Micro Insurance in India—Achievements and future challenges Dr R Kannan Member (Actuary)

Cape Town March 5 2010 1

Micro Insurance in India—Achievements and future challenges

Dr R Kannan

Member (Actuary)

Insurance Regulatory and Development Authority

INDIA


Micro Insurance – Definition

• Micro insurance is defined as insurance provided for low-income people by a variety of insurers, run in accordance with generally accepted insurance principles, and funded by premiums

Comprises of risk-pooling products • Appropriate for the low-income market cost, terms,

coverage, and delivery mechanisms

• Micro Finance helps people improve livelihoods• Micro Insurance helps them to protect the gains in the

event of any unfortunate events


Micro Insurance Potential

• Potential market for insurance in developing economies estimated to be between 1.5 and 3 billion policies.

• Significant demand for a range of insurance products – health, life, agricultural and property insurance, catastrophe cover

• Success of microcredit worldwide has shown that people with low incomes are a proven market for financial services if given appropriate products, processes, and knowledge.

• Microinsurance already covers around 135 million people, or 5% of the potential market. In many countries, annual growth is 10% or more.

• Microinsurance is effective even in markets with little experience of insurance, as long as products, procedures and policies are simple, the premiums are affordable, the administration is efficient, and distribution channels are innovative.


Role of Policymakers and Regulators

• Increasing access to financial services– allows financial sector development– consumer empowerment by catalyzing the market provision of risk

management tools for poorer households

• Facilitate effective supervision and enforcement– safeguard the solvency and the soundness of institutions providing

insurance– increase the growth, competiveness and efficiency (innovation and

investment)– protecting consumers and developing trust

• An enabling policy and regulatory environment is the prerequisite for a micro insurance market to develop to its true potential


Micro Insurance Regulations in India

• Objective is to bring low income people under the ambit of insurance

• Targeted sectors - Life, non life, pension and health • The existing regulations on rural and social sector

obligation was thought to be not sufficient to cover the low income group at desired level

• In order to meet the specific objectives, the IRDA issued Micro Insurance Regulations on 10th November, 2005


Micro Insurance Regulations

• The Insurance Regulator (IRDA) has the role of regulating, promoting and ensuring orderly growth of insurance and reinsurance business.

• Obligations to rural and social sector is a licensing requirement

• In general life insurers cannot offer non-life products and non-life insurers cannot offer life covers.

• This is the first occasion where both are allowed to join together and offer a combined product.



• MI agents exempt from licensing requirements – relaxation in distribution rules.

• MI agents can not sell any product other than MI products.

• Simplified product design and comply with ‘F&U’ procedure.

• All MI policies sold recognized for the fulfillment of obligations to rural and social sector.



Comparison of Remuneration to MI agents

Parameter Micro-insurance Traditional

Single Premium 10% 2%

Regular Premium

First Year 20% 40%

Second Year 20% 7.50%

Third Year 20% 7.50%

Subsequent Years 20% 5%


Type of cover Min. Amount of Cover

Max. Amount of

Cover

Term of Cover Min.

Term of Cover Max.

Min. Age at

entry

Max. Age at

entry

Term Insurance with or without return of premium

Rs.5,000 Rs.50,000 5 years 15 years 18 60

Endowment Insurance Rs.5,000 Rs.30,000 5 years 15 years 18 60

Health Insurance Contract (Individual)

Rs.5,000 Rs.30,000 1 year 7 years Insurer’s discretion

Insurer’s discretion

Health Insurance Contract (family)

Rs.10,000 Rs.30,000 1 year 7 year Insurer’s discretion

Insurer’s discretion

Accident benefit as arider

Rs.10,000 Rs.50,000 5 years 15 years 18 60

Micro Insurance Regulations (Life) product design Guidelines


Type of cover Min. Amount of Cover Max. Amount of Cover

Term of Cover Min.

Term of Cover Max.

Min. Age at entry

Max. Age at entry

Dwelling and Contracts, or livestock or tools or crop insurance against all perils

Rs.5,000 Per asset / cover Rs. 30,000 Per asset/ cover

1 year 1 year NA NA

Health insurance Contract (Ind.)

Rs 5,000 Rs30,000 1 year 1 year Insurers’ discretion

Health insurance Contract (family) (Option to avail limit for Individual / Float on family)

Rs.10,000 Rs.30,000 1 Year 1 Year Insurers’ discretion

Personal Accident (per life earning member of family)

Rs.10,000 Rs.50,000 1 Year 1 Year 5 70

Micro Insurance Regulations (Non-Life) product design Guidelines


MI Product Feature

• Both on individual and Group basis• Individual

- Pure Term

- Pure Term with return of premium

- Endowment Assurance on Non-par basis

- Accidental death rider only• Group: Only pure term and yearly renewal basis• Minimum size of group is 25


Year No. of Products approved

2006-07 5

2007-08 11

2008-09 6

2009-as on date

1

Total 23

Micro Insurance Product Statistics


YearIndividual

2007-08 2008-09

Premium (INR Mn) 182.31 365.656

Growth rate 65% 101%

Proportion to total New premium Income

0.04% 0.08%

Number of Policies 0.9 Mn 2.2 Mn

Growth rate 72% 129%

Proportions of New lives covered

2.21% 4.79%



YearGroup

2007-08 2008-09

Premium (INR Mn) 2012.75 2059.53

Growth rate 1.2% 2%

Proportion of total New premium Income

1.70% 1.50%

Number of Policies 12.2 Mn 12.5 Mn

Growth rate 1.5% 3%

Proportions of New lives covered

42.67% 36.65%



Parameters Micro Insurance Traditional

Benefit structure (A particular Product )

Individual Pure Term Assurance

Individual Pure Term Assurance

Average Sum Assured (INR) assumed in pricing

10,000 500,000

Mortality (IALM(-94-96))150% to 225% depending on

age90%

Rate of Interest 7.75% p.a. 6% p.a. on average

Commission

RP

First Year 20% 35%


Third Year 5% 7.50%

Subsequent Years 5% 5.00%

Premium Rate per INR 1000 SA for a male of 40 Yrs and term 5 yr term

2.78 4.66

MI Vs. Regular Products - Few Actuarial Issues


Parameters Micro Insurance Traditional

Benefit structure (A particular Product )

Term assurance with return of premium

Term assurance with return of premium

Average Sum Assured (INR) assumed in pricing

25000 220,000

Mortality (IALM(-94-96)) 125% 80%

Rate of Interest 6.25% 6.25%

Commission

RP

First Year 20% 30%


Third Year 5% 7.50%

Subsequent Years 5% 5.00%

Premium Rate per INR 1000 SA for a male of 35 Yrs and term 10 yr term

12.15 15.65




• Actuarial assumptions vary greatly because of the specific characteristics of the target market

• Interest rate – on long term basis at the time of filing the product

• Higher mortality – No underwriting • In general commission rates are higher in MI

products• Lower death benefit and higher per unit cost.• Higher profit margin with higher volatility• Variation is less seen in all counts for products

other than pure term.


Other Parameters (On average)

ParameterMicroinsurance Traditional

Pure Term Assurance Product

Age Range (Yrs) 18-60 0-80

SA Range (Rs.) 5000-50000 50000 - No Limit

Average Policy Term (Yrs)

10 20

Average Age (Yrs) 35 35

Average SA (Rs.) 25000 500000

MI Vs. Regular Products – Other Issues


Parameters Micro Insurance Regular Product

Product Design Simple More Complex

Policy WordingSimple language and few

exclusionsComplex policy wording

Premium ratesBased on little historical

data and price sensitive

Good quality data and better reflect individual risk characteristics

Premium CollectionMatch frequent and

irregular payments

All modes of payment and also sold thru' direct innovative channels

Insurance Risk

Broad eligibility, low SA and risk factored into pricing generally no underwriting

Limited eligibility, on medical and non medical basis, generally with underwriting

Claims HandlingSimple and quick

procedure

More complex and lengthy procedure with requirements of various documents

MI Vs. Regular Products - Other issues


Challenges ahead

• Low insurance awareness among the targeted segment

• Need of more innovative but simple and flexible products taking into account the life style and needs of the low income group people

• Simplification Product development—exclusions must be made clear and simple Proposal approval Premium payment Maturity / death claim settlement

Challenges ahead

Grievance redressal mechanism Affordability of premium—limited disposable

income Mobility of the targeted population High volatility and uncertainty of income Enhanced role of SHGs All documents must be in vernacular language• Developing insurance awareness amongst the

low income band people



Challenges ahead

• Need to develop Health micro insurance products

• Need of good quality data• Standardizing underwriting procedures for MI.

• Regulatory assistance


Thank You

Documents

Micro Insurance in India—Achievements and future challenges Dr R Kannan Member (Actuary)