This article was first published by the Global Association for Risk Professionals on January 12, 2016
With India’s under-served population as a case example, there is potential for economies of scale through efficient deployment of technology
In his 2014 book “Capital in the Twenty-First Century,” Thomas Piketty focused on income inequality and called attention to India, where inequality appears very stark despite a lack of data to prove or disprove it. Some of the homes of the ultra rich, in the city of Mumbai, among the most expensive homes in the world, overlook Dharavi, one of the largest slums in the world.
Within the context of access to financial services, insurance is a very critical financial risk management tool. Yet those who may need it the most, such as people vulnerable to natural catastrophes, loss of Income and infectious diseases due to lack of sanitation or access to health care, often have no Insurance.
Twenty-two percent of India’s population is below poverty line (according to estimates published by the Indian government’s Planning Commission in 2013), and a major chunk of the overall population is excluded from the protection of insurance. Life insurance penetration is 2.6%, and the general insurance penetration is merely 0.7%, whereas mobile phone penetration is close to 80%.
Furthermore, the insured in India are covered for just six months of income, and 60% to 70% of health care expenses are borne out of pocket.
Micro insurance regulations by the Insurance Regulatory and Development Authority of India (IRDAI) in 2005 were steps in the direction of making Insurance accessible and affordable. The regulations compelled insurers to look at an otherwise neglected market segment. A 2015 regulation, Obligations of Insurers to Rural and Social Sectors, provided further micro insurance impetus, requiring insurers to write fixed percentages of their business to the segments classified as “rural” and “social” each year.
There has thus been a steady increase in number of policies sold to individuals, though the overall premium collected from individuals have declined in the recent years (Exhibit 1). Almost 5 million policies, bought by individuals, are mostly self-funded, which indicates that the targeted segments have a need and are willing to purchase insurance.
While the individual micro insurance business is catching up, the group business dominates the sector. There was a significant decline in the premium collected and lives covered in FY2010-11 & 2011-12. There was resurgence in FY2012-13.
Insurance in India is generally a “push-based” business, with face-to-face selling by agents playing an important role. Agents’ importance increases in the micro insurance context, as this segment needs greater convincing and push. Although there has been a steady increase in micro insurance agents, the numbers are not adequate to cater to the vast population (Exhibit 2).
In spite of efforts by the regulator to enable the Insurers to remove rigidities in accessing the rural markets and customizing the insurance solutions for the targeted, a large number of the segment remains uninsured.
Factors in Under-Penetration
Temperament and awareness are the most important of the many reasons for under-penetration in the market. Those who are aware about Insurance often have the attitude that they will never need it — that catastrophes or accidents will strike others. Insurance can seem an unnecessary expense when it is a struggle to get two square meals a day. What’s more, a large swath of the population lacks awareness about insurance.
From an insurer’s perspective, this part of the population is mobile (in search of work), does not have a steady stream of income and takes a lot of cajoling to buy a policy. There are challenges in distribution, as not many agents are willing to target those below the poverty line. This segment lacks access to or knowledge of technology to buy online, and reinsurance support is not forthcoming.
There is also the question of whether the products are suitable for very low-income customers who would prefer to insure crops or cattle or loss of income, with premium payment schedules that match the seasonality of their income. Policy document can be complicated, the products too cumbersome to understand.
Reaching such a sizable, under-served market entails solutions that are extremely specific to the prospective customers. The approach must be to simplify, customize and create awareness. Use mobile technology, and speedy settlements. And rely on people with local knowledge to convince the customers about the need for protection.
It is important that insurers start looking at micro insurance as a business opportunity, rather than charity. Given the large population, in India as well as globally, who can benefit from micro insurance policies, economies of scale will set in as technology is put to efficient use.