Microinsurance - Demand and Market Prospects. A Three-Country Study: India

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In 2006, Allianz AG, GTZ, and UNDP teamed up in a public-private partnership to research the potential of a market-based mechanism to reduce poverty. This study analyzes market supply and demand for microfinance products in India.
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  • 1. ALLIANZ AG, GTZ AND UNDPPUBLIC PRIVATE PARTNERSHIPAUGUST 2006 M ICROINSURANCE DEMAND AND MARKET PROSPECTS I NDIA
  • 2. Microinsurance: Demand and Market Prospects – IndiaAllianz AGAllianz AG Group is one of the largest financial services providers in the world, with specialists in thefields of property and casualty insurance, life and health insurance, asset management and banking.Allianz AG is currently working with international help organizations to explore how insurance companiescan contribute to reducing poverty by offering low premium protection in Asia.GTZThe Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH is an international cooperationenterprise for sustainable development with worldwide operations. It provides viable, forward-lookingsolutions for political, economic, ecological and social development in a globalised world. GTZ works inalmost 130 countries of Africa, Asia, Latin America, the Eastern European countries in transition and theNew Independent States (NIS) and maintains its own offices in 67 countries. GTZ is a federal enterpriseand the German Federal Ministry for Economic Cooperation and Development (BMZ) is its major client.The company also operates on behalf of other German ministries, partner-country governments andinternational clients, such as the European Commission, the United Nations and the World Bank, as wellas on behalf of private enterprises.UNDPUNDP is the UNs global development network, advocating for change and connecting countries toknowledge, experience and resources to help people build a better life. We are on the ground in 166countries, working with them to strengthen their capacities and create their own solutions to global andnational development challenges.40 years of development experienceProgrammes in 166 countries135 offices around the world__________________________The information used in this study is based on both publicly accessible sources of information(publications, specialist articles, internet sites, conference papers etc.) and non-public papers (forexample internal reports from promoting institutions), as well as personal interviews with experts. Whileall information relied on has been reviewed for authenticity as far as possible, errors cannot be ruled out.Allianz AG, GTZ and UNDP do not accept any liability or give any guarantee for the validity, accuracy andcompleteness of the information provided in this study. Allianz AG, GTZ and UNDP do not assume anylegal liability resulting from the use of the information provided in this study. The views expressed in thisstudy do not necessarily represent those of Allianz AG, GTZ and UNDP. The designations andterminology employed and the presentation of material do not imply any expression of opinion on the partof the partners concerning microinsurance.
  • 3. Microinsurance: Demand and Market Prospects – IndiaC ONTENTSCONTENTS .........................................................................................................................................................IABBREVIATIONS...........................................................................................................................................IIIINTRODUCING MICROINSURANCE ........................................................................................................IVEXECUTIVE SUMMARY ............................................................................................................................ VIICHAPTER I. BACKGROUND......................................................................................................................... 1 1.1 MACROECONOMIC SNAPSHOT OF INDIA ...................................................................................................... 1 1.2 HISTORY OF INSURANCE IN INDIA ............................................................................................................... 2 1.3 INSURANCE INDUSTRY OVERVIEW .............................................................................................................. 3 1.4 WHAT IS MICROINSURANCE? ...................................................................................................................... 4 1.5 HISTORY AND CURRENT STATUS OF MICROINSURANCE REGULATION ......................................................... 4CHAPTER II. THE DEMAND FOR AND SUPPLY OF MICROINSURANCE......................................... 8CHAPTER II. THE DEMAND FOR AND SUPPLY OF MICROINSURANCE......................................... 8 2.1 METHODOLOGY OF THE STUDY................................................................................................................... 8 2.2 INTRODUCTION ........................................................................................................................................... 9 2.3 SOCIOECONOMIC PROFILE OF MICROINSURANCE CLIENTS .......................................................................... 9 2.4 RISKS AND VULNERABILITIES ................................................................................................................... 10 2.5 FAMILIARITY WITH INSURANCE ................................................................................................................ 10 2.6 MARKETING STRATEGIES.......................................................................................................................... 11 2.7 GENDER AND THE DEMAND AND SUPPLY OF MICROINSURANCE................................................................. 12 2.8 DEMAND FOR HEALTH INSURANCE ........................................................................................................... 13 2.9 DEMAND FOR ASSET MICROINSURANCE .................................................................................................... 16 2.10 DEMAND FOR AGRICULTURAL INSURANCE ............................................................................................. 17 2.11 DEMAND FOR WEATHER INSURANCE ...................................................................................................... 18 2.12 DEMAND FOR LIFE AND DISABILITY INSURANCE ..................................................................................... 19CHAPTER III. DISTRIBUTION CHANNELS............................................................................................. 25 3.1 PARTNERSHIP MODEL ............................................................................................................................... 25 3.2 AGENCY MODEL ....................................................................................................................................... 29 3.3 MICRO-AGENT MODEL .............................................................................................................................. 29CHAPTER IV. SOCIAL SECURITY IN INDIA: OVERVIEW AND ROLE OF MICROINSURANCE31 4.1 STRATEGIES TO MANAGE RISKS ................................................................................................................ 31 4.2 POLITICAL DEVELOPMENTS IN SOCIAL PROTECTION ................................................................................. 34 4.3 GAPS IN EXISTING SOCIAL SECURITY SCHEMES ......................................................................................... 34 4.4 POSSIBLE MICROINSURANCE PARTNERSHIPS IN INDIA: DONOR AGENCIES................................................ 35CHAPTER V. SUMMARY RECOMMENDATIONS .................................................................................. 37 5.1 ISSUES IN PRODUCT DESIGN ...................................................................................................................... 37 5.2 MARKETING MICROINSURANCE ................................................................................................................ 37 5.3 DISTRIBUTION CHANNELS ......................................................................................................................... 38 5.4 CONSUMER PROTECTION .......................................................................................................................... 38 5.5 PROMOTE MICROINSURANCE REGULATION ............................................................................................... 38 5.6 EXPANDING THE INDUSTRY ...................................................................................................................... 39 5.7 SUPPORTING MICROINSURANCE INNOVATION ........................................................................................... 39 i
  • 4. Microinsurance: Demand and Market Prospects – India 5.8 GENDER AND MICROINSURANCE ............................................................................................................... 39 5.9 CAPACITY BUILDING................................................................................................................................. 40 5.10 WORKING WITH COMMUNITY-BASED INSURANCE MODELS ..................................................................... 40 5.11 PROSPECTS FOR REINSURANCE ............................................................................................................... 40 5.12 BUILDING ON THE LIMITED DEMAND STUDIES ........................................................................................ 41 5.13 POLICY WORK/ENGAGING THE STATE .................................................................................................... 41 5.14 DATA COLLECTION ................................................................................................................................. 41 5.15 MICROINSURANCE AWARENESS .............................................................................................................. 41 5.16 THE ROLE OF SUBSIDIES IN MICROINSURANCE ........................................................................................ 42 5.17 ESTABLISHMENT OF A MICROINSURANCE COUNCIL ................................................................................ 42APPENDICES................................................................................................................................................... 43 APPENDIX I. LIST OF PEOPLE MET DURING THE VISIT....................................................................................... 43 APPENDIX II. ONGOING CAPITAL REQUIREMENTS FOR AN INSURANCE COMPANY IN INDIA ............................. 44 APPENDIX III. OBLIGATIONS TO THE RURAL AND SOCIAL SECTORS ................................................................. 46 APPENDIX IV. POSSIBLE MFI AGENTS ............................................................................................................ 49 APPENDIX V. STATE SOCIAL SECURITY SCHEMES .......................................................................................... 68 APPENDIX VI: TERMS OF REFERENCE ............................................................................................................. 72Tables1. Key indicators: India ........................................................................................................................................ 12. Insurance industry issues and observations ...................................................................................................... 33. Summary of healthcare expenditure figures by low-income households ....................................................... 154. Examples of low-premium products in India.................................................................................................. 155. Hut and possession insurance ......................................................................................................................... 176. Livestock insurance ........................................................................................................................................ 197. Life microinsurance products ......................................................................................................................... 218. Profitability based on estimated mortality rate ............................................................................................... 259. Measures for risk management .................................................................................................... 33 ii
  • 5. Microinsurance: Demand and Market Prospects – IndiaA BBREVIATIONSAIG American International Group (U.S.)ASA Activists for Social Alternatives (India)BPL Below poverty lineCEO Chief Executive OfficerCGAP Consultative Group to Assist the PoorCRIG Community Rural Insurance Group (India)DFID Department for International Development (U.K.)EPF Employees Provident FundESI Employees State InsuranceESI Employees State Insurance (India)FDCF Financial Deepening Challenge FundGDP Gross domestic productGIC General Insurance Corporation (India)GTZ Deutsche Gesellschaft für Technische Zusammenarbeit GmbH (Germany)ILO International Labour OrganizationIRDA Insurance Regulatory and Development Authority (India)LIC Life Insurance Corporation (India)MFI Microfinance institutionNABARD National Bank of Agriculture and Rural Development (India)NGO Non-governmental organizationNSAP National Social Assistance Programme (India)PRI Panchayati Raj Institutions – local government bodies (India)SHG Self-help group (India)UNDP United Nations Development ProgrammeUSAID United States Agency for International Development iii
  • 6. Microinsurance: Demand and Market Prospects – IndiaI NTRODUCING M ICROINSURANCEA public private partnership using a market-based mechanism to reduce povertyWhat happens when a poor family’s breadwinner dies, when a child in a disadvantagedhousehold is hospitalized, or the home of a vulnerable family is destroyed by fire or naturaldisaster? Every serious illness, every accident and every natural disaster threatens the veryexistence of poor people and usually leads to deeper poverty. That’s where “microinsurance”comes in. Microinsurance is specifically designed for the protection of low-income people, withaffordable insurance products to help them cope with and recover from common risks. It is amarket-based mechanism that promises to support sustainable livelihoods by empowering peopleto adapt and withstand stress. Two-thirds of human beings suffering in the most extreme povertyare women. Often living within $1 per day, they are the most vulnerable. But will microinsurance actually help those living in poverty by contributing to sustainablelivelihoods? We believe it can, and we decided to test the hypothesis in the real world. UNDPapproached Allianz AG about working together on a market potential study to analyze thedemand, acceptability and affordability of microinsurance products. They immediately saw thevalue of working in this under-explored area. This public private partnership acquired greaterstrength when GTZ, with considerable experience in the area of social protection andmicroinsurance, joined the alliance. The partners agreed to analyze demand for microinsuranceproducts in India, Indonesia and Lao People’s Democratic Republic (PDR) and jointly selected ateam of consultants to prepare country studies. The studies clearly indicate that access to microinsurance by the poor and disadvantagedpopulation can contribute significantly to the achievement of the Millennium DevelopmentGoals, particularly the goals of eradicating extreme poverty and hunger (MDG 1), promotinggender equality and empowering women (MDG 3) and developing a global partnership fordevelopment (MDG 8).Three country studiesThe country studies examine and appraise the most urgent social security risks and needs of poorpopulation groups. They highlight the following aspects of microinsurance supply and demand: Existing activities to meet the needs for social safety net mechanisms, including informal strategies; The role of government policies; Capacity development requirements at various levels; The need for advocacy and education to help poor populations as well as potential providers to understand the role of microinsurance; The need for ongoing efforts to analyze potential customer profiles, reflect on their ability to pay, and suggest possible products to suit the target groups; Possibilities for countries to learn from each other’s experiences. iv
  • 7. Microinsurance: Demand and Market Prospects – India In India, the study finds that this country currently has the most dynamic microinsurancesector in the world. Liberalization of the economy and the insurance sector has created newopportunities for insurance to reach the vast majority of the poor, including those working in theinformal sector. Even so, market penetration is largely driven by supply, not demand.Microinsurance in India has valuable lessons for rest of the world, particularly in the regulationof the industry. Certain aspects, such as the quota system need further and closer analysis. Thequota system, for example, may be viewed in terms of its costs and benefits: is it an onerousobligation for insurers that creates a barrier to innovation and demand-based products? Or, is itan avenue that may lead to the creation of a microinsurance market that meets the needs of thepoor and disadvantaged? In Indonesia, demand is strong for insurance to cover the risks that people are least preparedfor and have insufficient means to manage. Such risks include serious illness, poor harvest, deathin the family and social obligations. Education of children is a priority, and the potentialmicroinsurance policy holders would like to ensure that an unforeseen shock or stress does notdeprive their children. The number of insurers in Indonesia is significant, yet few have exploredthe low-income market. Consequently there is a critical need for capacity development, primarilyin the areas of agent training and market education. This could expand opportunities and lead tomarket-based tools to assist the poor in securing their lives. In Lao PDR, the country study finds that the social security system is nascent (and practicallyabsent for the informal economy) and microfinance institutions are conspicuously inadequate.The analysis confirms a commitment by the Government in several relevant areas: support forreforms, support for pensions and a social security fund for public employees, support forcompulsory social protection for the private sector, and support for a community-based healthscheme for people working in the informal sector. The study concludes that the potential forcommercial microinsurance is in the future at least a few years away. Meanwhile, formicroinsurance to become viable, the Government will need to strengthen the financialinfrastructure, develop capacity for potential insurance providers and build knowledge ofmicroinsurance mechanism and products among potential policy holders. Microinsurance is a low-price, high-volume business and its success and market sustainabilityis dependent on keeping the transaction costs down. Hardly any satisfactory state-run programmeof insurance benefits is now available for poor population groups, people working in theinformal sector and other disadvantaged individuals—and private-sector programmes are evenrarer. A number of constraints make microinsurance look unattractive, including a lack ofpolitical will, scarcity of public funds and absence of a viable business model. The costs ofmarketing and processing appear to be too high and, in view of the extremely low purchasingpower of the consumer base, it cannot be easily apportioned to the target group. Such constraintsmake microinsurance unattractive at the cursory level. Market analysis suggests that progress canbe made particularly when public and private sector work together in generating demand-basedand innovative products.Future stepsWhere do we go from here? Building on the recommendations of the studies, pilot activities inIndia and in Indon
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