A two-day national workshop titled “Microinsurance For The Poor: Strengthening Services and Addressing Policy Issues” was jointly organized by the Insurance Regulatory Development Authority (IRDA), The Self Employed Women’s Association (SEWA) and the Friends of Women’s World Banking (FWWB) on 15th and 16th September, 2003, at Vigyan Bhavan, New Delhi. GTZ, Ford Foundation, ILO-STEP and LIC supported the workshop. About 155 participants from all over the country representing the government, insurers (both government and private) micro-finance organizations, NGO’s and donors participated in the workshop.

Workshop Objectives

• To review and understand grassroot level microinsurance initiatives focussing on the poor in India

• To highlight the need for microinsurance as an integral component of financial services for the poor

• To review the current policy environment for microinsurance and develop policy recommendations to encourage microinsurance and the development of pro-poor insurance products and services.

Background Paper for Microinsurance Workshop

Microinsurance for the Poor Strengthening Services and Addressing Policy Issues

Introduction

Crises are recurrent features in the lives of the poor. Such crises – personal, social or natural – often involve high expenditure and drive a poor family deeper into poverty. The range of crises that the poor are vulnerable to is large. It includes accidents, sudden hospitalization, death of a bread-earner, loss of crops or assets and natural calamities like floods, cyclones and droughts. Expenses incurred during such crises are met either by borrowing from moneylenders, sale or mortgage of assets or by drawing on scarce savings. The affected household suffers a simultaneous reduction in income and savings and an increase in debt and expenditure. Each such crisis leaves a poor family weaker and more vulnerable. Women, who are invariably responsible for managing the household, bear the brunt of coping with such crises.

Insurance is a mechanism that can help the poor combat the vulnerability caused by exposure to such risks. By pooling into a risk fund to cover stipulated risks – such as illness, loss of assets, death and widowhood – members can protect themselves from unexpected losses. Such risk pooling in large numbers allows the few affected families to be compensated for their losses by distributing the cost among a larger group. People affected by a crisis obtain concrete economic support from the contributions of the many others who are not affected. Insurance gives them a sense of security and helps them plan for the future. It prevents decapitalisation and supports people’s efforts towards self-reliance.

Microinsurance in India: Growing Opportunities

The insurance market in India is concentrated in the urban middle and upper income groups. Government supported insurance schemes, such as the Employees State Insurance Scheme (ESIS), are aimed at workers in the organized sector and though some government initiatives do provide insurance coverage for the poor and those in the informal economy these have had limited success in actually reaching the poor. The targets for rural and poor populations set under IRDA regulations are yet to be achieved.

On the other hand, in the last decade or so, the country has seen the provision of insurance to the poor through the rapidly growing micro finance organizations and other community based insurance initiatives. Microinsurance is the term now commonly used for insurance services specifically aimed at the poor. Definitions of this relatively new term are still evolving, but the term certainly implies a focus on the poor (as in the case of micro credit) and involves insurance coverage with modest premia and sums insured.

There are certainly challenges involved in serving the low-income market, requiring innovations in product design, delivery mechanisms and marketing. The success of many microinsurance programmes in providing coverage to the poor throughout the country has shown that these challenges can be overcome by creatively designing demand-driven products along with client friendly collection and delivery mechanisms.

At the policy level too, there have been encouraging developments. In December 1999, the Indian Parliament passed the Insurance Regulatory and Development Bill (IRDA), opening the Indian insurance market to foreign insurance companies and re-insurers. It is expected that this liberalization will increase competition and, consequently improve the insurance products in keeping with client demand. The IRDA has also stipulated that a certain fixed percentage of the total business of insurance companies should come from the rural sector.

The other encouraging development has been in the micro finance sector. Led by NGOs, co-operatives and CBFIs (Community based Financial Institutions) Indian micro finance has gathered strength in the last few years. The micro finance practitioners have responded to the need of the poor for financial services through special delivery mechanisms customized to meet their needs. Many such initiatives have resulted in the household level capitalization of the poor, and have helped many families come out of poverty. However what is also becoming clear is that the poor need different types of financial services throughout their lives. Savings and credit is one of them. Insurance is another. Thus micro finance is now emerging as a concept, which denotes a set of financial services, which not only includes savings and credit, but also encompasses other services like insurance, directed to ultimately benefit those living in poverty. Another trend is the drive for sustainability or profitability, again perhaps in the face of increasing competition, which is leading MFIs to diversify their line of financial products. Insurance as a new financial product has the potential to improve profitability by reducing loan losses and replacing clients’ need to draw from savings for emergencies.

The microinsurance experience in India is rich and diverse, showing variations in volume of members, premium options coverage and insurance products. It is not possible here to review each initiative but we will make a few general observations regarding the current situation of microinsurance provision in India and look at some lessons learn, opportunities offered and challenges to be met.

Many different kinds of institutions are providing insurance to the poor and low income group. They include MFIs, NGOs, workers cooperatives, trade unions, workers organisations and associations or other kinds of member based organisations. Membership in almost all cases is voluntary. Enrollment may be at the level of ‘individuals’ or ‘households’. Sometimes, with individual membership, spouses and children can be enrolled with the payment of an extra premium amount. In some schemes, there is provision for enrolling groups such as self help groups.

In India, in the microinsurance sector, there are generally two kinds of insurance products as a protection against major risks – life and non-life. The latter includes sickness, loss of property/asset risks. In addition, there are a few other products such as crop insurance, cattle insurance, hut insurance and hand pump insurance. Life insurance is the most widely available insurance product for the poor. This may be due to both the lower death rate and relatively simple procedures needed in managing life insurance. Health and asset insurance are relatively more complex and have proved to be much more difficult to provide. Verifying claims for asset insurance for the poor is often a challenge as insurers need to have a reliable method for determining the value of the assets and simple and swift mechanisms for evaluation of loss, especially after the calamity.

Provision of health insurance is more risky and more complex than either life or property. The range of causes of health risks are much more varied and require more detailed information to identify and classify the relative risk-level associated with a potential policyholder. Second, there is a greater risk of unexpected increases in claims due to adverse selection and moral hazard and providers need to protect against these by both the policyholder and the health care provider.

Many institutions offer only one product – often only life insurance or health insurance, but a few others like SEWA are offering multiple products and multiple premium options. The premiums payment pattern may also vary – they may be linked to a savings plan or may be collected annually. Few schemes allow members to enroll round the year.

The extent of coverage - within each broad type of insurance – also varies. The coverage may range from protection against a small portion of the loss incurred as the result of death, illness or property damage, to near complete coverage of these losses. For example in health insurance, most schemes provide only a limited coverage. For example, the KKVS insures to a maximum of Rs. 10,000 per family per year, RAHA to Rs. 1,000 per individual per year and SEWA to Rs. 2,000 per member per year.

The microinsurance schemes can also be segregated on the basis of organisational structure. Each of the models has different roles for the players and different financial implications. For example, for life insurance, the most frequent model in India is where the insurance agency provides the insurance product and the insurance delivery institution/organisation (workers union, MFI or NGO) takes up the activity of sales and servicing the clients. This is also the most common model for asset insurance. For health insurance, three main patterns of scheme ownership and management have emerged. In many schemes the NGO running the insurance scheme is also the health care provider. For example, under the Voluntary Health Services, Chennai, households pay an annual premium and in return they are provided with a free annual health check-up, and discounted rates on outpatient and inpatient services. The second model is where the NGO is the insurer, but does not provide health care itself (e.g., KKVS, RAHA and Tribhuvandas Foundation). In the third instance, several of the schemes involve an organisation acting as an intermediary between the target population and one of the insurance companies. SEWA is an example of such a scheme.

It is in this context that the Insurance Regulatory and Development Authority (IRDA), the Self-Employed Women’s Association (SEWA) and the Friends of Women’s World Banking (FWWB), organised a two-day workshop titled Microinsurance for the Poor: Strengthening Services and Addressing Policy Issues, on 15th and 16th September, 2003, at Vigyan Bhavan, New Delhi. The workshop was supported by GTZ , Ford Foundation, ILO-STEP and LIC . About 155 participants from all over the country representing the government, insurers (both government and private) micro-finance organisations, NGOs and donors participated in the workshop.

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