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Micro insurance penetration in India: A tool for financial inclusion

Article · June 2016

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Prabhakar Nandru Byram Anand


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MICRO INSURANCE PENETRATION IN INDIA: A TOOL FOR FINANCIAL INCLUSION
Prabhakar Nandru1, Byram Anand2 and Satyanarayana Rentala3
ABSTRACT
Access of financial services to the people, particularly to the not covered areas and segment of
population in India, is an important key to inclusive growth potential and promote equity.
Priority of policy makers, Government of India (GOI) and Reserve Bank of India (RBI) for
financial Inclusion drive has been one of the increased access to banking services, easy
operatibility and effective delivery of financial services through provision of baking services in
habitation of 2000 plus persons at reasonable cost. Insurance sector in India is also contributing
to the field of financial inclusion through insurance inclusion in all habitations having 10,000
plus people by opening one office of public sector insurance companies. Thus, it has been felt by
policy makers that financial inclusion will remain incomplete unless initiatives of insurance
inclusion are simultaneously pushed to get greater penetration. The present paper discusses the
demand side and supply side factor of micro insurance services, and the role of micro insurance
in spreading financial inclusion in rural and urban people in India. The study based on secondary
data, which has been collected from Journals, articles, IRDA reports etc.
Keywords: Inclusive growth; Financial services; Insurance sector; Insurance inclusion; Micro
insurance; Financial inclusion

1. Doctoral Scholar, Department of Management, Pondicherry University, Karaikal


Campus, Karaikal ­ 609 605; Email: prabhakarphd897@gmail.com, Mobile: +91 90925
27553
2. Assistant Professor, Department of Management, Pondicherry University, Karaikal
Campus, Karaikal ­ 609 605.
3. Doctoral Scholar, Department of Management, Pondicherry University, Karaikal
Campus, Karaikal ­609 605; Email: rentsatya@gmail.com, Mobile: +91 9042876423

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1. Introduction
The role of sound financial system blow on access to reasonable rate of financial services
mainly credit and insurance services which helps to boost livelihood opportunities and
empowers the poor to take charge of their lives. Such empowerment helps social and political
constancy. Apart from these benefits, FI imparts formal uniqueness, provides access to the
payments system and to savings protection net like deposit insurance. Hence FI is measured to be
critical for achieving comprehensive economic growth, which itself is required for ensuring
basically sustainable inclusive economic development in the country (Thorat. 2007). Delivery of
banking services and credit at an affordable cost to the vast sections of disadvantaged and low
income groups which various financial services which includes frequently savings , taking loans,
having insurance products, payments, remittance facilities, and financial counseling by the
formal financial system in Indian. (Rangarajan Committee Report, 2008). An inclusive financial
sector provides access to credit for all ‘bankable’ people and firms, to insurance for all insurable
people in urban and rural areas and to savings and payments of basic banking services for
everyone. Financial inclusion, thus, has become an issue of worldwide concern relevant equally
provide basic banking services like savings, loans, insurance, remittance facilities etc. in under­
developed, developing, and developed nations. Building an inclusive financial sector has gained
benefits which are growing global recognition bringing to the forefront the financial needs for
development effective strategies that touch all lives in the society, instead of a select few. There
is a need to be encourage the institutions, introducing new financial instruments, building healthy
relationships and financing arrangements to be accurately geared for proving sound, basic
financial services to the majority of the people who do not have banking services. Inclusive
growth is now recognised as a necessary condition to ensure long term sustainability for the
poor, rural and socially disadvantaged sections of the society is now a major thrust area for
policy interventions. The vulnerability of the above mentioned category of households is very
high to various risks related to their lives and livelihood activities. Therefore making insurance
services available to them becomes a key strategy to ensure that sustainable social protection is
offered to these households. The rural and social sector obligations and the micro insurance
regulations form IRDA are important steps in the direction of ensuring financial inclusion and
social protection for the rural and urban poor. While developing new regulations are in place and
several insurance companies are in operations in India, there is still a need for innovation in

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providing insurance products and well distribution channels for enhancing the penetration to the
large segment of population who that need it. There is also the challenge of education the vast
majority of population on insurance that to be addressed. As part of these financial inclusion
programmes, micro insurance competently fits to be propagated in the targeted market segment.
2. Micro insurance penetration india
In order to facilitate penetration of micro insurance to the lower income segments of population,
Insurance Regulatory and Development Authority (IRDA) has created a special category of
insurance policies called micro­insurance policies to promote insurance coverage among
economically weak sections in society. The IRDA Micro­insurance Regulations, 2005 provide a
platform to distribute insurance products and services, which are affordable cost to the rural and
urban poor and to make possible micro insurance to be an integral part of the country’s wider
insurance system. The main thrust of micro insurance regulations is perform of low income
people with affordable insurance products to help them cope with and recover from common
risks with standardized popular insurance products adhering to certain levels of risk cover,
premium and benefit standards.
Characteristics of micro insurance
 Micro insurance is insurance and applies principles of risk pooling
 Micro insurance products are designed for rural and urban low
incomes people
 Micro insurance targets people in the informal sector
 Micro insurance products are designed general as well as life
insurance (health, live stock, personal accidents, etc.)
Chart1. Micro insurance products delivery mechanism

Low income Distribution


groups Targeted Channels
groups 1. NGO’S
Affordable cost 2. SHG’S
Micro insurance Rural and
Services Urban poor 3. MFI’S
Low premium 4. RRB’s
5. 5. Co­operative
Societies
Low coverage

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Source: author’s design
Micro-insurance policy is:
A general or life insurance policy with a sum assured of Rs.50, 000 or less
A general micro-insurance product is any:
 Health insurance contract
 Any contract covering belongings such as
 Hunt
 Live stock
 Tools or instruments or
 Any personal accident contract
 They can be on an individual or group basis
A life micro-insurance product is
 A term insurance contract with or without return of premium
 Any endowment insurance contract or
 A health insurance contract
 They can be with or without an accident benefit rider and
 Either on an individual or group basis
Intermediaries:
 Non­Government Organizations (NGO’s)
 Self­Help Groups (SHG’s)
 Micro­Finance Institutions (MFI’s)
 Regional Rural Banks (RRB’s)
 Co­operative societies
3. Review of Literature
Prabhakara (2007) examined that creating awareness of the need for services like life insurance,
basic banking services their accessibility and affordability increase the business opportunities of
bankers and life insurers in rural as well as urban. Creating awareness to banking services and
insurance services among rural and urban poor could also be regard as one of the ingredients
infrastructures to the financial market supports the financial inclusion programmes of
governments where life insurance deserves to be an integral part. The study also focused that as

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part of these financial inclusion programmes, micro insurance competently fits to be propagated
in the targeted market segments.
Gunaranjan (2007) studied that bringing in financial inclusion for the poor, rural and socially
disadvantaged sections of the society is now a major thrust area for policy maker’s interventions.
The rural and social sector obligations and the micro insurance regulations are important steps in
the directions of ensuring financial inclusion and social protection for the poor.
Choudhari (2013) stated that access to safe, easy and affordable financial services to the poor and
vulnerable groups, disadvantaged people in the society is so far largely remained concentrated
around banking inclusion but the focus is fast shifting towards inclusion of poor people in
insurance also. The study also found that the goal of financial inclusion will remain unmet until
the insurance needs of people particularly of those living in rural and semi­urban areas are met.
4. Objectives of the study:
The following objectives are drawn from above literature review.
 To know the trends of private and LIC new business premium collection under micro
insurance in India
 To examine the trends in number of micro insurance policies of private and LIC players
 To study the Demand and supply side factors impact on development of micro insurance
in India.
5. Research Methodology
The study is based on secondary data. Data has been collected from journals, articles, websites
and IRDA reports etc.The IRDA data represents micro insurance trends last 7 years i.e. from
2007­08 to 2013­14.
6. Micro insurance interventions and Ensuring Financial Inclusion
The rural and social sector obligations and the micro insurance regulations form IRDA are
important steps in the direction of ensuring financial inclusion and social protection for the poor.
As part of these financial inclusion programmes, micro insurance competently spread in the
targeted market segment. To improve the market share of micro insurance segment the IRDA is
reviewing the micro insurance regulations, 2005. In this connection, the authority has already
released draft modifications of the regulations on 31st Jan, 2014. Also, the Authority has issued a
circular on 3rd April, 2013 permitting several more entities like district co­operative banks,
regional rural banks, rural banks, etc. Who are banking correspondents to be appointed as micro

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insurance agents facilitating better penetration of micro insurance business in rural and urban
people which leads to financial inclusion.

Chart.1 Dimensions of Financial Inclusion

Savings

Bank Insurance
Accounts
Financial
Inclusion

Payments and
Financial Remittance
Advice

Affordable
Credit
Source: Rangarajan committee report

7. Current market share of Micro insurance in India


Since FDI allowed into Indian insurance sector its show increase in insurance density and
penetration on account of increased competion, design innovative products and distribution
channels. Even though insurance penetration remains at 4.1 per cent with 3.4 percent in life
insurance and only around 0.7 percent in non­life insurance segment. To improve the market
share of micro insurance segment the IRDA is reviewing the micro insurance regulations, 2005.
In this connection, the authority has already released draft modifications of the regulations on
31st Jan, 2014. Also, the Authority has issued a circular on 3rd April, 2013 permitting several
more entities like district co­operative banks, regional rural banks, rural banks, etc. Who are
banking correspondents to be appointed as micro insurance agents facilitating better penetration
of micro insurance business in rural and urban areas.

After, IRDA is reviewing the micro­insurance regulations, 2005, there is positive


trends emerging in micro insurance business in India. While the individual new business

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premium under the micro insurance segment in the year stood at Rs.95.65 crore for 2.76 million
new policies, the group business premium collected amounted to Rs. 141.77 crore covering about
1.32 crore lives. LIC contributed to a significant component of the business procured in this
portfolio by garnering Rs.86.36 crore of individual new business premium under 22.06 lakh
policies and Rs.125.81 crore of group premium covering 1.19 crore lives.
Table.1 clearly shows that combination of private and LIC about 2.76 million insurance
policies sold. The data clearly shows that there is positive growth in micro insurance business
from 0.93 million policies in 2007­08 to 5.03 million in 2012­13. But in 2013­14 it has been
decreased to 2.76 million
Table 1: Trends in number of new Life Micro Insurance Policies in India
(In millions)
Year Private LIC Total
2007­08 0.08 0.85 0.93
2008­09 0.61 1.54 2.15
2009­10 0.99 1.98 2.98
2010­11 0.69 2.95 3.65
2011­12 0.79 3.82 4.62
2012­13 0.69 4.34 5.03
2013­14 0.56 2.20 2.76
Source: IRDA reports
Table2. Shows that growth rate of agents in micro insurance in private and LIC micro
insurance sector in India. Micro insurance business is generated through 18,401 Micro insurance
agents in LIC and 1656 in private players. LIC has stable growth in case of agent’s growth. The
trend revealed that some private players are low in their number of micro insurance agents in
comparison to Public players.
Table 2: growth rate of Micro insurance Agents in life insurance Private and LIC
Year Private Growth rate (%) LIC Growth rate (%)
2008­09 603 44.25 6647 59.55
2009­10 770 27.69 7906 18.94
2010­11 758 ­1.55 9724 22.99
2011­12 1251 65.03 11546 18.73
2012­13 1824 45.80 15228 31.88
2013­14 1656 ­10.144 18401 17.24
Source: IRDA reports

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Table3. Shows that growth rate of premium under life micro insurance sector. The data
clearly shows that the LIC is collecting high premium from policy holders than private players.
But the growth rate premium is gradually decreases in both public and private players.

Table3: Growth rate of new business under life Micro insurance Premium
Year Private (in Rs. Lakh) Growth Rate LIC (in Rs. Lakh) Growth Rate (%)
(%)
2008­09 537.81 156.41 3118.74 93.30
2009­10 839.78 56.14 14982.51 380.40
2010­11 735.09 ­12.46 12305.76 ­17.86
2011­12 964.22 31.17 10603.49 ­13.83
2012­13 1018.54 5.63 9949.05 ­6.17
2013­14 929.29 ­8.76 8635.77 ­13.20
Source: IRDA reports
8. Potential Opportunities for Micro insurance players in rural India
Rural India per capita income level has risen due to shifting of its occupation from agricultural
based activites to non­farm agricultural income and it has become an important aspect of rural
India. The rural people income mostly comes from courtage industries, dairy, food processing
and packaging, commodity trading and handicraft etc. The nonagricultural base of rural
occupation and income has been growing in rural GDP figures that are estimated at 45%.
Insurance companies can add about Rs.1000 crore to their net worth from nearly 200 million
rural folk that are looking for alternate savings channels for their surpluses provided these
come out with innovative schemes at affordable premium. Currently, only 8­10% rural
households are covered under life insurance schemes and remaining 90% can be targeted for
new innovative insurance schemes
There are several opportunities for doing marketing of micro insurance products in rural and
urban areas which significantly impact on marketing of micro insurance services in India.
 Growth in rural consumption level
 Increase in literacy rate
 The government has increased spending in rural areas for development in infrastructure
and rural connectivity
 Improved access to finance and institutional credit has brought greater cash inflows to
households.
 Increased in level of income

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9. Drivers of Micro insurance development
The main economic drivers for general insurance development in rural areas are identified two
main key drivers. 1. Demand side factors and 2. Supply side factors

Chart2. Demand and supply side factors in micro insurance development

Income

Savings

Demand side
Education

Micro Insurance Development


Welfare

Attitude

Usage

Suitable
Products
Supply side

Distribution
mechanism
Source: author’s design

1). Demand side factors are growth in income, savings and education, welfare awareness ,
attitude towards buying insurance policies and usage. All these factors show significant impact
on development of rural insurance services in rural India. The income level and consumption
level also increased so that the rural people are willing to buy the insurance products.
2). Supply side factors are also show greater impact on growth of insurance business in rural
areas. The insurance players should develop the suitable products according to need of rural
customers and that should be available with low cost. And insurance players develop strong

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distribution mechanism to exploit the opportunities in rural areas which leads to develop the
insurance business in rural segment.

10. Conclusions
Since micro insurance product and related services are resigned to meet the risk protection needs
for the low­income and financially –excluded sector, affordability of the premium payments are
key consideration for defining micro insurance. Based on small premiums and proportionately
offers small benefits. Hence micro insurance products have emerged in India with low­income
people and low­cost premiums. The above study clearly shows that there is a positive trend in
this insurance business but in the year 2012­13 the micro insurance business shows that it is
moving some down trend in new business policies and collection of premium point of view.
Hence, the government should take sectorial decisions to improve micro insurance business in
rural and urban areas. Because of improving micro insurance business IRDA is reviewing the
micro insurance regulations, 2005. In this connection, the authority has already released draft
modifications of the regulations on 31st Jan, 2014. Also, the Authority has issued a circular on 3rd
April, 2013 permitting several more entities in to micro insurance activities like district co­
operative banks, regional rural banks, rural banks, etc. in to main stream of marketing of micro
insurance products who are banking correspondents to be appointed as micro insurance agents
facilitating better penetration of micro insurance business in India.

On the based on above study, the following suggestions are offered to policy makers and
government.
 There must be necessary to have innovative solutions to develop efficient delivery of
micro insurance services in rural India.
 By using all possible ways it is necessary to identify the effective rural needs.
 It is necessary to create awareness on various Insurance products through group meeting,
cultural events like folk dance, songs etc., among rural people in India.
 Steps must be taken to introduce the innovative products to meet the needs of rural
customers.

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References

1. Thorat, U. (2007). “Financial

inclusion­The Indian Experience” Reserve Bank of India at the HMT-DFID Financial

inclusion Conference, Whitehall place, London, UK on June 19.

2. Rangarajan, C. (2008). “Report of the Committee on Financial Inclusion, Government of

India, New Delhi.

3. Prabhakara, G. (2007). Creating consumers awareness, irda journal, V (12), pp-36-38.

4. Gunaranjan. (2007). The challenges of micro insurance, irda journal, V (12), pp-22-327.

5. Choudhari, N. (2013). Insurance inclusion, irda journal, XI (6) pp-28-33.

6. IRDA Annual Reports (2007­08 to 2013­14).

7. www. irda.gov.in

8. www.licindia.com

9. www. microsave.org

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