Comments on Concept Paper on Micro-insurance

Concept Paper on Need for Developing Micro-Insurance in India August 18, 2004 1 This paper sets out the objective and salient features of the proposed “micro- insurance” regulations and invites comments on the various aspects of micro- insurance, before finalization and notification of the regulations. Comments may be sent to Insurance Regulatory And Development Authority, Parishrama Bhawan, Basheerbagh, Hyderabad 500004 in a sealed envelope super scribed “Micro-insurance” or by E Mail to microinsurance@irdaonline.org before September 15, 2004. Background Micro-insurance refers to protection of assets and lives against insurable risks of target populations such as micro-entrepreneurs, small farmers and the landless, women and low- income people through formal, semiformal and informal institutions. Such products are often bundled with micro-savings and micro-credit, thereby allocating scarce resources to micro- investments with the highest marginal rates of return. Microinsurance is the most underdeveloped part of microfinance. Yet various schemes exist that are viable, benefiting both the institutions and their clients. Such schemes have generally served two major purposes: (i) they have contributed to loan security; and (ii) they have served as instruments of resource mobilization. The greatest challenge for microinsurance lies in the combination of viability and sustainability with outreach. Although introduction of sound practices such as appropriate policy sizes and timely payment of installments of premium or positive incentives to renew on time in order to avoid policy getting lapsed can be feasible, the ultimate effectiveness of interventions focusing on institutional transformation and sound insurance practices will vary considerably, depending on the appropriateness of the regulatory environment. Development Goal To enable microinsurance to be an integral part of a country's wider insurance system, it is important for every insurer to adjust its costs of serving marginal clients in remote areas, collecting premiums and installments, and offering doorstep services. It is also important to recognize a wide network of intermediaries in the rural and social sectors and notify regulations in order to guide and supervise the microinsurance service providers and their customers. · ~mam~m -I; INSUAANCE REGUIA TORY AND omlOrMENT AUTHORITY Concept Paper on Need for Developing Micro-Insurance in India August 18, 2004 2 Today we have a variety of microfinance institutions with national and local outreach. Many of them have already become corporate agents or have entered into referral arrangements with insurers. However, semiformal institutions including savings and credit cooperatives, NGOs and self-help groups which have immense potential in carrying the message of insurance as also solicit insurance business are yet to be utilized in a manner where their true potential can be harnessed to increase the insurance penetration levels. This is due to restrictions in the existing agency regulations in terms of minimum eligibility norms in order to become an agent. Depending on the existence and vigour of such institutions, the following alternatives have emerged, for offering strategic entry points for microinsurance development: i. Adapting formal insurance arrangements to the needs of the micro-economy. ii. Upgrading non-formal (comprising semiformal and informal) insurance arrangements with insurance companies. iii. Linking formal and non formal insurance institutions with banks and self-help groups. iv. Establishing new local institutions providing microinsurance services. The first three strategies may be inter-connected: i. adapting insurance companies to the requirements of the micro-economy is a first step; then ii. linking them as wholesale institutions to self-help groups as retailers; and finally, iii. upgrading self-help groups e.g. to the level of financial cooperatives or village banks. If insurers are to serve customers who differ widely in terms of service costs and risks, the only viable inducement for them is an adequate margin, lest they exclude small farmers, - micro-entrepreneurs and people in remote areas. Only sound social insurance, which combines a social mandate with profit-making, has a chance of sustainability. Institutional Adaptation The experience so far has been that formal financial institutions serve but a fraction of the population, which typically lies within the upper quartile of the social hierarchy. Through adaptation to the microfinance market requirements, they may gradually expand into the second-highest quartile and into segments of the lower quartiles. Within the foreseeable future they will normally not be able to fully serve that market. Non formal finance mostly rests on local institutions which are directly accessible to all segments of the population. Self-Help Groups (SHGs) are member-owned and member- controlled local institutions. They may either be financial groups, with financial intermediation as their primary purpose; or non financial groups, with financial intermediation as a secondary purpose, such as vendors' associations, family planning groups and numerous other types of voluntary associations. · ~mam~m -I; INSUAANCE REGUIA TORY AND omlOrMENT AUTHORITY Concept Paper on Need for Developing Micro-Insurance in India August 18, 2004 3 The functions that need to be focused must include: providing guidance to members, collecting premium installments from members, insurance services to members, communication and exchange of experience, providing linkages with banks, NGOs or donors, supporting the proposals of individual members to insurance companies through recommendations. Linkage to Insurers On a modest scale, various forms of life and health insurance have been successfully practiced by different institutions in different countries, particularly as part of loan protection schemes. Micro-insurance procedures and services should be set by insurers rather than the regulator. Appropriate procedures and services should be applied to attain (1) sound financial management, (2) convenient and safe savings premium collection and deposit facilities, (3) appropriate claim appraisal and processing procedures, (4) adequate risk management, (5) timely collection of premium installments, (6) monitoring and (7) effective information gathering, all of which may include cooperation between different formal and non-formal intermediaries in fields where each is most effective. Proposed Micro-insurance Regulations In order to introduce the concept micro-insurance it is necessary to draft suitable bring in suitable regulations to enable insurers to design and distribute and service micro-insurance products and discharge their obligations to the rural and social sectors as per provisions of the Insurance Act, 1938. 1. It is proposed that an insurer transacting life insurance business shall be permitted to provide life micro-insurance products as well as general micro-insurance products provided it ties up with an insurer transacting general insurance business for the general micro-insurance products, and vice versa. 2. In addition to an insurance agent or corporate agent or insurance broker who are authorized to solicit and procure insurance business, including micro-insurance business with an insurer in accordance with the provisions of the Insurance Act, 1938 and the regulations made there under it is also proposed to introduce the concepts of “micro- insurance product” and “micro-insurance agent” . · ~mam~m -I; INSUAANCE REGUIA TORY AND omlOrMENT AUTHORITY Concept Paper on Need for Developing Micro-Insurance in India August 18, 2004 4 Micro-insurance Product 3. A “life micro-insurance product” means any term insurance contract with or without return of premium, any endowment insurance contract or health insurance contract, with or without an accident benefit rider, either on individual or group basis, as per terms stated in the Table A below, filed with the Authority: Table A: Type of Cover Minimum Amount of Cover Maximum Amount of Cover Term of Cover Min. Term of Cover Max. Minimum Age at entry Maximum age at entry Term Insurance with or without return of premium Rs. 10,000 Rs. 50,000 5 year 7 years 18 60 Endowment Insurance Rs. 10,000 Rs. 50,000 5 year 7 years 18 60 Health Insurance Contract Rs. 10,000 Rs. 15,000 1 year 7 year 18 60 Accident Benefit as rider Rs. 10,000 Rs. 50,000 1 year 5 years 18 60 NOTE: The present average sum insured is around Rs. 5,000. This is highly inadequate to provide any tangible relief even to a individual below the poverty line. Therefore, it is suggested that the minimum amount of cover of Rs. 10,000 appears more realistic.