INTRODUCTION

Microinsurance is the protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved. Low-income people can use microinsurance, where it is available, as one of several tools (specifically designed for this market in terms of premiums, terms, coverage, and delivery) to manage their risks. In India, it is often assumed that a micro insurance policy is simply a low-premium insurance policy. This is not so. There are a number of other important factors. Low-income clients often: Live in remote rural areas, requiring a different distribution channel to urban insurance products; Are often illiterate and unfamiliar with the concept of insurance, requiring new approaches to both marketing and contracting; Tend to face more risks than wealthier people do because they cannot afford the same defences. So, for example, on average they are more prone to illness because they do not eat as well, work under hazardous conditions and do not have regular medical check-ups; Have little experience of dealing with formal financial institutions, with the exception of the National Bank of Agriculture and Rural Development (NABARD) Linkage Banking programme; Often have higher policyholder transaction costs. Thus a middle-class, urban, policyholder can send a completed claims form to an insurance company with relative ease: a quick call to the insurance company, receipt of the claims form by post, and then return of the form by post. For a lowincome policy holder, submitting a claims form may require an expensive trip lasting a day to the nearest insurance office (thereby losing a day of work), obtaining a form and paying a typist to type up the claim, sending in the claim, followed by a long trip back home. Aside from the real costs of doing this, the low-income policyholder may be uncomfortable with the process; clerks and the other officials are often haughty with such lowincome clients and can make clients feel ill at ease.

 Designing microinsurance policies requires intensive work and is not simply a question of reducing the price of existing insurance policies.

The few differences between traditional insurance and microinsurance are as follows: Traditional Insurance Microinsurance Clients Low risk environment High risk exposure/ high vulnerability Established insurance culture Weak insurance culture Distribution Sold by licensed Sold by non traditional model intermediaries or by intermediaries to clients insurance companies with little experience of directly to wealthy clients insurance or companies that understand insurance Policies Complex policy Simple language documents with many Few ,if any exclusion exclusions Group policies Premium Good statistical data Little historical data calculation Pricing based on Group pricing Individual risk Very price sensitive market Premium Monthly/quarterly/semi or Frequent or irregular collection annually collection payment adapted to volatile cash flow of clients Often linked with other transaction (e.g. loan repayment Control of Limited eligibility Broad eligibility insurance risk Significant documentation Limited but effective (adverse required control selection, Screening such as medical Insurance risk included

moral hazards, frauds)

test is required

Claims handling

Complicated process Extensive verification documentation

in premium rather than exclusion Linked to other service (like credit) Simple and fast procedure of small firms Efficient fraud control

Historically in India, a few micro-insurance schemes were initiated, either by nongovernmental organizations (NGO) due to the need felt 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. The UNDP report has analyzed six key issues pertinent to the growth of the microinsurance industry in India, capturing the concerns of different stakeholders as indicated below: (i) There are specific reasons for low demand for insurance in spite of intense need. Suppliers have their own concerns which help to explain why there have been so little efforts at market development. Consequently, the rural market is characterized by limited and inappropriate services, inadequate information and capacity gaps. (ii) There are challenges in product design, which has resulted in a mismatch between needs and standard products on offer. Efforts at product development / diversification have been limited. (iii) Pricing, including willingness to pay and the availability of subsidies, influence the market. In the absence of a historical data base on claims, premium

calculations are based on remote macro aggregates and overcautious margins. Building and sharing claims histories can help in aligning pricing decisions with actuarial calculations, thereby reducing prices. (iv) Difficulty in distribution is one of the most cited reasons for absence of rural insurance. The high costs of penetrating rural markets, combined with underutilization of available distribution channels, hinder the growth of rural insurance services. This adds to costs, both, managerial and financial. Like Inclusive credit, inclusive insurance is expected to be a low ticket business, requiring volumes for viability. (v) Cumbersome and inappropriate procedures inhibit the development of this sector. (vi)Contrasting perspectives of the insured and the insurers, lead to low customization of products and low demand for what is available.

MICRO-INSURANCE refers to the insurance of the low-income people. Today, th promise of providing Social Security to all is not being fulfilled in India. Only 20% of the world population enjoy adequate social protection. Ironically the poor, who are the most in need of social protection, are the excluded ones. Rural Population has to face many risks and hardships. The simple existence of risks inhibits their development initiatives.The liberalization of economy has strengthened the argument to strengthen the people at micro level, i.e., at the grass-root level of the society, the rural areas. Action plans are made to strengthen the rural areas by providing micro finance to the people living therein. With the concentration on micro finance, the concept of savings and credit has evolved. This concept has further developed the mobilization of local resources including the skills and expertise of local people by formulating self-help groups and micro financial institutions. Today the micro-finance institutions have grown both horizontally and vertically. They are playing a vital role in rural economy. With the increased attention and concentration on the micro-finance models & institutions, the need for protecting the rural people & assets from risk of uncertainties by purchasing the insurance products has been identified. Thus, insuring the people involved in the economic development by utilizing micro finance and the property created by micro finance has become priority. In order to

involve the insurers in protecting the micro-financial institutions, self-help groups and the property involved therein, the IRDA has conceptualized the special category of insurance model, micro-insurance. Micro-insurance refers to protection of assets and lives against insurable risks of target populations such as microentrepreneurs, small farmers and the landless, women and low-income people through formal, semi-formal and informal institutions. Micro-insurance products are sure to cover the entire gamut of micro-finance (credit & savings) and the assets created by micro-finance.The IRDA has framed and notified MicroInsurance Regulations on November 10, 2005, under the powers vested on it vide Sections 114 A of the Insurance Act, 1938 and Section 26 of IRDA Act, 1999. The insurance companies are asked to make innovative insurance products to meet the needs of the people involved in micro-finance. The micro-insurance coverage targets the low income groups with irregular and unstable income patterns. It also covers the assets purchased or acquired with the micro-credit, personal accident, health & life insurance. The IRDA has planned a three-tier strategic approach to promote micro-insurance adapting insurance companies to the requirements of micro-economy is the first step; then linking them as wholesale institutions to selfhelp groups as retailers; and finally, upgrading self-help groups, to the level of financial cooperatives or village banks. Low-income households are vulnerable to risks and economic shocks. One way for the poor to protect themselves is through insurance. By helping low-income households manage risks, micro-insurance can assist them to maintain a sense of financial confidence even in the face of significant vulnerability. If governments, donors, development agencies and others working for the welfare of the poorer community are serious about combating poverty, insurance has to be one of the weapons in their arsenal.

On a daily basis, the poor around the world face a multitude (huge amount) of risks that threaten to derail any progress they have made to work their way out of poverty. The death of a family member, loss of property and livestock, illness, and natural disasters each pose unique dangers. Protecting people against these losses is an important step to alleviating global poverty.

The institutions or set of institutions implementing micro-insurance are commonly referred to as a micro insurance scheme. Of the different risk management strategiesi, insurance that spreads the loss of the (few) affected members among all the members who join insurance scheme and also separates time of payment of premium from time of claims, is particularly beneficial to the poor who have limited ability to mitigate risk on account of imperfect labour and credit markets.