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Chapter - 1
MICRO INSURANCE
1.1 History
Micro insurance is generally, but inaccurately, referred to as a new concept, at first appearing as a new financial service within microfinance but increasingly becoming an independent
approach. In fact, it is only the term - Micro insurance, MicroInsurance or Micro Insurance - that is fairly new. Micro insurance is defined as follows in different sources:
The protection of low-income people against specific perils in return for regular premium payments proportionate to the likelihood and cost of the risk involved (Preliminary Donor Guidelines, 2003).
A risk transfer device characterised by low premiums and low coverage limits, and designed for low-income people not served by typical social insurance schemes (Micro Insurance Academy, India, 2007).
Insurance that is accessed by the low-income population, provided by a variety of different entites, but run in accordance with generally accepted insurance practices. Importantly this means that the risk insured under a microinsurance policy is managed based on insurance principles and funded by premiums (International Association of Insurance Supervisors, 2007).
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A mechanism to protect poor people against risk (accident, illness, death in the family, natural disasters, etc.) in exchange for insurance premium payments tailored to their needs, income and level of risk (Micro insurance Innovation Facility, 2008). These different definitions have in common the element of
protection for low-income people, even though the delineation between micro insurance and insurance and its role in social protection is not clearly defined and is subject to different points of view. a) The Origins of Insurance Commercial proprietors were the first to understand the need for and invent a type of insurance. In about 3.000 BC in China merchants and their investors wanted to ensure a profit from goods shipped overseas and therefore developed a way of sharing the cost of lost goods. A similar development took place in Babylon. In around 600 AD, the Greeks and Romans had organised guilds called benevolent societies which cared for the families and paid funeral expenses of members upon death. In the dark and middle ages, wealthier guilds had large coffers or reserves that acted as a kind of insurance fund; money from the coffers could be used to rebuild the burned down house of a guild member, or to support the family of a suddenly disabled or killed member.
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In the late 1660s, the London coffee shop of Edward Lloyd became a meeting place for merchants and ship owners seeking insurance. As an aftermath of the great fire of London in 1666 that destroyed some 14 000 buildings marine insurance, underwriters formed insurance companies to offer fire insurance policies. At the end of the 17th Century, the first mortality table was created, which enabled the subsequent development of modern life insurance. b) The Phenomenon of Micro Insurance Although, not known as Micro insurance, here are some examples from Europe and the United States that predate the development we know today:
Industrial life insurance life insurance policies with small sums insured and weekly premiums collected door-to-door was marketed in the late 1800s by Prudential Life Assurance Society in the United Kingdom and by Metropolitan Life Insurance Company in the United States.
Folksam General Mutual Insurance Company was founded in 1908 by the co-operative movement in Sweden to provide simple fire insurance policies on the contents of the flats of low-income workers and on the contents of co-operative shops.
CUNA Mutual Insurance Society was founded in 1936 by the credit union movement in the United States in order to provide simple group term life insurance cover on loans made to
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members by the credit unions. This was the origin of loan protection insurance which is used world-wide by credit unions (or savings and credit societies, caisses populaires, cooperativas de ahorro y credito, etc) to collectively protect all borrowing members/their families as well as the lending credit union from losses due to the death or total and permanent disability of the borrower.
1.2 Introduction
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proportionate to the likelihood and cost of the risk involved - seeks to provide a suitable solution for managing these risks. Until recently, there were very few formal insurance solutions available to the poor, and many policies were too complicated, too much out of line with the specific requirements of the poor, and just too expensive. In many cases, unfortunate experiences with inappropriate insurance products led to lack of understanding and mistrust of insurance. Today, micro insurance aims to enable the poor to manage risk through a range of suitable and affordable insurance products.
Micro-insurance, the term used to refer to insurance to the lowincome 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.
Although the type of risks faced by the poor such as that of death, illness, injury and accident, are no different from those faced by others, they are more vulnerable to such risks because of their
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economic circumstance. In the context of health contingency, for example, a World Bank study (Peters et al. 2002), reports that about one-fourth of hospitalized Indians fall below the poverty line as a result of their stay in hospitals. The same study reports that more than 40 percent of hospitalized patients take loans or sell assets to pay for hospitalization. Indeed, enhancing the ability of the poor to deal with various risks is increasingly being considered integral to any poverty reduction strategy (Holzmann and Jorgensen 2000, Siegel et al. 2001).
Of the different risk management strategies, 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.
In the past insurance as a prepaid risk managing instrument was never considered as an option for the poor. The poor were considered too poor to be able to afford insurance premiums. Often they were considered uninsurable, given the wide variety of risks they face. However, recent developments in India, as elsewhere, have shown that not only can the poor make small periodic contributions that can go towards insuring them against risks but also that the risks they face (such as those of illness, accident and injury, life, loss of property etc.) are eminently insurable as these risks are mostly independent or idiosyncratic. Moreover, there are cost-effective ways of extending
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insurance to them. Thus, insurance is fast emerging as a prepaid financing option for the risks facing the poor.
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 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, selfinsurance, 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. Micro-insurance is a term increasingly used to refer to insurance characterized by low premium and low caps or low
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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. The institutions or set of institutions implementing microinsurance are commonly referred to as a micro insurance scheme.
1.3 DEFINATIONS
1. 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 Microinsurance Regulations, issued in 2005 by the Indian Insurance Regulatory and Development Authority (IRDA), for example, adopted this definition in explaining micro-insurance products as those within defined (low) minimum and maximum caps. The IRDAs characterization of microBBI TOLANI COLLEGE OF COMMERCE Page 8
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insurance by the product features is further complemented by their definition for micro-insurance agents, those appointed by and acting for an insurer, for distribution of micro-insurance products (and only those products).
2. Micro-insurance is a financial arrangement to protect lowincome people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved. The author of this definition adds that microinsurance does not refer to: (i) the size of the risk-carrier (some are small and even informal, others very large companies); (ii) the scope of the risk (the risks themselves are by no means micro to the households that experience them); (iii) the delivery channel: it can be delivered through a variety of different channels, including small community-based schemes, credit unions or other types of microfinance institutions, but also by enormous multinational insurance companies, etc.
3. Micro-insurance is synonymous to community-based financing arrangements, including community health funds, mutual health organizations, rural health insurance, revolving drugs funds,
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and community involvement in user-fee management. Most community financing schemes have evolved in the context of severe economic constraints, political instability, and lack of good governance. The common feature within all, is the active involvement of the community in revenue collection, pooling, resource allocation and, frequently, service provision.
4. Micro-insurance is the use of insurance as an economic instrument at the micro (i.e. smaller than national) level of society. This definition integrates the above approaches into one comprehensive conceptual framework. It was first published in 1999, pre-dating the other three approaches, and has been noted to be the first recorded use of the term microinsurance. Under this definition, decisions in micro-insurance are made within each unit, (rather than far away, at the level of governments, companies, NGOs that offer support in operations, etc.).
5. 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
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stakeholders insurers, regulator and the Government. The working group also agrees that the cost of such cover should be affordable. Insurance functions on the concept of risk pooling, and likewise, regardless of its small unit size and its activities at the level of single communities, so does micro-insurance. Micro-insurance links multiple small units into larger structures, creating networks that enhance both insurance functions (through broader risk pools) and support structures for improved governance (i.e. training, data banks, research facilities, access to reinsurance etc.). This mechanism is conceived as an autonomous enterprise, independent of permanent external financial lifelines, and its main objective is to pool both risks and resources of whole groups for the purpose of providing financial protection to all members against the financial consequences of mutually determined risks. The last definition therefore, includes the critical features of the previous three: 1. transactions are low-cost (and reflect members willingness to pay); 2. clients are essentially low-net-worth (but not necessarily uniformly poor); 3. communities are involved in the important phases of the process (such as package design and rationing of benefits); and 4. The essential role of the network of microinsurance units is to enhance risk management of the members of the entire pool of
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microinsurance units over and above what each can do when operating as a stand-alone entity.
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Chapter - 2
Currently the IRDA regulations do not favor composite insurance (i.e., life and non-life insurances by the same company) and also limit the agency tie-up to one life and one non-life insurer. However, in recognition of the uniqueness of micro insurance, these regulations enable life and non-life companies to tie-up for offering a combined policy in rural areas. Further, the IRDA has allowed insurers to issue
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policies with a maximum cover of Rs. 50,000 for general and life insurance under these regulations. The regulations have also eased the norms for entry of agents relating to training and pre-recruitment examination. As an attraction, remuneration to agents has also been leveled across the term of the policy.
Another striking feature of the regulation is the provision of extending coverage to the family as a unit as against the system of insurance coverage to individual lives. The insurer has to take IRDAs prior approval for launching micro insurance products through the file and use mode. The maximum cover will be Rs. 30,000 per annum for a dwelling and contents or livestock or tools or implements or other named assets or crop insurance against all perils. For individual and group health insurance, the maximum cover is Rs. 30,000 per annum per individual. For personal accident policies the maximum Rs. 50,000 per annum and is open to 5-70 age group.
In case of life micro-insurance products, the cover amount for term insurance ranges between Rs. 5,000-50,000 for a minimum term of five years and maximum of 15 years. The entry age for this product is kept between 18-60. Endowment insurance policy provides cover for Rs. 5,000-30,000 for a minimum five years and maximum 15 years for people aged between 18 and 60. Further, an insurer can collect the premium for both life and general insurance components directly from the consumer or agents.
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At the time of opening of the insurance sector, IRDA had decided that all insurers, including the new entrants, should fulfill certain obligations to spread insurance in rural areas. Specific regulations have been issued prescribing targets in terms of quantum of policies to be written in the rural sector consistent with the years of their operations and also certain quantified target for coverage of lives in the social sector. With a view to encouraging the insurers to meet these obligations and give a fillip to micro-insurance products, IRDA also decided that all micro-insurance products may be reckoned for the purpose of fulfillment of the social obligation and where such policy are issued in rural area they could also be reckoned for rural sector obligation. IRDA has also proposed to benchmark the above obligations with reference to quantified limits of sums assured under micro-insurance policies. The above approach would ensure the faster development of the micro-insurance market and take the insurance penetration to rural areas.
The Committee wholly subscribes to the initiatives of IRDA in widening outreach of micro-insurance products to the rural poor and recommends that the same may be implemented with renewed zeal as providing micro-insurance is a necessary and essential adjunct in the inclusive process. The IRDA should continue to impose Rural and Social Sector Obligations but there should be no unreasonable caps on premiums and channel commissions. This is in line with the detariffing process in other sectors also. In the long run, it is only when
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the insurance companies find it profitable to serve this market that they will do so on their own. Chapter 3
MICRO-INSURANCE PRODUCTS
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. Micro insurance has made a significant difference in countries like Mali, Maxime Prud'Homme and Bakary Traor describe. Innovations in Sikasso Still, many countries face continuing challenges. Specifically in Bangladesh, micro health insurance schemes are having trouble with financial and institutional sustainability, Syed Abdul Hamid and Jinnat Ara describe, but things are improving.
3.1 Crop insurance:Crop insurance is purchased by agricultural producers, including farmers, ranchers, and others to protect themselves against either the loss of their crops due to natural disasters, such as hail,
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drought, and floods, or the loss of revenue due to declines in the prices of agricultural commodities. The two general categories of crop insurance are called crop-yield insurance and crop-revenue insurance. Crop-yield insurance: There are two main classes of crop-yield insurance:
Crop-hail insurance is generally available from private insurers (in countries with private sectors) because hail is a narrow peril that occurs in a limited place and its accumulated losses tend not to overwhelm the capital reserves of private insurers. The earliest crop-hail programs were begun by farmers cooperatives in France and Germany in the 1820s.
Multi-peril crop insurance (MPCI): covers the broad perils of drought, flood, insects, disease, etc., which may affect many insureds at the same time and present the insurer with excessive losses. To make this class of insurance, the perils are often bundled together in a single policy, called a multi-peril crop insurance (MPCI) policy. MPCI coverage is usually offered by a government insurer and premiums are usually partially subsidized by the government. The earliest MPCI program was first implemented by the Federal Crop Insurance Corporation (FCIC), an agency of the U.S. Department of Agriculture, in 1938. The FCIC program has been managed by the Risk Management Agency
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(RMA), also a U.S. Department of Agriculture agency, since 1996.
Crop-revenue insurance: is a combination of crop-yield insurance and price insurance. For example, RMA establishes crop-revenue insurance guarantees on corn by multiplying each farmer's corn-yield guarantee, which is based on the farmer's own production history, times the harvest-time futures price discovered at a commodity exchange before the policy is sold and the crop planted. There is a single guarantee for a certain number of dollars. The policy pays an indemnity if the combination of the actual yield and the cash settlement price in the futures market is less than the guarantee. In the United States, the program is called Crop Revenue Coverage. Crop-revenue insurance covers the decline in price that occurs during the crop's growing season. It does not cover declines that may occur from one growing season to another. That would be called "price support," and would raise a series of complex agricultural-policy and international-trade issues
3.2 Health insurance:Health insurance like other forms of insurance is a form of collectivism by means of which people collectively pool their risk, in this case the risk of incurring medical expenses. The collective is usually publicly owned or else is organized on a non-profit basis for
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the members of the pool, though in some countries health insurance pools may also be managed by for-profit companies. It is sometimes used more broadly to include insurance covering disability or longterm nursing or custodial care needs. It may be provided through a government-sponsored social insurance program, or from private insurance companies. It may be purchased on a group basis (e.g., by a firm to cover its employees) or purchased by an individual. In each case, the covered groups or individuals pay premiums or taxes to help protect themselves from unexpected healthcare expenses. Similar benefits paying for medical expenses may also be provided through social welfare programs funded by the government. By estimating the overall risk of healthcare expenses, a routine finance structure (such as a monthly premium or annual tax) can be developed, ensuring that money is available to pay for the healthcare benefits specified in the insurance agreement. The benefit is administered by a central organization such as a government agency, private business, or not-for-profit entity.
3.3 Term life insurance :Term life insurance or term assurance is life insurance which provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments and/or conditions. If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance
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is the most inexpensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis. Term life insurance is the original form of life insurance and can be contrasted to permanent life insurance such as whole life, universal life, and variable universal life, which guarantee coverage at fixed premiums for the lifetime of the covered individual. Many permanent life insurance products also build a predetermined cash value over the life of the contract, available for later withdrawal by the client under specific conditions. However, on most cash value policies like Whole Life insurance, the only way to receive the "savings" is to cash out the policy. The beneficiaries receive the face value of the insurance but NEVER the cash value with Whole Life policies. Financial advisers generally advise buying term life insurance and investing the difference elsewhere. Term insurance functions in a manner similar to most other types of insurance in that it satisfies claims against what is insured if the premiums are up to date and the contract has not expired, and does not expect a return of Premium dollars if no claims are filed. As an example, auto insurance will satisfy claims against the insured in the event of an accident and a home owner policy will satisfy claims against the home if it is damaged or destroyed by, for example, an earthquake or fire. Whether or not these events will occur is uncertain, and if the policy holder discontinues coverage because he has sold the insured car or home the insurance company will not refund the premium. This is purely risk protection.
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MICRO INSURANCE 3.4 Disability insurance:Disability insurance, often called disability income insurance, is a form of insurance that insures the beneficiary's earned income against the risk that disability will make working (and therefore earning) impossible. It includes paid sick leave, short-term disability benefits, and long-term disability benefits.
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Uncontrollable: Ideally the occurrence of an insured event should not be under the direct control of the insured person. However, this is not always the case with many kinds agriculture insurance.
Unequivocal: Assessing agricultural loss can be very difficult and costly, as the loss could be caused by a combination of the insured-against events.
Fraud: Farms are often physically remote, which creates opportunities for fraud.
Moral hazard: Physical remoteness makes it hard for an insurer to check whether insured farmers are diligently taking care of their crops or livestock.
Adverse selection: can have a destabilising effect on an insurance system, because the principle of risk-pooling will not work if only those negatively affected buy the insurance.
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Covariant risk: In agriculture, covariant risk is frequently an issue because droughts, pests and animal or crop epidemics are likely to affect many farmers at the same time.
All these factors, together with the costs of loss adjustment, can make agricultural indemnity insurance a very costly business, difficult to make profitable or indeed to break even. In fact hardly any agricultural insurance programs cover their costs (indemnity payments & administrative costs) from premiums. Almost all are subsidised, as agriculture is a much politicised sector. Animal insurance: Livestock insurance can cover losses resulting from death, disease and accidental injury to livestock. It can cover an individual animal or a herd. Crop insurance: Crop insurance covers the loss of crops due to one or more perils, and can be covered in a number of different way: yield loss (a lower-than-anticipated yield), quality loss (crops of a lower quality than anticipated), revenue loss (due to price fluctuations), or a combination of these. The two most common types of crop insurance are Named-peril crop insurance (policies payed out according to the actual damage that results) and, Multi-peril crop insurance (based on shortfalls on expected yield, rather than on the damage caused by a particular loss event.) Index-based insurance: is a way of providing protection against correlated risk such as extreme weather events. It is not strictly insurance, as individual losses are not assessed instead it pays-out to
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all policy holders in a geographic area when certain conditions are reached in the proxy, or index. Index insurance solves three of the most difficult challenges of agricultural insurance, and greatly reduces the prospects of fraud:
Moral hazard: the farmer cannot influence an index that is based on weather.
Adverse selection: whether farmers opt in or out, this will have no impact on the risk, because the risk would be based on the index, e.g. level of rainfall.
Costs of loss adjustment: it is not necessary for a loss adjustor to visit the farm and calculate losses, as once the index trigger is exceeded, the payment is sent regardless of loss.
Unfortunately index insurance is not quite a panacea, because it introduces new challenges. One challenge is basis risk, which can be described as the mismatch between the amount received because the index has been triggered and the amount actually lost by the client. Improved data collection and product design may be able to minimize basis risk however this typically makes the product more complex and more difficult for the low-income market to understand.
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worldwide by studying specific areas of micro insurance such as regional distribution, types of micro insurance cover, the risk carriers, the schemes and pilot programs, and finally the state of microinsurance regulations. The main conclusions of which are as follows:
There are very few agricultural insurance schemes in developing countries with products that are accessible to poor farmers. The landscape survey found a total of 122 schemes worldwide, and not all of these are fully operational.
Agricultural microinsurance is concentrated in Latin America. There are very few dedicated agricultural microinsurance schemes in developing countries. Those that do exist use existing agent infrastructures which end up perpetuating nonviable business models.
Agricultural microinsurance is highly subsidized, and run on business models that are not sustainable.
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has a contract with a landowner to use land in return for giving the landowner a share of the farmers harvest), and the use of forward contracts, which reduces the risk of price fluctuation but agreeing contractually the price beforehand. Nevertheless, non-insurance options cannot mitigate the effects of catastrophic losses, other than intervention by governments and aid agencies; there are few real substitutes for insurance. Interventions can take place at three levels: the macro level (supporting the policy environment), the meso level (supporting the infrastructure necessary to support agricultural microinsurance e.g. institutes to train insurance staff, reinsurers and agricultural support staff), and the micro level (improving the sustainability of risk carriers and distributors).
microinsurance is mostly anecdotal. By and large there is a distinct lack of information regarding this area and more studies need to be allocated to examine either what regulations need to be put into place or what changes could improve current regulations.
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Policy: There is invariably a need to subsidise agricultural microinsurance, and these come in various different forms (the distributor can be subsidised, the risk carrier can be subsidised, the government can take on the reinsurance risk at a subsidised rateetc). Another policy matter is whether to compel insurance companies to sell agricultural micro-insurance products. The Indian government has done this with microinsurance, with mixed results. On the positive side this policy has made India the worlds largest supplier of microinsurance and an engine of innovation. On the negative side many insurers treat the policy as a cost of doing business and provide low quality, poorly serviced products.
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not only makes the design of products difficult but, also can act as a barrier to insurers considering entering the market. Consumer education: A problem throughout the microinsurance sector, the lack of understanding and trust towards insurance will limit the demand and impede the functioning of a scheme, even when people do participate.
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people on low income. In too many cases the insurer merely reduces the premium and benefit of conventional agricultural insurance, while keeping the other features constant, resulting in products that cover for minor losses and tend to be expensive and overly complex. The best microinsurance products are those designed through a process of close consultation with potential policy holders. More research needs to be done in terms of creating a list of the best and worst practices. Reducing costs: We cannot avoid the conclusion that microinsurance is a low cost, high volume business, and unless costs are contained, agricultural microinsurance cannot be sustainable. A few interesting cost-contained strategies emerged in the case studies in Chapter 2.
ADR-TOM, in its Burkina Faso plough oxen scheme, made very effective use of its policy holders in reducing the costs of risk management through group co-payments. Attaching the insurance product to existing group structures such as credit solidarity groups will greatly reduce cost.
Technological advances are likely to bring costs down and increase access. The only significant technological innovation uncovered in the landscape survey was the use of sealed low cost weather stations that send their data via satellite for use in index insurance schemes.
The cost structure of agricultural microinsurance simply does not allow for products to be sold individually though agents. Agricultural microinsurance needs more specialized
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policy holders and, are linked in some significant way to the livelihoods of the farmer policyholders. Chapter 5
Partner agent model: A partnership is formed between the micro-insurance scheme and an agent (insurance company, microfinance institution, donor, etc.), and in some cases a thirdparty healthcare provider. The micro-insurance scheme is responsible for the delivery and marketing of products to the clients, while the agent retains all responsibility for design and development. In this model, micro-insurance schemes benefit from limited risk, but are also disadvantaged in their limited control.
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Full service model: The micro-insurance scheme is in charge of everything; both the design and delivery of products to the clients, working with external healthcare providers to provide the services. This model has the advantage of offering microinsurance schemes full control, yet the disadvantage of higher risks.
Provider-driven model: The healthcare provider is the microinsurance scheme, and similar to the full-service model, is responsible for all operations, delivery, design, and service. There is an advantage once more in the amount of control retained, yet disadvantage in the limitations on products and services.
Community-based/mutual model: The policyholders or clients are in charge, managing and owning the operations, and working with external healthcare providers to offer services. This model is advantageous for its ability to design and market products more easily and effectively, yet is disadvantaged by its small size and scope of operations.
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Chapter 6
Prepayment and resource-pooling: the regular prepayment of contributions (before the insured risks occur) that are pooled together.
Risk-sharing: the pooled contributions are used to pay a financial compensation to those who are affected by
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predetermined risks, and those who are not exposed to these risks do not get their contributions back.
Guarantee of coverage: a financial compensation for a number of risks, in line with a pre-defined benefits package. Microinsurance schemes may cover various risks (health, life,
Life microinsurance (and retirement savings plans) Health microinsurance (hospitalisation, primary health care, maternity, etc.)
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Chapter 7
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(iii) more than twenty five per cent of the male working population is engaged in agricultural pursuits. The categories of workers falling under agricultural pursuits are: cultivators, agricultural labourers, and workers in livestock, forestry, fishing, hunting and plantations, orchards and allied activities. The social sector as defined by the insurance regulator consists of (i) unorganized sector (ii) informal sector (iii) economically vulnerable or backward classes, and (iv) other categories of persons, both in rural and urban areas. The social obligations are in terms of number of individuals to be covered by both life and non-life insurers in certain identified sections of the society. The rural obligations are in terms of certain minimum percentage of total polices written by life insurance companies and, for general insurance companies, these obligations are in terms of percentage of total gross premium collected. Some aspects of these obligations are particularly noteworthy. First, the social and rural obligations do not necessarily require (cross) subsidizing insurance. Second, these obligations are to be fulfilled right from the first year of commencement of operations by the new insurers. Third, there is no exit option available to insurers who are not keen on servicing the rural and low-income segment. Finally, non-fulfillment of these obligations can invite penalties from the regulator.
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In order to fulfill these requirements all insurance companies have designed products for the poorer sections and low-income individuals. Both public and private insurance companies are adopting similar strategies of developing collaborations with the various civil society associations. The presence of these associations as a mediating agency, or what we call a nodal agency, that represents, and acts on behalf of the target community is essential in extending insurance cover to the poor. The nodal agency helps the formal insurance providers overcome both informational disadvantage and high transaction costs in providing insurance to the low-income people. This way microinsurance combines positive features of formal insurance (pre paid, scientifically organized scheme) as well as those of informal insurance (by using local information and resources that helps in designing appropriate schemes delivered in a cost effective way).
In the absence of a nodal agency, the low resource base of the poor, coupled with high transaction costs (relative to the magnitude of transactions) gives rise to the affordability issue. Lack of affordability prevents their latent demand from expressing itself in the market. Hence the nodal agencies that organise the poor, impart training, and work for the welfare of the low-income people play an important role both in generating both the demand for insurance as well as the supply of cost-effective insurance.
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Chapter 8
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Out of the 12 currently available health insurance products, 7 have been designed and are restricted to groups. Out of the total 12 health products, 7 products propose the reimbursement of hospitalization expenses while the other 5 have chosen to narrow down the coverage to some specific critical illnesses. Most of the health insurance products specifically exclude deliveries and other pregnancy-related illnesses. Most of these products also mention amongst their exclusion clauses, HIV/AIDS. Most products whether life or non-life require a single payment of premium ( i.e., a one-time payment) upon subscription. Private insurance companies have three times more products than the public companies.
As per the IRDA statistics, the public insurance companies still play a predominant role in the present coverage of the rural and social sectors. This is only to be expected since the incumbent public insurers have been in the market for a number of years now.
8.2) Demand for micro-insurance On the demand side too, the ILO (2004b) has recently prepared an inventory of micro-insurance schemes operational in India. Based on this list some of the observations are made below: The inventory lists 51 schemes that are operational in India.
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Most schemes are still very young, having started their operations during the last few years. Of the 39 schemes for which this information is available, around 24 schemes came up during the last 4 years, and about 7 schemes have operated for more than a decade. As regards the beneficiaries, the 43 schemes for which the information is available cover 5.2 million people. Most insurance schemes (66%) are linked with micro finance services provided by specialized institutions (17 schemes) or non-specialized organizations (17 schemes). Twenty two percent of the schemes are implemented by community based organizations, and 12% by health care providers. Life and health are the two most popular risks for which insurance is demanded: 59% of schemes provide life insurance and 57% of them provide health insurance.8 In SEWAs9 experience health insurance tops the list of risks for which the poor need insurance. Twenty-five out of 37 schemes received some external funds to initiate their schemes. Twenty out of 32 schemes received external technical assistance in the form of advisory services, technical services, training or even referral services for their schemes. In the majority of the schemes special staff had been recruited to manage the insurance activities. The other schemes kept relying on their regular staff while recognizing them the
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additional responsibilities linked to the management of the scheme. Most schemes (74%) operate in 4 southern states of India: Andhra Pradesh (27%), Tamil Nadu (23%), Karnataka (17%) and Kerala (8%), and the two western states (Maharashtra (12%) and Gujarat (6%)) account for 18% of the schemes. 56% of schemes deal with one single risk. Most schemes require single yearly premium at the time of subscription. Of the 43schemes, 6 use a monthly payment for their contribution, while 2 others have linked the contributions to some other activities developed with their members (disbursement of loan etc.). Most of the schemes (27) rely on voluntary contribution, while 10 schemes imposed compulsory contributions, and 7 adopted a mix of voluntary and compulsory contributions (based on the type of service provided).
Any nodal agency keen on buying insurance for their members now have a choice of insurers and approach those who offer them the best deal. According to the ILO inventory, schemes have already entered into partnerships with at least 2 insurance companies (public or commercial), and 3 schemes have already entered simultaneous partnerships with both public and commercial insurance companies.
Clearly, health and life are two most important risks for which insurance is demanded. Indeed, at low-income level, when much of
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the income goes into meeting basic needs, the scope of having varying priority needs is very limited. On the supply side we observe that out of 80 odd products only 7 products are health insurance products that provide for reimbursement of hospital expenses. Admittedly, compared to life insurance, which is a relatively straightforward business, health insurance is a much more complex service as it involves addressing the provision of healthcare that is location specific. The design and sale of products are currently driven by the objective of meeting the regulatory obligation and the making of profits or reducing losses. In this situation, there is a danger of certain priority needs getting neglected by the insurance companies.
Most products require single yearly premium at the time of subscription. It is well known that rural incomes are irregular and uncertain to enable payment of premium in one go, and more so when only a part of the remuneration is paid in cash. In the above, we find only a few schemes offer flexibility in paying premium. This could act as a serious drawback in increasing the membership. We find that most of the schemes are concentrated in the southern region of the country. The southern regions are well known for the social mobilization of low-income people. In contrast, the northern region is bereft of such mobilization as the nodal agencies are either nonexistent or dysfunctional. Creating and nurturing nodal agencies can be quite involved and can take a long time to develop. Local government, that can also perform the role of nodal agency, will take a long time to strengthen as a result of decentralization process
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currently underway in most Indian states. There has to be alternative approaches to extending insurance in regions where nodal agencies do not exist.
Even before insurance is bought for all important contingencies, affordability constraint is likely to kick in, especially for the lowincome people. The issue then is how to cover for these other important contingencies. One of the ways suggested is to impose a tax at industry level (this could be on the turnover or profits of the industry), and use the tax proceeds for the benefit of workforce involved in activities peripheral to the industry.
Finally, the type of contingency and the number of people covered under it are important parameters, but so is the extent of benefit provided should the contingency happen. Currently, the benefit or protection provided under some insurance schemes is quite shallow.
The attitude of insurers on these obligations has been mixed. Some have taken a positive view of the regulatory obligations and have made a genuine attempt to understand the rural and low-income segment of the market. Indeed, a few insurers have actually surpassed their obligations by a wide margin. These companies have realised that there is potential in the rural and low-income segment but tapping that potential requires a different kind of approach. In some cases, insurance companies have actually cross subsidised their microBBI TOLANI COLLEGE OF COMMERCE Page 42
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insurance products while in other cases insurers have been able to find a donor for paying premium, at least in part, on behalf of the lowincome people.
The impact of rural and social obligations on extending insurance to the intended people has been positive. However, development of micro-insurance needs further guidance from the insurance regulator by way of supplementary provisions. Sensing this, the insurance regulator has already come out with a concept paper on micro-insurance in which it has spelled out its thinking on what these supplementary provisions could be.
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Chapter - 9
Microinsurance in rural India has not really taken off. Insurance companies can benefit by
harnessing technology to leverage this under-explored market while doing their bit for all-inclusive development.
Din Dayal owns two bighas of land in the suburbs of Mandla in Madhya Pradesh. Like others of his ilk, he waits for the monsoons every summer, prays that it will rain on time, neither too much nor too little. His livelihood and hence, life centres on the fickle weather. With a hand-to-mouth existence, Din and his family hover dangerously close to the poverty line. An illness, disability, death of cattle, floods or earthquake can send the whole family down th e poverty spiral. For millions of farmers like Din, ensuring their families a safe and happy future remains a distant dream.
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It is thus ironical that this same low-income population in most developing countries has a global annual purchasing power of $5 trillion. The question is: how does the world, which is in the throes of a financial meltdown, capitalise on this enormous opportunity? The requirement for sustainable financial structures at the bottom of the pyramid has spawned hundreds of cooperatives, microfinance institutes and NGOs. But amongst the many facets of microfinance, microinsurance remains significantly under-penetrated; its growth restricted by challenges of reach and sustainability in Indias colossal hinterland. However, theres a solution in sight; technology can turn the game around, transforming rural India into one of the most lucrative markets for microinsurance.
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Even if companies can reach the rural interiors, the claims processing procedure would also need innovation. The claimant might not understand the policy conditions or the claim process, and might not have a bank account to receive the claim cheque. How can an insurance company overcome these unique challenges and, in turn, enable the marginalised millions to benefit from insurance?
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sale computer instantly. As soon as connectivity is regained, the policy details are synchronised with the base server. PDAs and Mobiles: Currently there is a considerable time lag between the actual collection of premium and the deposit made at the insurers office. This becomes an issue when there is a claim in the interim period. Technology could be an aid here in the form of PDAs and mobiles. A PDA can be used to issue a receipt as and where the claimant makes a payment, while the SIM card could be used to transfer the details of the transaction immediately to the insurers server. Even the possibility of fraud decreases as the time and date are mentioned in all transactions. Bio-metric cards: A bio-metric card is like a debit card that contains the insureds name, age, identification number and thumb-print. Already made compulsory by the government under the Rashtriya Swasthya Bima Yojna (RSBY), such cards minimise the possibility of fraud and speed up the processing of claims. In the event of a claim, all the insured needs to do is to swipe the card in the card-reader installed in the hospital and match the thumb print with the data base. Upon discharge, the claim amount is debited from the claimants account and the balance is utilised in the next hospitalisation. Under
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the RSBY, about 5 lakh cards have been issued in 16 States and over 1,500 people have benefited from the scheme. RFID tags for cattle: Currently cattle insurance is tracked using tagging on the ears of cattle. Since this is not a fraud-proof method, insurance companies have incurred huge losses. RFID (Radio Frequency Identification device) tags negate the possibility of fraud by implanting a microchip that has a unique identification number, near the ears of animals. At the time of claim, the unique ID number in the chip is matched with the number in the records, negating the possibility of frauds. Weather insurance: Modern automated weather stations calculate relative humidity and temperature apart from rain, and are better equipped to predict weather changes. However basis risk the risk of experienced loss being different from calculated loss is a matter of concern for underwriters. To reduce this risk, Normalised Difference Vegetation Index (NDVI) is seen to be an improved way to design weather products. This is a hybrid weather-cum satellite imagery-based weather index, where claims settlement is done on the basis of satellite image of foliage, type of soil and moisture data from satellite image along with temperature and rainfall data from weather station.
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Blue Ocean Strategy There are two facts to be considered. First, urban insurance markets are already saturated. Second, microinsurance in rural India hasnt really taken off. Put together, it simply means that if companies want to grow, they need to harness technology to leverage the underexplored rural market. Insurers must remember that, if assisted, the low-income policy holder of today can grow into the middle-class of tomorrow, and hence create a bigger market for the future. Therefore, the need to look beyond short-term gains, to leverage technology smartly, and reap profits patiently in the long run. Doing well while doing good is indeed very possible. The time to implement a blue ocean strategy is now. All one needs is innovation, drive and an all-inclusive vision to grow together.
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Chapter 10
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Further, the premium chosen by you shall be subject to the minimum and maximum sum assured of Rs. 5,000/- and Rs. 30,000/respectively payable on death and maturity under this plan.
Benefits:
Maturity Benefit: On your surviving to the date of maturity, payment of the Maturity Sum Assured along with vested bonuses, if any.
The specimen Maturity Sum Assured per Rs. 1200/- annual premium are given below for some of the decennial ages and terms:
Age at Entry 20 30 40 50
Benefit Illustration:
Statutory warning :
Some benefits are guaranteed and some benefits are variable with returns based on the future performance of your Insurer carrying on life insurance business. If your policy offers guaranteed returns then these will be clearly marked guaranteed in the illustration table on this page. If your policy offers variable returns then the
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illustrations on this page will show two different rates of assumed future investment returns. These assumed rates of return are not guaranteed and they are not the upper or lower limits of what you might get back, as the value of your policy is dependent on a number of factors including future investment performance.
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3. Mode of Premium Payment : The modes of premium payment allowable are Yearly, Half Yearly, Quarterly, Monthly including SSS, fortnightly, weekly and Single Premium. (Single premium is allowed for 10 year term only.) 4. Sample Premium Rates: Following are some of the sample premium rates per Rs. 1000/Sum Assured: Annual Premium for Rs.1000 Sum Assured: Age (yrs.) Term of the Policy (years) 10 15 20 39.90 24.35 30 41.30 25.95 40 49.25 32.55 50 69.65 47.75 Single Premium for Rs.1000 Sum Assured (Available for 10 year term only) Age (yrs.) 20 30 40 50 Term of the Policy (years) 99.60 105.20 136.65 220.70
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Benefits:
1. Benefits : Death Benefit: On death during the term of the policy the Sum Assured under the basic plan is payable, provided the policy is kept in force. Maturity Benefit: On surviving to the date of maturity, an amount equal to the total amount of premium paid during the term of the contract excluding the accident benefit premium and all extra premium, if any, is payable ,provided the policy is kept in force 2. Optional Rider: Accidental Benefit Rider: On death arising as a result of accident during the term of the policy, an additional amount, equal to Accident Benefit Rider Sum Assured is payable . On total and permanent disability arising due to accident (within 180 days from the date of accident), the Accident Benefit will be payable in monthly instalments spread over 10 years. If the policy becomes a claim either by way of death or maturity before the expiry of the said period of 10 years, the disability benefit instalments which have not fallen due will be paid along with the claim.
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The disability due to accident should be total and such that the Life Assured is unable to carry out any work to earn the living. Following disabilities due to accidents are covered:
a) irrevocable loss of the entire sight of both eyes, or b) amputation of both hands at or above the wrists, or c) amputation of both feet at or above ankles, or d) amputation of one hand at or above the wrist and one foot at or above the ankle The future premiums shall be waived after the disability claim is admitted. 3. Exclusions: Suicide : If the Life Assured commits suicide (whether sane or insane at that time) at any time on or after the date on which the risk under the policy has commenced but before the expiry of one year from the date of commencement of risk under this policy, the sum assured under this policy shall not be payable, instead all the premiums paid under this policy shall be refunded in such cases. Accident Benefit: The Corporation shall not pay the accidental benefit in case accidental death/ disability arises due to following reasons: (i) intentional self injury, attempted suicide, insanity or immorality or whilst the Life Assured is under
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the influence of intoxicating liquor, drug or narcotic; or (ii) injuries resulting from riots, civil commotion, rebellion, war (whether war be declared or not), invasion, hunting, mountaineering, steeple chasing or racing of any kind; or (iii) result from the Life Assured committing any breach of law; or (iv) arises from employment of the Life Assured in the armed forces or military service of any country at war (whether war be declared or not) or from being engaged in police duty in any military, naval or police organization; or (v) occur after 180 days from the date of accident of the Life Assured. Note : The above is the product summary giving the key features of the plan. This is for illustration purpose only. This does not represent a contract and for details please refer to your policy document.
Benefit Illustration:
LICs Jeevan Mangal Age (yrs.) Terms years sum Assured Annual Premium 35 10 30000 1324.50
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End of Total Benefit payable on Benefit payable on year Premium paid death during the survival/maturity till end of year year during the year 1 2 3 4 5 6 7 8 9 10 1324.50 2649.00 3973.50 5298.00 6622.50 7947.00 9271.50 10596.00 11920.50 13245.00 Guaranteed 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000 Guaranteed 0 0 0 0 0 0 0 0 0 13245.00
35 10 30000 3489
End of Total Benefit payable on Benefit payable on year Premium death during the survival/maturity paid till end year during the year of year Guaranteed Guaranteed 1 3489.00 30000 0 2 3489.00 30000 0 3 3489.00 30000 0 4 3489.00 30000 0 5 3489.00 30000 0 6 3489.00 30000 0 7 3489.00 30000 0 8 3489.00 30000 0 9 3489.00 30000 0 10 3489.00 30000 3489.00
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Chapter 11
CONCLUSION
a) Micro insurance is a young financial with few proven best practices. Demand is strong and indicative of an important potential market.
b) Along with savings and emergency loans, micro-insurance has a role to play in poor peoples risk management.
c) There are challenges to provide micro-insurance to the poor and there is no need for greater innovation and experimentation.
d) Regulation within the industry is also critical. Working together, micro-insurance can be both a successful business venture and advantageous to the poor. However, the current move of IRDA towards effective regulation requires a collective effort otherwise the issue will not gain attention.
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Following a structured product development process can be time consuming and require significant effort. However, the benefits generated include: Faster acceptance by potential clients because: - The product are designed to meet the real needs of potential policyholders - The product education and marketing campaign is appropriate for the low-income market - The sales people have been well trained and appreciate the benefits of the product they are selling Better renewal rates because service provision was tested and perfected. Limited chance of systems or process failure because these were fully tested Like traditional agricultural insurance, agricultural
microinsurance is difficult and costly. For development agents wanting to help reduce the risks for low-income farmers, its adoption needs to be considered against a number of potentially easier to implement risk management strategies. These include reducing the chance of the risk occurring in the first place (e.g. vaccinations in the case of livestock), or reducing the impact of the risk once it has occurred (e.g. through the provision of savings and credit facilities).
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However useful strategies are, they cannot deal with catastrophic risks such as droughts, cyclones, floods and plagues, and this is where agricultural microinsurance clearly does have a role to play. As the various interventions suggested show, there is an important role for development agents and other stakeholders to help it become an effective risk management tool.
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BIBLIOGRAPHY
www.microinsurancenetwork.org http://en.wikipedia.org/wiki/Microinsurance www.ilo.org/microinsurance www.microensure.com/microinsurance.aspx www.lloyds.com www.MicroSave.org www.nabard.org www.csmonitor.com www.grameen-info.org www.microcreditsummit.org www.globalenvision.org www. knowledge.allianz.com www.licindia.in
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