Micro Insurance — Prospects at the Bottom of the Pyramid
What is Micro Insurance? Purpose and Objectives; Sales, Services & Products at the Bottom of the Pyramid; Mass Health Insurance Schemes & Group Personal Accident Insurance
The Bottom of the Pyramid — Emergence of a New Consumer Segment
For a long time Business Enterprises, Managers and Management Experts did not consider the poor and disadvantaged segments of society as a business segment. They were not regarded as consumers, for it was assumed that they lacked the purchasing power to buy and use the products that industries conventionally produced. This traditional type-casting was destroyed by the work of C.K. Prahalad, an internationally renowned business strategist and thought leader who demonstrated that the lower economic segment of society had latent consumption needs as much as the middle and upper classes, that they had a desire for quality products and services, but required products that were re-designed, engineered and packaged to their specific situation and needs. He supported his theories with the evidence of the pioneering efforts of some innovative Managers who had perhaps unwittingly created products suited to this segment, and had successfully made a profitable business out of their ventures. Prahald called this customer segment the “Bottom of the Pyramid,” and since then the nomenclature and classification has become widely accepted. He awakened Industry and the Management fraternity to the possibility of making profits where till then none seemed to exist. The Bottom-of-the-Pyramid (BOP) deserved not ‘charity, but goods and services that gave them real value for their money.?’
Micro Insurance Business Segment — a Profile
The Micro Insurance business segment owes its origins to Government policy making much more than it does to a conscious adoption of the ideas of CK Prahalad, though the Insurance Industry would certainly benefit immensely by applying his theories.
Micro Insurance may be described as the business of providing insurance protection to “low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved.”?? However, Micro Insurance is often regarded as the distributing of existing insurance products after stripping them of some less necessary features, scaling down the value or Sum Insured and suitably reducing the price to make it ‘affordable.’ A Micro Insurance policy is treated simply as a low -premium insurance policy, a ‘small ticket’ size product. This is not correct. Micro Insurance policies are, and have to be, ‘small ticket’ for the amount of insurance protection required by this segment, the value of the asset that has to be protected and the price they can afford to pay is quite small compared to persons and risks situated further up the economic ladder. However, it is not scale but a number of other and more important factors which differentiate the needs of the Low-income segment clients:
Geographical Location: Many live in remote rural areas and require a different distribution channel; it is true that the urban poor are also a part of this segment, but even to service them the traditional products, channels and strategies are not suitable.
Literacy: Members of this segment are often illiterate and unfamiliar with the concept of insurance.
Severity of Hazard: The BOP segment person has to often face more risks than wealthier people do because they may either be exposed to greater ‘severity’ and variety of hazards , and also because they cannot afford the same defences. For example, on average a poor person is more prone to illness because they do not eat as well, work under more hazardous conditions and do not have regular medical check -ups.
Financial Literacy: BOP people have little or less experience of dealing with formal financial institutions, the documentation and formal processes involved, of their rights and duties as consumers.
Usage Costs: The existing requirements for documentation and processes, which may be routine for educated middle class consumers, would seem to carry hidden time-opportunity costs for BOP persons who may find them daunting. A middle segment policyholder may have little difficulty in filling up detailed ‘Claim Forms, attaching several documents, and emailing a set of scanned copies and sending the originals by post, but this is beyond the horizon for the BOP claimant. He would probably visit a Branch Office in person to transact, to obtain the Forms, then spend more time to get them filled up, probably with the help of someone conversant with them, and finally return to the insurance Office to deposit them. The cost in terms of money, time and lost work opportunity is very high for such a person. Self evidently, Micro Insurance products have to be designed to incorporate these factors as well as the difference in monetary scale. Simply reducing the price of existing insurance policies, and ‘tweaking’ the features is an inadequate solution.
A Profile of the Segment
The Micro Insurance segment has not been defined in any Indian Law or Regulation in terms of the levels of income or geographical location. In fact there is no formal definition of such a customer segment. However there is a definition of the ‘Rural Sector’ in as much as a rural location is defined in terms of population and a target is stipulated for the number of policies which an Insurer must sell in rural locations. The regulations specify that these clients must come from rural areas. With poverty in India largely located in rural areas, the effect of such a stipulation is to ensure that poor clients are sold policies. The urban poor, of which there is also a good number, are not covered specifically by regulations. The Micro Insurance business segment must therefore be understood in terms of its characteristics, risks faced and requirements for protection. There is, however, a regulatory definition of what constitutes a ‘micro’ general insurance and life insurance product which we will shortly examine.
Using broad generalizations we can build up a profile of the typical client for micro insurance. The chief characteristics of customers of this market segment are:
Family Size: Usually households consist of five or more members, sharing income and access to financial services.
Source of Income: Agricultural labour is the main source of income. However, there is Self evidently, Micro Insurance products have to be designed to incorporate these factors as well as the difference in monetary scale. Simply reducing the price of existing insurance policies, and ‘tweaking’ the features is an inadequate solution.
A Profile of the Segment
The Micro Insurance segment has not been defined in any Indian Law or Regulation in terms of the levels of income or geographical location. In fact there is no formal definition of such a customer segment. However there is a definition of the ‘Rural Sector’ in as much as a rural location is defined in terms of population and a target is stipulated for the number of policies which an Insurer must sell in rural locations. The regulations specify that these clients must come from rural areas. With poverty in India largely located in rural areas, the effect of such a stipulation is to ensure that poor clients are sold policies. The urban poor, of which there is also a good number, are not covered specifically by regulations. The Micro Insurance business segment must therefore be understood in terms of its characteristics, risks faced and requirements for protection. There is, however, a regulatory definition of what constitutes a ‘micro’ general insurance and life insurance product which we will shortly examine.
Using broad generalizations we can build up a profile of the typical client for micro insurance. The chief characteristics of customers of this market segment are:
Family Size: Usually households consist of five or more members, sharing income and access to financial services.
Source of Income: Agricultural labour is the main source of income. However, there is additional income from off-farm activities, and family members pursue multiple activities to supplement income. The implications of this are that much of the income is irregular and seasonal. Premium collection must take into account the particular variances in the seasonal income of this market.
Risk Profile: Due to their poverty they present a higher than average risk profile for many types of insurance. For example, due to lack of sanitation, lack of access to clean water, hazardous working conditions and poor nutrition imply higher rates of death and disease. This means they present a higher risk profile for both Health and Accident insurance.
Literacy: Low levels of literacy imply that marketing needs to be done without written media: for example, film, radio and word of mouth.
Product Distribution profile: The rural poor often live in areas with inadequate road and telecommunications infrastructure, which increases the costs of selling and servicing policies. In urban areas infrastructure is increasingly not a constraint, and only the awareness gap needs to be bridged.
Risks and Vulnerabilities
The poor by definition own very few assets. In contrast to the urban poor, many of the rural poor own their dwelling and the land that it is constructed on. Income generation for the landless poor is largely a function of daily agricultural labour rates and the number of days such work is available.
The insurable perils would be: -Loss of life: Most household members contribute to household income, except those too old, young or infirm to work.
- Critical illness: This has the dual impact of loss of earnings, inability to do household labour as well as necessity to incur treatment expenses.
- Medical Exigencies and Illness: These reduce the working days and income, and also create expenses though not at the high level of a critical illness.
-Old Age Pension: There are few income options during old age, and not enough savings to take care of expenses. Also, there is some evidence of emerging social trends in which the obligation of the young to take care of the old is weakening.
«Reduction in Agricultural Productivity: Crop Failure, lowered agricultural productivity or returns caused by low levels of rainfall or natural catastrophes.
-Loss of Assets: Damage or destruction of assets used to generate income, or of house and household possessions.
«Personal Accident and Disability: Especially among specific occupational groups such as construction workers, or farm labourers working on dangerous machinery such as ‘Threshers’ or ‘Crushers, accident at the workplace and disability are risks which can destroy lives by eliminating a person’s capacity to earn and support himself and his dependants.
Regulatory Specifications — Micro Insurance Products IRDAI Regulations define two types of micro insurance products:
General Micro Insurance Product, which refers to any policy offering coverage for:
1. ‘Health, with Sum Insured not exceeding 1,00,000/for Individuals and Sum Insured not exceeding 2,50,000/for families, or
2. Belongings such as ‘Hut,’ ‘Livestock,’ ‘Tools or Instruments, with Sum Insured not exceeding 1,00,000/per asset, or
3. Personal Accident on Individual, Family or Group basis, with Sum Insured not exceeding 1,00,000/-, and for a fixed period 1 year.
Life Micro Insurance Product, which is specified as any Life Insurance policy that offers 1. ‘Life’ or ‘Pension’ or ‘Health’ insurance benefits 2. A Sum Insured not exceeding 2,00,000/
The guidelines also stipulate that the Life Insurance policy should be either a ‘Term’ or ‘Endowment’ product but not a ‘Unit Linked Insurance Plan’ which was specifically prohibited. Payment of Premium in instalments may be permitted except for policies that are regular premium, pure ‘Term’ or ‘Health’ products. Endowment Policies could carry standard features such as ‘Lock-in’ period and ‘Surrender Value.’
Product and Their Features
Mass Health Schemes: Rashtriya Swasthya Bima Yojana (RSBY)
For the poor and disadvantaged, people forced to live below the poverty line, an illness is the single biggest threat to their income and their earning capacity. It often leads them and their families in a crushing “debt trap.” Fearing the high cost of medical treatment, and the possible loss of wages due to absence from work, they postpone treatment till it is almost too late. The treatment itself can consume their savings, compel them to sell assets, even force them into debt. A well designed, and efficiently executed mass healthcare program can provide the remedy for all these problems. In the past healthcare schemes run by the Central and State Governments had failed to achieve these objectives.”?
The Rashtriya Swasthya Bima Yojana (RSBY)
is a carefully designed healthcare initiative launched by Ministry of Labour and Employment, Government of India on 1* April 2008 that takes care of a very wide range of eventualities with a solution that combines convenience with efficiency, ensuring both security against fraud and freedom from bureaucratic delay.
Features
Sum Insured: Hospitalization coverage up to Rs. 30,000/is provided for an extremely wide range of diseases.
Treatment Costs: Treatment Protocols have been fixed as acombination of procedures, medicines, tests and stay at a hospital for in-patient treatment. A package rate is fixed by the Government after negotiation with the hospitals for a large number of interventions.
Pre-existing conditions: These are covered from day one and there is no age limit.
Family Coverage: The coverage extends to five members of the family which includes the head of household, spouse and up to three dependents.
Costs Registration Fee: The Beneficiary has to pay Rs. 30/as registration fee
Premium: The premium is paid by the Central and State Government to the insurer who is selected by the State Government. on the basis of a competitive bidding process.
Group Size & Membership
Each policy contract was specified to cover an individual district in a state. A single insurance company assumed the liability for each district, and delivered services through an office to be located in the district.
Beneficiary Enrolments: The Insurance Company uses Mobile Enrolment Stations to conduct on-the-spot Enrolment according to well publicized schedules, on the basis of data of Below Poverty Line (BPL) population provided by the State Government. Biometric information (fingerprints) and photographs are taken for the beneficiary and family members. Smart Cards recording the biometric and pictographic information are issued on the spot for beneficiaries and their family members.
Technology Integration: In a unique initiative the Central has deployed state-of-the art technology and processes for a social sector scheme on a pan-India scale. Every beneficiary family is issued a biometric enabled smart card containing their fingerprints and photographs. All the hospitals empanelled under RSBY are IT enabled and connected to the server at the district level. This ensures a smooth data flow regarding service utilization periodically.
Robust Monitoring and Evaluation - RSBY is evolving a robust monitoring and evaluation system. An elaborate backend data management system is being put in place which can track any transaction across India and provide periodic analytical reports. The basic information gathered by government and reported publicly should allow for mid-course improvements in the scheme. It may also contribute to competition during subsequent tender processes with the insurers by disseminating the data and reports.
Security & Fraud-proofing: The biometric enabled smart card ensures that only the real beneficiary can use the smart card. The key management system of RSBY ensures that the card reaches the correct beneficiary and there remains accountability in terms of issuance of the smart card and its usage.
Portability - A beneficiary enrolled in a particular location can use their smart card in any RSBY empanelled hospital across India, a feature especially beneficial for poor families that migrate across geographies due to employment opportunities, e.g. in the construction industry. Cards can also be split for migrant workers to carry a share of the coverage with them separately.
Cash less and Paperless transactions - A RSBY beneficiary receives cashless treatment in any of the empanelled hospitals. Their Smart Card provides verification via their finger prints. For the treatment received the Hospital is paid directly by the Insurer. The Hospital sends the claim ‘On-line’ to the Insurer and gets paid electronically, and papers do not have to be sent.
Sustainable Business Model — Incentivizing All Stakeholders
The RSBY initiative has been structured as a business model with incentives for each stakeholder to ensure both its future expansion and long run sustainability. Each incentive The World Bank, the UN and the ILO praised RSBY as one of the world’s best health insurance schemes, and Germany is evaluating how it may adopt or adapt the smart card based model for revamping its own social security system.”
This is a level of efficiency that is still not rivalled by the conventional health products sold by Insurance Companies to customers from higher economic segments. It would seem less likely, but this once at least, the advanced management concepts of CK Prahald have received concrete shape not from the work of a Corporate Giant but through the efforts of a Government Department.
Group Personal Accident Insurance Schemes
An example of a Group Personal Accident Insurance product designed for the ‘Micro’ insurance segment is the Pradhan Mantri Suraksha Bima Yojna (PMSBY) Policy which has been discussed in Chapter 13. It offers Personal Accident insurance of a fixed and limited Sum Insured to Bank Account holders residing in both urban and rural locations who voluntarily choose to join the scheme. The premium has been pegged at an affordable minimum while the documentation and procedure is relatively simple. The Banks are authorized to choose the Insurer who will administer the scheme, issue policies and deliver services, with the Banks acting as a ‘Single-point-of-Contact’ for enrolling their account holders and for service delivery.
Insurance of Agriculture - Crop Insurance & Weather Insurance
Effect of Weather and Rainfall on Agricultural output
All over the world farmers have to face the risk of their crops, and yields, being adversely affected by variable weather conditions. In India
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