Microinsurance in India

GROUP 7

D005

Varun Agarwal

D020

Sanket Guhagarkar

D054

Himanshu Sood

F045

Sachin Sanghvi

Microfinance
I would say that I did something that challenged the banking world.
Conventional banks look for the rich; we look for the absolute poor. All people
are entrepreneurs, but many dont have the opportunity to find out that
-Mohammad Yunus (founder of Grameen Bank)
Microfinance recognizes that poor people are remarkable reservoirs of energy and
knowledge. And while the lack of financial services is not just a sign of poverty, today it is
looked as an untapped opportunity to create markets, bring people in from the margins and
give them the tools to help themselves."
Kofi Annan (Sec. General
of UN)
The poor stay poor, not because they are lazy but because they have no
access to capital.
Laureate Milton Friedman

Microfinance
Lets understand with this example
Mrs. Bharti, 48 years old

Unemployed husband
4 children
No savings
Good sewing skills

Mrs. Bharti decides to start a home based sewing business

She goes to the bank and makes a demand for a loan at her bank
MRS. Bhartis DEMAND IS REJECTED

Traditionally banks and Lending Institutions do not lend

money to Low Income Individuals
The reasons being

High Transaction cost of processing

Lack collateral or guarantors
Gap in the communication / lack of confidence in the Banks
Doubt of the bank of the repayment capacity
Lack of access to financial infrastructure and services in remote areas

Microfinance provides a solution for the above problem

Introduction to Microfinance

Microfinanceis the provision offinancial servicestolow-incomeclients orsolidarity lending groups

including consumers and theself-employed, who traditionally lack access tobankingand related
services.

Microfinance is not just about giving micro credit to the poor, It covers a wide range of services like credit,
savings, insurance, remittance and also non-financial services like training, counselling etc.

Salient features of Microfinance:

Borrowers are from thelow incomegroup

Loans are of small amount micro loans

Short duration loans

Loans are offered without collaterals

High frequency of repayment

Loans are generally taken for income generation purpose

Microfinance in India - The Need in India

India is said to be the home of one third of the worlds poor; official estimates
range from 26 to 50 percent of the more than one billion population.

About 87 percent of the poorest households do not have access to credit.

The demand for microcredit has been estimated at up to $30 billion; the
supply is less than $2.2 billion combined by all involved in the sector.

Microfinance has been present in India in one form or another since the 1970s
and is now widely accepted as an effective poverty alleviation strategy

The microfinance industry has achieved significant growth in part due to the
participation of commercial banks, despite this growth, the poverty situation
in India continues to be challenging.

Microfinance in India - The Need in India

The Indian Microfinance sector has been rated as one of the

fastest growing sectors in the world
There
MFIs

are 1,000 MFIs operating in India (as of March 2009)

have reached 234 of the 331 poorest districts identified by the government

At

present lending to the economically active poor both rural and urban is pegged at
around Rs 7000 crores in the Indian banks credit outstanding.

As

against this, according to even the most conservative estimates, the total demand for
credit requirements for this part of Indian society is somewhere around Rs 2,00,000
crores.

More

than 350mn people in India live below the poverty live

MFIs

cater to over 55mn people in India, with 90% of them being women

The

total market potential is to have a reach of about 275-300mn people in India

A Need For Financial Inclusion

A great need for a 100% financial inclusion is being felt by the economists and practitioners
The un-bankable population of India promises a huge market in itself

Poor people are trapped in poverty, because:

Commercial banks will not lend them money as they are often neither in a position to offer collaterals nor
are they considered creditworthy enough; while
Local money-lenders, who are often their only source of credit, charge exorbitantly high interest rates,
thereby depleting them of whatever little possible savings they can manage

Hence, there is a need for micro credit institutions offer small amount
of loans to the people in the bottom of the pyramid

Channels of Micro finance

Who requires Microfinance?

In India, generally
microfinance is sought by:

In India microfinance operates through two channels:

1. SHG Bank Linkage Programme (SBLP)

2. MicroFinanceInstitutions (MFIs)

Small and marginal farmers;

Rural artisans; and

Economically weaker sections

Women constitute a vast majority of

users of microcredit and micro savings
facilitates

Challenges Faced By The Sector

Heavy
dependence
on Banks &
FIs

Competition

Weak
governance

Steady
access
to
capital

Political
sensitivity of
interest rates

Operational
issues while
aggressive
growth

Correcting Large Geographic Asymmetries

Microinsurance
The protection of low income households against specific perils
in exchange for premium payments proportionate to the likelihood
and cost of the risk involved.

Microinsurance is specifically designed for the protection of low -income

people, with affordable insurance products to help them cope with and
recover from common risks.

It is a market-based mechanism that promises to support sustainable

livelihoods by empowering people to adapt and withstand stress.

Myth: Microinsurance policy is simply a low -premium

Evolution of Microinsurance in India

Regulation 1 : Obligations of Insurers to

Rural Social Sectors (2002)
Compels insurers to sell a percentage of their insurance policies
to de facto low-income clients
Incremental sales of such policies expected to achieve
16 percent of overall sale and
5 percent of overall premium
Consequence:
Dumping of poorly service microinsurance policies
Only just meeting the regulatory target and stopping the sale
afterwards

Regulation 2 : Obligations of Insurers to

Rural Social Sectors (2005)
Created a framework for NGOs and MFIs to sell microinsurance
Offered flexibility in product design, distribution and servicing

IRDA Regulation on Microfinance

Tie up between life insurer and non life insurer:

A life insurer may offer general micro-insurance products provided:

The life insurer has a tie up with a general insurer.

Premium for such sold micro general insurance can be collected by the
life micro insurer and transferred over to the tied up general insurer.

In the event of any claim regarding the general micro insurance product,
the life insurer shall forward it to the tied up general insurer and assist in
disposal of the claim.

Similarly, a general insurer can offer life micro insurance products besides
general micro insurance products with above mentioned conditions.

IRDA Regulation on Microfinance

Distribution of micro insurance products:

This can be done by:
1.

an insurance agent,

2.

corporate agent,

3.

broker licensed under the Act,

4.

micro insurance agents provided :

that a micro insurance agent shall not distribute any product

other than a micro insurance product.

IRDA Regulation on Microfinance

Appointment of micro insurance agents:

1.

By an insurer by entering into a deed of agreement specifying duties

and responsibilities of both the parties.

2.

A micro insurance agent cannot work for more than :

1.

1 insurer carrying on life insurance business

2.

1 insurer carrying on general insurance business

IRDA Regulation on Microfinance

Filing of micro insurance product design:

1.

Every insurer shall be subject to file and use procedure with respect to
filing of micro insurance products with the authority.

2.

Every such micro insurance product cleared by the Authority for micro
insurance purpose shall be captioned as Micro Insurance Product.

Underwriting:
No insurer shall authorize any micro insurance agent or any other outsider
to underwrite any insurance proposal for the purpose of granting insurance
cover.

IRDA Regulation on Microfinance

Remuneration/Commission:
Remuneration, including the commission, to the micro insurance agents by
the insurer shall not exceed the following limits:
for Life Insurance :
Single Premium Policies 10% of the single premium
of

Non Single Premium Policies 20% of the premium for all the years
the premium paying term.
for Non Life Insurance :
15% of the premium

IRDA Regulation on Microfinance

Obligations to Rural and Social Sectors :
1.

All micro insurance policies may be reckoned for the purpose of

fulfillment of social obligations by an insurer as per the law

2.

Where a micro insurance policy is issued in a rural area and falls under
the definition of social sector, such policy can be reckoned for both
under rural and social obligations separately.

Handling of complaints/grievances :
3.

It is the responsibility of the insurer to handle complaints against a

micro insurance agent.

4.

The insurer shall also send a quarterly report to the authority regarding
the handling of complaints against the micro insurance agent.

IRDA Regulation on Microfinance

General Micro Insurance Products :

Type of cover

Min amt to cover Max amt to cover Term of cover Min Term of cover
Max
Rs 5000 per
Rs 30000 per
1 year
1 year
asset cover
asset cover

Dwelling and
contents, or
livestock or tools
or implements or
other named
assets / or crop
insurance against
all perils
Health Insurance Rs 5000
Contract (Ind)
Health Insurance Rs 10000
Contract (family)
Personal Accident Rs 10000
(per life/earning
member of
family)

Rs 30000

1 year

1 year

Rs 30000

1 year

1 year

Rs 50000

1 year

1 year

Min Age at entry Max Age at entry

NA

NA

Insurer's
Discretion
Insurer's
Discretion
5

Insurer's
Discretion
Insurer's
Discretion
70

IRDA Regulation on Microfinance

Life Micro Insurance Products :

Type of cover
Term Insurance
with or without
return of
premium

Endowment
Insurance
Health Insurance
Contract
(individual)
Health Insurance
Contract (family)
Accident benefit
as rider

Min amt to cover Max amt to cover Term of cover

Min
Rs 5000
Rs 50000
5 year

Term of cover
Max
15 year

Min Age at entry Max Age at entry

18

60

Rs 5000

Rs 30000

5 year

15 year

18

60

Rs 5000

Rs 30000

1 year

7 year

Insurer's
Discretion

Insurer's
Discretion

Rs 10000

Rs 30000

1 year

7 year

Rs 10000

Rs 50000

5 year

15 year

Insurer's
Discretion
18

Insurer's
Discretion
60

Important factors which differentiate

Microinsurance with other insurance policies

Live in remote rural areas requiring a different distribution channel to urban insurance
product

Most vocations related agriculture , thus income generation is seasonal and irregular

Are often illiterate and unfamiliar with the concept of insurance, requiring new approaches
to both marketing and contracting

Face more Risks compared to wealthy people because they can not afford the same
defenses

Have little experience in dealing with financial institutions

Not enough reliable actuarial data available for effective product design

Often have high transaction cost as compared to the benefit sought

Distribution Channels
Partner-Agent Model

Insurers utilize MFIs delivery

mechanism to provide sales
and basic services to clients

There is no risk and limited

administrative burden for
MFIs

Community-Based Model

The policyholders own and

manage the insurance
program, and negotiate
with external health care
providers

Full-Service Model

The provider is responsible for

all aspects of product
manufacturing, sales,
servicing, and claims
assessment

The insurers are responsible

for all insurance-related costs
and losses and they retain all
profits
Micro
Agent Model

Bypasses the Agents

(MFIs,NGOs)

Appoints representatives
from among the SHG as
Micro insurance agents

Partner Agent Model

Agents act as intermediaries between an insurance company and its market

Agents can be

Microfinance Institution

NGO

Commercial Enterprises that cater to large number of Low-income people e.g. Fertilizer Company

The MFI acts as the agent, marketing and selling the product to its existing clientele through the
distribution network it has already established for its other financial services.

The insurance provider acts as the partner, providing the actuarial, financial, and claimsprocessing expertise, as well as the capital required for initial investments and reserves as
required by law.

Partner-Agent Model
Partner
Insurance Company

Product
Manufacturing

Agent
Product Sales
Policy
holder

MFI, NGO, SHG

Product
Servicing
Service Provider

Partner Agent Model

Benefits for MFI

Benefits to Insurance Company

Limited Initial Capital Investment and Low

Variable Costs.
Compliance with Legal and Regulatory
Requirements.
Potential for Stable Revenue Stream
Learning the Business

Access to New Markets

Access to Clientele with Strong Financial
Records.
Lower Transaction Costs for Serving a New
Market.
Regulatory Compliance.

Micro-agent model

The central building blocks of the model are Rural Community Insurance Groups (CRIGs) supervised
by rural organizations such as churches, NGOs or MFIs

CRIGs are a partnership firm formed of five women from a self -help group (SHG). The leader of the CRIG is
licensed as an agent.

A typical leader(micro-agent) is

Educated to the 12th standard or above,

have a good track record of past social -sector performance and integrity,

systematic and organized

Centralized training given for CRIGS in same geographical area

CRIG as a whole is registered as a body under the Andhra Pradesh Societies Act (where the model is
currently being used)

CRIGs are responsible for promotion, sales and collection of insurance proceeds and maintaining records.

Micro-agent model

Pros

Cons

Relatively high training cost

Transaction cost of sales increases

once the agent has sold to all people
he knows and has to sell to strangers

When a claim arises the MFI or NGO

investigates the claim, pays the
benefit immediately, and then claims
it back from the insurer. This is not
possible in this model

Creates an insurance distribution infrastructure in low

-income neighbourhoods
Creates a new profession, that of micro -agent, with new
livelihood opportunities in his/her vicinity

Sustainable for long term, since unlike NGOs, MFIs it is not

dependent on the goodwill and public recognition for aids
flow

TYPES OR RISK FACED AND

EXAMPLES OF
CURRENT OPERATIONAL POLICIES

Characteristics of Risk
Characteristics
- High Level of poverty
- Frequent catastrophes
- Lack of access o
conventional forms of risk
management
- Low awareness levels
- Small asset size leading
to pricing constraints of
products

Key Risks Faced

- Individual life risk,
health risk and personal
accident
- Livelihood
Agriculture: Weather risk, crop
produce risk
Livestock risk

Need
Risk mitigation through
insurance

Examples of Policies (1/2)

Examples of Policies (2/2)

Overview of Current Scenario

With a few schemes launched by non government organizations (NGOs), micro

finance institutions (MFIs), trade unions, hospitals and cooperatives to create
an insurance fund against a specific peril

The micro-insurance landscape changed with the first set of regulations

published in 2002 entitled, the Obligations of Insurers to Rural Social Sectors
while IRDA came up with the micro-insurance regulation in 2005

Source:
KPMG 2013

Penetration of Insurance

Source: IRDA

 Just meet target approach

Challenges for various stakeholders

FUTURE OUTLOOK
tential Solutions to further incre
Penetration and scaling up of
Micro-insurance Business

Regulatory Structure and Policies

Need for Regulation
Critical need to set micro-insurance goals at an industry level and supporting the industry with the right
set of policies and reporting procedures
Need to create grievance channels and a resolution system appropriate for low income policy holders
Regulating new channels for distribution and mandating risk carriers which are unregulated or under
other authorities to become licensed
Central and State Government funding for insurance, extension of coverage beyond the poor class to
low income self employed groups, the risk profile is expected to improve and even savings and retirement
schemes can be offered to the mass segment

Industry led
change/innovatio
n

Leveraging
technology

A micro-insurance exchange,
where graded portfolios (by
underwriter, risk assessment,
mortality statistics etc.) can
be traded

Need to reduce operating

costs in micro-insurance will
drive a model that includes
shared infrastructure and a
shared database to reduce
cost for individual insurers

Biometric devices and

smart cards
Leveraging recent initiatives
by the Central and State
Govts. like issuance of smart
cards to the poorest Indians
to store financial transactions,
health history

A micro-insurance pool,
enabled by pooling together of
all revenues accrued through
initiatives run by insurance
companies, the Govt, postal
services etc.

The biggest advantage

accruing from a shared
database will be the
availability of a significantly
larger set of information
required for modelling, risk
analysis and fraud protectionsimilar to CIBIL

Cloud computing
Massive data stores to enable
companies to collect huge
volumes of data and use
sophisticated data analysis
tools to analyze all types of
trends, and for each individual
customer

For cost and risk

sharing