’s poor population, IRDA issued the regulations on micro-insurance, in 2005. These regulations define the micro-insurance product and streamline many other issues related to the product and servicing of this sector.
According to IRDA, a life micro-insurance product is defined as any term insurance contract with or without return of premium,
any endowment insurance contract or health insurance contract; with or without an accident benefit rider, either on individual or
group basis, as shown in Table.
Micro-insurance Product Regulations
The micro-insurance regulations also specify guidelines on the distribution and product design of micro-insurance products. According to the guidelines, insurers have to issue insurance contracts to the individual micro-insurance policyholders in the vernacular language which is simple and easily understood by the policyholders. They have to impart at least twenty-five hours of training through their designated officers in the local vernacular language to all micro-insurance agents. The training has to cover all areas of insurance selling, policyholder servicing, and claims administration. The regulation authorizes insurance companies to use MFIs, SHGs and NGOs as intermediaries to distribute their products in the rural and social sector.
3.MARKETING OF MICRO-INSURANCE PRODUCTS
With growing per capita income, rising financial awareness, and marketing initiatives of private life insurance companies the micro-insurance market is growing faster. Apart from the regulatory requirements, the rural and social sector represents a huge opportunity for insurance companies as the bulk of the Indian population belongs to this group. This segment is also referred to as the bottom of the pyramid. It constitutes a new important market segment where the baśis of return on investment is the volume of the business. The sheer numbers available in this segment make it lucrative. Even if the profit per unit of sale is minuscule, when multiplied across a huge number of sales it can become attractive to shareholders. Moreover, for insurance products, this model suits the basic insurance principle of the law of large numbers which states that as the number of people in the risk pool increases there is a higher chance of the claims experience resembling the expected claims.
When projections can be estimated with a high degree of confidence, then the pricing does not have to include a margin of
error. This makes the product affordable to the poor. In spite of the efforts in micro-insurance, a recent survey revealed that 81% of rural households have no risk cover Though there is a reluctance to buy insurance in all segments of society, the low-income market may be particularly disinclined to purchase insurance. Insurance products have a certain degree of complexity and the poor often lack familiarity with insurance and do not understand the way it works till they actually receive a claim payout. People in this segment feel that if the claim situation does not arise, their premium payments will be wasted.
Insurance benefits are intangible, so it is difficult to persuade someone to part with his limited resources to buy peace of mind.
People in the lower economic strata have a short-term perspective, only making financial plans a few weeks or months into
the future. Consequently, they are not likely to trust a company offering such a long-term financial proposition such as life insurance. Even when a low-income market is familiar with insurance, the insurance company has to build trust and acceptance in
the market. Some techniques used by insurance companies to promote insurance in this market are the use of short films or
street theatre. Some companies use posters and mobile vans to spread the message in the rural areas.
These social marketing techniques along with financial education are being employed to change the attitude of the target market towards insurance. The key message that is conveyed by the insurance companies in the rural market is cooperation, which promotes the idea of people helping each other. This the message builds on informal self-help mechanisms which are more familiar to this market than insurance. This message is particularly important to explain the risk pooling aspect. If they do not experience the insured event, they may not receive money back because it is being used to pay for the claims of other community members. This message tries to steer away from the association of insurance with unpleasant events. Instead of portraying the risks leading to insurance benefits, optimistic approaches concentrate on the security provided by the insurance.
Trust building is critical in this market. The intermediary has to be a recognizable and trustworthy person or organization in
this market. Insurance companies leverage an existing relationship and partner with rural cooperatives and SHGs to market micro-
insurance products. Some companies hold village meetings and involve the headman or other respected elders in such meetings to
spread insurance awareness and create trust. The language and cultural sensitivity are taken into account by most insurance companies in their marketing efforts. Application forms and marketing brochures that are used are in the local language. The use
of simple concepts and familiar images on all marketing communication is important.
Training material for intermediaries is made appropriate for their literacy level and degree of familiarity with insurance. Products designed by the insurance companies for micro-insurance also reflect the market conditions. Different methods of premium payment are used for this market. These variations include special premium one-time lump-sum payment plans, monthly savings towards annual payment put in fixed deposit (and the interest accrued is used to pay the annual premium), etc.
Micro-insurance is a big opportunity for life insurers. At the same time, it poses many challenges too. The rural market is very
different from the urban market, and hence, insurance companies need to have a holistic strategy to capture this market. Success in
this market would come from ingenuity in product design, appropriate marketing efforts, simple application procedures and,
easy and prompt claims processes.
1 Fill in the blanks with appropriate terms.
(a) ………………are the target market for micro………….insurance products.
(b) The minimum…………..for micro-insurance products is lower than for the products sold in the urban market.
(c) The…………..mandates that a percentage of total business every year has to be from the rural market.
(d) A rural area is defined by IRDA regulation as one having a population of less than…………
(e)………………process for micro-insurance than the products are more relaxed products marketed to urban markets.
(f)According to IRDA guidelines, insurance issued contracts to micro-insurance policyholders should be in…………….
2 Give the answers in brief.
(a) Why is micro-insurance critical to alleviating poverty in society?
(b) Why are conventional products not suitable for people in low-income groups?
(c) What are the three differences between micro-insurance products and conventional life insurance products?
(d) Why is the micro-insurance market with its small premium policies a profitable venture for life insurance companies?
(e) State the reasons for reluctance to buy insurance products in low-income groups.
1 (a) Low-income individuals(b) premium and sum assured(c) IRDA rural and social obligation
regulation of 2000,(d) 5000(e) Underwriting and claims (f)vernacular language