Microinsurance Can Build Security for the Poor in India

06 Jun 2007

New Delhi, 6 June 2007 - Microinsurance offers an innovative new way to combat poverty by helping the rural poor systematically manage financial risks to their livelihoods and lives. Microinsurance represents an untapped market of nearly US$2 billion in India alone, according to a new study released by the United Nations Development Programme (UNDP).

Up to 90 percent of the Indian population, or 950 million people, are excluded from the insurance market and represent a powerful "missing market," UNDP reported the study, Building Security for the Poor: Potential and Prospects for Microinsurance in India.

"Reducing poverty requires not just the generation of income among the poor, but also the protection of these incomes," said Minh H. Pham, Regional Manager of the UNDP Regional Centre in Colombo, which oversaw the study. "The microinsurance industry is poised to take off in India. It is in a similar state of development as microcredit was a decade ago."

Demand for microinsurance in India thus far has remained low, in large part because of a severe mismatch between services offered by insurers and the needs of the insured, the study stressed. The present outreach of microinsurance is around 5 million people, covering only 2 percent of the poor in the country.

According to the study, the rural poor not only want insurance to be affordable, but also to protect against high-frequency risks such as serious ill health, accidents, harvest failure and fire. But insurance companies mostly offer standardized products for a clientele that is relatively better off, urban and male, with few products for women. Many potential insurance risks are specific to women, such as coverage for delivery expenses, female infertility treatment and injuries from domestic violence.

Other challenges for insurers are the high costs of covering the needs of the rural poor and that microinsurance is difficult to distribute. Without appropriate insurance services, the vast majority of the poor "do without," turn to patrons, the extended family or village moneylenders, or temporarily migrate for work.

The study recommends that insurance companies significantly broaden the scope of products with a readiness to customize, as well as expand distribution channels and deliver benefits without delay. The use of ICTs (information and communications technology) in this process could also help to cut down on costs to rural microinsurance clients. Current coverage tends to be far more common for life insurance rather than non-life insurance for livestock, health and crops, confirming that most non-life products need to be "sold."

"Development of the microinsurance sector needs a longer-term perspective that combines responsiveness to client priorities with market development and financial viability," said Anuradha K. Rajivan, Programme Coordinator of the Human Development Reports Unit at the UNDP Regional Centre in Colombo and leader of the study team.

The timing of the study is strategic, Dr. Rajivan said, because policy interest in India in rural insurance has been building since the national Insurance Regulatory and Development Authority issued regulations in November 2005 regarded as highly favourable for the growth of the sector.

The 2005 IRDA regulations legally recognized non-Government organizations, self-help groups and microfinance institutions as "microinsurance agents," substantially increasing the pool of permissible agents. The regulations also allow companies to provide both live and livelihood coverage, fix coverage limits and reduce procedural bottlenecks.

She said other factors contributing to emerging opportunities for microinsurance in India include robust economic growth, which is increasing income among rural households; a "silent revolution" of rapidly expanding self-help groups comprised mostly of poor women, which has led to more entrepreneurial activity in rural areas; and increased media exposure, which can boost marketing practices.

In conclusion Ms. Rajivan said, "Catalyzing microinsurance can result in a 'win-win' situation, combining the double bottom line of commercial profit with social benefits of combating poverty through systematic risk management among the rural poor."

Conservative estimates place the potential market size for microinsurance in India, both life and non-life, at INR62,300 million to 84,300 million, or US$1.4 billion to $1.9 billion, the study said. This figure is expected to grow as microinsurance becomes better understood and demand increases.

The study is based on field investigations and public consultations in rural areas in the states of Orissa, Rajasthan and Tamil Nadu. Tamil Nadu was found to be relatively developed in insurance compared to Rajasthan and Orissa, where coverage is less than 1 percent.