Micro-insurance in India Practices & Prospects

Premasis Mukherjee

The Storyline

• Introduction to micro-insurance

• Micro-insurance products & challenges

• Delivery channels in micro-insurance

• Micro-insurance in India

• Micro-insurance regulation and its‟ impact

• Trends in micro-insurance industry

• Some Experiments by MFIs/ companies

• Possible engagements of MicroSave

Risk Management by the Poor

Self Insurance

• Liquidation of assets

• Informal /semi-formal borrowing

• Informal savings (ROSCA/ASCA)

Informal Group Insurance

• Funeral/burial societies

• Multiple membership

• High transaction cost

• Mostly covering specific life risks

Social Security

• Gap in intent and practice

• In-efficiency of formal economy

• Resource stress on developing

nations

Micro-insurance

Defining micro-insurance

• “Protection of low-income people……………. (not having

access to commercial insurance or social protection)

……………………… … ………against specific perils (that

causes vulnerability in their livelihood) ……..in exchange for

regular payment of premiums proportionate to the likelihood

and cost of the risk involved.”

--- Craig ChurchillMicro-insurance working group, CGAP

Social Finance Programme, ILO

Fundamental Principles of Insurance

Insurance

Utmost Good Faith

Event

Indemnity

Insurable Interest

Life : at inception

General: at occurrence

Full material disclosure

Clear communication of product

At the time of inception

Creditor- Debtor (Loan

amount)

Proposer – Nominee

Low probability

Randomness

Independence

Uncontrollability

Unequivocal

Micro-insurance Scenario : World

Micro-insurance Product types

• Loan linked insurance (Credit-life or credit-life +)

• Health insurance

• Long term insurance

• Annuity

• Pension

• Endowments

• Agriculture insurance

• Rain fall insurance

• Livestock insurance

Loan Linked Insurance

• Benefit :Credit- life/Accidental disability

• Added benefits:

• Illness cover

• Funeral cover

• Spouse cover

• Risk borne by: MFI/Insurance company (as re-insurer)

• Sum Assured: Outstanding loan / include accrued interest

• Price:

• 0.2% to 8% of loan portfolio (group price)

• Profit-sharing model

• Term : Renewed only if loan renewed (optional)

• Nominee : The MFI

• Subscription : Mostly mandatory with loan

Loan Linked Insurance: Focus

• Product

• Group based

• Term : loan schedule

• Flexible Sum Assured

• Price

• Affordable

• Competitive

• Annual review of price

• Promotion

• The opportunity benefit

• Place

• Mandatory

• Physical Evidence

• Process

• Easy claim settlement

• Least paper work

• Group underwriting

• Service agreement • Issuance

• Addition/Deletion

• Claim

• Positioning

• Least cost insurance

• People

• Research about options

The benefit of insurance is best communicated through claims

Health Insurance

Client

InsurerHealth

Service

ProviderSpecific benefit package

Premium : frequency &

quantum

Fund management

High claim ratio

High cost, low frequency

events

Claim servicing

Adverse selection

Moral hazard

Fraud

Pre-existing criteria

Low cost-high frequency events

Relevant

Fraud

Relationship

Payment

Long term Insurance

• Annuities

• High actuarial expertise

• Efficient financial management (asset-liability management)

• Defined contribution & defined benefit pension

• COMPFED

• Endowments

• Horizon issue

• Stability and brand

• Financial sector performance

Long term Insurance

• Challenges with clients

• Migration

• Matching with transaction patterns

• Assurance of return

• Challenges with intermediaries

• High cost – high involvement proposition

• High admin cost + distribution cost

• Standalone MI is becoming non-profitable

• Transfer of actuarial risk and distribution cost to companies

• Resource intensive

• Brand / imagery risk

• Long term tracking of clients

The Micro-insurance Supply Chain

Insures the insurer against catastrophic risks

e.g. Munich Re

Re-

insurer Insurer Delivery

Channel

Policy

Holder

Covered

Lives

• Receives

premium

•Carries risk

•Manage

regulation

•Pays claims

e.g. Insurance

companies, CBOs,

Mutual

•Sells the

product

•Collects

premium

•Aids the client

in settling claims

e.g., MFIs, NGOs,

CBOs, retailers , agents

•Buys the

product

•Proposer

e.g. Individuals, Groups

•Those who have

a premium paid

to cover them

e.g., family members,

group members

Partner-Agent Model

• Selecting partner (Insurer)

• Bidding

• Role clarity

• Staff training

• Underwriting

• Premium collection

• Claim processing

• Financial Arrangement

• Commission

• Profit sharing

• Premium mark-ups

• Benefits

• Simple & quick

• No need for specialised

manpower

• No capital requirement

• Additional income source

• Constraints

• Income only from commissions

• Service in third party hands

• Limitation on product offering

• Incentive structure for staff

Micro-insurance Scenario : World

Agents

10%

Brokers

0%

NGOs/CBO

s

33%

Employer

Groups

0%

Government

15%

Mutuals

17%

MFIs

22%

Retailors/Fu

nerl Parlors

2%

Un-

organized

1%

Distribution Channels

Life

36%

Health

20%

Accident

&

Disability

23%

Property

21%

Product wise Distribution

The Life Insurance Preference

Credit-

Life

36%

Credit-

Life

Plus

0%

Endow

ment

2%Funeral

5%

Investm

ents

0%

Pension

55%

Term

2%

Life Insurance Sub

Category

• Can be easily linked with other products

• Not dependent on other infrastructure

• The insured event is a clear cut fact

• Easy to price

• Resistant to moral hazard & fraud

• Claim settlement is relatively easy

Indian Micro-insurance : Regulation

Rural sector obligation

Life Insurance

Year of

operation

% of total NOP

1st 5

2nd 7

3rd 10

4th 12

5th 15

6th – 10th year 18 -20

General Insurance

Year of

operation

% of total NOP

1st 2

2nd 3

3rd - 5th 5

6th – 10th year 7 -10

Indian Micro-insurance : Regulation

Social SectorUnorganized workers, economically vulnerable or backward classes in urban /rural

Year of operation Number of policies

1st 5,000

2nd 7,500

3rd 10,000

4th 15,000

5th 20,000

6th to 10th year 25,000 to 55,000

Indian Micro-insurance Framework

Client

MI Product

[1-1.5% of SA]Group Insurance

[Rs.3-5/1000SA]

Insurance Company

Portfolio Security/Funder

Obligation

Sales Force of Insurance

Comp.

Commission Value addition

Rural

sector

Obligation

Social

Sector

Obligation

Risk Mitigation Savings

Issues in Indian Micro-insurance

Client

MI Product

[1-1.5% of SA]

Group Insurance

[Rs.3-5/1000SA]

Insurance Company

Funder ObligationSales Force of

Insurance Comp.

Commission Value addition

Rural

sector

Obligati

on

Social

Sector

Obligati

on

Risk Mitigation Savings

•Acquisition cost + Distribution cost

•Mortality data not available

•Rural channels upcoming

•„Cost of Simplicity‟

•Credit linkage insures portfolio

•Value addition not realised (latent demand)

•Better Service Level Agreement

•Not profitable due to resource intensiveness

•The low commission is insignificant income

•Client‟s family not getting benefit

•Limited flexibility

•Horizon problem/ commitment

•Endowment product not available

•Seen as cost of credit

•Un-availability of integrated product

Micro-insurance regulation

Enabling features

• Higher commission for

prolong association

• 20% in life, 15% in general

• Greater responsibility for

MI agents

• Qualify for both rural and

social sector numbers

• Benign negligence towards

community based micro-

insurance schemes

Critiques

• Definition of MI agent

• Issues with NBFCs/Sec.25

• 80% of clients belong to them

• Capacity building cost less

• Commission capping

• Lapsation rate is high

• NBFCs associate for long term

• Companies prefer not to renew

• Showing premium in books

• Single Life & General insurer

• Bias towards partner-agent

model

Trends Derived from MI Regulation

• All companies have MI product (24 MI products)

• Composite insurance absent in formal platform

• Companies wait for better opportunity (regulatory risk)

• Negotiation cost do not suffice benefit (wariness)

• NBFCs not forthcoming to become MIA

• Just in target approach by companies (Growth stagnant)

• Apprehension of IRDA for brokering in MI space

• Greater responsibility for MIA

• Community health insurance increasing (benign neglect)

• Concentration in south India

Recent trends in micro-insurance

• MI through Bancassurance

• Profit sharing & shared responsibility

• Focus on savings linked products (micro-pension)

• Service and technology focus

• Competition parameter

• Increasing awareness of BoP risks by actuaries

• Re-negotiation of price

• Spouse cover for diversifying risks

• Community health insurers tie up with re-insurers

Indian Examples: VimoSEWA

• Composite product

• Life and non-life

• Individual policies

• Health claim

• In house claim assessment

• Cash paid in emergency

• Preventive health care

• TAT of 9 days

• High claim ratio in urban

areas (172% in 2008)

• Sells to other NGOs

Coverage 3 months to 55 years

Sum Assured Rs.2,000-Rs.6,000

Min. criteria

for claim

24 hr hospitalisation

(ex. cataract/fracture

Premium •Rs.325-550 for comp.

•Rs.100-150 for health

Backward

integration

ICICI Lombard,

Reliance , Kotak

Mahindra, LIC, Bajaj-

Allianz

Benefit Life membership

Indian examples: Yeshaswini

Indian Examples: Micro-pension

• UTI Micro-pension

• Rs.50 p.m as premium

• Savings upto 55 years, payout from 58 years

• Account convertible to annuities (SWP for UTI)

• Invested in 60% debt+40% equity instruments

• Aam AdmiVima Yojna (GoI initiative)

• Horizon problem + long term tracking of clients

• Cost for intermediary not met

• Match with transaction pattern

• No guarantee of return

• Demand of insurance cannot be met (COMPFED)

Indian examples: Max Vijay

• Investment in government securities• 60% of 1st year premium

• 90% of subsequent premiums

• Investment once credited, will not reduce

• Premium from Rs.1,000-Rs. 2,500• Subsequent premiums Rs.10

• No deadline of renewal , No lapsation

• Death benefit • 5 X/10X annual pr.+ account value (normal)

• Term :10 years

• Partial withdrawal after 3 years

• Retailer channel exploited

•

Donor Activities in Micro-insurance

Gates +

ILO, 15

DFID

(UK),

3.96

ADB,

1.35

AIG, 1.50

GTZ

(Germany

), 1.17

Opportuni

ty

Internatio

nal, 0.85

Top Micro-insurance donors (in

mn US$)

Thank You