1. 1 /16 September 12, 2015 Driving Efficiency & Growth in Microinsurance through regulatory intervention Ayandev Saha Driving Efficiency & Growth in Microinsurance through regulatory intervention – A Perspective 2012 RESEARCH CONFERENCE MICROINSURANCE April 11 – 13, 2012 University of Twente, Netherlands Views expressed are in the personal capacity and do not reflect the organization with which he is presently affiliated.

2. 2 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Agenda Background Need for Microinsurance (MI) Regulation MI Regulation in the Indian Context Effectiveness of MI Regulation - India BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward Learnings Way Forward

3. 3 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Opportunity rather than obligation poverty line Medium to high income Conventional insurance market Microinsurance market (commercially viable) 2.6 billion people USD 33 billion market ~ USD ($) 4/day ~ $ 2/day ~$ 1.25/day Microinsurance through aid / Government support 1.4 billion people USD 7 billion market Note: $ amounts refer to poverty line in 2005 Purchasing Power Parity international dollars (PovcalNet / World Bank) Source: Swiss Re, sigma No 6/ 2010 Swiss Re: Potential market is valued at up to USD 40 bn with current penetration ~ 2% - 3% Lloyds: Potential market in developing economies is estimated to be between 1.5 – 3 bn policies UNDP: Potential market size in India ranges between USD 1, 298 mn to USD 1, 755 mn BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

4. 4 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Issues and Challenges related to microinsurance Demand Lack of insurance awareness; socio - cultural factors; limited perceived value Operational Maintaining low cost operational framework; providers limited knowledge of low income segment and lack of skilled staff and resources; non diversified risk portfolios; claims settlement issues Underwriting Lack of quality data; coverage for hard to insure risks; policy language Distribution Selection of channel partners; training; motivation level Market Skepticism about profitability; short sighted focus of providers; low renewal rate Infrastructure Lack of quality healthcare infrastructure / providers and weather stations Regulatory No specific provisions for microinsurance; lack of or limited government support Insurance Over-usage, fraud, adverse selection, moral hazard and covariant risk Source: Swiss Re Economic Research & Consulting BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

5. 5 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Motivation / Literature “Microinsurance Regulation” Making insurance markets work for the poor: microinsurance policy, regulation and supervision, CGAP Working Group on Microinsurance, 2009 Facilitating an appropriate regulatory and supervisory environment for microinsurance USAID Microinsurance NOTE 8, USAID, 2008 Issues in regulation and supervision of microinsurance IAIS and CGAP Working Group on Microinsurance, 2007 Regulation and Supervisionof Microinsurance, Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH August 2004 “Market Overview” Microinsurance to the Last, the Least, and the Lost, Celent, December 2011 Swiss Re, 2010, Sigma Report No 6/10: Microinsurance: risk protection for 4 billion people Lloyd’s 360° Risk Insight Insurance in developing countries: Exploring opportunities in microinsurance, 2009 UNDP “Building security for the poor – potential & prospects for micro-insurance in India” Microinsurance beyond Social Responsibility, LIMRA Research “The next 4 billion” World Resource Institute and International Finance Corporation, March 2007 BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

6. 6 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Need for Micro Insurance Regulation Time % Usage 100% Source: Porteous, 2005 1. Have now 2. Market can reach now 3. Market can reach in future 4. Beyond the reach of the market Do not want Access frontier Regulatory changes, as well as product and distribution innovation, can be used to extend the reach of the market to this segment. BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

7. 7 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Microinsurance Regulations in India >> Based on the lifecycle of the insurer − Rural defined as % age of total policies written direct in that year (life) % age of total gross premium income written direct in that year (general) − Social - number of lives to be covered in the social sector Demand Supply Known Facts − Restricted as the largest and best known intermediaries are already taken and have existing relationships with commercial insurers − Limited perceived value − Companies have preferred to sell insurance to relatively well off segment − Products tend to address the needs of the poor only incidentally − Perceived less as a potential business opportunity and more as a charity oriented social obligation Rural Social Sectors Obligations 2002 Rural Social Sectors Obligations 2002 BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

8. 8 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 >> Microinsurance Regulations in India Easing distribution challenges for inclusion − Wider and more inclusive definition of microinsurance agents − Allowing the same company to provide life and non-life cover − Permitting composite products − Revising commission structure upward − Classification of products by fixing upper and lower coverage limits Reducing procedural bottlenecks − Allowing agents to distribute policy documents to clients − Lowering the required training period for agents − Permitting premiums to be collected and remitted by agents − Contracts in vernacular languages IRDA Microinsurance Guidelines 2005 IRDA Microinsurance Guidelines 2005 MI as line of business has been able to demonstrate robust growth in the fast few years post the regulations In FY 2010-11, the total premium collected under life & non-life MI portfolios put together was `1,543 crore, of which life insurance premium was `1,149 cr and non-life insurance premium was `393 cr BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

9. 9 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Effectiveness of Indian Microinsurance Regulation Steady increase in no. of policies sold to individuals with a fall in premium collected in FY 2010-11 For the overall category, in FY 2010 -11, private insurers have shown negative growth both in the no. of policies sold (by 43%) and new business premium collected (by 14%) over the last year 3.6 million individual policies are mostly self-funded (individual owners) which indicates that the targeted segments have a need and are willing to purchase insurance Under Group category, in FY 2010 -11, there has been a significant decline in the premium collected (by 57%) and lives covered (by 10%) vis-à-vis the last FY (2009-10) In FY 2010-11, the individual renewal premium was `181 crore while the group renewal premium for the year was `682 crore There has been a constant decline in the percentage of number of micro insurance agents added to the same percentage corresponding to the last FY BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

10. 10 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Effectiveness of Indian Microinsurance Regulation Year Gross Written Premium Gross Incurred Claims Gross Incurred Claims Ratio (in per cent) 2009-10193.14126.6565.57 2010-11393.38309.978.78 (Amount in ` crore) Source: IRDA Annual Reports Premium underwritten and claims paid by the non-life insurance companies Life insurers had 16 individual and 12 group micro insurance products in their basket while general insurers had launched a total of 66 products Increasing realization that social security schemes of the Govt. are better administered through insurers due to cost-efficiency, superior service-delivery and better accountability (Aam Aadmi Bima Yojana (AABY), Janashree Bima Yojana and Rashtriya Swasthya Bima Yojana (RSBY) have been handed over to insurers for administration) BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

11. 11 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Recommendations basis International market practices Constraints / Challenges RecommendationsInsurerCustomerMarketReference a) Large number of informal quasi- insurance schemes run by cooperatives, churches; NGOs and SHGs (operate in a legal vacuum) b) Policyholder protection Provision to recognize the informal schemes / triggering consolidation activity or partnering informal operators with formal underwriters - Philippines - MBAs are allowed to offer insurance products under a reduced regulatory burden and with lower capital requirements - South Africa - The institutional space for microinsurance is opened up to friendly societies and coop a) High capital requirement of over $22 mn as per the Indian Insurance Act discourage established insurers from offering services to low income HHs Lower prudential requirement or evaluate the minimum capital requirements for the locally organized small MI institutions - Philippines - Guaranty fund for new / existing MBAs has been reduced from Pesos 125 mn to 5 mn - South Africa – MI requires R3 mn upfront capital (R5 mn / R10 mn for short / long term insurers) BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

12. 12 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Constraints / Challenges RecommendationsInsurerCustomerMarketReference a) Limited perceived value b) Consumer Education / Financial Literacy is more treated as a “public” good Regulator needs to play a pivotal role to create public awareness and consumer education on various financial products and its usage. This in turn will reduce any form of information asymmetries and promote market transparency, competitiveness and efficiency - Philippines - Insurance Commission promoted MI by declaring month of Jan every year as “MI month”. Concerned regulatory authorities in coordination with the Department of Finance conduct financial literacy trainings, seminars and workshops on MI - South Africa - Consumer awareness and education campaign to be implemented by the Financial Services Board with focus on creating awareness of insurance and its value proposition - Peru - Consumer protection and financial education programs is present in the supervisor's institutional agenda Recommendations basis International market practices BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

13. 13 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Constraints / Challenges RecommendationsInsurerCustomerMarketReference Low –income clients also show a disproportionately high distrust of insurers and insurance, requiring particular attention to product design, the sales process and claims payment Claim settlement should be given a higher priority with a well defined regulatory TAT (much less as compared to mainstream insurance) - Peru - Claims should be paid within 10 days - Mexico - Claims should be paid within 5 working days; paid through a variety of channels, e.g. microfinance networks, through utility companies, or distribution networks (traditional intermediaries) - Philippines - All entities providing MI products shall process and settle claims within 10 working days. Submission of the required documents through electronic means shall be accepted - South Africa - All valid MI claims should be paid within a period of 48 hours Recommendations basis International market practices BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

14. 14 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Constraints / Challenges RecommendationsInsurerCustomerMarketReference Low renewal rate (high lapsation / low persistency) as the policyholders mostly have irregular income (or cash flow) In addition to consumer education and awareness on insurance the regulator should also encourage features such as extended grace period - South Africa - As a minimum, cover will continue for 1 month after the due date of the premium. For policies that have been in force for one year or more, the grace period will be extended by one month for each completed twelve month period that the policy has been in force with no reduction in cover. However, the maximum grace period for a policy will be 6 months. - Philippines - The manner and frequency of premium collections shall, if possible, coincide with the cash flow of the insured and may be collected (e.g. weekly; monthly) whichever is applicable Recommendations basis International market practices BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

15. 15 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Constraints / Challenges RecommendationsInsurerCustomerMarketReference Products tend to address the needs of the poor only incidentally Need of more customer centric products & more importantly processes Regulator should spell out more on product specifications and standards (to encourage more customer centric products) Faster product approval - Peru - Deductibles / copayments are not allowed. No exclusions should be established (if necessary they should be minimum and in accordance to coverage) - Mexico - Exclusions can only be set in general and should not relate to the individual’s risk profile - South Africa - No surrender value be included in the MI product. No exclusions will be allowed for pre- existing conditions. It is proposed that micro insurers be required to submit all new MI products to the Registrar for review at least 60 calendar days before launching the products. Products may be launched if no objection is received within 60 calendar days after filing. Recommendations basis International market practices BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

16. 16 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Constraints / Challenges RecommendationsInsurerCustomerMarketReference Agent / aggregator not to have collaboration with more than one life and non-life insurance company acts as deterrent to the growth of microinsurance business MI does not need the traditional life/non-life insurance demarcation - South Africa - Both life and non-life underwriting is allowed by a single entity. Recommendations basis International market practices BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

17. 17 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Way Forward Future Research: To map the effectiveness of country specific regulations (clause) in terms of growth of microinsurance business (premium earned); products approved; customer benefitted Policy: To create a microinsurance regulatory framework for the countries (markets) which are presently not under any form of regulation There should be a common platform for regulators to exchange experience ideas and thoughts to incorporate the learnings in their respective regulatory framework BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

18. 18 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 You’ll learn more about a road by traveling on it rather than by consulting all the maps in the world… Views expressed are in the personal capacity and do not reflect the organization with which he is presently affiliated.

19. 19 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 PoliciesPremium Insurer2007-082008-092009-102010-112007-082008-092009-102010-11 Private83153610851998809699733209.74537.81839.78735.09 LIC8546151541218198514529512351613.363118.7414982.5112305.76 Total9377682152069298395436509681823.13656.5515822.2913040.85 Source: IRDA Annual Report (Premium in ` lakh) New Business under Microinsurance Portfolio (Individual) BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

20. 20 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Lives CoveredPremium Insurer2007-082008-092009-102010-112007-082008-092009-102010-11 Private874901149899418951431983537871.233326.81472.091719.14 LIC1136712611052815149469271327546419256.2317268.5422869.7213803.67 Total1224202712551809168420701525900120127.4620595.3424341.8115522.81 Source: IRDA Annual Report (Premium in ` lakh) New Business under Microinsurance Portfolio (Group) BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

21. 21 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Micro Insurance Agents of Life Insurers (Additions) 06 -0707-0808-0909-1010-11 Private79341281309139 LIC12322934248220712171 Total13113275276323802310 As on March 31st of the respective year (Source: IRDA Annual Reports) Micro Insurance Agents of Life Insurers BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward

22. 22 /16 Driving Efficiency & Growth in Microinsurance through regulatory intervention September 12, 2015 Consumer Education / Financial Literacy is a “public” good Trust Belief Brand Awareness Budgeting & Lifestyle Financial Instruments & Concept of Insurance Policy T & C Product & Services Consumer Awareness Financial Literacy Financial planning & cash management Regulator Build awareness & trust (perception of value) Creating a market place Insurer and distribution channel Creating a customer base BackgroundMI RegulationIndian ContextEffectivenessLearningsWay Forward