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)