Is Microinsurance Made for India?
Despite the fact that insurance is a necessity, many Indians largely value it as an optional product, which they tend to easily ignore
Insurance is one of the most vital sectors in India's financial inclusion plan and yet it is one of the most ignored product lines in the country.
According to the Economic Survey 2018, the insurance penetration or the ratio of premium underwritten to the GDP was 3.49 percent in 2016-17 while other Asian countries such as China and Malaysia had higher insurance penetration rate of 4.77 percent while Thailand boosted of 5.42 percent. On the other side, India's life insurance density is $46.5 and general insurance density is $13.2 as against a global average of $353 and $285.3, respectively.
These numbers only speak of the immense potential of the insurance sector, which is why IBEF notes that the segment is expected to reach $280 billion by 2020 – but why is it lagging behind currently.
According to Casparus Kromhout, MD & CEO, Shriram Life Insurance, the low penetration levels and the large protection gap is a major challenge for the Indian insurance industry. Quoting the former IRDAI chairman, T.S. Vijayan, he says, "The protection gap in the life insurance industry is Rs. 480 lakh crore. Considering India's mass population and that the focus of most commercial insurers has been on the mass-affluent and higher income group. The impact of this huge insurance gap is strongly felt in the lower income group that's mass/rural market."
Additionally, in our fast-moving, digital-led world, the insurance industry is still controlled by physical agents, walking the consumer through exhaustive documents and vague inclusion and exclusions. To top it all, these policies are filled with jargon, leaving the insured party confused and unsure of coverage even post-purchase.
WHAT IS MICRO-INSURANCE?
The IRDA micro-insurance Regulations, 2005 defines microinsurance as a general or life insurance policy with a sum assured of Rs 50,000 or less. In other words, micro-insurance aims to provide financial protection to low-income families, particularly those with approximate income of less than Rs. 250 per day.
Moving beyond the definition, Kromhout adds that the focus should be on providing protection to the stratum of society that is financially most vulnerable, where the death of a breadwinner transcends into a financial catastrophe for the family and in some cases no food on the table. The social need to provide insurance to this sector is very critical. With 80 percent of the country's population living in the rural parts of India, micro-insurance makes insurance affordable for a lot of people.
However, servicing these products is not an easy job. A.S Narayanan, CEO, McXtra, an insurance servicing company says there are majorly three issues while servicing this segment:
1 . Service Cost - As the average premium per policy is very low, it is imperative that the cost of service per policy, an absolute amount is kept at a minimum. This implies the high amount of automation, minimal human intervention, high volumes and elimination of documentation requirements.
2. Claim Settlement: It is necessary to collect all the details of the bank account information at the time of insurance. As the number of claims is large, any mismatch in name or other data can result in claim settlement issues and impact the service standards adversely.
3. Fraud Control: There is potential for fraudulent claims as there are large volumes of low ticker insurance. This makes it difficult to investigate claims from a logistical and feasibility standpoint. Hence, the risk underwriting process and fraud control process needs to be robust.
Technology makes micro-insurance viable and scalable in several ways. Anand Prabhudesai, Co-founder of Turtlemint says it simplifies the process of data collection and makes it easy to collect small payments through digital instruments.
Also, insurance can be more naturally distributed (bundled) along with the other products that the customer is buying. With the number of smartphone users swelling every year, it makes sense to use the same to make buying and claiming simpler. While on the other side, there are many companies that use satellite data collection to monitor and understand crop health and yield.
"This helps insurance companies to predict risk better depending on the location of plots and therefore provide a customized pricing to the insured," Adarsh Agarwal, Appointed Actuary, Digit Insurance pointed out.
To top it off, online engagement is significantly more cost-effective as opposed to a traditional, offline insurance agent, allowing the carrier to compete with lower prices and target a mass audience at one time. It also offers paperless transactions throughout the entire process.
Rohan Kumar, CEO & Co-Founder, Toffee Insurance says this coupled with easy to understand singular focus micro-insurance products will improve overall affinity within this ecosystem. "Stronger digital engagement can help companies acquire new target segments, strengthen their customer relationships, improve retention, and cultivate loyalty into advocacy," Kumar adds.
THE EMERGENCE OF INSURTECH START-UPS
The rise of insurtech companies — with innovative ideas, availability of a huge amount of customer data and cutting-edge analytical tools — poses both an opportunity and a threat for the industry.
Kromhout feels it is similar to the "banks vs. fin-techs/ e-wallets' scenario. "Start-ups come with a fresh, innovative thinking combined with the latest digital technology. Today, the needs and service requirements of customers are diverging into smaller sub-segments requiring the design of diverse products and processes. Also, the exposure to various digital platforms has enhanced the customer's need for best service," he shares while adding that, "Digital has capabilities like chat-bots and social media mining, which enables real-time communication and assimilation of customer sentiments. Start-ups with their fresh thinking and competencies have the capabilities to leverage these technologies to add value to the customers. This also gives them the power to influence customers."
How can insurers keep up? Simply by working along with these companies and adopting the disruptive technology.