Need for specific government policies for the development of the Microinsurance Industry in India

Certain policies and guidelines govern every business, some of them are generic and applicable to all the businesses, whereas others are industry-specific. Government policies and regulations not only guide businesses but also provide the necessary framework to prevent exploitation and misconduct, creating a conducive environment for both businesses and the customer.?

Some of the key objectives behind industrial policies are: -?

1.???????????????To enhance employment opportunities?

2.???????????????To guide businesses in general & specific?

3.???????????????To maintain sustained growth and productivity?

4.???????????????To gain international competitiveness?

Why does Microinsurance need separate government policies

Given the specific nature of the microinsurance business, its requirements and way of operating differ from traditional insurance in many ways. Here is what differentiates microinsurance from traditional insurance. The major factors governing the microinsurance business- Are premiums, Policies, Claims, & Delivery channels.

Premium –?In conventional insurance, the payment frequencies are typically regular, annual, quarterly, or monthly, based on age or other specific risk characteristics. For Microinsurance policies the premium payments are frequent or irregular depending upon the income of the people involved

Policies -?Complex policy documents, and plans with higher premiums are some features of conventional insurance. Microinsurance policies are simple with limited protection, no exclusions, and faster/immediate issuance.??

Claims –?Conventional insurance has a large sum insured and hence the claims process for large sums insured may take time and a lot of documents. The claims process for small sums insured under microinsurance is simple and fast in terms of claims processing time.?

Delivery Channels –?Conventional insurance is sold by licensed agents or brokers or companies that typically understand insurance. Whereas microinsurance is often sold by unlicensed non-traditional agents to low-income persons, preferably in groups requiring significant consumer education.

The most significant difference between conventional insurance and microinsurance is the size of the premium and the insured amount.

Microinsurance sector regulations?

To facilitate the penetration of microinsurance to lower-income segments, IRDAI has formulated microinsurance regulations. Micro Insurance Regulations, 2005 provide a platform to distribute insurance products, affordable to the rural and urban poor enabling microinsurance as an integral part of the country’s wider insurance system.?

The first Micro Insurance Regulations came in 2005 and were amended from time to time. IRDAI Micro Insurance Regulations 2015 was notified in July 2015 to develop the microinsurance market in India. However, outside of Govt’s Social Security Schemes and the Govt. sponsored or initiated schemes like PMJJBY, PMSBY, PMSYM Yojana, and PMJAY (Ayushman Bharat), coverage through Micro Insurance remains very low.

Some of the key regulations and amendments in the microinsurance insurance sector taken in 2015 include

1. The sum assured under an Insurance product offering Life or pension or Health benefits shall not exceed an amount of Rs 200000.?

2. The Annual Premium shall not exceed Rs 6000 p.a. in a Micro Variable Insurance product under the Non-Linked Non-Par platform.?

3. Micro Insurance schemes marketed to Groups with a minimum Group Size of 5.?

4. Insurers shall not offer microinsurance products under unit linked platform.?

Robust Distribution Network: Key factor responsible for the success of Microinsurance?

The analysis of the penetration of the three main industries comprising the financial sector, namely Banking, Insurance, and Mutual funds, clearly shows that banks and non-banking financial companies (NBFCs) have been more successful in penetrating the Indian rural markets compared to the other two.?

The success of the Banking system in Penetrating Rural India?

The steps are taken in the past like the nationalization of banks, building a robust branch network of scheduled commercial banks, co-operatives and regional rural banks, formation of self-help groups, permitting BCs/BFs to be appointed by banks to provide doorstep delivery of banking services, zero balance BSBD accounts, etc. have resulted in a wider reach, especially in the rural areas.?

As per 2021 statistics, there are 12 public sector banks, 21 private sector banks, 9,507 non-banking financial companies (NBFCs) and 531 urban cooperative banks (UCBs), and 97,006 rural cooperative banks, with the latter making up 65% of the total asset size of all cooperatives taken together.?

With a robust network and clear categorization of banks as per various segments to cater to, The Indian banking system is contributing to achieving financial inclusion.?

In the case of Mutual Funds, although they are one of the primary sources of national financial growth, the true potential of the sector is yet to be unleashed. The Role of Mutual funds in promoting savings remains insignificant, with the size of the mutual fund industry being less than 10 per cent of the Indian GDP. One of the main reasons for low MF penetration in rural areas is because of the perception that mutual funds cater only to middle- and high-income groups. For the rapid growth of the MF sector, appropriate schemes catering to rural investors are required. 80 per cent of the business for the MF industry comes from metros. Thus, the rural market remains mostly untapped.

In the case of the Insurance industry, the penetration of the insurance products currently (as of 2021) remains at 3.71% of GDP which is way below the global average of 7.31%. With 70% of the Indian population still living in rural areas, it's necessary to design simple and effective products catering to the rural population. Currently, insurance companies struggle to develop a robust network of distributors for Microinsurance because comparatively small premiums and commissions do not enthuse the traditional distributors.?

Conclusion?

To bring in financial inclusivity it is important to make various financial instruments reach the broader market, including the rural areas of India. For making financial products available to rural India, there is a need to create institutions specifically designing, promoting, and handling Microinsurance products like in the case of the banking INdustry. These microinsurance companies can tap the potential market and contribute towards bringing financial inclusivity.?

A first step was taken by IRDAI (the regulator) in creating a committee for suggesting ways to set up MICROINSURANCE companies in 2020. The committee came out with its recommendations in August 2020. The committee has recommended 10 major initiatives which can drive the microinsurance business in India.

1.??????Entry-level capital requirement for standalone microinsurance entities should be reduced to Rs. 20 crore maximum from the current Rs. 100 crore.

2.???????Risk-based capital (RBC) approach should be adopted to enable the progressive growth of the microinsurance business while maintaining the highest prudential standards.

3.??????. Microinsurance companies (as well as cooperatives and mutuals) should be allowed to act as composite insurers to transact both life and non-life business through a single entity. Their portfolios should have a balance of both life and non-life business.?

4.??????Use of end-to-end digital technology for transparency, accountability and monitoring will be an essential part of how microinsurance companies will do their business. A common information and technology (IT) platform for all microinsurance companies should be developed.?

5.??????Standalone microinsurance companies/cooperatives/mutuals will require reinsurance. The regulator can facilitate reinsurance of microinsurance through the existing licenced insurance/reinsurance companies.?

6.???????Regulations for standalone microinsurance must be developed with the highest prudential standards in consultation with those who are already undertaking microinsurance as intermediaries (cooperatives, mutuals, NGOs) as well as other stakeholders. In addition, microinsurance companies and organisations may also be encouraged through a regulatory architecture to focus on developing a self-regulatory mechanism.

7.??????The Insurance Act, of 1938 should be amended to bring the standalone microinsurance business under its purview. This will include defining microinsurance, and microinsurers, reducing the capital requirement and/or giving powers to IRDAI to decide on capital requirements for microinsurance companies. However, amending the Insurance Act, of 1938 may require time.?

8.??????A cell captive model may be offered as a way for micro players to underwrite the microinsurance business. As per this model, existing insurers and others can become cell owners by bringing in capital and sharing the underwriting risk with SAMIs with a capital of no more than Rs 5 crore or such contribution as may be considered appropriate.

9.??????IRDAI may develop an appropriate supervisory structure to fast track product approvals, enable offsite supervision of SAMIs, undertake capacity-building of staff and develop a separate microinsurance division within the IRDAI.?

10.????IRDAI and/or the Central Government may establish a Microinsurance Development Fund to support and promote the growth of this business across the country.

About MicroNsure

MicroNsure is a technology-led Microinsurance consulting and distribution company. We are committed to bringing financial inclusion to the economically vulnerable sections of our society by offering simple, hassle-free, and affordable microinsurance solutions.?

To know more about our services and products do write to us at [email protected]

Disclaimer:

Insurance is offered by Svojas Insurance Broking and Risk Management Services Private Limited (CIN U67120TG2017PTC118828).

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References: Report of the committee on standalone microinsurance company (SAMI Report August 2020, IRDAI)