This is the story of Feizal, a resident of Uttar Pradesh. He sells aluminum pots, his son works as a tailor?s apprentice and his wife and daughters roll bidis. Between them, they earn about Rs 2,000 a month to feed a family of 10. Interestingly, despite the seemingly hand-to-mouth existence, they also manage to save for one daughter?s wedding. Once, when Feizal fractured his thigh bone, not only did he cough up almost two-thirds of the family?s income for treatment, but he was also rendered jobless for eight months. The illness ate into his savings and pushed him to borrow from friends and neighbours. But as the researchers of Portfolios of the Poor?How the World?s Poor Live on $2 a Day observed, ?the family?s financial networth deteriorated, but did not turn negative?. Feizal comes across as the perfect target for a micro-insurance health product. Except, how easy will it be to convince him to pay small premiums to buy an insurance cover to guard him in case such misfortune strikes again?
Had it been easy, the micro-insurance figures wouldn?t be as dismal. According to Insurance in Developing Countries: Exploring Opportunities in Microinsurance report that Lloyd?s released in November 2009, currently just 5% (around 135 million) of low income people in developing countries are using micro-insurance products. But the low-income market size, measured by the number of potential clients, adds up to 1.5 to 3 billion potential policies. The estimates for India, even with the IRDA?s 2005 micro-insurance regulations in place, are as bleak?the penetration of the micro-insurance market in India is pegged at just 2% of the adult population. The opportunity aggregates up to 300 million policies. Clearly, there?s no denying the fact that while micro credit is now a global success story, micro-insurance has not been able to follow the same path to success.
That apart, there are vast regional disparities as well. Tilak Mukhopadhyay from the Centre for Insurance and Risk Management shares research that points out that 74% of the schemes operate in four southern states of India?Andhra Pradesh (27%), Tamil Nadu (23%), Karnataka (17%) and Kerala (8%). ?Moreover, there is lack of basic data on health, weather, longevity, etc,? he adds. It makes it difficult for insurance providers to design an actuarial model of the micro-insurance products.
There are other reasons too. ?Unlike micro credit, which has been around for about 25 years, micro-insurance has a relatively shorter history. The real challenge lies in the fact that it is not a demand side product, but a supply side product. Being intangible in nature, there is a natural reluctance towards it. The people at the bottom of the pyramid need to see insurance as a way to manage risks,? says Craig Churchill, team leader, Microinsurance Facility, International Labour Organisation.
The inability of the poor to manage risks takes its own toll. Several studies of Indian villages to determine why households descend into poverty have found healthcare expenses to be responsible in more than half of all cases. Moreover, this segment is more prone to illnesses due to lack of proper hospitals and poor hygiene and sanitation. ?Over 800 million people living in rural areas, majority of them in the low-income category, have almost negligible access to healthcare through insurance,? says Yogesh Gupta, head, business procurement and micro-insurance, Bajaj Allianz Life Insurance.
For players in the insurance industry, there seem to be more challenges than incentives. ?These are low-ticket premiums where we need to ensure expenses are kept under control for collection of premiums of less than $1 per month.? And there?s the catch. Given the small margins of profits per policy, only volumes can result in a sustainable model. For instance, in the past two years, Bajaj Allianz has covered nearly 1.4 lakh lives under health insurance and 34 lakh under its group term assurance plan with systematic savings. And, it has already paid over $8,00,000 worth claims in health and property (hut insurance) which is over ten times the premium collected. It also settled over 4,339 life insurance claims amounting to $9 million in 2008 and 13,276 claims in 2009 amounting to $10 million. ?Currently, we are trying to consolidate our position by focusing on the volume component that is required to support such a product.
We have been able to maintain the renewal ratios, which normally stand very low in micro-insurance, at 90%,? shares Gupta. His team is working hard to reach the required number of customers and Gupta is ?confident of achieving that goal in the next few years?.
Economies of scale in such a case come under serious scrutiny, precisely the reason why Tata AIG strived hard to arrest its cost per policy. When it launched Sampoorn Bima Yojana (SBY) in 2006, the issuance cost per policy was Rs 200. ?We have managed to scale it down to Rs 50,? says Vijay Athreye, VP & head, rural, social and micro-insurance, Tata AIG. Athreye must know. Speaking from a mobile insurance service office (MISO) stationed in Jhalawar, Rajasthan, he is well versed with the grassroots reality. Athreye with his 50-people team dedicated to micro-insurance has managed to create a network spread over 16 states, 350 NGOs and 4,500 self-help groups of women distributors. ?I hope to begin making profits by 2013. However, that depends on the persistence of policy holders, which is currently 60%,? he adds. SBY comprises about 70% of Tata AIG?s micro-insurance portfolio. Having sold 65,000 SBYs last year, Athreye is targeting a modest 70,000 this year. ?Insurance companies are driven towards micro-insurance merely for compliance with the regulator?s mandate.? Though Tata AIG?s case is different, he contends, ?against the regulatory requirement of 19%, we managed 24% last year?.
The key seems to lie in innovation. Bajaj Allianz learnt this the hard way. Microfinance Report 2010 by Allianz Group points out how insuring cows in India was a loss-making business because too often the farmers claimed an insurance loss that was not theirs. Market experts consider a quarter of all claims to be fraudulent. Moreover, to send an insurance assessor all the way to a farm to see if a cow had really died and if it was the same one that was insured proved to be a costly affair. To overcome it, Bajaj Allianz began injecting radio frequency identification chips under the cattle?s skin. Among other things, the grain-sized chip carries information on the breed, age and vaccinations of the animal. In the event of death of a cattle, a veterinarian examines it to determine the cause and scans it with a reader. The information is then sent to the insurance company together with the claim and a photograph of the reader while scanning the chip. The success of this pilot project can well translate into a profitable business for Bajaj Allianz. IFFCO-Tokio General Insurance also uses the RFID technology.
Most micro-insurance companies are working out methods to lower costs, get distribution right, customise products and forge tie-ups with NGOs, SHGs and cooperatives. ?We are also experimenting with remote sensing technology like NDVI for crop insurance,? says K Gopinath, head (rural and cooperative), IFFCO-Tokio General Insurance. Bharti AXA, for instance, is trying to reach out to BPL families across the country through Tamil Nadu government?s Kalaingar health scheme and Andhra?s Apathbandhu Scheme. Eyeing a 70% surge in turnover, Bharati AXA recently also tied up with Anjali Microfinance and Arohan Financial Services to tap the semi-urban and rural customers. ?Currently 8% of our revenues come from the rural and micro business. We are looking to grow this to 20% in fiscal 2010-11,? says Dr Amarnath Ananthanarayanan, CEO & MD, Bharti AXA General Insurance. Bharti has also designed a package policy called Smart Micro Insurance Policy. ?It has been filed with IRDA for approval. It provides a single policy to cover the customers? household assets along with providing a personal accident and health insurance cover,? says Ananthanarayanan. One key reason why India is taking so long to tap into the micro insurance market, he feels, is ?reinsurance support for microinsurance which was discouraging insurers from entering the segment?.
Vimo SEWA is a case in point. Few know that Anil Swarup, the head of UPA?s flagship Rashtriya Swasthya Bima Yojna (with its 1,72,01,375 active cards) studied Vimo SEWA?s model to take a cue. ?Insurance was one of the missing links in SEWA Bank. The women kept on telling us that they were able to save and borrow from the bank, but one illness or hospitalisation took them back to square one or even negative. Health casualties was the biggest leakage on their assets,? says Mirai Chatterjee, Vimo SEWA. The insurance programme, which began with 7,000 members in 1992, presently has 1,20,000 members?a feat Chatterjee chooses to call ?fair growth?. Till recently 50% of the members dropped out each year. The renewal rate has been painstakingly increased to 60%. ?We are now targeting to bring it to 80%. We are sending SMSs to members to remind them that it is time to pay their premiums and give them no-claim discounts. We collected Rs 1.3 crore as premium last year. We hope to target Rs 1.5 crore this year, a 25% aggressive growth,? says Chatterjee. Analysis of Vimo SEWA?s claims for the past two years threw up an interesting finding?over 40% claims were for readily preventable conditions or conditions that could be treated without hospitalisation.
The ground situation makes it difficult to meet targets in rural India. Birla Sun Life Insurance, which has been focusing on the micro-insurance segment since 2007, cracked the market with product customisation. Till date it has sold about a million policies. ?Our micro-insurance policy base has grown at a CAGR of nearly 100% since 2007,? says Mayank Bathwal, chief financial officer, Birla Sun Life Insurance. A flexi-premium model seems to have helped it the most. ?From our experience, single premium products are better suited for them, given the income volatility. Also, premium flexibility in the form of extended grace period of 180 days that our products offer helps in premium collection in regular premium products given the seasonality of income in rural areas.?
However, internationally there has been far more traction in the field of micro-insurance innovation. For instance, funeral parlours in South Africa are selling funeral insurance. More interestingly, an insurer in eastern Europe is developing a SMS-based fast claims handling system in health insurance. The idea is to provide cash to the patient as fast as possible in case of a medical emergency, leaving the claim-related paperwork for later. The doctor who verifies a claim just needs to SMS the codes of the patient and the required treatment to a server. An automated reply to him includes an authorisation to withdraw the insurance payment from an ATM. Alternatively, money could be sent to a mobile phone or directly to the doctor.
Though amongst all the countries that Churchill has observed, India has ?displayed the greatest success and largest outreach in terms of micro-insurance. Over a third of the ILO innovation grantees are based in India?. But he is only part optimistic, ?If we spoil the chances to gain trust of the people now, we stand to lose out on an entire generation. So, it is absolutely critical to make the micro-insurance experience positive now. I fear not everyone is being as responsible and that may spoil the waters.?
There is no denying that micro-insurance is the way forward. ?If micro credit is helping people to acquire new wealth, micro-insurance will help them to keep it. Currently profits are modest, but there is the potential for significant returns in the future,? says the report by Lloyd?s. The bottomline is to look at this segment as business and not just charity and for it to be socially beneficial and commercially scalable at the same time. This is something that seems completely viable if one were to consider that about a month back, the world?s first micro-insurance fund, LeapFrog Investments, announced its final close on $137 million for investments in Africa and Asia. ?We are looking to invest up to 30% of the total fund in India in insurance companies, insurance brokerage firms, in third party administrators, in brokerage firms that service mass market, technology firms, etc. We are particularly keen on the ones that work with the RSBY programme,? says Dr Jim Roth, principal, LeapFrog Investments. Roth easily convinces that it is possible to make money from a policy where the premium is just a few dollars a year. He shares the example of Aflife, a South African life insurer that exclusively serves people living with HIV and diabetes and even manages to be profitable. ?That firm has been recently acquired by Sanlam for hundreds of millions of dollars,? he adds.
There are other challenges in India as well. ?The current regulation requires a minimum capital of Rs 100 crore to establish an insurance company. It acts as a significant barrier for smaller entities like us,? says Vimo SEWA?s Chatterjee. Roth adds that in most other countries the minimum capital required is a million or two. He also considers ?the cap of 26% on foreign investment in insurance companies a grey area?. For Mukhopadhyay, ?a subsidy in premium such as in RSBY could be the way forward?.
?A 20% per annum commission cap for life on micro-insurance products is not enough of an incentive us. We spend from our own pocket to go the extra mile and collect premiums and still are required to pay service tax as well. What are we left with?? asks a policy agent.
This is just one of the many questions that may hold the answer to making micro-insurance successful in India!