Cape Town March Micro Insurance in India—Achievements and future challenges Dr R Kannan Member (Actuary) Insurance Regulatory and Development Authority INDIA

Cape Town March 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

Cape Town March 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.

Cape Town March 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

Cape Town March 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 10 th November, 2005

Cape Town March 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.

Cape Town March Micro Insurance Regulations 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.

Cape Town March Micro Insurance Regulations Comparison of Remuneration to MI agents ParameterMicro-insuranceTraditional Single Premium10%2% Regular Premium First Year20%40% Second Year20%7.50% Third Year20%7.50% Subsequent Years20%5%

Cape Town March Type of coverMin. Amount of Cover Max. Amou nt 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.5,000Rs.50,0005 years15 years1860 Endowment InsuranceRs.5,000Rs.30,0005 years15 years1860 Health Insurance Contract (Individual) Rs.5,000Rs.30,0001 year7 yearsInsurer’s discretion Health Insurance Contract (family) Rs.10,000Rs.30,0001 year7 yearInsurer’s discretion Accident benefit as arider Rs.10,000Rs.50,0005 years15 years1860 Micro Insurance Regulations (Life) product design Guidelines

Cape Town March Type of coverMin. Amount of CoverMax. 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 / coverRs. 30,000 Per asset/ cover 1 year NA Health insurance Contract (Ind.) Rs 5,000Rs30,0001 year Insurers’ discretion Health insurance Contract (family) (Option to avail limit for Individual / Float on family) Rs.10,000Rs.30,0001 Year Insurers’ discretion Personal Accident (per life earning member of family) Rs.10,000Rs.50,0001 Year 570 Micro Insurance Regulations (Non-Life) product design Guidelines

Cape Town March 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

Cape Town March YearNo. of Products approved as on date 1 Total23 Micro Insurance Product Statistics

Cape Town March Year Individual Premium (INR Mn) Growth rate65%101% Proportion to total New premium Income 0.04%0.08% Number of Policies0.9 Mn2.2 Mn Growth rate72%129% Proportions of New lives covered 2.21%4.79% Micro Insurance Product Statistics

Cape Town March Year Group Premium (INR Mn) Growth rate1.2%2% Proportion of total New premium Income 1.70%1.50% Number of Policies12.2 Mn12.5 Mn Growth rate1.5%3% Proportions of New lives covered 42.67%36.65% Micro Insurance Product Statistics

Cape Town March ParametersMicro InsuranceTraditional Benefit structure (A particular Product ) Individual Pure Term Assurance Average Sum Assured (INR) assumed in pricing 10,000500,000 Mortality (IALM(-94-96)) 150% to 225% depending on age 90% Rate of Interest7.75% p.a.6% p.a. on average Commission RP First Year20%35% Second Year5%7.50% Third Year5%7.50% Subsequent Years5%5.00% Premium Rate per INR 1000 SA for a male of 40 Yrs and term 5 yr term MI Vs. Regular Products - Few Actuarial Issues

Cape Town March ParametersMicro InsuranceTraditional Benefit structure (A particular Product ) Term assurance with return of premium Average Sum Assured (INR) assumed in pricing ,000 Mortality (IALM(-94-96))125%80% Rate of Interest6.25% Commission RP First Year20%30% Second Year5%7.50% Third Year5%7.50% Subsequent Years5%5.00% Premium Rate per INR 1000 SA for a male of 35 Yrs and term 10 yr term MI Vs. Regular Products - Few Actuarial Issues

Cape Town March MI Vs. Regular Products - Few Actuarial Issues 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.

Cape Town March Other Parameters (On average) Parameter MicroinsuranceTraditional Pure Term Assurance Product Age Range (Yrs) SA Range (Rs.) No Limit Average Policy Term (Yrs) 1020 Average Age (Yrs)35 Average SA (Rs.) MI Vs. Regular Products – Other Issues

Cape Town March ParametersMicro InsuranceRegular Product Product DesignSimpleMore Complex Policy Wording Simple language and few exclusions Complex policy wording Premium rates Based on little historical data and price sensitive Good quality data and better reflect individual risk characteristics Premium Collection Match 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 Handling Simple and quick procedure More complex and lengthy procedure with requirements of various documents MI Vs. Regular Products - Other issues

Cape Town March 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 Cape Town March

Cape Town March Challenges ahead Need to develop Health micro insurance products Need of good quality data Standardizing underwriting procedures for MI. Regulatory assistance

Cape Town March Thank You