A Study of Microinsurance in Rural India

Project objectives

To identify and understand the barriers for growth of Micro insurance sector in India.

To study the role and importance of Micro insurance as a Rural Development Initiative.

Keywords: The keywords used are “Micro insurance”, “Rural development in India”, “Microfinance”, “Barriers and Challenges for growth of Micro insurance in India”.

Introduction:

There are certain risks faced by every person living in this world. The intensity of risks and the type of risks faced by an individual, depends on various factors which affects him or her. They depend on the business he deals in, the place he lives in, the people he deals with, or the number of people in his family who are depended on him etc. For example, a person living in an urban area is highly prone to health risks, which is a result of pollution. Rural poor in India are prone to many risks such as Untimely Death, Health & Accident Risks, Crop Risks, Livestock, Calamities and disasters, Fire, theft, machinery failure etc, changes in government policies, technological changes etc. Many of these risks are inevitable.

Some solutions to handle such risks are done either by risk avoidance, risk transfer or by risk mitigation. Because individuals cannot handle all the risks themselves. That is why concepts like insurance, community funds, pension schemes etc. came up. On the other hand, managing risks is not the same for both categories of people i. e. people in urban areas and rural areas. There are various factors which make it difficult to manage the risks. Some of these risks can be handled through informal places of saving money like relatives, friends, superiors. Rural population is very conservative. They don’t invest money in any system which they don’t trust because for them it is not just money, but it is manifestation of their hard work. They save these small amounts of money with the people whom they trust. But, how far will this kind of arrangement handle risks like health, hospitalization, death, loss of crop etc. where huge amounts of money are required? Yet another argument countering this is the availability of credit. Even though there is lot of boom in the Micro Credit Sector, it is observed that a person having taken a loan to meet his current needs does not have enough to repay the loan taken. For this reason, he takes loan again at the time of repayment. As a result, the person’s debt goes up and also the amount liable in the form of interest payments also rise. (Ms. Kirti Singh & Dr. Vijay Kumar Gangal, 2011)This results in suicides by farmers. Having an insurance cover provides greater financial security. It not only provides financial security, but also provides psychological security. This is a clear indication for the need for insurance in the rural areas. Even though there is presence of such instruments, “What impact it made on the lives of the people?” is a question to be enquired.

This has encouraged me to take up an objective to identify the role and importance of Micro insurance in developing the rural poor. It has been researched that in spite of huge need for insurance in rural India, the demand for micro insurance is low. This is because of various factors like of awareness about such facility, lack of financial literacy etc. to look at it from the angle of supply, insurance companies have not set up their branches in rural India. (Dr. Rupali Satsangi; Ms. Namrata Anand;, 2016)This is an indication that there is huge gap between demand and supply of micro insurance in India. Hence, I am inspired to identify and understand the barriers for growth of this sector in India. Review of research and literature:Micro insurance: DefinitionEven though there are many definitions that define micro insurance, this definition by Churchill seems very relevant. “Micro insurance is the protection for the low-income population against specific dangers in exchange for regular payments of proportional premiums to the probability and costs of the involved risks” (James Roth; Craig Churchill; Gabriele Ramm; Namerta, 2005) Insurance Regulatory Development Association (IRDA), defines micro insurance as, “A general or life insurance policy with a sum assured of Rs 50,000 or less” Evolution of Micro insurance in India:As the need for insurance is very evident in rural parts of the country. Many micro insurance schemes were initiated in rural India by NGOs and trust hospitals, as they felt the need for it amongst the people. As time passed such schemes have picked up pace with the rise of microfinance. In the year 2000, IRDA has made it mandatory for all the insurance companies to extend their presence to “rural and well identified social sector”. But these insurers turned out to be for-profit players. As a result, the accessibility for these schemes have been low due to high prices and high premiums. In the year 2002, IRDA has developed norms that compelled all insurance companies to achieve

Certain percentage of policy sales in rural areas.

A limited number of lives to be covered in the social sector.

In the year 2003, a consultative group was set up to look into various issues. RRB’s were permitted to sell insurance as agents in the year 2005. IRDA came up with regulations on micro insurance. India is one of the very few countries who have a proper mechanism for micro insurance. (Dr. Rupali Satsangi; Ms. Namrata Anand;, 2016)Micro insurance in India: OverviewEven though there is lot of demand for Micro insurance in India, it is observed that there is very less supply. Insurers are not willing to open up avenues for rural poor. A study conducted in Rural Ghana says that micro insurers do reach out to a high number of clients but to a richer segment of the location. (Lena Giesbert, 2008)A study conducted revealed that “Micro insurance is not an opportunity, but is a responsibility”. To fulfil this responsibility micro insurers should create awareness which is lacking in India. (Venkata Ramana Rao, 2008)This is an indication that there is low penetration of Micro insurance in India. There is Micro insurance for poverty alleviation:Rural poor benefit less from income generation opportunities which may reduce poverty. Majority of these people try and handle their risks by their own personal savings rather than paying for insurance and other schemes.

These schemes do not provide enough cushion when adversities occur in series. The only solution which can minimize these risks is by getting insured. (Ms. Kirti Singh & Dr. Vijay Kumar Gangal, 2011)On the other hand, (Paul Mosley;, 2009) gives various approaches on how to make the micro insurance products more poverty-oriented. He says that firms should minimise their costs, to be able to provide services at a lower price. He says that instead of providing insurance, incentivise the rural poor. For example, in the case of crop insurance, helping them plant drought-resistant varieties. He brings out the importance of insurance by saying that if providing micro insurance is not possible, then provide “Quasi-insurance” services. Rural finance:The future of business in India lies in rural areas. This is due to urban saturation in terms of business growth. The key to business and agriculture is finance. Thus arouse the concept of rural finance in the last decade. Although the researchers define rural finance as the credit to the rural people, it is a broader concept than this. It covers all the financial services like savings, credit, insurance, leasing etc. provided to the rural people to enhance business, agriculture and raise their standards of living. It is that affordability aspect that makes it different from conventional financial services concept. There are various financial services that have developed under the umbrella of rural finance. Some of them are still in their infancy stages. We will look at them in detail one by one. As of today, the three legs on which rural finance is taking its support are Microcredit, Micro leasing, Micro savings, while the other are still taking their birth as their need is made evident to a large number of people. The main objective behind the concept of rural finance is financial inclusion. but the impact of these financial services on the financial inclusion is not very evident, which create a huge entry barrier for institutions to venture into.

Microfinance:Microfinance is the concept that was first brought Muhammad Yunus in Bangladesh in the form of Grameen bank. This was later adopted by NABARD and termed it a microfinance in India. Bhartiya Samruddhi Finance Ltd. Was the very first Microfinance Institution which was set up in India. Microfinance in India has gone through many ups and downs since its inception. One such major crisis which changed the face of microfinance is Andhra Pradesh microfinance crisis.

ANDHRA PRADESH CRISIS

What Is Andhra Pradesh Crisis?Andhra Pradesh State is highly penetrated with Microfinance institutions and self-help groups which led to borrowing by people from multiple sources at multiple times. CGAP Study revealed that the average household debt in A. P. was Rs. 65000 whereas the country’s average stood at Rs. 7700. This led to competition between State and Financial Providers and led to wider conflict of interest. This resulted in lending aggressively to people whose capacity to repay the debt is lesser. On the other hand, MFIs were charging higher interest rates as there is lot of risk involved. MFIs adopted coercive collection practices as there is lack of repayment from the client’s side. This made a lot of psychological impact on people which resulted in committing suicides by farmers in huge number. At this point of time, Government had to intervene. On October 16th 2010, Government of A. P. came up with an ordinance which became ‘The A. P. MFIs Act, 2010”. (Ghiyazuddin M. A; Shruti Gupta;, 2012)Impact of A. P. CrisisDuring this period, the activities of MFIs and SHGs have slowed down. A. P. Crisis made lot of difference on the lending Environment in A. P. Also, given the repercussions in other parts of the country also. This study reveals that after the crisis period, the client household of MFIs had very less number of total loans outstanding but the indebtedness has increased. The most shocking thing in this context is that when the formal players have slowed down in their activities, the indebtedness of the clients have increased. This study reveals some facts, prior to the crisis, the amount of outstanding loans to various informal sources has decreased by about 24% while the percentage of outstanding loans to moneylenders increased to 25%. But after the crisis period, MFIs clients had to borrow from Moneylenders which increased by 46%. Few reasons were identified for the non-repayment. There are only 45% of the clients who defaulted on their loans. Others said that it was the absence of the loan officers at the time of repayment and also the influence of political leaders and government officials. Despite the crisis and its repercussions, 72% of the clients indicated that MFIs were very useful to them. (Vaishnavi Prathap; Mudita Tiwari; Santhadarshan Sadhu, 2013)

Micro credit:The term microcredit is verily associated with microfinance even though MFI’s provide all the other financial services. Microcredit is the provision of small amount of loans to the rural poor (usually people below poverty line) at lower rates of interest. Micro savings:Savings in rural areas have been happening in through informal channels. Rural people save the small amounts of money that remain after meeting their daily needs within the house or they save it with their relatives and friends. This will neither give them any returns nor give them the protection against the default risk. Hence this concept of micro savings arouse. The major player in this area is the Indian postal services. This is due to their long term presence in the country. This also attracts large number of customers because of the high awareness it has created among the rural player. These savings which are made into postal services by the rural poor are also insured as postal services are government services. Hence rural poor place lot of trust in postal services. Micro leasing:It is a concept which is still in its infancy stage in India. Micro-leasing is a similar concept to usual concept of leasing. The amounts of lease rentals paid in the micro leasing are lesser when compared to conventional leasing. For example, in micro leasing, properties like land are often leased out to cultivate. Such properties are to be leased at a lower lease rental. But, it is not the case practically. There are two theories that are directly related to micro insurance and prove the need for development of micro insurance. The theory of uncertainty, in which there are two important assumptions that are made, i. e. , expected utility theorem is good, which means that the total utilty is equal to the whole of the probable weighted utilities of very possible result.

The second assumption is that people are thought to be hazard opposed. Due to this, people are willing to “trade risk for uncertainty” as it gives them extra utility from a particular outcome. (Boyer M ; Dionne G;, 1983). If the price of insurance is reasonable then the individual would prefer to got to certain result over an uncertain result. (Schlesinger H, 2006). Furthermore, Mossin’ theorem (1968) clarifies that assuming all the above presumptions hold, the individual is fully insured. Delivery models:There are five basic delivery models for delivering micro insurance that are prevalent in India. The partner-agent model:In this model, a regulated insurance company endorses and offers a micro insurance item, while delivery of the item is finished by delivery channels. Delivery channels can be of many types. Microfinance institutions(MFIs) are the "conventional" distribution channel, and still the most widely recognized in many circumstances due to their wide spread, however various inventive options have started to rise, including retailers (money and credit-based), utility and broadcast communications organizations, and outsider bill instalment suppliers, after the IRDA notification has been issued permitting all types of rural parties sell micro insurance. The community based model:In this model, the insurer is possessed by customers (individuals), who share in the advantages and expenses of the insurance activities, frequently with individuals' liability limited to their premium commitments.

These models have comparative attributes, including inclusion of insurance clients in administration, and regularly serve groups of clients. Thus no commercial insurer is involved in this model. This is usually used in health insurance. The full service model:In this various organisations - MFIs, insurance companies, and so on – can likewise offer their products specifically to the poor through their agents who are paid by compensation, deals commission, or both. In this model, the same entity bears all expenses and risks related with the product and also performs all distribution and servicing functions. The franchise model:In this model, the professional insurer provides his license to a licensee, and also assigns some part of his capital through a reinsurance agreement. The licensee is held responsible for designing the product, pricing the products and handling all losses and gains. The supplier model:In this model the supplier acts as the insurer. There are two sides to this same coin. It is a good model because the supplier is able to increase access and create demand for the product. But at the same time the service provider may have inadequate potential to bear the risk. Among the above mentioned models, the partner-agent model(PAM) has shown good results and has been able to capture the market share and reach out to large number of clients, co-creating value for one another. Types of micro insurance:Life insurance:Life insurance gives benefits to the assigned beneficiaries when the death of the insured occurs.

There are three types of life insurance coverage: term, whole life, and endowment. Term life insurance policies provide a set amount of insurance coverage over a specified period of time. Whole life insurance is a “cash-value policy” that provides lifetime insurance protection. This type of life insurance is rarely offered in rural areas. Whereas there exists a lot of demand for such products. Endowment insurance covers up to the face value of the insurance if the insured dies within the agreed upon time. Health insurance:This is a type of insurance that covers for the illness and accidents that result in physical injuries. MFI’s have analysed that these injuries are one of the main reasons why people are not able to improve their economic conditions and are defaulting in terms of their payments of loans. Hence, they themselves some health insurance schemes. Crop insurance:This usually provides protection against their loss of crops that are destroyed by natural disaster such as floods or droughts. Rural areas are more prone to such natural calamities. Keeping this in view, many governments have started crop insurance schemes and set up agriculture development banks. For example, in India PMFBY (Pradhan Manthri Fasal Bima Yojana) was started that provide crop insurance. In the last budget allocation, PMFBY’s allocation was increased by 44%. There are also other types of insurance like disaster insurance, unemployment insurance, disability insurance, property insurance etc. but their presence is not much seen as there exists huge amount of risk in these products. Rural poor not only need these products, but they need products like cattle insurance, which are not being provided by the insurers. The below diagram speaks about the current micro insurance market and the respective insurers serving in those areas.

The diagram is based on the study conducted by world bank in the year 2005. Conclusion:This study will be majorly exploratory in nature, trying to provide solutions where ever possible. It will serve as an addition to the existing research in this field. The need for micro insurance for the rural development in India is clearly evident through the argument mentioned in the literature. It is evident that there is a huge gap demand supply of micro insurance in India, in spite of the regulatory requirements. This is an area which requires research and development to serve this nation, through rural development. This is to explore new barriers for the growth for the growth of this sector and provide solutions to the problems. This project is an attempt to contribute to the rural poor through the development of micro insurance in India, which would give a boost to the microfinance industry and also provide cushion to the rural poor in adverse situations.