Wednesday, June 20, 2012

Catalysing the growth of microinsurance in India

Microinsurance, which is the provision of insurance against specific perils to low income people, has the potential to follow mirco-credit and emerge as the next big business opportunity at the bottom of the pyramid in the financial sector. Microinsurance products which insure for healthcare and death, when combined with an investment opportunity, offer several attractions for low income people.

In India, since 2002 (with subsequent amendments) the Insurance Regulatory and Development Authority (IRDA) has mandated that all insurers provide a specific share of their policies in rural areas and social sectors. Insurers are required to provide 7% of new life insurance policies from rural areas from their first year and this quota rises to 20% over ten years. Currently there are 6 million such life insurance policies and 10 million in non-life insurance policies. The Indian microinsurance market is estimated at between 140-300 million policies. 

This policy mandate has played an important role in forcing insurance companies into rural areas and the low income people. This is all the more so given the meagre penetration of insurance products in India, the ample opportunities available for insurers from marketing their products to those in cities and at the upper half of the income ladder, and the high transaction costs associated with selling low value insurance to the poor in rural areas. But it has led to some innovative business models, where insurance providers have sought to leverage microcredit agencies and mobile phones to peddle their insurance products.

But such regulations also create distortions as insurers try to game the market to avoid meeting their obligations. Some insurers offer products which are not customized to add value to the poor and are merely to meet the regulatory requirements, while others stop selling it once they meet their quota. The major share of insurers have no incentive to innovate and see it as an issue of regulatory compliance.

In the circumstances, a more effective strategy to achieving the objective would be to allow tradeable permits in such policies. The IRDA should permit insurers to meet their quotas either directly or by buying permits from the other insurers who specialize in microinsurance or those with surplus policies. This will in turn catalyze a niche market with specialized microinsurance products and which has fewer market distortions and where insurers have greater incentive to innovate and expand their market shares.

1 comment:

Arindom Baidya said...

Microinsurance credits. This is a brilliant idea.