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Micro ins.


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Micro ins.

  2. 2. TYBBI (SEM-VI) MICRO INSURANCE 1.1 Meaning: Growing household income, building assets, and managing risk are integral to poverty alleviation. For the poor who lack formal insurance and primarily depend on informal and self insurance mechanism, crisis can rapidly erode their hard won gains. This chapter attempts to signify the much underdeveloped protection—the micro insurance as a tool to protect these underprivileged and downtrodden masses of India. Micro insurance offers a valuable vehicle to reduce the vulnerability of the poor while offering and their agents the potential to expand their markets to low-income households. Insurers’ donors and microfinance institutions are investing in financial instruments to meet the need of the low-income market. While formal risk-pooling mechanism for this market are still in early stages of development, evidence KES SHROFF COLLEGE OF ARTS AND COMMERCE 2
  3. 3. TYBBI (SEM-VI) MICRO INSURANCE suggests that appropriate micro-insurance services for this population can be offered on a financially sound basis. This chapter analyzes the current scenario of micro insurance in India and explores some of the specific challenges and characteristics that will determine the success of micro- insurance products in India. The challenges faced by this industry include technical specialization, marketing and sales and distribution channels. It also endeavors to focus strategies to make micro insurance a reality in India, viz., product design, product flexibility, recognition of specific needs, linking with formal players etc. This chapter analyzes the current scenario of micro insurance in India and some of the specific challenges and characteristics that will determine the success of micro insurance in India. The challenges faced by this industry include technical specialization, marketing and sales and distribution channels. It also endeavors to focus strategies to make micro insurance a reality in India, viz., product design, KES SHROFF COLLEGE OF ARTS AND COMMERCE 3
  4. 4. TYBBI (SEM-VI) MICRO INSURANCE product flexibility, recognition of specific needs, linking with formal players etc. The other sections of the chapter discuss the models delivering these micro insurance products and taken examples from the practices followed globally in this regard. These models are differentiated by insurance risk: local villagers, MFIs, health care facilities, or regulated insurance companies. The litmus test for success is the entity’s ability to manage the insurance risks. In India the micro financial institutions play active role in promoting micro credit and micro finance in the rural areas of the country. This chapter addresses the need for these MFI’s in promoting micro- insurance products and proposes them to follow certain steps in promoting it. They include concentration on the capabilities of the poor through social empowerment and entitlement rather than struggling with financial services, involvement of the clients in the design of the product, starting small and increasing coverage over time, concluding know ledged based surveys etc. KES SHROFF COLLEGE OF ARTS AND COMMERCE 4
  5. 5. TYBBI (SEM-VI) MICRO INSURANCE It concludes with the summary of the challenges ahead and strategies to be adopted but the apex body of insurance regulation, the Insurance Regulatory and Development Authority of India IRDA so as to frame enforcing bye-laws in developing micro-insurance to reduce the vulnerability of the vast majority of the Indian population lying below the poverty line. 1.2 An Overview: “Life for the poor is one long risk.” Risk comes in many forms, for example, illness, death of a loved one, fire of theft. These risks occur frequently and create financial pressures that exacerbate the ever-present stress of meeting regular need such as food, rent and school fees. To cope with the risk the poor uses adversity of strategies. These may include borrowing. Saving, selling productive and non-productive assets and other forms of ‘self-insurance’, informal group-based risk sharing system KES SHROFF COLLEGE OF ARTS AND COMMERCE 5
  6. 6. TYBBI (SEM-VI) MICRO INSURANCE and occasionally formal insurance. Yet, the effectiveness of these strategies is limited. There id also a sequential dimension to risk. Often following one after another, the myriad of unanticipated and anticipated risk events make it difficult for the poor to build up reserves that are key to successful coping. Without significant assets and other risk mitigation mechanisms, the poor lack the capacity to withstand the consequences of a shock. Moreover, mechanisms, the poor lack the capacity to withstand the consequences of a shock. Moreover, the level of resource endowment also determines the severity of impact. It is important to remember that what may be a minor shock for the vulnerable non-poor can be devastating for those below the poverty line. KES SHROFF COLLEGE OF ARTS AND COMMERCE 6
  7. 7. TYBBI (SEM-VI) MICRO INSURANCE Chapter - 2 REVIEW OF LITERATURE 2.1 Books Reference: 2.2 Magazine Reference: 2.1 Books Reference: (a) According to “Nalini Prava Tripathy & Prabir Pal” in their book they states that, “with the globalization of financial services and liberalization of economy with wider ramifications and rapid development in insurance have been taken place. Insurance business is one of the fast emerging financial services, predominantly in the developing nation KES SHROFF COLLEGE OF ARTS AND COMMERCE 7
  8. 8. TYBBI (SEM-VI) MICRO INSURANCE like India, in terms of the population it services. The Indian insurance market has undergone significant changes in recent year. The insurance business has been comprehensively networked in almost all parts of the country.” This extensively covers the dynamics of insurance service. Together this people along with the poor will arrive at the risk needed to be insured and then will form a pool to finance these risks. (a) Preface, Insurance Theory & Practices, Nalini Prava Tripathy & Prabir Pal, 2005. 2.2 Magazine Reference: (a) According to “Deepti Bhaskaran” in his magazine he states that, In order to cater to insurance needs of the poor and supplement the insurance industry’s endeavor in the micro insurance space, a Micro Insurance Academy, MIA has been set up. Moving forward MIA plans to set up a reinsurance KES SHROFF COLLEGE OF ARTS AND COMMERCE 8
  9. 9. TYBBI (SEM-VI) MICRO INSURANCE school in November and also plans to assist insurers to get into micro insurance. (a) Micro Insurance Academy Created, The survey of Insurance Industry 2006, May-06. KES SHROFF COLLEGE OF ARTS AND COMMERCE 9
  10. 10. TYBBI (SEM-VI) MICRO INSURANCE Chapter - 3 ECONOMIC SHOCKS AND THEIR IMPACT: 3.1 Introduction: 3.2 Vulnerability- Defined: 3.3 Immediate impacts: 3.4 Secondary impacts: 3.1 Introduction: In assessing the potential demand for micro-insurance, the key question is what coverage at what cost? To begin this discussion, let us turn the position on its head and ask, in KES SHROFF COLLEGE OF ARTS AND COMMERCE 10
  11. 11. TYBBI (SEM-VI) MICRO INSURANCE the absence of insurance, what is the impact of a shock on poor households? How vulnerable are the poor? 3.2 Vulnerability- Defined: Vulnerability has been described as the ability of individuals and households to deal with risk. Vulnerability if both a cause and a symptom of poverty. It resides in many shocks that pervade the lives of the poor. Their frequent occurrence can easily erode hard won gains and force households quickly back into poverty. Over the past few years, a growing body of evidence shows that micro finance has had a positive impact on the poor. Growths of enterprise revenues and in turn increased household incomes have brought important benefits to many households. However, focusing only on static measures of households earnings and incomes tend to mask the more dynamic side of poverty, the vulnerability of the poor to risk. Risk: Risk is defined as the chance of a loss or loss itself. Different types of risks are listed in the following table. List of Identified Risks KES SHROFF COLLEGE OF ARTS AND COMMERCE 11
  12. 12. TYBBI (SEM-VI) MICRO INSURANCE Types of Risks Risks Health problems: Sickness/Accidents Disability Death: Death of a member of a household Death of a husband Property loss: Theft and robbery Fire Eviction/demolition of business premises: Floods and drought Enterprise risks: Business Death of business owner Sickness of business owner Price fluctuations Employees stealing money Change in business line KES SHROFF COLLEGE OF ARTS AND COMMERCE 12
  13. 13. TYBBI (SEM-VI) MICRO INSURANCE Electricity shut downs, breakdown of Machinery: Water shortages Loss of goods in transit/buying Expired goods: Bad debts Defaulters Competition Risk of a loan: Loan misappropriation by spouse Systematic loss: Crop and animal diseases Other losses: Marriage/separation/divorce Irrespective of the type of risks, its impact follows a two- stage process, viz. KES SHROFF COLLEGE OF ARTS AND COMMERCE 13
  14. 14. TYBBI (SEM-VI) MICRO INSURANCE 3.3 Immediate impacts: Faced with a shock, all households incur expenses in meeting the immediate cost of the loss such as funeral expenses or medical charges. 3.4 Secondary impacts: These initial responses to the crisis at hand often have further repercussions. The following table shows different types of risks and its impact. KES SHROFF COLLEGE OF ARTS AND COMMERCE 14
  15. 15. TYBBI (SEM-VI) MICRO INSURANCE Chapter - 4 RISK MANAGING MECHANISM 4.1 Introduction: 4.2 Prevention & Avoidance: 4.3 Preparation 4.1 Introduction: Most of the poor people manage risk by their own means. Many depend on multiple informal mechanism (e.g. cash savings, asset ownership, rotating savings and credit associations, moneylenders).To prepare for and to cope with such risk as the death of a family breadwinner, sever illness, or loss of livestock. Very few low-income households have access to formal insurance for such risks. KES SHROFF COLLEGE OF ARTS AND COMMERCE 15
  16. 16. TYBBI (SEM-VI) MICRO INSURANCE 4.2 Prevention & Avoidance: When possible poor people avoid and/or actively work to reduce risk often through non-financial methods. careful sanitation, for example is a non-financial way to reduce the risk of infectious illness, particularly among children. Using family networks to identify business opportunities is another such mechanism. The imperative to avoid risk often leads to conservative decision making by poor people especially in business considerations. 4.3 Preparation: Poor people save, accumulate asset (such as livestock), buy insurance and educate their children to handle future risk. For certain risks, informal community systems offer protection. However, such systems generally do not adequately protect against costly and unpredictable risks, such as the debilitating illness of a family income earner. Formal insurance product are beginning to be offered to low- income markets, such as simple credit life insurance (which covers an outstanding loan balance in the event of a KES SHROFF COLLEGE OF ARTS AND COMMERCE 16
  17. 17. TYBBI (SEM-VI) MICRO INSURANCE borrower’s death), but these insurance products sometimes appear to be designed to protect the lending institution rather than is clients. KES SHROFF COLLEGE OF ARTS AND COMMERCE 17
  18. 18. TYBBI (SEM-VI) MICRO INSURANCE Chapter - 5 COPING Ex post coping can result in desperate measures that leave poor households even more vulnerable to future risks. In the face of severe economic stress, poor people may take out emergency loans from moneylenders, Microfinance Institutions (MFIs), and/or banks. They may also deplete savings, sell productive assets, default on loans, and/or reduce spending on food and schooling. In general, prevention and planning are far less costly than coping strategies for the individual. Risk-managing financial products include liquid savings accounts from which clients can draw to reduce the effects of an economic stress, emergency loans, and micro insurance. Among this options poor people’s preferences depends on a range of issues: 1. Alternative coping strategies-While the poor may need the support provided by these services, they are KES SHROFF COLLEGE OF ARTS AND COMMERCE 18
  19. 19. TYBBI (SEM-VI) MICRO INSURANCE unlikely to voice a significant demand because they do not have any expectations that a bank or insurer would be willing or be able to address their needs. The demand for risk managing financial services, therefore, has to be inferred based on the cost and effectiveness of current risk coping strategies used by the poor. 2. Types of risk-The risk pooling aspects of insurance work best for both provider and consumers when the loss is relatively large and there is a low likelihood that the risk will occur. Insurance is therefore useful to cover funerals, expensive medical treatments, or rebuilding a burned house. If the loss is relatively small, or potentially so, then savings or credit might be more appropriate. 3. Planning propensity-For savings or insurance to be option to manage risk, the decision to protect one’s households from risk needs to be made in advance-to start paying premiums or to build up a saving reserve, KES SHROFF COLLEGE OF ARTS AND COMMERCE 19
  20. 20. TYBBI (SEM-VI) MICRO INSURANCE 4. Poverty level-For the poor, asset accumulation in the form of saving and/or insurance requires forgoing consumption today for greater security tomorrow. Therefore, for savings and insurance to be good options, the households needs to have some net income that it can put money aside, to buy an asset, or pay a premium. 5. Cash flow-Saving and borrowing enable persons to allow consumption to be somewhat independent of income. For the non-poor, the ability to smooth consumption often results in access to material possessions. For the poor, the emphasis is less on buying things and more on risk and cash management, spreading expense spikes over time. 6. Social conditions-The choice between credit, savings, and insurance may depend more on social and cultural considerations than costs and benefits. 7. Education, biases, and risk tolerance-The demand for savings, credit and particularly insurance also depends on one’s education, biases and tolerance for risk. Although savings and credit are fairly familiar KES SHROFF COLLEGE OF ARTS AND COMMERCE 20
  21. 21. TYBBI (SEM-VI) MICRO INSURANCE to most people, may low-income people are not familiar with risk-pooling concept or they have a misperceptions about insurance needs. 8. Credit and savings products-Offer low-income households a method for converting a series of small contributions into a large sum of money. Emergency loan funds offered by institutions, such as Grameen bank, Shakti Foundation and Action Aid in Bangladesh are good examples of providers reducing typical restrictions on credit products to provide more effective protection. Flexibility in loan size and the repayment terms make this institution’ products responsive to the risk management needs of their clients. However, credit and savings products cannot provide complete protection against risk resulting in a loss greater than what a household can save or repay. As the size of loss increases relative to households expected future income, credit products become increasingly ineffective risk-management tools. Similarly, saving products offer only partial protection against risks causing large losses KES SHROFF COLLEGE OF ARTS AND COMMERCE 21
  22. 22. TYBBI (SEM-VI) MICRO INSURANCE relative to household income. At this point, insurance becomes a more effective method of risk management. KES SHROFF COLLEGE OF ARTS AND COMMERCE 22
  23. 23. TYBBI (SEM-VI) MICRO INSURANCE Chapter - 6 MICRO INSURANCE 6.1 Micro Insurance- The New Challenge: 6.2 Micro Insurance-Characteristics: 6.3 Basic Principles: 6.4 Models of Micro Insurance Delivery: 6.5 Provider model (GRET Cambodia): 6.1 Micro Insurance- The New Challenge: Micro-insurance is the protection of low income, people against specific perils exchange for regular monitory payments (premiums) proportionate to the likelihood and cost of the risk involved. As with all insurance, risk KES SHROFF COLLEGE OF ARTS AND COMMERCE 23
  24. 24. TYBBI (SEM-VI) MICRO INSURANCE pooling allows many individuals or groups to share the cost of risky event. To serve poor people, micro insurance must respond to their priority needs for risk protection (depending on the market, they may seek health care or life insurance) be easy to understand and affordable. 6.2 Micro Insurance-Characteristics: Insurance is mechanism that uses risk pooling to compensate individuals and group adversely affected by a specified risk or event. As such, it is a way to transfer risk from an individual to a group so that each individuals only pays the average of the loss for all members of the group. • Micro insurance is a subset of insurance that provides protection to the poor in a way that reflects their cash constraints and coverage requirements. Its clientele is markedly different from the market served by the existing formal insurance companies. • Micro insurance clients are poorer and depend on the flow of the income that can fluctuate considerably throughout the year. While the shocks experienced KES SHROFF COLLEGE OF ARTS AND COMMERCE 24
  25. 25. TYBBI (SEM-VI) MICRO INSURANCE by the poor may be same, they are more vulnerable to them because they have fewer reserves to draw upon. Once their reserves are gone, repeated shocks force them into reactive mode, always responding after a crisis. • Micro insurance, if designed appropriately, offers the poor an opportunity to be more proactive in managing risk by reducing the chance of a loss resulting from unanticipated risk events. To date, the experience with micro-insurance has been limited. 6.3 Basic Principles: Basic principles that should be observed by micro insurance providers are universal to insurance and risk management. They include: 1. Similar units are exposed to risk-Insurers require that risks in a particular class or group of policies be similar. Insurers also require that the group insured (or the ‘’risk pool’’) includes a large number KES SHROFF COLLEGE OF ARTS AND COMMERCE 25
  26. 26. TYBBI (SEM-VI) MICRO INSURANCE of these similar risks, relative to the total population. 2. There is limited policy holder control over the insured event-Insurance protection cannot be offered if policyholders can control the occurrence of insured event. 3. Insurable interest exists-Insurance cannot be provided to policyholders who have a vested interest in a loss occurring. A property insurance policy, for example, an a home cannot to sold anyone other than the residents of the home. 4. Losses are determinable and measurable- Insurance provider must have a mechanism for verifying the occurrence of a loss and identifying its cause and value. 5. Losses should not be catastrophic- The risk-pooling mechanism of insurance breaks down against risk that cause large losses for a substantial portion of the risk pool at the same time. KES SHROFF COLLEGE OF ARTS AND COMMERCE 26
  27. 27. TYBBI (SEM-VI) MICRO INSURANCE 6. Chance of loss can be calculated- Setting insurance premiums requires estimating the size of the expected losses and the chance of loss. 7. Premiums are economically affordable- In general, for an insurance policy to be an attractive purchase, the cost of premiums must be substantially less than the benefit offered by the policy. 6.4 Models of Micro Insurance Delivery: Community based model-Owned and managed by members UMASIDA: Tanzania Local communities from groups that capitalize and manage a risk pool for their members. ILO STEP and CIDR deliver health services using this community base model. 6.5 Provider model (GRET Cambodia): GRET insures and primary doctor is the employee. Hospitals and clinics create prepaid or risk pooling coverage for people at their facilities. MFIs such as ASA and KES SHROFF COLLEGE OF ARTS AND COMMERCE 27
  28. 28. TYBBI (SEM-VI) MICRO INSURANCE Grameen bank use this model but manage their own clinics, explain as follows: Full Insurer Model (SEWA India)- MFI is insurer (Limited with C.U.) regulated insurers downsizing insurance service like Delta Life (Bangladesh), which offers a long term savings product (annuity) with life insurance and a premium affordable by the poor. Partnership Model- Partnership model (AIg and Micro Care with Uganda MFIs) – No risk tom MFIs, administrative burden minimal insurers with products are pairing with MFIs and others, with low-income markets to provide micro insurance as AIG does with MFIs in Uganda. KES SHROFF COLLEGE OF ARTS AND COMMERCE 28
  30. 30. TYBBI (SEM-VI) MICRO INSURANCE 7.1 Introduction: In India, there are leading insurance corporations/companies (e.g. the Life Insurance Corporation Ltd. and the General Insurance Corporation) in the formal sector. A plethora of insurance schemes is available to the general public, though very limited products are available exclusively for women and rural poor. The insurance products are designed for the purpose of attracting more clients, as a gift for getting them into the banks fold for security reasons (e.g. in the event of loan defaults), and not for the meetings the needs of the poor. The benefits are, if at all realized, purely incidental and not intentional. It is ironic that even the incidental distributions of insurance benefits are not even equally shared amongst the target clients. For instance, under Government sponsored schemes like IRDP India, it is made compulsory to be an equal entitlement of benefits; however it is confined to limited schemes like animal husbandry (AH) and Transport. The moot point here is that whilst the status of the poor KES SHROFF COLLEGE OF ARTS AND COMMERCE 30
  31. 31. TYBBI (SEM-VI) MICRO INSURANCE remains the same with equal entitlements for the benefits under IRDP, only the lucky schemes like AH benefits from the access to insurance. The above situation indicates lack of innovative products to match the needs of all categories of poor households by the prominent players in the insurance field. The available products are designed more for safeguarding the interests of the suppliers than that of the receivers (the poor clients). The overall picture on micro-insurance indicates that the insurance remains the ‘Cinderella of Micro financial activities’. 7.2 Demand side picture: Rural folk, particularly woman and the very poor are not insurance conscious and are more concerned with saving rather than securities as they feel that destiny will decide their fate. As reported by the MFI/NGO (LEAD- INDIA) the poor ignorantly ask why they should insure. By forcing insurance onto the poor without their conscious demand (which requires awakening) and MFIs foraying into insurance with neither capability nor KES SHROFF COLLEGE OF ARTS AND COMMERCE 31
  32. 32. TYBBI (SEM-VI) MICRO INSURANCE competency is like putting the “cart before the horse” or the “last before the first”. Alternative development approaches should eschew the above anomalies. Among the various needs for protecting the livelihood of the poor, health assumes priority since the target clients are very much exposed to environmental predicaments. Women and children are also highly susceptible to health hazards due to unhygienic environments, contaminated water and poor medical facilities. There for there is the demand for health based insurance products designed exclusively for the rural poor. In the organized sector, laborers are protected by the provision of different insurance schemes like: 1. Employees State Insurance Scheme (ESIS)- Providing cash and the medical benefits for illness, maternity, temporary or permanent disablement and funeral rights. 2. The Standard Mediclaims Policy-It is of the General Insurance Corporation Ltd. (GIC). It is a reimbursement insurance plan covering only KES SHROFF COLLEGE OF ARTS AND COMMERCE 32
  33. 33. TYBBI (SEM-VI) MICRO INSURANCE hospitals care and domiciliary hospitalization benefits. 3. Specialized Insurance from the life insurance corporation Ltd. covering the medical expenses for four dreaded diseases. 4. Arogya Bima Policy of GIC providing medical reimbursement on an individual basis and charging higher premiums for older people and those with dependence. Similar products should design for the welfare of the poor in the unorganized sector. KES SHROFF COLLEGE OF ARTS AND COMMERCE 33
  35. 35. TYBBI (SEM-VI) MICRO INSURANCE 8.1 Introduction: Existing micro-insurance schemes that provide more than simple credit life insurance find it difficult to become sustainable. Suppliers whether government, savings and credit societies, private sector insurers, or other financial institution such as MFIs face the following difficulties: 1. Technical specialization – Insurance requires specialized actuarial capacity, which uses mathematics to place a monitory value on future risks. Actuarial analysis for micro insurance is complicated by claim volatility and lack of reliable data characteristics of low-income, informal markets. Often, actuarial expertise resides with one type of institution (i.e. formal insurers), while distribution network to poor customers lie with another (i.e. MFIs or NGOs). 2. Marketing and sales – Most of the poor people do not understand insurance or are even based against it. Many are skeptical about paying KES SHROFF COLLEGE OF ARTS AND COMMERCE 35
  36. 36. TYBBI (SEM-VI) MICRO INSURANCE premiums for possible future benefits, when the insured event may not occur. Creating awareness about the value of insurance is time consuming and costly. In addition, the wording of insurance contracts is often to complicated for the poor, many of whom are illiterate. 3. Distribution channels – Micro-insurance requires a distribution system that can both efficiently handle small financial transaction in convenient location and engender trust. Existing distribution system if this kind are hard to find; creating a new system to collect premiums and play claims is expensive and often ineffective. 8.2 Making Micro-Insurance—A Reality: 1. Product design – The demand for micro insurance is high. Poor households are aware of their vulnerability to risks. Responding to this need with appropriate products and service is an enormous challenge. they include: KES SHROFF COLLEGE OF ARTS AND COMMERCE 36
  37. 37. TYBBI (SEM-VI) MICRO INSURANCE • Separate out the different risk element of health or life/funeral/loan insurance. • Provide differentiated products able to meet different needs. • Time premium payment to match income flows. • Match households’ financial flows to payment cycles. • Assess the range of formal and informal insurance options until we gain a better understanding of effective demand. • De-link micro-credit and micro-insurance. • Focus on protective mechanism for property loss rather than ex post insurance. • Learn from the advantages and disadvantages of reciprocity and social obligations in informal group-based mechanism. 2. Product flexibility – It has become the new mantra of micro-credit. The same massage seems applicable to micro-insurance. KES SHROFF COLLEGE OF ARTS AND COMMERCE 37
  38. 38. TYBBI (SEM-VI) MICRO INSURANCE • More than one option for when and how the premiums are paid may be necessary if demand for micro-insurance products is to be sustained. Caution must be heeded in considering linkages with long-term savings in which the premium equal to the interest earned on savings. Alternatively and perhaps a better option, insurance accounts could be linked to savings accounts with automatic withdrawals when the premiums come due. • This can also be made very flexible by allowing the client to choose when they want the payments to be made. For most of the poor, small amount paid over time may not be as taxing as a large premium due all at once. • Frequency of payments and variability in the size of premiums are other aspects of flexibility. The design of micro-insurance products should allow for continuous average. In the rural areas, it might me more appropriate to tie payments to the KES SHROFF COLLEGE OF ARTS AND COMMERCE 38
  39. 39. TYBBI (SEM-VI) MICRO INSURANCE harvest season when people have a little more money. 3 Recognition of specific needs – All micro-insurance should recognize the specific needs of the women, making availabl life insurance policies for their husbands or ensuring the beneficiaries of these policies, that they receive the payout possibly in the form of direct deposits into their own saving accounts. Many of the stresses experienced by women as a result of a husband’s death are not always addressed by any of the insurance mechanism discussed. The potential exist to meet this needs with other financial and non-financial services, e.g. legal support for the women, educational loans, financial educations, business development services, or saving accounts. These might be separate product offered by MFI. 4 Delinking of loan insurance and life insurance – Life insurance should not be a mandatory requirement of taking a loan and should be available to the poor even when they choose not to take a loan. Furthermore loan, life and funeral insurance respond KES SHROFF COLLEGE OF ARTS AND COMMERCE 39
  40. 40. TYBBI (SEM-VI) MICRO INSURANCE to different risk and serve different objectives. Loan insurance exist primarily to protect the MFIs portfolio and to reduce the liabilities of surviving family members. A lump sum can help the households of the deceased to keep going and recover while funeral insurance meets the demand of the immediate burial rites. By default, not by design, they are currently offered together. Splitting the products may be more complex for the insurer, but it would offer customers a choice that may correspond better to effective demand. KES SHROFF COLLEGE OF ARTS AND COMMERCE 40
  41. 41. TYBBI (SEM-VI) MICRO INSURANCE Chapter - 9 MFIs AND MICRO-INSURANCE 9.1 Introduction: 9.2 Role of MFIs: 9.3 Considerations for MFIs: 9.4 Recommendations for MFIs: 9.5 Sharing of international experiences of MFIs in micro-insurance: KES SHROFF COLLEGE OF ARTS AND COMMERCE 41
  42. 42. TYBBI (SEM-VI) MICRO INSURANCE 9.1 Introduction: Insurers who have entered this new low-income market have benefited from working with an intermediary, such as Micro Finance Institutions (MFI) or other organization that are widely used by the poor. 9.2 Role of MFIs: For those insurers wishing to partner with an MFI, and understanding of the potential role of these institutions as financial intermediaries is necessaries: • Today some MFIs offer risk management service in the form of savings and emergency loans. These can be effective tools. Together with existing non-formal insurance mechanism, KES SHROFF COLLEGE OF ARTS AND COMMERCE 42
  43. 43. TYBBI (SEM-VI) MICRO INSURANCE they should be considered as options for risk management in the face of certain shocks. These products often fall within an MFIs core competencies, while insurance does not. • Beyond acting as an agent, the provision of micro insurance can be treacherous for MFIs because the risk structure of insurance is significantly different from that of credit. MFIs do not have such capacity. Insurance risk should be born by professional insurers not MFIs. • Micro-insurance requires specialty management and technical insurance skills. Poor pricing, risk assessment and the responsibility of actuaries can do serve damage to micro-insurers. • Insurance regulations may impose special licensing requirements for MFIs and their employees acting as insurance agent. Micro- insurance products for low-income markets frequently require insurance commission approval. KES SHROFF COLLEGE OF ARTS AND COMMERCE 43
  44. 44. TYBBI (SEM-VI) MICRO INSURANCE • MFIs often work within a different business culture from insurers. Maintaining clear communication is critical. 9.3 Considerations for MFIs: The following problems are already being faced by MFis in general and the NGOs involved in financial services, thus the decisions of MFIs to enter into the insurance sector should be carefully looked into. • Ability to obtain legal status and authorization to mobilize savings from the public (members as well as non-members). • Viability and sustainability. • Participation is more governed by the donor’s expectations than the demands of the market. • Lack of co-ordination among MFIs/NGOs for comprehensive coverage of all regions. • Financial Management capability is still lacking in the weak MFIs capacity building programmers are already being conducted. KES SHROFF COLLEGE OF ARTS AND COMMERCE 44
  45. 45. TYBBI (SEM-VI) MICRO INSURANCE • Sustainable good recovery performance. • Competition from the grassroots level field agents/workers functioning for the formal players. 9.4 Recommendations for MFIs: • It is too early for NGOs/MFIs to enter insurance activities and best they could market the products as an agent without directly underwriting the risk. • NGOs could concentrate on the capabilities of the poor through social empowerment and entitlement rather than struggling with financial services. Possibilities could be explored to promote insurance schemes based on demand or insurance substitutes (like collateral substitutes) with priority to health. Client must be involved in the design of the products in terms of amount type of coverage. KES SHROFF COLLEGE OF ARTS AND COMMERCE 45
  46. 46. TYBBI (SEM-VI) MICRO INSURANCE • It is prudent to start small and increase coverage over time. • Knowledge based surveys are most effective to collect data for product development. • The full service may not be a good idea to start off with the given high risk of insurance. Therefore, providing the full range or some of the more risky insurance products might be appropriate for the larger institutions. 9.5 Sharing of international experiences of MFIs in micro-insurance: Philippines—CARD Bank. CARD Bank is a micro- finance institution with its head office in San Pablo City. CARD is a Grameen Bank replication that received a banking license last year. It currently serves more than 28,000 clients. CARD Bank experienced that when members died their families were often unable to pay back the loan. Therefore, CARD set up an insurance fund. However, the product was not appropriately KES SHROFF COLLEGE OF ARTS AND COMMERCE 46
  47. 47. TYBBI (SEM-VI) MICRO INSURANCE designed and the premiums did not cover the benefits promise to the clients. CARD’s auditor felt that this would affect the institution’s viability and recommended that CARD recruit the services of an actuary. CARD followed up on the recommendations and found a local Filipino actuary. They paid the sum of US $800 for the actuary’s services He recommended some major changes, particularly in pricing and the benefits. In the Philippines, NGO, MFIs are not legally allowed to mobilize savings. They usually collect deposits “informally” as Capital Build up (CBU) as a service to clients. Only credit co-operatives and CARD Bank are providing flexible savings to clients, as they at formal financial institutions. (a) Nepal-DICGC: Credit guarantee scheme: The Nepali law requires government agencies to have 25 percent investment in priority sector. DICGC provides loans in this sector that are automatically guaranteed. KES SHROFF COLLEGE OF ARTS AND COMMERCE 47
  48. 48. TYBBI (SEM-VI) MICRO INSURANCE Commercial banks have to offer 1 percent premium to DICGC. Livestock insurance: Once the DICGC has an agreement with the banks, all loans to purchase livestock, must be automatically insured with DICGC. Livestock very for meat and milk production, versus work. These distinctions are taken into consideration in order to complete the insurance application process. The identification of the livestock must be done to verify claims. Deposit insurance scheme: The DICGD deposit insurance scheme safeguards small depositors. (b) Cambodia – GRET: GRET began its work in micro-insurance as an experiment in 1996. It began with three main products covering amputation, surgery and health. Initially the premiums were under US $50 for amputation and surgery and US $15 for health. GRET began its programme in six villages, wording through partner MFs for the collection of the KES SHROFF COLLEGE OF ARTS AND COMMERCE 48
  49. 49. TYBBI (SEM-VI) MICRO INSURANCE premiums. Since the provision of health insurance id a specialized business, this activity was separated from the other typical microfinance activities of the partners. The insurance programme was well received by the clients. However, there were efforts to redesign the products in order to avoid adverse selection. Frequent evaluations revealed that typical health insurance was not the major priority for the client base GRET initiated an experimental project on 1998, supported by the Microfinance. Best Practices Project (MBP) conducted an impact assessment to understand the health behavior of the people. The study served to inform the design of an appropriate product and help to reduce finances losses. The GRET Programme currently covers 711 people in 167 families. Since GRET reaches about 27 percent of the population through its programmes, outreach will be relatively easy. However, there is concern that premiums will have to be increased for sustainability. KES SHROFF COLLEGE OF ARTS AND COMMERCE 49
  50. 50. TYBBI (SEM-VI) MICRO INSURANCE The Ministry of Health is interested in testing insurance among the rural population and is very supportive. As currently there are no insurance providers working in rural areas, GRET’s programme is innovative in the context or Cambodia. Chapter - 10 NON-FINANCIAL SERVICES PROMOTING MICRO-INSURANCE 10.1 Client education: 10.2 Legal services: 10.3 Planning codes and enforcement: KES SHROFF COLLEGE OF ARTS AND COMMERCE 50
  51. 51. TYBBI (SEM-VI) MICRO INSURANCE The ranges of non-financial services that will increase the success of any micro-insurance initiative are: 10.1 Client education: One of the recurring stumbling block in introducing micro-insurance is the Poor’s limited comprehension of the concepts of insurance. Because the meaning of formal insurance as a concept has not been well experienced to the customers, they lack clarity about risk pooling as it applies to formal insurance and so insurance is not well used. An important part of client education is to link the experience that people have with informal group-based system to similar concepts with regard to formal insurance. This process can also be used to explore with formal KES SHROFF COLLEGE OF ARTS AND COMMERCE 51
  52. 52. TYBBI (SEM-VI) MICRO INSURANCE insurance companies hoe they can better market their product to low income markets. Insurance and savings are often confused; some clients feel that if one pays a premium one should be able to withdraw this cash when needed. With continuous pressure on scarce cash payment to a micro-insurer for an unpredictable ‘rainy day’ is not always valued. While they do this with informal group mechanism, there needs to be similar understanding of how this concept can be adapted to formal micro-insurance. Benefits of client education • Client education about insurance help to raise the acceptance and therefore success of a micro-insurance programme by the poor. • It can also positively affect policy retention rates. Insurance education will also require those selling the product as well as those buying the product to understand KES SHROFF COLLEGE OF ARTS AND COMMERCE 52
  53. 53. TYBBI (SEM-VI) MICRO INSURANCE their cost and value to the consumer and be clear about the benefits and costs of voluntary versus mandatory insurance provision. • Clients need straightforward written materials describing the insurance products, their cost, their use and the claim process. Buying a premium primarily reduces risk for the client, but it also carries some risk. • The basic concept will have to be simplified, disclosed to and discussed with the clients. • Insurance education should also be extended to the insurance officer with responsibility for selling the product and managing the client /insurance interface on claims. 10.2 Legal services: KES SHROFF COLLEGE OF ARTS AND COMMERCE 53
  54. 54. TYBBI (SEM-VI) MICRO INSURANCE Support to protect property rights for women after the death of their husbands is the priority. This would include legal rights awareness campaigns, legal rights education, legal reform (where necessary); and individual/group legal counseling and support. This could well accompany a programme of client insurance education. Role of the state in social protection • National health policies should be understood before introducing private micro-insurance. • The equity of user fee policies should be assessed, as should the affordability and accessibility of the services for the poor. • An evaluation of the gaps in the market and the complementaries will suggest where the greatest opportunities exist for micro-insurance to extent service provision and quality care to those currently un- served. KES SHROFF COLLEGE OF ARTS AND COMMERCE 54
  55. 55. TYBBI (SEM-VI) MICRO INSURANCE • The state also has another role, the guardian and enforcer of a legal framework that supports the rights of the disadvantage, especially women. Women faced with sever shocked often find themselves caught in a trap. When they suffer a shock like the loss of a husband, they find themselves dispossessed of assets they have rightfully earned or to which they are entitled. This occurs even when they are the beneficiary of an insurance policy. Weak enforcement of inheritance rights offers them no means of appeal. 10.3 Planning codes and enforcement: Faced with formidable barriers to asset insurance, people depend primarily on preventive measures to reduce the risk of fire and theft. Many can be undertaken by individuals or communities with common KES SHROFF COLLEGE OF ARTS AND COMMERCE 55
  56. 56. TYBBI (SEM-VI) MICRO INSURANCE interest. But other preventative measures, such as ensuring safe electrical connections or constructions that is up to standards, must engage the public authorities. • Insurers should approach micro- insurance conservatively and take time to understand this new market and its supply and demand for risk management services. • Partnership model can provide efficient and profitable accesses to huge low- income markets. • There are many high quality MFIs with large market interested in developing micro-insurance products with insurers. Conduct due to diligence reviews with all potential partners. Micro-insurance can be profitable, especially with life insurance, and is approaching profitability with others. KES SHROFF COLLEGE OF ARTS AND COMMERCE 56
  57. 57. TYBBI (SEM-VI) MICRO INSURANCE • Micro-insurance should not be limited to only the downscaling of existing formal insurance products. • Products need to fit the preferences of the market. • International donors should approach micro-insurance cautiously. • Short-term technical assistance to address specific issues like actuarial and market studies. • Client and staff education in concepts, policies and procedures associated with micro-insurance. • Training of trainers to create additional local or regional resources to call upon for specialty training. • Disseminations of the growing pool of information needed to inform the emergence of this market and the KES SHROFF COLLEGE OF ARTS AND COMMERCE 57
  58. 58. TYBBI (SEM-VI) MICRO INSURANCE development of new market responsive micro-insurance program. Chapter - 11 PRIMARY DATA 1.Did the Micro-Insurance gives any benefit to the Insurance company or not? Yes No KES SHROFF COLLEGE OF ARTS AND COMMERCE 58
  59. 59. TYBBI (SEM-VI) MICRO INSURANCE 1. Did the Micro-insurance gives any rewards to the insurance agent or not? Yes No 2. Did the Micro-Insurance is beneficial for the customers/clients or not? Yes No 3. Did the Micro-Insurance is reducing vulnerability or not? Yes No KES SHROFF COLLEGE OF ARTS AND COMMERCE 59
  60. 60. TYBBI (SEM-VI) MICRO INSURANCE Chapter - 12 CONCLUSION & FINDINGS (a) Micro insurance is a young financial with few proven best practices. Demand is strong and indicative of an important potential market. KES SHROFF COLLEGE OF ARTS AND COMMERCE 60
  61. 61. TYBBI (SEM-VI) MICRO INSURANCE (b) Along with savings and emergency loans, micro- insurance has a role to play in poor people’s risk management. (c) In offering micro-insurance there are important considerations for MFIs and insurers, as well as for foreign collaborators in terms of their support. (d) There are challenges to provide micro-insurance to the poor and there is no need for greater innovation and experimentation. (e) Regulation within the industry is also critical. Working together, micro-insurance can be both a successful business venture and advantageous to the poor. However, the current move of IRDA towards effective regulation requires a collective effort otherwise the issue will not gain attention. KES SHROFF COLLEGE OF ARTS AND COMMERCE 61
  62. 62. TYBBI (SEM-VI) MICRO INSURANCE Chapter - 13 SUGGESTIONS & RECOMMENDATIONS (a) Company should have to introduce more new policies to their customers. Like children policy, educational policy, 2nd inning policy etc. KES SHROFF COLLEGE OF ARTS AND COMMERCE 62
  63. 63. TYBBI (SEM-VI) MICRO INSURANCE (b) Now a day’s company is also giving loan but if insurance holder dies, then company should have to give concession to the nominee. (c) Now a day’s life is become uncertain so, the insurance company should have to give claim amount on time. (d) Company should have to reduce late fee charges on premium. (e) The insurance company should have to appoint a person as an employee for collecting EMI cheques from client’s home. KES SHROFF COLLEGE OF ARTS AND COMMERCE 63
  64. 64. TYBBI (SEM-VI) MICRO INSURANCE BIBLIOGRAPHY (1) Books Reference: (a) Preface, Insurance Theory & Practices, Nalini Prava Tripathy & Prabir Pal, 2005. (2) Magazine Reference: (a) Micro Insurance Academy Created, The survey of Insurance Industry 2006, May-06. KES SHROFF COLLEGE OF ARTS AND COMMERCE 64
  65. 65. TYBBI (SEM-VI) MICRO INSURANCE (3) Electronic Medium: Goggle search engine: (a) (b) (c) www.microinsurance ANNEXURE 1. Did the Micro-Insurance gives any benefit to the Insurance company or not? KES SHROFF COLLEGE OF ARTS AND COMMERCE 65
  66. 66. TYBBI (SEM-VI) MICRO INSURANCE 2. Did the Micro-insurance gives any rewards to the insurance agent or not? 3. Did the Micro-Insurance is beneficial for the customers/clients or not? 4. Did the Micro-Insurance is reducing vulnerability or not? KES SHROFF COLLEGE OF ARTS AND COMMERCE 66