What was a luxury for the poor has now become a reality due to several innovative models by various institutions. India is now a major centre for rapidly growing microinsurance
The pandemic has been a game changer for microinsurance and people now understand its importance in their lives. This should spur a greater demand for it. In the developed world, insurance is a part of life but its coverage has been patchy and woefully inadequate in the developing world. However, what was a luxury for the poor has now become a reality on account of several innovative models developed by various institutions. India is now a major centre for rapidly-growing microinsurance.
In India, low-income communities live on the edge; just a tiny misfortune away from disaster — an injury, illness, or natural calamity can push them deeper into poverty as their meagre resources get depleted. These events often have very grave financial consequences. Many get drawn into debt traps as they borrow beyond their means, sell productive assets, take children out of school or put them to work, compromise on food, or leave sickness untreated .
Although poor households often have informal means to manage risks, such strategies provide inadequate protection, while insurance is a major safeguard for low-income groups. They need it more than well-heeled people because the poor have no financial cushion and are more vulnerable to risks. One of their biggest challenges is health-related expenditure — a burden that often triggers poverty.
Poor families have suffered for long, the triple curse of sudden illness: The trauma associated with sickness, loss of wages and the financial burden of intensive healthcare. It is a fertile hunting ground for loan sharks and illnesses become a financial sinkhole for villagers.
The poor usually face two types of risks — idiosyncratic (specific to household) and covariate (in which the entire community suffers loss; the most common, for instance, are drought and epidemics). Insurance contracts are most easily offered if risks within the relevant population are not covariate — so that only some put in a claim at the same time. Furthermore, insurance for rare and infrequent events is also typically more difficult to offer.
Low-income communities aren’t considered as “insurable” at reasonable levels of premium. This makes a case for insurance schemes designed specifically for the poor, particularly in sectors of health and life. Microinsurance has emerged in response to the inadequacy of regular insurance to provide protection to the bottom tier of the population. Such insurance can improve healthcare outcomes and raise school attendance rates. Several health insurance programmes cover wage loss on account of illness or other health related issues. Health insurance policies typically don’t cover outpatients or domiciliary treatment where the major expense is on account of pharmacy bills, diagnostic tests, and so on.
By managing risks and avoiding debt, those who have microinsurance policies are in a position to protect the assets they accumulate, generate more income, and can even get a fair chance to rescue themselves and their families from poverty. The cost of insuring against an unforeseen development is considerably lower than self-insuring through savings.
The Governments, donors and other players engaged in combating poverty and designing social protection measures should keep insurance as a key component of their toolbox. They can reach the poor and thus reduce the cost of servicing remote clients. For the poor to reap the real benefits of microinsurance, our insurance companies need to function with a sense of responsibility. Because of the lack of proper awareness and failure of institutions to properly guide them, people buy insurance policies without proper planning and give up midway because they don’t have the money to pay the premium.
Aggressive selling prevents the agents from properly assessing the consistency in income streams of the buyers for servicing their policies. The customers end up losing heavily as penalties are very harsh.
The outreach of the insurance companies has been very limited. Microinsurance accounted for less than 1.80 per cent for life and 1.16 per cent for general insurance in 2019-20. The key challenge is the high cost of administering it. Microinsurance is a low ticket business, requiring huge volumes to become sustainable. The poor live off the banking grid. Further, the transaction costs of issuing millions of small policies through service agents are high.
Despite the potential of insurance products to provide a “risk floor” for farmers and to encourage higher-productivity investments and behaviour, uptake of microinsurance at market prices is extremely low and it has not been found to be easily scalable except when heavily subsidised by the Government.
India also lacks the distribution channels appropriate for lower-income groups. Rapid advances in digital payment systems are creating opportunities to connect poor households to affordable and reliable financial tools, through mobile phones and other digital interfaces.
Insurance coverage can be widened by coupling services with existing mobile financial products or creating new solutions that bring insurance services straight to a consumer’s phone.
There are also problems with product design. Typically, rural insurance products are clones of products introduced in urban areas and are not suited to the local context. Risk mitigation mechanisms are weak and complexity of people and problems make underwriting, claim processing and resolution a challenge.
An Insurance Regulatory and Development Authority (IRDAI) committee has suggested reduction in entry-level capital requirement for standalone microinsurance companies to `20 crore from the current `100 crore with a view to accelerate expansion of this segment.
Microinsurance companies as well as cooperatives should be allowed to act as composite insurers to transact both life and non-life business through a single entity.
There are countries which have witnessed a large improvement in product design and availability of a range of insurance products. Microinsurance products tailored for the farmers’ community — such as crop insurance, health insurance, rural, personal, accident, irrigation, animal cart, aqua-culture, agri-allied and cattle insurance — are now available in the market. Even niche products such as insurance covers for snake bites, livestock welfare, failed wells, damage caused by thunderstorms, health issues, funerals and even covering the birth of twins are available.
Microinsurance is now acknowledged as a highly effective tool to end the cycle of poverty by providing a robust safety net that families need. If the poor know that they are covered, they are more likely to plan their future better, invest in expanding businesses, diversify crops or send their children to school without the fear of losing their savings if something were to happen.
The whole capacity to take risks, changes. Thus, apart from just being a safety net, microinsurance promises something that earlier generations could never imagine: Hope for the future.
The writer is a well-known development professional. The views expressed are personal.