A tech-based and non-exclusive approach could boost microinsurance and financial inclusion in India, argue Anjani Chowdhary and Anirudh Bansal
In 2018, 67.4% of India’s rural population contributed less than 25-30% of India’s GDP. India’s insurance penetration rate was 3.67%, compared to the global average of 6.33%. One reason behind this low penetration rate is lack of financial inclusion, especially in the rural sector.
The micro-ecosystem model aims to create equal opportunities to enable members of society to participate and grow socially and financially through literacy inclusion, digital inclusion and community inclusion, which will lay the foundation for financial inclusion. Financial inclusion deals with easy access to both banking facilities and insurance, to protect vulnerable sections of society during difficult times. An example of this would be providing a small shop owner with credit facility to grow his business and credit insurance to protect from indebtedness due to unfortunate events such as death or chronic disease.
The Indian government has introduced several flagship schemes to cover low-income households and increase financial inclusion. Examples are allowing zero-balance bank accounts for low-income households, the Digital India programme to provide digital connectivity, and he Ayushman Bharat scheme, which is a government-backed family floater health insurance scheme. However, the execution faced challenges due to lack of awareness, and will require an efficient monitoring mechanism.
A non-exclusive approach
Almost two Indians are pushed into poverty every second because of healthcare costs. At the most extreme end of the distress, almost 30 Indian farmers commit suicide every day, driven primarily by indebtedness and crop failures. It is this most vulnerable section of society that needs the most protection and that could benefit from a micro-insurer offering products that are non-exclusive, where no member is excluded from the benefits of microinsurance.
A 2015 regulation mandated insurers to sell insurance to the informal sector. To comply with these obligations, India’s Insurance Regulatory and Development Authority (IRDAI) defines a micro-insurance policy as “a general or life insurance policy with a sum assured of Rs.200,000 or less”.
It is perhaps the right time to redefine the meaning of microinsurance from ‘a mere product with low premiums and a small cover’ to ‘affordable insurance that genuinely protects the financial needs of the underserved community’. The International Cooperative and Mutual Insurance Federation’s 5-5-5 Mutual Microinsurance Strategy could be a game changer, tapping the potential of licensing a mutual and tech-based microinsurance company in India. Currently, there are a few community-based mutual insurance products being sold by NGOs, cooperatives and self-help groups (SHGs), which are not regulated by IRDAI.
Inclusive technology
Insurtechs will increase digital and financial inclusion in India, with not only companies but also customers adapting to new technology that can make insurance more consumer-friendly – especially for the informal sector. Currently, the most used technology in India’s informal sector includes WhatsApp, Facebook and YouTube, accessed via mobile phones or smartphones. This is a limitation for Indian insurers – especially when compared to insurers in China, the US and Europe, which are starting to use advanced technology in insurance products, distribution and claims processing. This is facilitated by rapid advances in digital infrastructure such as internet connectivity, as well as higher incomes, which impact the affordability of telematics, wearable devices and so on.
Challenges and opportunities
Microinsurance products need to be event-based, time-based, product-based and/or weather-based, and must be customised to meet an individual or community’s needs. This is currently a challenge due to lack of technology experts and infrastructure, and although the regulator mandates it, not all insurers sell microinsurance. Some of the key challenges in India are:
Distribution channels
In India, the agent-driven model is used to sell microinsurance. India is home to 92,000 registered voluntary organisations and NGOs, 6.5m SHGs and 223 microfinance institutions (MFIs). Of these, only 72,857 are registered as microinsurance agents, of which 9% are NGOs, 0.5% are SHGs and 0.4% are MFIs. Despite IRDAI granting permissions to various organisations that allows them to sell microinsurance products in India, the challenge remains, due to:
- Lack of expertise about microinsurance products among the distributors
- Additional effort required by agent to
- sell, possibly due to lack of consumer awareness/education
- The incentives for microinsurance intermediaries might not be worthwhile.
One way to overcome these challenges could be to revisit the regulations pertaining to the distribution. Another could be providing an online platform via WhatsApp or an offline mode using toll-free calls or texts. For example, the insurance broking startup Gramcover uses mobile technology to distribute products in rural India. It follows a paperless onboarding system using rural-friendly technology such as mobile and Aadhaar (a unique identification number for Indian citizens).
Product design and pricing
There are only 44 microinsurance products available in India, of which 20 are group products and 24 are individual products. However, it is primarily sold as group insurance: 121 million new lives were covered via group insurance in the year 2018-19, vs 0.9 million new lives that were covered via individual insurance during the same period.
Underwriting
Insurance products can be complex, involving jargon and detailed proposed forms. Here, behavioural economics could play a vital role in designing a consumer-oriented proposal form, including:
- Order and structure of the questions to be asked
- Possible options available for each of the questions in the form
- Language used.
With the help of technology such as chatbots, underwriting can be automated. Chatbots with speech-recognition in regional languages may eliminate the language barrier, while a video-calling feature could enable members to have a face-to-face interaction with agents and/or underwriters. Chatbots integrated with AI could enhance policyholders’ engagement with micro-insurers, providing a more satisfying customer experience. Making best use of these to closely connect at grassroots level can help insurers with distribution, underwriting and claim assessment to reduce adverse selection.
Access to reinsurers
The availability of reinsurers in India, especially for products covering the informal sector, is quite low – even when compared to countries such as Bangladesh, Indonesia and the Philippines. This is due to the reinsurance regulations of the General Insurance Corporation of India, the sole Indian reinsurer. In order to overcome this challenge, mutual and tech-based microinsurance companies could offer a quasi-reinsurance arrangement to the mutual insurers and conventional insurers.
Digital and financial literacy among the poor
This is a challenge from the point of view of both insurers and the insured. For a member of the rural community, understanding product details can be cumbersome due to lack of financial literacy, lack of banking/insurance infrastructure in villages, lack of effective education, social biases relating to women, and so on. These barriers also hinder market research initiatives by insurers, with prospective customers being either unable or reluctant to provide the right kind of information.
A step in the right direction
Microinsurance has largely been regulator-driven in India. The Indian regulator’s Sandbox initiative, which relaxed certain norms for new products and extended to underwriting, innovative or tech-based distribution/solicitation and claims servicing, could open up avenues for microinsurance. Recently a report was published to explore the setting up of a standalone microinsurance company with revised capital requirements – another step in the right direction. Adaptability, agility and adopting an experimentative culture are the key to creating a sustainable insurtech microinsurance model in India.
“The most vulnerable section of society could benefit from a micro-insurer offering products where no member
is excluded”
Anjani Chowdhary is working with Swiss Re
Anirudh Bansal is the founder of InsurTech Actuary
