Journey of Micro-insurance in India
By- Priyanka Banerjee
Risk is the unescapable
phenomenon which is synonymous with the lives of every person, especially
affecting the economically weak and low-income groups. They are faced with an
assortment of risks, and are frequently forced to exhaust their monetary,
physical and human assets just to cope with the eventualities. Some frequently
occurring risks they meet with are unemployment, sickness, accident that result
in injury, disability or death of bread winner of the family. Other accompanied
risks that re posed are loss of crop, livestock loss, loss borne due to
fluctuation market factors incurred in trading, loss due to onset of fire,
burglary, natural calamities such as drought, famine and flood.
These people survive on a
meagre earnings and maximum of the time depend on small credits. Either these
credits are arranged from money lenders or new age set up of microfinance in
order to carry on with their business and livelihood. Microfinance a its roots
informally seeding from an informal beginning in the 18th and 19th century as a
kind of banking for the poor or economically backward classes, who are left
unprivileged of the commercial and private banking sector. Micro-financing phenomenon is stands out to
be amongst the most remarkable socio-economic developments of today. For a very
long time the under-privileged owing to their declining economic circumstance,
were thought to be non-bankable.
However, with the
conceptualization of the “micro-credit phenomenon”, the poor is now capable of
being made credit-worthy, when they are organized into small groups, thereby
illustrating insightful illustrations not only from the perspective of finance,
but also from the perspective from bringing in “financial inclusion for the
Journey from the Genesis
Microfinance has its origin in
India, with its reported existence anywhere in the world by two to three
millenniums. In a global context it existed in the form of financial
intermediation, comprising lending, borrowing, deposit taking and other
financial services commonly known as the merchant banking during the first millennium B.C. One can trace instances of
merchant guilds dealing in goods and money in seen in the Vedic scripts that
dates beyond the first millennium B. C. These merchants’ guilds eventually
evolved into stringently hereditary castes and trading, that became the main
occupation of the Vaishya caste. It was seen in the first two century A. D,
that the regulation of lending deeds of traders came under the purview of a law
code, Dharmashastra. As per this code we get to know that, a rate of
interest of 15 percent (%) per annum on secured loans was considered as
‘reasonable’ while on the unsecured loans, higher rates would be charged.
Depending on the degree of risk (higher or lower chances of loss occurrence) of
lending money on the basis of caste, (i.e
an interest rate of 2% per month from a priest (Brahmin) while an
interest rate of 5% per month to be levied from a cultivator (Shudra), could be
charged on unsecured loans. There was also provision stated for interest free
loans to the deserving and poor.
Most prominent amongst these
categories is the money lenders or Sahukaars who existed 1700 to 2300 years
ago, when it started becoming an organized occupation with a subsequently
regulated profession. We can still see the money lenders to exist in both rural
and urban India. The significance of sahudaars or money lenders as a source of
finance is stimulated by the Report of the Study Group of the Banking
Commission on Indigenous Bankers (2006) based on the fifty ninth round data of
NSSO (2003) which shows that in case of rural areas, the survey shows that
share of institutional finance came down from 64% in 1991 to 57.1% in 2002,
while on the contrary the share of money lenders in rural finance in the same
period increased from 17.1% to 29.6 %.
As in much of the developing
world, India has a large number of informal quasi-insurance schemes: for
example, households that pool rice. In addition to this, there are small
schemes run by cooperatives, churches and NGOs that may pool their members’
incomes to create an insurance fund against a specific peril: for example,
funeral costs. In a few countries, there is specific legislation to regulate
these schemes, e.g., the South African Friendly Societies Act. In India no such
law exists, and any individual or institution conducting insurance has to
comply with the stipulations of, among other regulations, the 1938 Indian
Insurance Act as amended.
Microfinance Movement in India
The Self Employed Women’s
Association (SEWA) Bank in Ahmedabad and Working Women’s Forum (WWF), Chennai,
and a significant number of Non-Government Organizations (NGOs), in a way
revived concept of microfinance albeit with a difference, with the aim to filling
the vacuum in the financial system. Four thousand women contributed Rs10 each
towards share capital to establish the Mahila Cooperative SEWA Bank in 1974
which covered approximately two lakh clients and had loans outstanding in
excess of Rs13 crores in 2003. In South Indian states like Tamil Nadu,
Karnataka, Kerela and Andhra Pradesh commendable work is being done by
Microfinance Institutions (MFIs) such as Swayam Krishi Sangham (SKS) Finance,
SHARE, BASIX, MYRADA and Spandan Spoorthy.
The next central regulatory
document is not yet an official regulation but a concept paper published by the
IRDA in August 2004 entitled “Concept Paper on Need for Regulations on
Micro-Insurance in India.” While not a regulation it nonetheless reflects the
intentions of the regulator. There is much that is commendable in the concept
paper, but there are two significant concerns. They revolve around the implicit
restriction of microinsurance to the partner’s hip model, and the lack of
Essentially the concept paper
creates a framework for NGOs and MFIs to sell microinsurance. While there is
nothing inherently limiting in this arrangement some of the clauses in the
concept paper severely curtail the capacity of MFIs and NGOs to make products
available that best meet their own needs and those of their clients.
It was during this time that
microinsurance products started piggy backing on the microfinance products
which was at its peak especially around 2010, and the sudden rise in
microinsurance is also a result of the same boom in the microfinance
institutions being successful.
The definition of a
microinsurance product proposes two seemingly arbitrary products: a life
microinsurance product and a general microinsurance product with a specified
minimum amount of cover, term of cover, age of entry and age of exit. Unless
the product sold by the insurer meets these criteria, the product will not be
classified as a ‘microinsurance product’ and therefore will not be able to
qualify for some of the exemptions.
Some of these conditions are
out of sync with existing microinsurance products in India. For example, the
concept paper sets a minimum amount of cover of Rs. 10,000. In client surveys
undertaken by partner organizations of Friends of Women’s World Banking, many
NGOs found that their clients were not able to pay for such an amount of cover.
They preferred less cover for a lower price. The ‘Minimum Amount of Cover’
requirement would exclude a large segment of the poor from the insurance
In recent informal discussions
with the IRDA, it has indicated that in the final regulations, a microinsurance
product will be defined solely by the maximum amount of cover. An issue that
remains is how a microinsurance product will be registered with the IRDA. At
present, an insurer wishing to introduce a new product on the market in India
needs to go through a ‘File and Use Procedure’, divided into life and general
products. Insurers have said that obtaining the relevant information and
completing the required forms can take several weeks. While this may be
justified for complex insurance products with significant sums assured, with
microinsurance and the low sums involved, such a long and complicated procedure
does not seem necessary.
Microfinance and insurance,
are the principles that owe to the development of the concept of “Micro-Insurance”, with its own levels
of complexities, diversities and technicalities of microinsurance, making it a sector
like no other. Microinsurance is commonly referred to the insurance for the
less fortunate or poor. It is in recent times, that it has attracted the
attention from practitioners in developing countries, such as India.
In more specific terms,
Microinsurance has originated from two different terms – “Micro” and
“Insurance”, micro- referring to the low cost/ affordable premiums that paid,
as consideration for the benefit of assuring one’s life/ health/ livestock, etc
against the unforeseen risk that time has to offer. Microinsurance is an insurance that functions by pooling of risks ii)
financed through regular premiums and (iii) tailored to the poor who would
otherwise not be able to take out insurance. (Reference – Churchill, 2006).
Low income clients often:
Live in remote rural areas, requiring a different
distribution channel to urban insurance products
Are often illiterate and unfamiliar with the
concept of insurance, requiring new approaches to both marketing and
Tend to face more risks than wealthier people do
because they cannot afford the same defenses. On average they are more prone to
illness as they do not eat as well, work under hazardous conditions and do not
have regular medical checkup.
Thereby, micro insurance is an
effective tool in making financial services available for the poor families and
small enterprises, by helping them to sustain their livelihoods.
Basically micro-insurance is
broadly categorized into two broad categories –
The first, focuses on expanding
social protection for those who are incapable of affording insurance,
who in the nonexistence of adequate government schemes.
The other, focuses on framing a competent
business model that helps the financially unprivileged groups to come forward
as a prominent (sustainable in terms of business), market segment for both
cooperative as well as commercial insurers
accommodates the feature of group insurance, wherein a single contract can
cover thousands of people. Though, it requires an intermediary (mainly
microfinance institutions (MFI), non-governmental organization (NGO) and
self-help groups) to exist which would be present between the customer and the
Amitabh, Verma (2008). Retention of life
insurance business – Need for improvement. IRDA Journal, 13 (1), 23.
Anuradha, K.R. (2007). Building security for
poor – potential and prospects for micro insurance in India, Human development
report unit, UNDP Regional Centre in Colombo, Serving Asia and the Pacific.
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CARE, India Ratings, PwC analysis
accessed on Dec 10 2015.
Annual reports 2005 to 2017. Retrieved from
http://www.dipp.nic.in, accessed on March 1, 2017.
Source: Sa-Dhan. (2016). The
Bharat Microfinance Report 2016. Retrieved from http://indiamicrofinance.
com/2017-2016-bharat-report.html, Census India 2011, PwC analysis
MFIN. (2016). Micrometer,
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crore INR and < 1,000 crore INR, small – GLP < 100 crore · Annim, Samuel Kobina. (2012). Microfinance efficiency: Trade-offs and complementarities between the objectives of microfinance institutions and their performance perspectives. European Journal of Development Research, 24(5), 788–807.