Micro-insurance is a financial arrangement to protect low-income people against specific perils in exchange for regular premium payments.
The premium is devised using calculations involving the likelihood and cost of the risk involved.1 Micro-insurance is similar to conventional insurance (as defined in the first Chapter) except that there is the clearly defined target market for the micro-insurance product. Micro-insurance is a insurance designed only for the low income section of society keeping in mind their specific needs.
The term micro-insurance was coined by the International Labour Organization (ILO) in 19992 for insurance products specifically designed and sold to the lower economic section of the society. Micro-insurance is characterized by the low premium and low coverage limits. It is designed to service low-income people, and businesses which are typical and not served by social security schemes or commercial insurance schemes. The three main features of micro-insurance are as follows:
(i) Low cost transactions on a voluntary basis for individuals of a group
(ii) Low-net-worth clients (although they may have varying income levels)
(iii) Operating through networks of self help community based organizations to enhance reach and risk pooling ability (can be directly driven by government or corporate as well) Micro-insurance schemes around the world are offered by government, non-government organizations or insurance companies. The size of the risk-carrier (insurance companies) ranges from small and even informal to very large companies. Micro-insurance is sold and marketed through many channels of distribution including small community-based schemes, credit unions or other types of microfinance institutions or by large multinational insurance companies.
Micro-insurance, like regular insurance, may be offered for a wide variety of risks. These include both health risks (illness, injury or death) and property risks (damage or loss). Life and nonlife insurance companies offer a number of micro-insurance products to address these risks. Some common products sold in the micro-insurance format are crop insurance, livestock/cattle insurance, insurance for theft or fire, health insurance, term life insurance, endowment insurance, disability insurance, insurance for natural disasters, etc. The low-income group with no cash or contigency reserve and disposal income are more vunrelable to the risks of death, illness and disability.
The uncertainty of risk and lack of means to manage them when they occur, make it difficult for the poor to make use of income generating opportunities that can aliveate the economic crises. Poverty reduction measures of countries and individuals cannot be complete without using micro-insurance as one of the ways to transfer the risk through insurance. Though the financial impact of risk per individual is relatively small, but for the individual affected by it, it is a significant risk which can seriously damage their livelihood or standards of living. Conventional insurance sold by the large insurance companies in urban areas is targetted at middle to high income level. These products are not suitable for the low income group of people.
Many of the products sold to the middle class urban population are designed keeping certain mortality risks in mind. Such products are considered inappropriate to low income groups percieved to be at a higher risk with lower lifespans and higher mortality. The minimum premium and coverage amounts for many of these products are unaffordable to the poor. Underwriting policies exclude many low-income group of people engaged in casual labour or other such professions from obtaining conventional insurance products at standard premium rates.
Requirement for a number of documents like identity proofs, income proof, etc., at the time of applictaion and claims discourages them from applying for such insurance policies. Another reason for development of micro-insurance, as a separate stream, is the complex benefit features and policy conditions in regular insurance products. Simple products with straightforward benefits and requirements are designed for micro-insurance purposes.
Micro-insurance policies, are therefore, designed with lower premiums and coverage levels. These policies also have simpler policy features and benefits. For an insurance company, the objectives of a viable micro-insurance scheme are three-fold. Firstly, it should serve the needs of the target population. Secondly, they should minimize operating costs for the insurance company, and thridly they should minimize price to ensure affordability and enhance accessability.
3 In India micro-insurance schemes were initially started by non governmental organizations (NGO) in specific communities where some of them operated. Increasing focus on the development of micro-finance and the liberalization of the insurance sector in India has brought micro-insurance into limelight. IRDA issued a regulation in 2000 making it mandatory for all insurance companies to address the insurance needs of rural and social sectors in the country.
This has provided impetus to this sector. Many micro-finance institutions (MFIs), Self-help groups (SHG) and NGOs along with insurance companies are aggressively exploring this sector. To ensure coverage for a wider group of people MFIs and NGOs negotiate with insurers for the purchase of customized group or standardized individual insurance schemes for the low-income group of people, thus, creating a healthy competition in the market.
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