Microinsurance - A study in the Indian context

Anish Shankar Menon

December 20, 2013

Abstract

This paper examines the microinsurance business in the Indian

context. It looks at the origins of microinsurance and then traces the

trends across the world. It then examines microinsurance from an

Indian perspective. The paper looks at the landscape of the microin-

surance business in India. It then looks at the legislations that affect

the microsinsurance business. Further it tries to look at the future

of the microinsurance business in the background of the recent legal

developments in the microfinance business in India. The final part of

this paper studies the microinsurance business of a particular insurer

in detail.

1 Introduction

Microfinance has been one of the most important innovations in the past

century in the field social inclusion. The reason being that it virtually trans-

formed the poor from being unbankable to a safe investment. Not only did

this movement gain momentum in Bangladesh and its neighbouring coun-

tries but also spread around the world especially in South East and West

Asia, Latin America and Africa.

1

According to Ledgerwood (1999), microfinance is an approach targeted

at providing financial services to low income consumers. It includes but

is not limited to savings and credit, insurance and payment, financial and

social intermediation, training, literacy and capacity building measures and

similar activities. Microinsurance is an activity that comes under the scope

of microfinance though it can be studied in isolation.

This paper tries to look study the microinsurance industry in India. It

first defines microinsurance and then traces its historical development in the

world as well as in India. It examines the trends in microinsurance both

international and Indian. It then looks at the legal developments to promote

inclusiveness in the insurance sector. It finally tries to analyze the impact of

the legislations in the microfinance sector on the microinsurance business.

2 Microinsurance - An overview

2.1 Definition

According to Churchill (2006), microinsurance is essentially the same as regu-

lar insurance except for the target consumer segment which is the low income

people. It is essentially a financial product that offers protection against spe-

cific risks commensurate to the premium paid and the likelihood of occur-

rence of the risk insured against. The target population of microinsurance

are the people who were erstwhile thought to be uninsurable. According

to Churchill (2006) the microinsurance frontier is made of workers in the

informal economy with unpredictable cash flows. Microinsurance does not

refer to the size of the insurer. Many large insurance companies provide mi-

croinsurance products. However there are small and informal microinsurance

providers also. It also does not characterize the nature of the risk. Loss of

2

life has the same dread for the rich and poor alike and is in no way trivial

for the poor.

Microinsurance could cover various types of risks such as illness, death and

property loss. It could also extend to insurance of agriculture, livestock and

similar important aspects in the customers life. Primarily anything that can

be insured conventionally will fall under the ambit of microinsurance. The

term micro merely signifies the scale of the operation in absolute monetary

terms. The premium size and hence finally the sum assured in such products

would be significantly smaller than that of conventional insurance products.

Microinsurance according to Churchill (2006) has a two-fold objective.

The first is to provide the poor and marginalized sections of the society with

adequate social and economic protection in the absence of any government

initiatives for the same. The second is to help create a sustainable busi-

ness model that would help insurers view the poor as a profitable customer

segment.

2.2 A brief history

Microinsurance is not a new concept. Insurance has been around for quite a

long time. However the term microinsurance is new. According to Zanjani

and Koven (2013), the forerunner to the modern day microinsurance was

the industrial insurance in the United States of America (USA) in the early

1900s which was meant for the working class family. According to McCord

and Roth (2006) the premium was collected on the wage day and was very

effective. The agents were market specific and the risks were worker specific.

Coverage was tailored to suit the workers needs.

According to Zanjani and Koven (2013), another product that focussed on

low income customers was fraternal life insurance. Unlike normal insurance

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products, fraternal insurance was based on the social security of communities

or groups. This insurance was based on the method of assessments. Suppose

an insured member of the fraternity died, then the rest of the surviving

members contributed towards the death benefit of the deceased member. A

member could remain insured as long as the assessments were paid. This

system moved towards the premium system prevalent today.

Microinsurance today is mainly distinguished from conventional forms of

insurance on a few parameters. According to Tomchinsky (2008)1 these are,

1. Microinsurance policy documents are simple and easy to understand in

comparison with complex insurance documentation.

2. They are broady inclusive unlike ordinary insurance products that have

a limited eligibility with standard exclusions.

3. The premium payments take into account irregular cash flows in the

case of microinsurance.

4. Coverage can be less than a year, wherein most conventional products

have a minimum term of twelve months.

5. Self declaration in the case of microinsurance is usually accepted unlike

ordinary policies where a medical examination is usually required.

6. Only small sums insured in case of microinsurance.

7. Pricing of the product in the case of microinsurance is usually group

or community based.1Gabrielle Tomchinsky, "Introduction to microinsurance: Historical Perspective", Pre-

sentation made at the 4th International Microinsurance Conference Cartagena, Colombia,November 5, 2008, http://www.ilo.org/public/english/employment/mifacility/download/presentations/mconf2008_tomchinsky.pdf

4

8. The distribution channel manages the entire customer relationship from

sale of policy, premium collection to claims disbursal.

9. The customers of microinsurance are usually not quite aware of what

an insurance product is.

Microinsurance today is seen as a huge business opportunity. A simple

reason is the market size. According to the World Bank nearly 1.22 billion

people lived on or below $1.25 per day. 2.4 billion people lived on $2 or less

per day.2 Both these indicators denote extreme levels of poverty. There are

many others who though not extremely poor, are certainly not well off. This

market size is a fundamental reason for the emergence of microinsurance as

a viable and profitable business opportunity.

2.3 Types of microinsurance products

Microinsurance products like all insurance products can be bifurcated into

life and nonlife products. The life products include credit life insurance, term

life or personal accident insurance and savings life insurance. Health insur-

ance, agricultural insurance and property insurance are the non-life insurance

products.3

Besides these there are other types of products. According to Hougaard

and Chamberlain (2011) the most popular microinsurance product after

credit life insurance is funeral insurance. Ramsay and Arcila (2013) develop

a risk-neutral model for pricing funeral insurance policies in the African con-

text through a burial society. They too emphasize the fact that funeral

insurance is among the most popular products in Africa.2http://www.worldbank.org/en/topic/poverty/overview3http://www.microfinancegateway.org/p/site/m/template.rc/1.11.48248/1.

26.9202/#types?

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2.4 Microinsurance delivery mechanisms

There are many models through which microinsurance is delivered to the end

customer. The most prevalent among them include 4:-

1. The self insurance mode wherein the microfinance institution uses a

credit life or mandatory life products. The product is also managed in-house

by creating a reserve. When a client dies, the loan balance remaining in her

name is written off from the fund. This however is highly risky as many

institutions lack both the capital and skill to manage an insurance product.

2. Some institutions may partner with specialist insurance companies and

provide services to their customers. The insurance company capitalizes on

the distribution network of its partner while the microfinance organization

takes advantage of the insurance companys expertise. This is the most

common model prevalent today.

3. In some instances, the microfinance organizations may employ the ser-

vices of an intermediary or broker who has the adequate local knowledge and

acts as a bridge between the microfinance institution and the insurance com-

pany. These brokers also help identify markets for microfinance companies

to start and expand their microinsurance business.

4. In some cases microfinance companies with large enough resources

might create their own microinsurance companies. Examples would include

the company created by African Allianz, the parent group of Select Africa

in Swaziland, Africa and SANASA Insurance Company Limited created by

SANASA, a co-operative network in Sri-Lanka.

Of the four, the last method, that of creating an own microisnurance

company, could be the best method of delivering the product to the end

consumer. However of the four it also the most difficult. In the Indian4See Churchill et al. (2012)

6

context for example, SEWA has wanted to create its own insurance company.

However the steep capital requirements and rigid protocol for venturing into

the insurance business has been constant and unsurmountable impediments

in its path.

According to Karmakar et al. (2011), microinsurance models can be clas-

sified into four types namely:-

1. Government initiated schemes like the natural disaster fund in Viet-

nam.

2. Reinsurance initiated schemes like the tieup between Interpolis Re

(reinsurer) and the DHAN Foundation (Non-Governmental Organiza-

tion (NGO)) in India.

3. Microfinance initiated schemes like the ones initiated by Opportunity

International.

4. NGO initiated schemes like the one initiated by the Disaster Manage-

ment Institute (DMI).

3 Microinsurance around the world

Microinsurance has been developing at quite a rapid rate all over the globe.

Matthews (2012) provides data with respect to developing countries that in-

clude Brazil, India, Indonesia, China, Mexico, South Africa, Kenya, Nigeria

and Vietnam among others. He emphasizes that the development of mi-

croinsurance depends on two factors namely the size of the market and the

prevalent economic environment of the country.

There has been a lot of research in the microinsurance field around the

world. According to Giesbert et al. (2011) who studied the relationship

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between the households decision to take up microinsurance and the use of

other financial services in Ghana have found that risk averse households do

not take up microinsurance as they consider microinsurance to be risky. This

they claim is a problem of adverse selection due to asymmetric information

in the market. In another study in Ghana, Karlan et al. (2011) have found

that loans with an indemnity component wherein the farmers were assured

of being indemnified if the price of the crop fell below the threshold price

was not effective. Farmers took loans in the same level irrespective of the

indemnity component or not.

Hamid et al. (2011) have found in their study conducted in Bangladesh,

a positive relation between health microinsurance and various outcome mea-

sures closely related to poverty that include household income, stability of

household income via food sufficiency and ownership of nonland assets, and

the probability of being above or below the poverty line. They propose that

this relationship is quite important for the food security of the families. A

study by Akter et al. (2011) on micro flood insurance in Bangladesh revealed

that the administration costs of micro flood insurance determines their via-

bility in the long run.

There is extensive research being done in the field of micoinsurance. Der-

con et al. (2008) and Bock and Gelade (2012) provide a good overview of the

literature in the microinsurance domain.

4 Microinsurance in India

4.1 Landscape

Microinsurance both in theory and practice has gained huge impetus in India.

India, with its huge population and with most of it having low incomes, is

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the perfect market for microinsurance.

According to Roth et al. (2005) there were many informal microfinance

sources in India. These were run by churches, co-operatives, societies, Non-

Governmental-Organizations and similar institutions.

An early pioneer of microinsurance in India was the SEWA Bank. SEWA

Bank had integrated schemes that covered the womens lives, their husbands

lives and comprehensive insurance that included loss of property.5. The sub-

components of the insurance was covered by mainstream insurance companies

like the Life Insurance Corporation (LIC). However SEWA was not able

to begin its own insurance company due to strict regulations and capital

adequacy requirements imposed by the insurance regulator.

There are other mutual insurance schemes in India. A good example

of this is the Yeshasvini health insurance scheme for farmers in Karnataka.

The scheme was started by the renowned cardiac surgeon Dr. Devi Shetty

and provides insurance facilities akin to the cashless facilities provided by

conventional term health insurance policies.6.

The typical Indian microinsurance client has the following characteris-

tics7:-

1. The average family size is five members or more.

2. Agriculture is the main income source.

3. The poverty of the client increases his risk profile above average.

4. The closely knit communities facilitate internal surveillance.5See Fisher and Sriram (2002)6See Micro-Credit Ratings International Limited (2008)7See Microinsurance: Demand and Market Prospects

? India, UNDP Report http://www.undp.org/content/dam/aplaws/publication/en/publications/capacity-development/microinsurance-demand-and-market-prospects-for-india/Microinsurance.pdf

9

5. Lower literacy levels means the information about the insurance prod-

ucts must be done through medium other than the written word.

6. Inadequate infrastructure in rural areas increases cost of selling and

servicing the products.

Microinsurance faces many impediments in India. These include8:-

1. Lack of expertise in selling low value high volume products.

2. High fixed costs of sales and distribution.

3. Lack of awareness of clients.

4. High risk allocation of clients by actuaries.

5. Low premiums hence low commissions.

6. Client migration.

7. Low sum assured compared to actual loss.

There are a variety of products on offer in India. According to Mukherjee

(2012c) these include individual life insurance products, savings linked life

insurance products, individual and group general insurance products and

group (term) life assurance products. This is in addition to the informal

community based products already available.

Conventional insurers are active in the microinsurance domain. Accord-

ing to the Compendium of microinsurance products released by the Centre

for Microfinance, there were around 43 products that covered life and non

life types. 9. A comprehensive study was done in the year 2005 by the In-

ternational Labour Organization which listed the companies that provided8See Mukherjee (2012a)9http://www.srtt.org/institutional_grants/pdf/compendium.pdf

10

microinsurance and their products. 10. The Insurance Regulatory and Devel-

opment Authority (IRDA) website that provides similar information however

is updated only until the year 2009.

In a study by Ito and Kono (2010), the researchers find that the reason

for low microinsurance acceptance especially in the health insurance is due

to well established economic behaviour. They say that people are risk loving

when it comes to losses and hence do not take up insurance which they find

consistent with prospect theory. They also find evidence of adverse selection

where families with more sick people take insurance. Since microinsurance

health products seldom require comprehensive health checkups, the problem

of adverse selection is bound to be high.

However Bauchet et al. (2010) observe that microinsurers direct their

insured to hospitals that have better facilities than the ones the clients would

have visited had they not been insured. However they also find that just being

insured does not guarantee better quality care.

Rusconi (2012) studies four microinsurance products in India offered by

established insurance companies. He observes that insurance products with a

savings component attached are quite suitable for the poor customers as the

poor are able to see some value for the premium that they have paid. This

substantiates the observations made by Bannerjee and Duflo (2011) where

they observed clients moving from one microfinance institution that made

insurance compulsory to another. This is attributed to the question of trust

and this is achieved in a savings linked insurance product where the client

can see his savings firsthand.10See Special Studies: Insurance products provided by insurance companies to the

disadvantaged groups in India: Working paper http://www.ilo.org/public/english/protection/socsec/step/download/823p1.pdf

11

4.2 Legislations impacting microinsurance

A number of legislations were primarily responsible for the development of

microinsurance in India. The first was the regulations released in the year

2002 by the Insurance Regulatory and Development Authority (IRDA) titled

IRDA (Obligations of Insurers to Rural Social Sectors) Regulations, 2002.

The original document stated that any insurer carrying on the business of

insurance after enactment of the Insurance Regulatory and Development Au-

thority Act, 1999 has to achieve some specified targets during the first five

financial years. For a life insurer in the rural sector, the targets were 7%,

9%, 12%, 14% and 16% in the five years respectively of total policies written

that year. For the general insurer it was 2%, 3% and 5% of the total gross

premium income of that year. Apart from this it also specified limits for

all insurers with respect to the social sector. This was five thousand, seven

thousand, ten thousand, fifteen thousand and twenty thousand lives to be

covered in the first five years respectively. Besides the general insureres were

also asked to provide agricultural insurance for crops. Here rural sector was

defined as a place which according to the current census had a population of

less than five thousand, a population density of less than four hundred per

square kilometre and more than 25% of the male population engaged in agri-

cultural pursuits (cultivators, agricultural labourers and workers in livestock,

forestry, fishing, hunting and plantations, orchards and allied activities). The

social sector included the unorganized, informal sector, economically vulner-

able or backward classes in both urban and rural areas.

This was followed by a concept note released by IRDA in 2004 titled

Concept Paper on Need for Developing Micro-Insurance in India. This pa-

per laid down the foundations of new microinsurance regulations in India. It

broadly spoke of the requirement to adapt formal insurance mechanisms to

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suit the needs of the micro-economy and providing an impetus to the non-

formal sources of insurance. In the year 2005, the IRDA issued the IRDA

(Micro Insurance) Regulations, 2005 and also amended its earlier regula-

tions. The new regulations provided definitions of microinsurance products,

microinsurance agents and other key terms. It also laid down some rules with

regard to tie-ups between life and non-life insurers, distribution of products,

appointment of microinsurance agents, their code of conduct their remuner-

ation, filing of the policy design, issuance and underwriting of the contracts,

capacity building and similar matters. The amendments to the old regula-

tions included a target for the sixth year. This was that in the case of life

insurers, 18% of the total policies written should be in the rural sector. In

respect of non-life insurers, 5% of direct gross total premium must be from

the rural sector. It also mentioned that in respect of all insurers twenty five

thousand new lives had to be insured in the social sector. The 2002 regu-

lations were amended twice in the year 2008. In the third amendment, the

targets are further revised for the sixth year and new targets on similar lines

as in the original regulations are specied for the seventh to the tenth year.

The fourth amendment is a technical one where an insurance company that

has commenced operations in the second half of the year and has less than

six months of operations is exempt from rural and social sector obligations

for that year and its first year starts from the beginning of the year after its

commencement of operations.

However the insurance companies do not find microinsurance enticing

enough. According to Mukherjee (2012b), the LIC is the major player in

the microinsurance market since it is state owned. The rest of the compa-

nies focus on high value business while just managing to meet the target

requirements.

13

A few important statistics on the microinsurance industry in India can

be provided to support the above statement.11

Table 1: Individual - Number of policies: Life

Company 2008-09 2009-10 2010-11 2011-12Aviva 310 3757 11222 6322

Bajaj Allianz 10226 127Birla Sunlife 280659 568647 290395 256226

HDFC Standard 176464ICICI Prudential 234299 344926 324889 321009

Metlife 734 125 3501 9243Sahara 604 324 1483 6282

Tata AIA 84019 80903 68243 18114Private Total 610851 998809 699733 793660

LIC 1541218 1985145 2951235 3826783Industry Total 2152069 2983954 3650968 4620443

Table 1 shows the number of life microinsurance policies issued by the var-

ious insurance companies. The growth of the business seems to be uneven.

By the year 2011-12, ICICI Prudential has the most number of microinsur-

ance policies. LIC has the most number of policies in total in all the years.

Table 2 shows the premium collected from life microinsurance polcies. In

the year 2011-12, HDFC Standard has collected the highest premium amount.

Table 3 shows the average premium per policy. It can be seen that the

premium per policy is different for different insurers. Many companies over-

priced during the initial years with prices settling after the first two years.

The most radical change is seen in both Bajaj Allianz and Metlife. Birla Sun-

life and ICICI Prudential has consistently maintained low premiums. They

are also the companies that have some of the highest business volumes.

Apart from individual life microinsurance business, the companies also11Handbook on Indian Insurance Statistics 2011-12, Insurance Regulatory Development

Authority (IRDA) Publication

14

Table 2: Individual - Premium Amount (in Lakhs): Life

Company 2008-09 2009-10 2010-11 2011-12Aviva 1.52 18.17 58.87 36.40

Bajaj Allianz 85.47 2.42Birla Sunlife 147.69 263.72 186.00 168.14

HDFC Standard 352.93ICICI Prudential 122.05 288.18 256.08 281.44

Metlife 18.69 7.19 4.21 10.63Sahara 8.21 4.90 12.24 39.43

Tata AIA 154.17 255.20 217.69 75.25Private Total 537.81 839.78 735.09 964.22

LIC 3118.74 14982.51 12305.76 10603.49Industry Total 3656.55 15822.29 13040.85 11567.71

Table 3: Individual - Average Premium per policy

Company 2008-09 2009-10 2010-11 2011-12Aviva 490.32 483.63 524.59 575.77

Bajaj Allianz 835.81 1905.51Birla Sunlife 52.62 46.38 64.05 65.62

HDFC Standard 200.00ICICI Prudential 52.09 83.55 78.82 87.67

Metlife 2546.32 5752 120.25 115.01Sahara 1359.27 1512.35 825.35 627.67

Tata AIA 183.49 315.44 318.99 415.42Private Average 88.04 84.08 105.05 121.49

LIC 202.36 754.73 416.97 277.09Industry Average 169.91 530.25 357.19 250.36

insure in groups. The tables below provide data on group insurance policies.

Table 4 shows the number of schemes per company. By far LIC has the

maximum number of schemes. In the private sector Birla Sunlife and SBI

Life have the highest number of schemes.

Table 5 shows the number of lives covered. Again LIC covers the maxi-

mum number of lives. In the private sector Aviva, IDBI Federal and SBI Life

have covered the maximum number of people.

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Table 4: Group - Number of policies: Life

Company 2008-09 2009-10 2010-11 2011-12Aviva 1 1 5

Birla Sunlife 63Canara HSBC 1DLF Pramerica 1 1 1 1IDBI Federal 2 13 5 1ING Vysya 2Sahara 1 1SBI Life 7 1 12 39Shriram 1 3 3

Private Total 14 17 23 112LIC 6883 5190 5446 5461

Industry Total 6897 5207 5469 5573

Table 5: Group - Number of lives covered: Life

Company 2008-09 2009-10 2010-11 2011-12Aviva 872244 1548820 896377 110415

Birla Sunlife 63357Canara HSBC 2586DLF Pramerica 2602 7500 10010 15125IDBI Federal 22602 41442 648835 315400ING Vysya 40000Sahara 50 69SBI Life 558910 281856 70683 108829Shriram 15525 357563 137429

Private Total 1498994 1895143 1983537 750555LIC 11052815 14946927 13275464 9444349

Industry Total 12551809 16842070 15259001 10194904

Table 6 documents the amount collected as premium. LIC still has the

maximum premium collection while in the private sector, the maximum pre-

mium collected is by SBI Life and Aviva.

Table 7 shows the average premium per policy. In most cases, the pre-

mium is substantially lower than individual policies which can be explained

by economies of scale. However the premiums reduce and then show an in-

16

Table 6: Group - Premium (Rs. Lakhs): Life

Company 2008-09 2009-10 2010-11 2011-12Aviva 16.75 834.79 1118.30 547.82

Birla Sunlife 20.17Canara HSBC 2.34DLF Pramerica 0.01 0.01 1.00 0.03IDBI Federal 2.97 11.02 178.41 116.34ING Vysya 0.78Sahara 0.10SBI Life 3303.85 622.17 78.23 246.44Shriram 4.10 343.20 219.88

Private Total 3326.80 1472.09 1719.14 1150.67LIC 17268.54 22869.72 13803.67 9831.63

Industry Total 20595.34 24341.81 15522.81 10982.30

Table 7: Group - Average Premium per policy: Life

Company 2008-09 2009-10 2010-11 2011-12Aviva 1.92 53.9 124.76 496.15

Birla Sunlife 31.84Canara HSBC 90.49DLF Pramerica 0.38 0.13 9.99 0.2IDBI Federal 13.14 26.59 27.5 36.89ING Vysya 1.95Sahara 200SBI Life 591.12 220.74 110.68 226.45Shriram 26.41 95.98 160

Private Average 221.94 77.68 86.67 153.31LIC 156.24 153.01 103.98 104.1

Industry Average 164.08 144.53 101.73 107.72

creasing trend. On an average LIC has a fairly stable average premium per

person.

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4.3 Effect of microfinance legislations on microinsur-

ance

Microfinance Institutions (MFIs) are the most prevalent vehicles for carrying

on microinsurance business. However in the recent times, the microfinance

industry has come under scrutiny by the Government. The Government

has enacted laws for regulating the microfinance business. This includes

the Andhra Pradesh Microfinance Institutions (Regulation of Money lend-

ing) Act, 2011 (hereinafter the AP Act) in the state of Andhra Pradhesh

and the Microfinance Institutions (Development and Regulations) Bill, 2012

(hereinafter the Bill) at the national level. The regulations severely impact

the MFIs in conducting business as they previously used to by curbing their

freedom in setting interest rates, fixing instalment periods and other similar

conditions.

The AP Act does not define microfinance services. However the Bill

defines microfinance services and insurance falls under its ambit. This creates

an interesting scenario since the insurance business in India is regulated by

the IRDA. The Bill states that the Reserve Bank of India (RBI) has the power

to issue directions to the MFIs in respect of "levy of processing fees, interest,

life insurance premium and other terms relating to micro credit facilities

including the ceiling on the percentage of margin to be maintained by a micro

finance institution." The clause is confusing as it relates microinsurance and

microcredit which are two different products.

The Bill has not been passed in the Parliament. Only then will more

clarity emerge on its effects on the microinsurance business. However the

trends do not seem quite promising. According to the year 2012 annual report

of Bhartiya Samruddhi Finance Limited, a leading MFI, the revenues from

microinsurance business have fallen from |216 million in the year 2010-11 to

18

|124 million in the year 2011-12.12 Similarily in the case of SKS Microfinance

Limited, the only publicly listed MFI in India, the revenue from insurance

decreased from around |11 crores to |2 crores in the same period.13.

5 Allianz: A study with focus on India oper-

ations

Allianz is one of the worlds prominent financial services institution that

specializes in insurance. Based out of Germany, Allianz is the worlds largest

diversified insurance company.14

Allianz started its microinsurance business in the year 2004 in India with

the microfinance institution Activists for Social Alternatives. In the year

2006, it set up a partnership with CARE International to offer microinsurance

in the coastal regions of Tamil Nadu. Again in the year 2007, in Tamil Nadu,

it launched a mutual health insurance scheme with CARE International. In

the next year with the same partner in the same State, it launched general

insurance products. In the year 2008, it began a savings linked life insurance

scheme with SKS Microfinance. In the year 2010, it launched a savings linked

life insurance scheme with the Punjab Dairy Federation.15

As on October, 2013, Allianz has five products in India.16 Out of these,

two are life products (one individual and the other group) which is distributed

by Bajaj Allianz Life Insurance Company and the rest are non-life products12See Bhartiya Samruddhi Finance Limited Annual Report 2011-1213See SKS Microfinance Limited Annual Report 2011-1214According to the Forbes website http://www.forbes.com/global2000/list/#page:

1_sort:0_direction:asc_search:_filter:Diversified%20Insurance_filter:All%20countries_filter:All%20states

15See learning to insure the poor: microinsurance report, allianz group, 201016See Microinsurance Product Pool, Overview and assessment of Allianz microinsurance

products, Allianz SE, October 2013

19

that are sold by Bajaj Allianz General Insurance Company. The life prod-

ucts include a pure life product and a life insurance with savings product.

The non-life products include a cattle and livestock insurance product and

personal insurance products.

The main channel of distribution of these products are MFIs. Other

channels include banks, co-operatives, Regional Regional Rural banks and

banking correspondents. The common channel is the MFI. This would help

Allianz achieve penetration in the rural market and widen its customer base.

Allianzs business model in India primarily had three partners CARE

International, SKS Microfinance and the Punjab Dairy Federation.

In Tamil Nadu, Allianz partnered with CARE International to develop a

product that would suit the poor fishermen of the coastal areas. The product

was a general insurance policy that covered multiple risks. It also included an

education grant for a single child. Premium payments were monthly. From

March 2008, sixty three thousand five hundred policies were sold in the first

nine months. The benefit of the insurance was felt in the year 2008 when the

cyclone Nisha hit the eastern Indian coastline in November 2008. Allianz

settled over sixteen thousand claims in forty four villages. Allianz increased

its premium but people understood the benefits of insurance.

Again with CARE International in Tamil Nadu, Allianz started a mutual

insurance scheme. In the case of mutual insurance, technically the insurane

company is owned by the policyholders. The drawback of this method is

that the size of the claim could easily exceed the resources thus forcing the

scheme into bankruptcy. The Allianz model with CARE International as

the intermediary was such that the smaller risks were mutually insured while

the larger ones were taken care by Allianz. CARE International partnered

with local NGOs like Kodi Trust to setup mutual schemes. Focus was on

20

complete family coverage including maternity. People could be insured till

they were seventy years old. Of the premium collected, two thirds would

remain in the group while Allianz would get the remaining one third. The

adverse selection problem is settled as only direct referrals by members are

given insurance. The problem of moral hazard is solved by doctors referring

patients to the concerned hospital at pre-determined prices. The principle of

mutuality negated fraud.

In April, 2008, Allianz partnered with SKS Microfinance to launch a

savings linked life insurance product. SKS Microfinance provided Allianz

with a huge captive base of clients. The premium was paid weekly for five

years. In case of death, the claim was serviced else the amount deposited

is returned with interest. SKS Microfinance made the insurance compulsory

and it saw many clients leave the company for its competitors.

Allianz partnered with the Punjab Milk Federation to provide savings

linked life insurance. The three tier structure of the co-operative dairy in-

dustry with the Village Co-operative at the lowest level, the District Union

at the middle level and the State Federation at the top level provided a solid

foundation on which the insurance business could be built. The policy was

at a group level and could be customized as per the requirement of the union.

The intermediation was done by the dairy unions themselves and premiums

were collected when payments to the dairy farmers were disbursed.

Microinsurance for Allianz has been a reasonable success. As on October,

2013, Allianz has covered over 21,332,000 individuals. This is 19,100,000

people under group term life, 1,900,000 people under life endowment, 333,000

people under personal accident, 2,000 people under personal accident with

hospitalization and 45,000 cattle under the cattle and livestock plan.17

17See the Microinsurance at Allianz Group 2013 Half Year Report

21

Allianzs major partners are MFIs. The MFIs have both the knowledge

and scale to penetrate rural markets. However MFIs have been having a

tough time in India due to regulatory issues as discussed earlier in this paper.

For example in the case of the product supported by SKS Microfinance,

premium collections are weekly. People who default on loan instalments

would also be likely to default on premium instalments. This would be

detrimental to Allianzs microinsurance business as a whole.

Both commercial banks with their expertise in financial services and the

postal services with its extensive networks are channels of distribution that

Allianz can explore. The hope however would be that the MFI regulations

would come in place and lend more clarity to the whole matter.

6 Conclusion

In purely commercial terms, microinsurance is an extremely viable and prof-

itable business proposition. The customer base is extremely large and if

operations are scaled up, the thin margins might be more than adequately

covered by the volume of business.

An insurance is an asset. It is an accepted collateral in a bank for availing

of loan facilities. Microinsurance too helps in asset formation of a similar sort

but at a much smaller level.

The future of the microinsurance industry would depend on how the Gov-

ernment frames rules and regulations in this domain and the reaction to the

same by the various functionaries in the business chain. This would include

large insurers (almost all major private insurance companies have entered the

microinsurance business) who design the products, the MFIs who distribute

the products and ultimately the consumers who purchase the product. The

22

voices of the first two are most loudly heard whereas that of the last, dissap-

pears into silence.

23

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IntroductionMicroinsurance - An overviewDefinitionA brief historyTypes of microinsurance productsMicroinsurance delivery mechanisms

Microinsurance around the worldMicroinsurance in IndiaLandscapeLegislations impacting microinsuranceEffect of microfinance legislations on microinsurance

Allianz: A study with focus on India operationsConclusion