MICROFINANCE PAPER WRAP-UP: Making Insurance Markets Work for the Poor: Microinsurance Policy, Regulation and Supervision – India Case Study; by Sanjay Sinha and Swetan Sagar; Published by CGAP (Consultative Group to Assist the Poor) Working Group on Microinsurance

By Sanjay Sinha and Swetan Sagar; published by CGAP (Consultative Group to Assist the Poor) Working Group on Microinsurance; January 2009; 127 pages; available at http://www.microinsurancenetwork.org/file/8_India_Impact_RSP_2009.pdf

This document presents the findings from the Indian component of a five-country study on the role of regulation in the development of microinsurance markets. The study covers both life and non-life microinsurance products targeted at the low-income market, which is defined as the strata of the population earning between USD 1 and USD 2 per day per capita. The other countries that comprise the series are Colombia, the Philippines, South Africa and Uganda.

The authors trace the evolution of microinsurance in India from the deregulation of the insurance industry in the 1990s, which facilitated the entry of private insurance providers into the market. In 2000, the Insurance Regulatory and Development Authority (IRDA) was instated to oversee the development of the insurance industry and ensure that the benefits of insurance services reach the excluded, low-income sections of the population. Accordingly in 2002, IRDA promulgated a law that requires insurance companies to develop business on a quota basis from pre-defined rural areas and social sectors; however this did little to incentivize insurance providers to serve low-income households beyond the required levels.  Furthermore, the minimum capital requirement of INR 100 crores (USD 25 million) to establish an insurance provider has deterred many from entering the industry.

In 2005, IRDA introduced microinsurance regulations with the aim of further increasing the level of insurance penetration in India. The salient features of these regulations are as follows: the definition of microinsurance and delineation of product guidelines; promotion of the extensive use of microinsurance agents to sell and service insurance products, including nongovernmental organizations (NGOs), microfinance institutions (MFIs) or other community organizations; and placement of a commission cap for those agents that ranges between 10 percent and 20 percent of premiums per year.

The 2005 regulations, coupled with economic growth, have stimulated the microinsurance industry, with life microinsurance provided to approximately 14 million clients as of January 2009. Over 80 percent of this coverage is channeled by formal insurance companies via the micro- and rural finance network, of which approximately 90 percent is provided via compulsory credit-life insurance products. These products pay off the loans of microborrowers if they die with an outstanding loan balance. The 10 percent of microinsurance taken up voluntarily consists mainly of endowment products, which are a variant of life insurance that returns funds to the insured at the end of the term if no claim is made.

Other aspects of the 2005 microinsurance regulations impose limitations that may slow the uptake of microinsurance in India. First, the definition of microinsurance agents includes NGOs, self-help groups and MFIs, however the participation of MFIs is limited to societies, trusts and cooperatives and thus excludes a large proportion of MFIs operating through other legal forms such as for-profit and nonprofit companies. Second, a microinsurance agent is restricted to working with one life and/or one general insurer. Third, microinsurance agents often have difficulty accessing the identification documents of potential clients, particularly those located in rural areas. Fourth, it has been argued that the 10 percent to 20 percent commission cap is not high enough to incentivize agents to increase sales significantly. Fifth, there is a general lack of awareness of the benefits of insurance amongst the low-income segment of the population.

The authors argue that the regulations have to some extent created supply-side interest but that this needs to be reinforced by (1) amending requirements to enable the entry of specialized insurers to meet the specific needs of low-income populations and (2) enabling for-profit rural finance companies to act as microinsurance agents. This must be coupled with the creation of demand-side interest through financial literacy programs and marketing campaigns.

The India case study was published by CGAP and designed, managed and partially funded by FinMark Trust, a nonprofit independent trust primarily funded by the UK’s Department for International Development. It was also funded by the International Development Research Centre, a nonprofit enterprise owned by the Canadian government, and the US-based Bill and Melinda Gates Foundation. Technical support and additional funding were provided by Gesellschaft fur Technische Zusammenarbeit GmbH (GTZ) and Bundesministerium fur Wirtschaftliche Zusammenarbeit und Entwicklung (BMZ), two agencies of the German government. The research team received guidance from the International Association of Insurance Supervisors (IAIS), an international body based in Switzerland, and CGAP. The research was conducted by India’s Micro-Credit Ratings International Limited (M-CRIL).

By Jacqueline Foelster, Research Associate

Additional Resources:

“Making insurance markets work for the poor: microinsurance policy, regulation and supervision – Philippines case study”: http://www.microinsurancenetwork.org/file/9_Philippines_Impact_RSP_2009.pdf

“Making insurance markets work for the poor: microinsurance policy, regulation and supervision – Uganda case study”: http://www.microinsurancenetwork.org/file/11_Uganda_Impact_RSP_2009.pdf

“Making insurance markets work for the poor: microinsurance policy, regulation and supervision – Colombia case study”: http://www.microinsurancenetwork.org/file/7_Colombia_Impact_RSP_2009.pdf

“Making insurance markets work for the poor: microinsurance policy, regulation and supervision – South Africa case study”: http://www.microinsurancenetwork.org/file/10_South_Africa_Impact_RSP_2009.pdf

MicroCapital Universe Profile: CGAP (Consultative Group to Assist the Poor), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=CGAP+%28Consultative+Group+to+Assist+the+Poor%29

MicroCapital Universe Profile: FinMark Trust, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=FinMark+Trust

MicroCapital Universe Profile: Bill and Melinda Gates Foundation, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Bill+and+Melinda+Gates+Foundation

MicroCapital Universe Profile: Gesellschaft fur Technische Zusammenarbeit GmbH (GTZ), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Gesellschaft+f%C3%BCr+Technische+Zusammenarbeit++%28GTZ%29

MicroCapital Universe Profile: Bundesministerium fur Wirtschaftliche Zusammenarbeit und Entwicklung (BMZ), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Bundesministerium+fur+Wirtschaftliche+Zusammenarbeit+und+Entwicklung+%28BMZ%29

MicroCapital Universe Profile: International Association of Insurance Supervisors (IAIS), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=International+Association+of+Insurance+Supervisors

MicroCapital Universe Profile: Micro-Credit Ratings International (M-CRIL), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Micro-Credit+Ratings+International

Similar Posts: