By mid-century, India will be the world’s most populated nation, but also home to more poor people than any other country. A crucial asset in the fight against poverty could be microinsurance that covers the poor against disease, accidents and natural disasters.
Microinsurance Profile India – Protecting the Poor
A boy sells Indian national flags in Mumbai. The majority of Indians work informally and enjoy no social protection (Photo Reuters)
Despite its rapid growth, India remains a poor country. Only one in ten Indian workers are formally employed, according to the OECD. The vast majority of Indians work informally, pay no taxes, and enjoy no social protection whatsoever. They must look after themselves, because no one else will.
Some are rich enough to buy mainstream insurance, but more than 850 million Indians earn less than 2 dollars a day, according to the International Labor Organization (ILO)—not enough to afford traditional coverage. Microinsurance, however, can cost only a few euros per year and could help those with a low income to overcome the financial shocks that come along with natural disasters, accidents, or disease.
According to a study conducted by Strengthening Micro Health Care Units for the Poor in India, an Indian-European think tank, more than half of India’s poorest households spend about 2,400 Rupees (54 euros) or more per year on health care. If only a fraction of this went into microinsurance, millions of people would enjoy better and cheaper health care.
The Indian government has realized the benefits of low-premium coverage. Insurance companies now operating in India have to do a certain amount of business in rural areas or face hefty fees. Given the low income of most Indian farmers this almost always means underwriting microinsurance policies.
Consequently, the microinsurance industry in India is growing rapidly; a growth closely linked to the overall growth of insurance in the country. In 2007, there were 31 insurance companies–including 24 private and 7 public insurers—selling life and general policies in India. The number of policies issued in 2006 to 2007 by private insurers registered a 100 percent increase over those issued in 2005 to 2006.
A number of microinsurance schemes are state-led. Many others are partnerships between private insurance companies and microfinance institutions (MFIs). In such a partnership, the MFI assumes the role of an agent and distributes the product of the insurance company to its clients.
This helps the insurance company to reach difficult markets cheaply, an important precondition for low premiums. The insurance company also benefits from the trust relationship the local microfinance institution has established with the target populations. “Trust of the prospective client to the insurer is one of the main hindrances, because you pay now but your benefit is in the future,” explains Ralf Radermacher, from the Microinsurance Academy in New Dehli.
Microinsurance growth is concentrated in South India, owing mainly to the growth of microfinance in the area. The poorer and more conflict-prone north is slowly catching up, says Radermacher. “What I find very encouraging is that we now get more requests from institutions in the North, who are interested in setting up microinsurance schemes.”
A wide range of products is being offered, including coverage against bad weather or health insurance against disease. Communities can choose from more than 150 products with different terms and conditions. According to Mirai Chatterjee, who coordinates social security for India’s Self-Employed Women’s Association (SEWA), the choice is still limited. Most microinsurance providers in India, she writes, focus on life insurance, which is easier to administer and less prone to fraud. Existing products rarely ever cover income uncertainty, market risks, and weather- or climate-related risks.
For distribution, the classic partner-agent model is becoming popular, as it is preferred by suppliers and provides an economic incentive to Indian agents. However, large numbers of informal models run by NGOs, microfinance institutions, co-operatives, and credit unions exist, as well as products offered by central and state governments.
Policy and Regulation
India is one of the few developing countries in the world that has a special microinsurance act that regulates the suppliers through its special agency for insurance regulation – the Insurance Regulatory and Development Authority.
Under the Microinsurance Act, insurance companies are obliged to conduct a certain percentage of their business in rural areas or with marginalized groups. Because of these obligations and the prospect of a very large market, many microinsurance innovations stem from India.
Ralf Radermacher says that while India was the first country to introduce regulation for microinsurance, the scope of this regulation is still limited. “The regulator is not touching the community-based insurance movement, because it is currently difficult to find the effective regulation for that sector.”
Another challenge faced by the sector is the lack of customer education. “Many of these potential policyholders have little understanding and experience of, or trust in, insurance,” says Richard Leftley of Micro Insurance Agency, an intermediary between insurers, microfinance institutions, and charities.
On the other hand, insurers are trying desperately to get a better idea of the Indian market and its needs. “There is a severe scarcity of data, which makes it difficult for many insurers to develop adequate products. At the same time, insurers have started to provide new models, which is a good initiative,” says Radermacher.
Radermacher predicts a rapid increase in numbers and outreach for both community-based schemes and big commercial insurers. “In essence, there will be more diversity of products and business models and a huge increase in the number of the insured,” he says. While most Indians will remain in the informal sector, these microinsurance policies provide them with a new level of social protection.
editor: Thilo Kunzemann
publishing date: January 16, 2008