In a recentl article, The Asset Magazine discusses the massive market for microinsurance, which is currently estimated to be approximately $1 billion. Amit Karla, Vice President of Swiss Re, explains that the market could potentially cover 4 billion people. India, which constitutes a quarter of the world’s low-income population would be the largest perspective market for microinsurance. A number of companies have begun offering life and non-life insurance products with low premiums to low-income markets in India through microfinance institutions, retailers, utility providers, and other institutions able to reach remote or low-income populations. The article discusses that though these products are offered such as those of Bajaj Allianz, the model has to be modified so that service providers can charge low premiums but still cover their operational costs.

A relatively new area of insurance has opened up a world of possibilities for all the participants. For the insured, micro-insurance engenders savings for the future and a safety net in case of an eventuality. For the private sector, its involvement may well enhance the effectiveness of micro-insurance schemes and open up opportunities for future generations.

It has been interesting to witness the subtle shift in the epicentre of the financial world over the past couple of years, with the emerging nations presenting plenty more avenues for growth and profitability.

Social entrepreneurs, businessmen and economists have all touted the fortune that lies hidden at the grass roots level. Nevertheless, there are barriers to growth that need to be addressed before the population at the bottom of the pyramid can become the consumers of tomorrow.

That reality is nowhere as stark as in the most populated parts of the globe – such as South Asia, Indonesia and parts of Africa – where large sections of the population live in poverty and are in need of assistance. Micro-insurance is regarded as a right step in the direction of providing help.

Mind-boggling scope

Research on micro-insurance throws up some revealing statistics. According to Amit Kalra, vice-president at Swiss Re, one of the world’s largest and most diversified re-insurers, “the global micro-insurance market has the potential to cover up to 4 billion people and generate premiums of up to US$40 billion (against an estimated current market size of around US$1 billion)”.

India accounts for approximately 25% of the world’s low-income population, thereby making it the largest prospective market for micro-insurance. The scope of micro-insurance is mind-boggling when one takes into account the varied product needs as well as the potential to move large segments of people into a higher trajectory of social growth.

The Insurance Regulatory and Development Authority (IRDA) that oversees insurance related policy in India announced a series of measures in 2005 that were aimed at improving insurance penetration in rural areas. The IRDA regulations allowed insurers to tie up for offering a combined policy for general and life insurance. Since the opening up of the insurance market, several new participants have joined the fray, most of them being joint partnerships between local and foreign players. The number of participants in the industry has gone up from six insurers in 2000 to 48 insurers operating in the life, non-life and re-insurance segments.

Case for private sector involvement

It has been recognized that private players need to become involved in the process in order to make the scheme more viable and efficient. It is indeed a conundrum for private sector participants as they weigh the pros and cons of making inroads into the micro-insurance market.

Public private partnerships (PPP) in India have garnered considerable attention recently owing to newly-introduced government legislation that requires the private sector to support the development of micro-insurance. “For instance, in India the licensing conditions obligate insurers to source business from pre-defined rural and social sectors, thus creating strong incentives for insurers to reach the low-income population,” explains Kalra. One of the examples of PPP in the Indian micro-insurance sector is RSBY (Rashtriya Swasthya Bima Yojana) initiative – a welfare scheme introduced by the central government in collaboration with the state government, which leverages government financing and private sector expertise to offer free healthcare services to people below the poverty line.

Under the RSBY, the state governments selects an insurer through a competitive bidding process. The insurer agrees to cover the benefits package prescribed by the government of India through a cashless facility that requires the use of smart cards, which must be issued to all members. This scheme has been a resounding success and has helped quadruple India’s overall health insurance penetration in the three years that it has been in operation. The RSBY now covers some 23 million poor families in 330 districts and 27 states across India and is poised to increase its coverage with the help of PPP.

Boosting bottom lines

Still, profitability in the life and non-life segments remains depressed and participants need to figure out a way to boost their bottom lines. “PPP in the context of micro-insurance involves a multi-stakeholder response from the private and public sectors in order to address the risk management and risk transfer needs of the low-income population,” says Kalra.

A PPP approach is of particular importance in the start-up and early expansion phase of micro-insurance schemes, when offering products to the extremely poor population or market segments which are not commercially viable for private and economically driven operators. For these segments, governments through PPP can effectively channel subsidies through micro-insurance programmes by fully funding or subsidizing premiums.

PPPs have been seen in action in India for the last few years with heartening results. In addition to life and health micro-insurance, Swiss Re has been a key development partner with the private Indian insurance sector to offer weather-index solutions to low-income farmers. These policies pay out as soon as a few weeks after harvest when the levels of rainfall and/or temperature deviate from climatology standards. “Fostered by government subsidies, the weather insurance market in India has continued to grow and currently covers around three million farmers,” confirms Kalra.

Bajaj-Allianz, a pioneer in the micro-insurance market in India, took a pro-active step to penetrate the rural market through tie-ups with micro-finance institutions (MFIs), non-governmental organizations (NGOs), regional rural banks, co-operatives, etc. They offered extremely low-cost savings and security products with flexibility in premium payments and minimal penalties or hidden charges levied to them.

According to Yogesh Gupta, head of micro-insurance at Bajaj Allianz Life Insurance, “the idea was to cover the rural population and offer a basic protection tool at an attractively low insurance premium in spite of the immense challenge in terms of costs and reach. In addition, it helped dynamic field representatives to successfully cross-sell microcredit and insurance.”

Making it attractive

From the insurer’s point of view, there are several issues with micro-insurance that make them virtually unattractive for private sector participation. For starters, the pricing of micro-insurance schemes is extremely difficult. Distribution is another gargantuan issue.

At present, most of the distribution occurs through micro-finance institutions, non-governmental organizations and self-help groups. Kalra believes that there is a continuous drive for innovation by risk carriers and distributors as they look for optimal solutions to meet the needs of the low-income population, reduce transaction costs and expand the reach.

“New initiatives in distribution include tie-ups with retailers, utility providers, postal offices and other affinity groups in touch with these customer segments, yet are not dependent on distribution of insurance products alone,” he remarks.

Bajaj Allianz’s Gupta says that entrants are hesitant due to the poor paying capacity of the people of this segment and the economically non-feasible operational structure of the financial institutions. He goes on to say that the quantum of investment is very low, making it uninteresting to financial institutions. Additionally, the high product processing and operational costs make it even more difficult for them to justify their involvement in the micro-insurance space.

The role of re-insurers in such a market would be critical in increasing the depth of the market for micro-insurance. There have been instances of re-insurers’ greater involvement in programmes, thereby providing risk capacity as well as technical expertise and innovative product knowledge.

This is critical in order to manage risk accumulation at the institutional level, since many of the risk carriers operate at a small- to medium-scale at the regional level. Swiss Re has been involved in the government-sponsored life savings treatment scheme in the state of Tamil Nadu in India. Through an innovative and customized re-insurance structure, Swiss Re addressed the needs of various cedents who participated in the programme.

Surge of products

The Indian market has seen a rapid increase in innovative product offerings and it is fast expanding to cover areas such as health, agricultural insurance, term life insurance, affordable pension products and other savings products.

“Many of these products feature innovative designs, leverage new technologies extensively and make use of various conventional and alternative channels,” comments Kalra. With agriculture being the mainstay of large sections of the population in the emerging countries, index-based agricultural protection covers are being tested in a number of countries including India, Kenya, Mexico and Malawi.

These products help to overcome the challenges of traditional agriculture insurance through the use of index-based solutions with pay-outs defined as a function of a weather parameters or an index that is highly correlated with agricultural production. Examples of indexes include rainfall (e.g. flood or drought), temperature (minimum or maximum), relative humidity, sunshine hours, etc.

Gupta adds that the main challenge is to devise a product that has a low premium and at the same time make it viable for the insurer in terms of operational cost. This is done by ensuring and creating new underwriting processes and improving service delivery systems. “We had to undertake a lot of process re-engineering to keep the policy issuance costs and the servicing cost absolutely low. The other learning is to be ready for surprises as it requires a whole new mindset,” explains Gupta.

The prospects for micro-insurance continue to be challenging. “Regulatory changes are required to allow the proliferation of micro-insurance, insurance awareness has to be raised among the potential clients, distribution and administration of policies need to become more efficient and less cost intensive, necessary historical data and infrastructure need to be made available and accessible,” suggests Kalra.

The scandals that have hit micro-credit institutions cast a pall over micro-insurance, although the two are unrelated. Needless to say, the microfinance sector is currently in transition and sound regulation needs to be put in place. A successful model in India could serve as a blueprint for other countries. The need of the hour is a prudent mix of technology, private enterprise and government support that could buttress the pyramid.