Micro insurance, macro problems

Even as rural banking obligations for new bank hopefuls are in the limelight, it may be time to take a look at similar obligations for insurance companies and how they are being implemented.

There are today 27 general insurance and 24 life insurance companies in India.

Keeping in mind concerns that a competitive, open environment could lead to the neglect of the rural and weaker sections of India, the Insurance Regulatory and Development Authority of India (IRDA) passed the IRDA (Obligation of Insurers to Rural or Social Sectors) Regulations Act in 2002. After that, every insurance company was required to engage with the rural and social sectors by complying with mandatory obligations.

The IRDA regulations set rural insurance targets for each company. These require that 7 per cent of all life insurance business should be generated from the rural social sector in the first financial year, and this should increase annually to reach 18 per cent by the sixth financial year.

For general insurance, 2 per cent of insured premium in the first financial year should be from rural social business, increasing annually to 5 per cent in the sixth year.

The definition of micro insurance in India is primarily a product-based, monetary one. The regulation sets the boundaries of the cost and coverage of the product and provides clarity about distribution mechanisms.

India is one of the first countries to adopt micro insurance formally through the Micro insurance Regulations Act in 2005. The regulation sets boundaries for the cost and coverage of the product and provides clarity about distribution mechanisms. Insurers in the private sector, while meeting the obligations, have brought in significant innovations in products and processes to serve the poor, such as (i) co-payment models; (ii) increasing client value with products such as health screening, tele-medicine, no claim discounts; (iii) mobile enrolments; (iv) exploring exciting distribution channels such as internet kiosks; and (v) introducing products such as weather-based insurance, rainfall-index insurance.

Declining registrations

But insurers have not readily embraced the concept of micro insurance.

However, a study by MicroSave in 2012 shows that there are 23 registered micro insurance products filed by 16 companies compared to 64 products sold as Rural Social Obligations, but not registered as micro insurance.

It is also seen that the number of micro insurance products registered with IRDA over the last five years also shows a decline from 11 in 2007-08 to just one in 2009-10. No products were registered from 2010-11. Only seven life insurance companies sold micro insurance products in 2010-11.

Clearly, the motivation to introduce microinsurance products seems to be decreasing. This also raises the question as to how the companies are meeting their rural social targets.

A study by the C. K. Prahalad Centre for Emerging India (LIBA) showed that firms were inconsistent in using the term micro insurance and reporting its performance.

For instance, firms such as ICICI Lombard, HDFC Ergo and Bharti Axa described their products for the poor simply as ‘rural products’. Others such as Bajaj Allianz and Birla Sun Life referred to them as micro insurance. This suggests that the terms are chosen arbitrarily, rather than backed by a sound understanding of what it includes or excludes.

Every insurance company is expected to share the data relating to its products in its ‘public disclosures’.

Many insurers find it difficult to fit their products within the parameters set by the IRDA for a micro insurance product. For example, sum assured of Rs 30,000 may be perceived by an insurer as inadequate to make health insurance attractive even to low- income consumers.

Govt-sponsored schemes

Under the new public-private-partnership mantra, many insurers have begun to underwrite government-sponsored mass insurance programmes to help the poor. The Rashtriya Swasthya Bima Yojana (RSBY) is one such Central Government-subsidised programme. In addition, there are five State-sponsored programmes. The United India Insurance Company and ICICI Lombard cover the maximum number of districts in partnership with the Central and State governments. Premiums are subsidised completely or partially by the government.

The premium generated from such programmes by general insurance companies is included in the rural social business of the respective insurer. This creates further confusion on what constitutes micro insurance.

Ironically, though the sum assured of the Chief Ministers Comprehensive Health Insurance of Tamil Nadu is more than three times the IRDA limit, the scheme does not satisfy the IRDA definition of micro insurance. This is irrespective of the fact that in the international context, given the 36 million people covered under this scheme, it would definitely fall within the scope of micro insurance.

Without a clear definition and with disaggregated data for micro insurance, it becomes difficult to compare performances and arrive at a conclusive number indicating the number of insurance products and the number of poor reached in India.

The micro insurance industry no doubt suffers from several other issues. These include high cost of selling micro insurance, difficulty in finding effective distribution channels, low insurance awareness among consumers, companies finding rural social obligations unviable, and so on.

It is our contention that most of these simply originate from the fact that micro insurance is not defined clearly and categorically.

It is time for the IRDA to revisit the definition of micro insurance first, and put it in clear qualitative and quantitative terms. Two, based on this conceptual clarity, data regarding insurance for the poor needs to be segregated and collected from all companies.

The performance of the companies in meeting rural social targets would help to strengthen the micro insurance regulations and monitor the activities under it. Data from companies should also be made available for the benefit of existing and prospective consumers and for research and policy.

Given that the IRDA has a mission of “promoting orderly growth of insurance industry for benefit of the common man’’, a separate body under it to effectively monitor all forms of insurance for the poor would plug the many loopholes in India’s path to effective financial inclusion.

(The authors are researchers at the C. K. Prahalad Centre for Emerging India, Loyola Institute of Business Administration, Chennai.)

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