By Mirai Chatterjee*
Bharti is a bidi worker from Madhya Pradesh who had never heard of insurance till the COVID-19 pandemic. She is a front-line health worker serving her neighbourhood by providing life-saving health information. She took microinsurance coverage for the first time ever for health and also for loss of income due to illness. She got sick, tested positive for corona virus and was hospitalised. She put in her claim and obtained Rs 25,000 towards hospitalisation expenses and Rs 3900 for loss of income.
Ayesha is a small farmer in a village near Ahmedabad. During the second lock down, her husband Javed, had a heart attack and passed away. She had been taking microinsurance coverage for the last fifteen years. Her son sent all the documents by WhatsApp and the claim was processed online with Rs 35,000 directly deposited in her bank account. She said that at her time of loss and sorrow, this was some support to her and her children.
Both Bharti and Ayesha were fortunate enough to have some microinsurance coverage. This is not the case for an estimated 500 million persons, mostly from the informal economy, who are yet to obtain some basic financial and social protection.
For low-income families, calamities such as illnesses, accidents, death or the loss of assets often have very grave financial consequences. Such events can push these families deeper into poverty as their meagre resources get depleted. The pandemic has further brought this concern into sharper focus.
The need to reach low-income families with microinsurance, therefore, must be a vital part of India’s financial inclusion and social protection plan. Informal workers like Bharti and Ayesha have now found a voice in the report of the Committee on Standalone Microinsurance Company made public last week by the Insurance Regulatory and Development Authority of India (IRDAI).
Set up in February, 2020, it is a significant step forward in the IRDAI’s commitment to furthering microinsurance. Committee members included former Executive Director of the Life Insurance Corporation of India (LIC), RT Mendiratta, Dr Nachiket Mor, former board member of RBI and Chair of the RBI Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, Biswa Mohan Mohanty, former Chief General Manager, National Bank for Agriculture and Rural Development (NABARD), Ajit Dayal, founder of Quantum Mutual Fund, Tabassum Inamdar, former financial analyst at Goldman Sachs and IRDAI’s senior team of Dr Mamta Suri, Chief General Manager (Finance and Accounts), SP Chakraborthy, General Manager ( Actuarial) and Dr N.M.Behera, Office of the Insurance Ombudsman ( Bhubaneshwar),Mr Aleem Afaque, Assistant General Manager ( Legal) IRDAI, and myself.
IRDAI has been a pioneer globally in promoting insurance for low income families through its rural and social sector obligations and microinsurance regulations requiring insurance companies to meet certain targets. Despite this, the outreach by the insurance companies has remained very limited. Microinsurance accounted for less than 1.80 per cent for life and 1.16 per cent for general insurance in 2019-20.
The Committee studied international microinsurance models to understand what worked and what did not, and found that while India’s population coverage under microinsurance in absolute terms at 111.1 million is high, the per cent of our population covered is low at 9 per cent of the overall population and 14.7 per cent of the potential microinsurance market size in the country. Other Asian countries, like the Philippines and Thailand, had coverage ratios of 20.6 per cent and 13.9 per cent of their populations respectively1.
Reasons for the slow growth and outreach of microinsurance in India include lack of awareness on and understanding of insurance, absence of need-based products customised to the low income segment of our citizens, and cumbersome claims processes and procedures requiring much documentation and delays in disbursing claims.
Further, the cost of business acquisition and servicing inhibits companies from doing this business as microinsurance premium amounts are small but require several contacts with potential customers at the grassroots which increases costs.
Further, most insurance companies do not see microinsurance as a long-term and sustainable business proposition due to its very limited contribution to their top line. Finally, most insurance companies do not enjoy the trust of low income clientele. There have been instances of mis-selling and fraud and people are understandably sceptical.
Yet the IRDAI’s Microinsurance Report outlines the several creative and innovative approaches to reaching microinsurance to workers in our vast informal economy. Microinsurance has huge potential to provide financial security, increase productivity and also provide employment, if nurtured in an enabling environment and by those—cooperatives, mutuals and microfinance institutions—dedicated to and working closely with people, especially women, at the grassroots level.
This was further bolstered by international experience, especially from the Philippines and South Africa, where their regulators actively engaged with microfinance institutions and NGOs already providing microinsurance to develop new laws and especially regulations that reduced capital requirements. The latter allowed them to expand their microinsurance business with capital of Rs 2 Crore in the case of South Africa and Rs 19 Crore in the case of the Philippines. Even the most stringent regulations in the European Union allowed a maximum of Rs 20 Crore for life and Rs 29 Crore for non-life business. In China, internet platforms have managed to provide 200 million people with health insurance with no capital requirement. Nor are these under the purview of a regulator.
Having studied all the national and international experience, the Committee concluded that “the minimum capital requirement of Rs 100 crore stipulated under the Insurance Act has acted as the biggest impediment to the expansion of the microinsurance market.”2 Pointing to the RBI’s experience where a recognition for the need to reduce to capital requirement for small finance banks and payments banks and consequent reduction by 60 per cent and 80 per cent in the capital requirements respectively, resulted in the expansion of banking services to low and middle-income households and in the remotest parts of the country and concluded that “ there is every reason to suggest that the same would apply to microinsurance if capital is reduced.” 3
The recommendations in the report are supported by detailed notes and evidence from both India and abroad, including indicative modelling based on authentic data that showed that microinsurance can be conducted in a viable manner with capital of Rs 5, 10 and 20 Crore with sums insured and premium adjusted according to the capital invested. Not surprisingly, the top recommendation is to reduce entry-level capital requirement to Rs 20 Crore from the current Rs 100 Crore. A risk-based capital approach while maintaining the highest prudential standards has also been recommended. IRDAI is already considering moving to a risk-based capital approach in the next few years, as has already been done by countries like the Philippines. Importantly, the report recommends that cooperatives, mutual and companies be allowed to act as composite microinsurers, transacting both life and non-life business through a single entity, with care being taken to ensure that appropriate capital is stipulated for a balance portfolio of both types of insurance which will serve to cover several risks faced by low income families.
Another key recommendation is the amending the Insurance Act 1938 to bring standalone microinsurance under its purview, including defining microinsurance, microinsurers, and reducing the capital requirement and/or vesting the powers to do so with the IRDAI. As an interim measure, the Committee recommends rules are issued giving the IRDAI the powers to put in place a regulatory framework for standalone microinsurance organisations.
Further, building on the experiences of the mutual funds platforms for conducting business, the Committee has recommended end-to-end digital technology for transparency, accountability and monitoring. The report argues that this will both reduce transaction costs over time and help in regulatory oversight. In addition, reinsurance by existing reinsurance or insurance companies, facilitated by the IRDAI, has been recommended.
The Committee was careful to note that the highest prudential standards should be maintained when developing regulations, and has recommended that these be done in consultation with those already undertaking microinsurance to ensure that they are appropriate and practical, while encouraging self-regulatory mechanisms. Utmost care will have to be taken to ensure that mis-selling and other malpractices are prevented from the start. It has also recommended appropriate supervisory structure to fast-track product approvals and even a special division devoted to microinsurance in the IRDAI.
Referring to the South African innovation of captive cell model, the Committee has recommended that this model also be offered. Finally, the Committee recommends the setting up of a Microinsurance Development Fund to support the growth and expansion of microinsurance in India, citing the earlier experiences of NABARD and Small Industries Development Bank of India (SIDBI) which set up such funds which contributed to the promotion of microfinance and financial inclusion in India.
These recommendations, the Committee observed, take on a particular urgency in light of the COVID-19 pandemic, and the vulnerability and insecurity that it has resulted in for the majority of our citizens who are the working poor engaged in the informal economy. By enabling the spread and outreach of microinsurance with reduced capital requirement, our citizens will have some measure of financial protection and social security, enabling them to emerge from poverty and towards self-reliance.
*Chairperson, Committee on the Standalone Microinsurance Company and Director, SEWA Social Security
1 The Landscape of Microinsurance in Asia and Oceania 2013, Munich Re Foundation, pg 4, https://microinsurancenetwork.org/sites/default/files/The_landscape_of_microinsurance_in_Asia_and_Oceania_2013__full_report.pdf
2 Op.cit., p.22.
3 Op.cit., p.22