Spotlight
New Delhi, 6 March 2020
Managing Risks &Debt
LEG-UP FOR MICROINSURANCE
By Moin Qazi
The Committee on
Micro-Insurance appointed by Insurance Regulatory and Development Authority of
India (IRDAI) has suggested several measures to enable microinsurance to become
an affordable tool for risk management for vulnerable people and make India’s financial
inclusion revolution truly transformative. It has recommended an option to pay
single premium in daily/ fortnightly/ monthly/ quarterly instalments to deepen
insurance penetration in low-income groups. Alternatively, customers should be
allowed to pay mortality premium in lump sum with remaining premiums to be paid
in instalments. The Committee has also recommended that the product benefits
should be defined in simple language so that they can be easily understood by
customers.
In the developed world, insurance is a part
of life. But its coverage has been patchy and woefully inadequate in the
developing world. However, what was a luxury that enabled the poor to secure
their gains and plan for the future with confidence has now become a reality on
account of several innovative models developed by institutions. India is now a
major site of a rapidly growing micro-insurance revolution. Social
protection can help reduce vulnerability, increase nutrition, add to
productivity and may be able to contribute to social cohesion.
Low-income communities live on the edge; just a minuscule
misfortune away from disaster-one injury, illness, or natural calamity can push
them into a tailspin. They’re vulnerable to numerous perils, multiple risks,
ranging from individual-specific (illness, theft or unemployment), to
economy-wide risks (drought, recession, etc.). They need insurance more than
wealthier people do, because they have no other cushion. Uninsured risk has substantial welfare costs,
not just in the short run, but also in terms of perpetuating poverty. The
poorest households tend to be the most vulnerable to natural disasters that can
lead to smaller crops, poorer health, and weaker economic performance.
Insurance is a critical tool in managing risk, whether that
risk relates to personal health or to one’s livelihood. For the poor, insurance
is the only hedge against financial adversities, with important consequences on
their welfare. Without insurance, it’s harder for them to rebuild or recover
from an emergency By managing risks and avoiding debt, those who have
micro-insurance policies, are in a position to protect the meagre wealth they
accumulate, generate more income and even get a fair chance to rescue
themselves and their families out of the mire of poverty. Insurance cover for
life, health, accidents and more can give millions of less fortunate and
vulnerable people a safety net. it can help families avoid desperate measures
such as abandoning children or taking them out of school, selling assets or incurring
debts. Insurance can improve healthcare outcomes and raise school attendance
rates and property.
Healthcare costs impose the biggest burden. They say, “We
die once but go to the doctor many times every year”. Poor families have long
suffered the triple curse of sudden illness — the trauma associated with
sickness, loss of wages and the financial burden of intensive healthcare. It is a fertile hunting ground for loan
sharks. Illnesses become a financial sinkhole for village women; they are often
forced to drop out of the labour force as they provide most of the care.
Health insurance is limited in its coverage of population
segments and types of illnesses. It is also far from universal.Thus getting
sick can be a costly proposition.
The poor usually face two types of risks — idiosyncratic
(specific to household) and covariate (in which the entire community suffers
loss; the most common, for example, are drought and epidemics). Insurance
contracts are most easily offered if risks within the relevant population are
not covariate – so that only some put in a claim at the same time. Furthermore,
insurance for rare and infrequent events is also typically more difficult to
offer.
Incidentally low-income communities aren’t considered as
‘insurable’ at reasonable levels of premium. This makes a case for insurance
schemes designed for them, particularly in sectors of health and life,
agriculture. Micro-insurance has emerged in response to the inadequacy of
regular insurance to provide protection to the bottom tier of the population.
Micro-insurance envisages the protection of low-income people against debt
traps that often imperil their livelihood and even their lives. It leverages
economies of scale (large volumes of small policies). Because of its affordability,
more people can get policies. More policies mean greater business for the
company and viable coverage for clients.
Poverty and vulnerability reinforce each other in a
downward spiral. Often, the trigger for poverty is illness. Illnesses are a
severe risk and can eat away most of the hard-earned savings in low income
communities. The net result is bankruptcy. The poor prefer health insurance to
life insurance. As they say, “we die once but go to the doctor many times each
year”. According to the Union health ministry, 25 per cent of the people
admitted to hospital were driven to penury by hospital costs, not to forget the
cost of missed work.
By managing risks and avoiding debt, those who have
micro-insurance policies are in a position to protect the wealth they
accumulate, generate more income, and can even get a fair chance to rescue
themselves and their families out of the mire of poverty. Insurance can provide
the low-income group with a greater protection against health, property,
disability and death risk.
The cost of insuring against an unforeseen development is
considerably lower than self-insuring through savings. Governments, donors and
other development actors engaged in combating poverty and designing social
protection measures need to have insurance as one of the weapons in their
arsenal.
Historically, it has been difficult for insurers to
service low-income communities, especially in developing countries, due to a
variety of factors, including, moral hazard, pricing complications adverse selection,
asymmetric information and elevated expense ratios. This is now beginning to
change. Thanks to new data technology and the spread of mobile phones-there are
new avenues to make insurance more accessible to uninsured and underinsured
populations. The challenge, with both microfinance and insurance, is to
simplify the products in ways that they can be sold to people affordably.
Financial literacy is essential for enabling people to
make right financial choices. In view of the lack of proper awareness, people
buy insurance policies without adequate planning and give up midway because
they don’t have money to pay the premium. Aggressive pushing of products by
insurance providers without adequately assessing the consistency in income
streams of the buyers paying premiums can mean more harm to the poor. The
customers can end up losing heavily as penalties are harsh. An important
challenge is to strike the right balance between adequate protection and
affordability to make insurance responsible and sustainable.
The difficulties in making micro-insurance viable stem
from the fact that it is a ‘low ticket’ business, requiring huge volumes to
become sustainable. .The key challenge
is the high cost of administering it. The poor live off the banking
grid. Families are scattered, this makes physical access difficult. The
transaction costs of issuing millions of small policies through service agents,
too, are high. Despite the potential of insurance products to provide a “risk
floor” for farmers and to encourage higher-productivity investments and
behaviour, uptake of micro-insurance at market prices is extremely low and it
has not been found to be easily scalable except when heavily subsidized by the
government.
India also lacks the distribution channels appropriate
for lower-income groups. But rapid advances in digital payment systems are
creating opportunities to connect poor households to affordable and reliable
financial tools, through mobile phones and other digital interfaces. Insurance
coverage can be widened by coupling services with existing mobile financial
products or creating new mobile solutions that bring insurance services
straight to a consumer’s phone.Insurance can piggyback on the exploding reach
of mobile banking and infrastructure created by micro-credit institutions. ---INFA
(Copyright, India
News & Feature Alliance)
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