IRDA License

Challenges Faced by Micro Insurance Sector in India

The first and foremost priority of any Government is to eradicate the poverty of its population. In fact, in this move to reduce the poverty apart from the Government even the Society, NGOs, and the Corporate world are also expected to contribute in this move. In one-way poverty can be the best indicator showing the progress of any nation. If a major population of the nation is below the poverty level, it indicates that the society is not a just society. The development of a nation must consider and include all sections of the population of the nation. The wealth of the nation must be equitably distributed amongst all the people of society. It is a very risky situation if few members of society hold a large number of the wealth of the nation. This may turn into rebel and revolution by the poor population as witnessed by many countries in the world.

As the major population of our country reside in villages and deprived of many facilities to grow and prosper, it is very necessary to take actions through various plans and policies to uplift them. Micro insurance is one of such projects and plans to uplift and make grow the rural people under the scheme of financial inclusion.

The poor and rural population in India are still in worse economic conditions as compared to the urban population. They are exposed to various risks and their insurance requirements are not fulfilled easily as such.

Traditional insurance companies do not like to approach this segment of society because of many reasons. Thus, Micro insurance is the solution for such people. Micro insurance as the name suggests nothing but a low-premium-low-claim insurance plan specially tailored for low-income group of rural and poor people of India. In micro insurance, the premium and consequently, the claim has got to be low by design as it is for poor segment people of society. The micro insurance schemes will provide a cover from the potential risks and thus would reduce the risks in the life of the poor people. They will be secured and thus will have some surplus income in their hands to prosper further.

What is a Micro Insurance?

A simple definition of micro insurance sector is that it is an insurance that (i) operates by risk pooling (ii) financed through regular premiums on policies and (iii) planned for the poor and rural population

Micro Insurance is basically for the low-income^[1] population, to protect for specific risks, payment of proportionate premium for probable risk, with easy plans and policies to understand, with low premiums to pay and maximum sums insured for this insured risk and easy documentation for the claims on calamity etc.

For this, IRDA has officially gazetted separate Regulations on 30 November 2005 for regulating and controlling purpose. The Micro Insurance Sector undertakes life and general insurance with a sum assured to Rs. 50000 or less and it offers many insurance products needed by the rural population. Under life insurance products, it offers coverage against death, in health insurance, it covers hospitalization expenses for illness etc. Further, it offers crop, livestock/cattle, and asset insurance facilities to the insured.

Major Challenges faced by the Micro Insurance Sector in India:

The micro insurance industry is faring very well for the past few years in India and further growth in value and volume. Still, it is facing many challenges on the systemic, institutional, operational and financial front. They can be narrated as follow:

1. Micro insurance operators and their distributors are still not able to decide if this activity /business to be continued as the main business with independent revenue or to continue as additional activities only.
2. The absence of financial literacy in rural and village population which do not allow them to understand the required insurance product and select the wrong Thus, lack of insurance literacy amongst the people slows down the growth of activities of micro insurers.
3. The rural micro insurance is riskier compared to regular insurance and thus the companies are less interested to expand fast.
4. There is a wide gap between demand and supply for micro insurance, especially in rural areas. This also hinders the expansion of micro insurance business in our country.
5. General awareness of people for insurance and products features is very limited in our rural population and this limits the growth of micro insurance.
6. Many of micro insurance products do not take care of problems like the adverse selection of products, moral hazards, and fraud in the transaction.
7. There is still a need for progress in regulation that can be effective for consumer protection and service rendered by micro insurers. The regulations should be flexible and simple to understand by the rural population.
8. The process of distribution of insurance products by the micro insurer is difficult in a rural area and this leads to high cost and creates a hindrance for the development of rural micro insurance

Concluding thoughts

Micro insurance business holds a lot of potentials to expand and develop in India. However, the insurers must take into account the specific needs of the clients and formulate a proper solution to meet their needs at a reasonable price to the rural population. The risk assurance or risk cover offered to the clients must be easy to understand and simple to follow without any hassles as the rural clients are generally illiterate.

However, micro insurance is becoming very popular nowadays in our country. The micro insurance figures reveal that there is a regular rise in its business. Further, with publishing the notification of the IRDA (Micro-insurance) Regulations 2005, by the Regulator, the design of products offered to the poor and rural population has grown consistently.

To overcome the challenges, it is imperative that measures are taken to encourage regulatory modification, product development, distribution optimization, and financial education.

However, in spite of all challenges, micro insurance industry offers a great scope for development in our country and that is the reason for big insurance players entering Micro Insurance Sector.

Read our article:Understanding the key aspects of Micro Insurance Regulations