Defining Microinsurance | An untapped market

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 those with an approximate income less than Rs. 250 per day.

These are designed as independent policies that lower-income individuals and families could easily pick and choose according to their budget.

Some examples of microinsurance are crop insurance, livestock insurance, disability insurance.

Need for microinsurance in India

Microinsurance is an urgent need in the current Covid scenario where many people who lost their livelihood are now leading more insecure lives, especially in the informal sectors.

 In developing countries microinsurance enables the less financially privileged to avoid the debt trap caused by any disease, death, natural disaster or any such calamity. These events can push families deeper into poverty as their meagre resources get depleted.

Death of the bread earner of these families leads to financial catastrophe for the family and often no food on the table.

Microinsurance provides life, health and other unique form of insurance, providing limited benefits at very low premiums. Since 65% of the country’s population lives in the rural parts, micro-insurance makes insurance affordable.

Potential of microinsurance in India

India has 80 crores living in rural areas the microinsurance sector that offers insurance to the poorer sections of the society has the potential to generate premium income of Rs 8,000 crore. Spliting it roughly 25:75 between the Life and non-Life sectors, according to the United Nations Development Program (UNDP).

This is not a segment insurers can ignore, given the significant population size and the continued rise in income levels in rural areas.

Looking at this growth potential perhaps, even some private insurance companies, which have in the past not looked at rural areas favourably, are now eyeing this sector, while some already have jumped on.

Features of microinsurance

Microinsurance is simple, as most of the target audience is not able to understand the technical jargons. The terms should be simple and easy to understand.

Microinsurance is accessible, as most customers live in rural areas. Unfortunately, many insurance companies do not have offices or representation in these areas. Microinsurance is also distributed through non-traditional channels.

Microinsurance is affordable, Affordability ensures to cater the needs of lower income  segment people.

Recent proposals by IRDAI panel

• The government and the IRDAI should license standalone microinsurance institutions which can cater to the low-income
• Reduction in an entry-level capital requirement for standalone micro-insurance companies to ₹20 crores from the current ₹100 crores. This is in view to accelerating expansion of this segment of the insurance market in the country.
• Risk-based capital (RBC) approach should be adopted to enable progressive growth while maintaining the highest prudential standards.
• Micro-insurance companies (as well as cooperatives and mutuals) should be allowed to act as composite insurers to transact both life and non-life business through a single entity. Their portfolios should have a balance of both life and non-life business.
• Establishment of micro-insurance Development Fund to support and promote the growth of the micro-insurance business across the country.

Hope you found this information interesting and insightful. Written by: Rishav Saraf