Challenges to be encountered in the Indian Rural Insurance Market
The task of providing insurance services to the people in rural areas will be major challenge for both public and private insurance companies. The challenges to be overcome for providing universal access to insurance services in rural areas are as follows:
1. Awareness and Education
There is major challenge for insurance companies and policy makers to increase the awareness levels among rural population, so that they may view insurance policies as a risk management tool.
Traditionally rural households have addressed their risk protection in various forms: from the joint family, investing in gold, land and other areas. Most insurance policies that rural customers are familiar with have been sponsored or subsidized by the government, the legacy of this post is that rural people do not fully see insurance as a risk sharing mechanism through contributions in premium.
There is need for sufficient investment by both private and public insurance companies to bring about a change in the perception of insurance as a risk mitigation instrument and enhance the awareness levels on various products and how they work in principle.
2. Documents for Certification
For effecting and servicing various insurance contracts, a variety of documents are expected to be provided by the customer to the insurance company. On account of their low awareness levels and also lack of documentation systems in public institutions for issuing various documents, rural people face a peculiar disadvantage of not processing even some very basic documents required for taking insurance policies. Below are listed a few such cases:
a. Age Proofs
Most rural people do not have a formal age proofs that are demanded by insurance companies. A common kind of age proof that may be available with good number of people is the voter identity issued by the Government.
Unfortunately, the quality of information captured on these voter IDs is found wanting and therefore is not accepted as a standard age proof by some Insurance Companies. If you are to seriously look at extending life insurance on a large scale in rural areas, it will be necessary to provide a standard age proof to all rural customers which will be accepted by all insurance companies without discrimination.
b. Death Certificate
Currently there is no standardization of how a death certificate is issued uniformly across the country. Some insurance companies have difficulty in accepting death certificates issued by other than municipal authorities and revenue departments.
For rural people, the most feasible way to get death certificate is from the Gram panchayat. The regulator should clarify to the industry to give sanctity to the death certificate issued by Gram panchayat. Sometimes the insurers insist for cause of death, which is possible only if an autopsy is conducted.
c. First Information Report (FIR)
In claims that involve an accident, all insurance companies insist on submission of a FIR report registered with the police. In the rural context, the access to a police station is quite remote to many places and perception and experience of rural people is such that accessing a police station only invites more hassles to them.
In view of this, insurance companies should be willing to substitute an FIR with a declaration from community members in cases where it is not convenient to get a FIR.
3. Product Customization
Most products being offered today to rural market are very often urban products, offered to the rural market with some tweaking in features. Very often this may not be the right way to go about selling rural products, as the requirements of rural customers can be very different from that of the urban customer. The product needs specific design in terms of pricing premium payment opinions and simplicity in product features and process requirements.
4. Premium routing
Customers in rural areas do not have direct access to insurance companies, in order to remit small premium amounts in cash to the insurer directly. The alternative available for them is to remit cash to the insurer through banking instructions like cheques or Demand Drafts.
But this option is unlikely to be helpful to rural customers as very few have bank accounts to use these instruments and also the banking infrastructure in rural areas is grossly inadequate. Therefore there is a need for the regulator and the insurance companies to work on a process, which would allow rural customers to remit premium to insurance companies in a convenient and cost effective manner.
An alternative would be to route the premium through distribution channels like micro-insurance companies, which have the capacity to handle small and multiple cash transactions in villages.
5. Remuneration of expenses for distribution and servicing
It is well known that cost of delivering micro-finance is very high. This is a result of the combination of small and multiple transactions, with the customers scattered over a wider geography. The current regulations on compensation for insurance distribution have a cap on the commissions payable, which does not necessarily cover the cost of selling and servicing policies in rural areas.
There is need to de-regulate the commissions payable on various kinds of policies, especially for the rural sector. This would allow the insurance companies to ensure that at least the transaction costs of selling and servicing of rural insurance policies are recovered by the distribution partners. This would be absolutely essential to ensure that rural policies are sold and serviced actively.
6. Moving from “willingness to pay” approach to “willingness to charge” approach
Traditionally all research and design of rural products has been weighed down by thinking on what will be minimum premium amount that rural customers will be willing to pay for various policies. The result of this has been that most products have been designed with very low premiums that do not adequately cover the actuarial cost of covering the risk, leave alone the cost of delivery and servicing of the product.
This has only helped to meet the short term regulatory requirement imposed on the insurance companies to do a certain minimum number of policies in rural areas. But as a consequence of this method of pricing, there is little incentive for either the insurance company or the distributor to sell these policies in large numbers and do the need full servicing.
Therefore there is a need to design products that are priced in such way that there is enough interest for customers and also for the insurance companies and distributors to sell the products on a large scale.
7. Lack of focus on pure risk policies by insurance companies and high lapsation of policies in rural areas
In India, traditionally life insurance business has been seen more as a savings and tax reduction instrument rather than as a major risk protection tool. In the rural context, it has got translated into a mere saving instrument, with very little risk coverage.
The time bound contracts in insurance policies are such that there is every chance of lapsation of these policies if the customer cannot pay the premium in a timely manner. This results in, not only the loss of risk coverage, but the loss of a significant part of the savings made by the customer. The probability of this happening in rural areas is very high as the incomes of rural household are unpredictable and varying.
This is on account of the agrarian economy of the rural areas, which is subject to the risks of nature (like inadequate rainfall) quite frequently. Thus the current life insurance policies, primarily designed for the urban market, are to the disadvantaged of rural market, where the customers stand to loss both their savings and risk protection.
There are reports (The Hindu, 8-9-2004) which indicate that LIC itself has mopped up about 100 crores in lapsed policies from rural Andhra Pradesh alone in the past two years. Hence, there is need to motivate life insurance companies to sell pure risk products actively and also make the savings linked products more flexible and fair to rural customers keeping in view their fluctuating income patterns.
The regulator can also look into improving this situation, by ensuring that Life Insurance Companies do a certain minimum number or percentage of pure risk policies in their overall portfolio.
8. Minimal targets for rural areas
The current targets set by the regulator for the insurance companies, to meet the rural/social sector obligations are not representative of the percentage of people residing in rural sector. Further the targets talk about only first 5 years from commencement of the company.
As a result of this, insurance companies have not made sufficient investments in the right direction, to design and deliver products for the rural market. They have by and large preferred to exhaust their efforts on rural market by meeting the minimalist targets set by the regulator.
To see a greater investment in rural products by Insurance Companies, it is time for the regulator to consider a revision in the rural targets for the insurance companies to a higher level.
9. Group Approach
While the group is very much being explored by many insurance companies to offer insurance services, it gets very restricted to groups where members have taken credit from an institution.
The down side of this arrangement is that those customers who do not have credit requirement get left of insurance coverage. Therefore there is a need for insurance companies to design products for groups in rural areas where insurance can be offered as a stand alone service without necessary bundling with credit. This would allow getting a large size of rural population under insurance coverage through the simplicity of group products.
10. Health Insurance — a morphing product
Health insurance product would be more viable to administer for the high impact and low frequency health risk events. These would generally fall under the critical illness category. While there is an expressed demand by both customers and grass roots organizations in rural areas to provide insurance coverage for the minor and more frequent ailments, it would be more advisable to meet these smaller costs through savings ( self-insurance).
It is also well documented that one of the major requirements for credit in rural areas is to meet health expenses. Thus, it would be useful to design a health finance product where the lower cost and higher frequent health risks are addressed by savings and the other end of the spectrum with higher cost and lower frequency health risks can be addressed by insurance.
Some of the health risk in the middle of the spectrum could be addressed by credit possibly. Thus we will have a health finance product, which morphs from a savings to credit to insurance product based on the scale and frequency of health risk. Of course, the delivery of such product would need the capacities of more than one institution, which have the capacity to deliver all these services in a complimentary manner.
11. Separate regulations for rural insurance
Today most of the regulatory activity is directed in general at the whole market, which is still dominated by the urban and commercial insurance business.
Some of these regulatory directions while addressing the regulatory requirements of the large market may sometimes actually work to the disadvantage of developing the rural market. Therefore, it is essential for the regulator come out with separate legislation, which would propel the development of insurance services for the rural sector.
Scope of Collaborative Action
1. Joint Product and Process design by Insurance Companies and Micro Finance Institutions (MFIS) and other rural intermediaries
MFIs and other rural intermediaries have the unique advantage of access to the doorstep of the rural customer. In this process, they not only have a good opportunity to capture the customer requirements but also a grasp of the process issues involved in taking these products to the doorstep.
It would be necessary for insurance companies to look at these channel partners not merely as distributors in the traditional sense, but as partners whose domain knowledge can contribute to the product development process. This would ensure that the products coming out from insurance company have a closer fit to the channel feasibility and customer requirements.
2. Partnership between Life and General Insurance Companies
While the regulator does not allow the same company to offer both life and general insurance products, it is not convenient for the rural customer to approach different companies for different insurance products. Therefore it is necessary that different companies collaborate to offer complementary risk mitigation services. MFIs and other rural intermediaries can be the channel to offer these services so that the rural customer can get all his services from a single point.
3. Orientation for smaller pilots
The public institutions in the country have shown a tendency to go for large scale launches of social/rural insurance products, with huge budgets, for products and concepts that have not been tested rigorously earlier. A case in point would be the Universal Health Insurance launched by the government.
Sometimes the magnitude of scale and social good intended, rob away the attention required to fine-tune the process requirements, for the success of such products. While such large scale projects do offer their own set of insights, it would also be useful if apex public institutions in the country can show an appetite for smaller pilots with low budgets, where complete attentions can be paid to design and fine tune processes so that they can be scaled up successfully.
4. Resource support to grass-root organization to pilot innovative insurance products
Gross-root organizations are in a good position to conceive and pilot various rural insurance products. But the cost of testing new concepts is beyond the financial capacity of most such organizations, As the benefits of such experiments will be a learning resource for the entire sector, there is an opportunity for collaboration so that the resource requirements for testing new products and concepts can be adequately met.
5. Sharing of learning and experience among MFIs
Today many MFIs are actively engaged in delivering insurance services to their customers in collaboration with various insurance companies. As the customer profile of all these MFIs is similar, sharing of experience between the various MFIs and Insurance Companies on their rural insurance products would help to spread the benefits of more number of rural customers.
6. Data Bank Development
As data on rural insurance experience is still very marginal, there is a need for sharing and achieving data on experiences in rural sector, which will contribute to the development of better-designed products in the future. The regulator could play an active role in setting up such an entity, which will maintain all such data, which is accessible to institutions involved in design of rural products.
7. Starting Micro Insurance Companies
The rural customer segment, its location and its requirements are significantly different from that of the urban market, The regulator can look at providing the right regulatory environment where micro-insurance companies can be set up with complete focus on meeting the insurance needs of the rural sector.
The investments in such companies can come from insurance companies, MFIs and other competent entities which will bring the respective domain expertise required for delivering rural insurance.
- Challenges to be encountered in the Indian Rural Insurance Market
- 1. Awareness and Education
- 2. Documents for Certification
- 3. Product Customization
- 4. Premium routing
- 5. Remuneration of expenses for distribution and servicing
- 6. Moving from “willingness to pay” approach to “willingness to charge” approach
- 7. Lack of focus on pure risk policies by insurance companies and high lapsation of policies in rural areas
- 8. Minimal targets for rural areas
- 9. Group Approach
- 10. Health Insurance — a morphing product
- 11. Separate regulations for rural insurance
- Scope of Collaborative Action
- 1. Joint Product and Process design by Insurance Companies and Micro Finance Institutions (MFIS) and other rural intermediaries
- 2. Partnership between Life and General Insurance Companies
- 3. Orientation for smaller pilots
- 4. Resource support to grass-root organization to pilot innovative insurance products
- 5. Sharing of learning and experience among MFIs
- 6. Data Bank Development
- 7. Starting Micro Insurance Companies