Microinsurance Term Paper Revised

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Microinsurance - A study in the Indian context
Anish Shankar Menon December 20, 2013
Abstract This paper examines the microinsurance business in the Indian context. It looks at the origins of microinsurance and then traces the trends across the world. It then examines microinsurance from an Indian perspective. The paper looks at the landscape of the microinsurance business in India. It then looks at the legislations that affect the microsinsurance business. Further it tries to look at the future of the microinsurance business in the background of the recent legal developments in the microfinance business in India. The final part of this paper studies the microinsurance business of a particular insurer in detail.

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Introduction

Microfinance has been one of the most important innovations in the past century in the field social inclusion. The reason being that it virtually transformed the poor from being ’unbankable’ to a safe investment. Not only did this movement gain momentum in Bangladesh and it’s neighbouring countries but also spread around the world especially in South East and West Asia, Latin America and Africa. 1

According to Ledgerwood (1999), microfinance is an approach targeted at providing financial services to low income consumers. It includes but is not limited to savings and credit, insurance and payment, financial and social intermediation, training, literacy and capacity building measures and similar activities. Microinsurance is an activity that comes under the scope of microfinance though it can be studied in isolation. This paper tries to look study the microinsurance industry in India. It first defines microinsurance and then traces it’s historical development in the world as well as in India. It examines the trends in microinsurance both international and Indian. It then looks at the legal developments to promote inclusiveness in the insurance sector. It finally tries to analyze the impact of the legislations in the microfinance sector on the microinsurance business.

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2.1

Microinsurance - An overview
Definition

According to Churchill (2006), microinsurance is essentially the same as regular insurance except for the target consumer segment which is the low income people. It is essentially a financial product that offers protection against specific risks commensurate to the premium paid and the likelihood of occurrence of the risk insured against. The target population of microinsurance are the people who were erstwhile thought to be ’uninsurable’. According to Churchill (2006) the microinsurance frontier is made of workers in the informal economy with unpredictable cash flows. Microinsurance does not refer to the size of the insurer. Many large insurance companies provide microinsurance products. However there are small and informal microinsurance providers also. It also does not characterize the nature of the risk. Loss of 2

life has the same dread for the rich and poor alike and is in no way trivial for the poor. Microinsurance could cover various types of risks such as illness, death and property loss. It could also extend to insurance of agriculture, livestock and similar important aspects in the customers’ life. Primarily anything that can be insured conventionally will fall under the ambit of microinsurance. The term ’micro’ merely signifies the scale of the operation in absolute monetary terms. The premium size and hence finally the sum assured in such products would be significantly smaller than that of conventional insurance products. Microinsurance according to Churchill (2006) has a two-fold objective. The first is to provide the poor and marginalized sections of the society with adequate social and economic protection in the absence of any government initiatives for the same. The second is to help create a sustainable business model that would help insurers view the poor as a profitable customer segment.

2.2

A brief history

Microinsurance is not a new concept. Insurance has been around for quite a long time. However the term ’microinsurance’ is new. According to Zanjani and Koven (2013), the forerunner to the modern day microinsurance was the industrial insurance in the United States of America (USA) in the early 1900s which was meant for the working class family. According to McCord and Roth (2006) the premium was collected on the wage day and was very effective. The agents were market specific and the risks were worker specific. Coverage was tailored to suit the workers’ needs. According to Zanjani and Koven (2013), another product that focussed on low income customers was fraternal life insurance. Unlike normal insurance 3

products, fraternal insurance was based on the social security of communities or groups. This insurance was based on the method of assessments. Suppose an insured member of the fraternity died, then the rest of the surviving members contributed towards the death benefit of the deceased member. A member could remain insured as long as the assessments were paid. This system moved towards the premium system prevalent today. Microinsurance today is mainly distinguished from conventional forms of insurance on a few parameters. According to Tomchinsky (2008)1 these are, 1. Microinsurance policy documents are simple and easy to understand in comparison with complex insurance documentation. 2. They are broady inclusive unlike ordinary insurance products that have a limited eligibility with standard exclusions. 3. The premium payments take into account irregular cash flows in the case of microinsurance. 4. Coverage can be less than a year, wherein most conventional products have a minimum term of twelve months. 5. Self declaration in the case of microinsurance is usually accepted unlike ordinary policies where a medical examination is usually required. 6. Only small sums insured in case of microinsurance. 7. Pricing of the product in the case of microinsurance is usually group or community based.
Gabrielle Tomchinsky, "Introduction to microinsurance: Historical Perspective", Presentation made at the 4th International Microinsurance Conference Cartagena, Colombia, November 5, 2008, http://www.ilo.org/public/english/employment/mifacility/ download/presentations/mconf2008_tomchinsky.pdf
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8. The distribution channel manages the entire customer relationship from sale of policy, premium collection to claims disbursal. 9. The customers of microinsurance are usually not quite aware of what an insurance product is. Microinsurance today is seen as a huge business opportunity. A simple reason is the market size. According to the World Bank nearly 1.22 billion people lived on or below $1.25 per day. 2.4 billion people lived on $2 or less per day.2 Both these indicators denote extreme levels of poverty. There are many others who though not extremely poor, are certainly not well off. This market size is a fundamental reason for the emergence of microinsurance as a viable and profitable business opportunity.

2.3

Types of microinsurance products

Microinsurance products like all insurance products can be bifurcated into life and nonlife products. The life products include credit life insurance, term life or personal accident insurance and savings life insurance. Health insurance, agricultural insurance and property insurance are the non-life insurance products.3 Besides these there are other types of products. According to Hougaard and Chamberlain (2011) the most popular microinsurance product after credit life insurance is funeral insurance. Ramsay and Arcila (2013) develop a risk-neutral model for pricing funeral insurance policies in the African context through a burial society. They too emphasize the fact that funeral insurance is among the most popular products in Africa.
http://www.worldbank.org/en/topic/poverty/overview http://www.microfinancegateway.org/p/site/m/template.rc/1.11.48248/1. 26.9202/#types?
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2.4

Microinsurance delivery mechanisms

There are many models through which microinsurance is delivered to the end customer. The most prevalent among them include 4 :1. The self insurance mode wherein the microfinance institution uses a credit life or mandatory life products. The product is also managed in-house by creating a reserve. When a client dies, the loan balance remaining in her name is written off from the fund. This however is highly risky as many institutions lack both the capital and skill to manage an insurance product. 2. Some institutions may partner with specialist insurance companies and provide services to their customers. The insurance company capitalizes on the distribution network of it’s partner while the microfinance organization takes advantage of the insurance company’s expertise. This is the most common model prevalent today. 3. In some instances, the microfinance organizations may employ the services of an intermediary or broker who has the adequate local knowledge and acts as a bridge between the microfinance institution and the insurance company. These brokers also help identify markets for microfinance companies to start and expand their microinsurance business. 4. In some cases microfinance companies with large enough resources might create their own microinsurance companies. Examples would include the company created by African Allianz, the parent group of Select Africa in Swaziland, Africa and SANASA Insurance Company Limited created by SANASA, a co-operative network in Sri-Lanka. Of the four, the last method, that of creating an own microisnurance company, could be the best method of delivering the product to the end consumer. However of the four it also the most difficult. In the Indian
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See Churchill et al. (2012)

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context for example, SEWA has wanted to create it’s own insurance company. However the steep capital requirements and rigid protocol for venturing into the insurance business has been constant and unsurmountable impediments in it’s path. According to Karmakar et al. (2011), microinsurance models can be classified into four types namely:1. Government initiated schemes like the natural disaster fund in Vietnam. 2. Reinsurance initiated schemes like the tieup between Interpolis Re (reinsurer) and the DHAN Foundation (Non-Governmental Organization (NGO)) in India. 3. Microfinance initiated schemes like the ones initiated by Opportunity International. 4. NGO initiated schemes like the one initiated by the Disaster Management Institute (DMI).

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Microinsurance around the world

Microinsurance has been developing at quite a rapid rate all over the globe. Matthews (2012) provides data with respect to developing countries that include Brazil, India, Indonesia, China, Mexico, South Africa, Kenya, Nigeria and Vietnam among others. He emphasizes that the development of microinsurance depends on two factors namely the size of the market and the prevalent economic environment of the country. There has been a lot of research in the microinsurance field around the world. According to Giesbert et al. (2011) who studied the relationship 7

between the households’ decision to take up microinsurance and the use of other financial services in Ghana have found that risk averse households do not take up microinsurance as they consider microinsurance to be risky. This they claim is a problem of adverse selection due to asymmetric information in the market. In another study in Ghana, Karlan et al. (2011) have found that loans with an indemnity component wherein the farmers were assured of being indemnified if the price of the crop fell below the threshold price was not effective. Farmers took loans in the same level irrespective of the indemnity component or not. Hamid et al. (2011) have found in their study conducted in Bangladesh, a positive relation between health microinsurance and various outcome measures closely related to poverty that include household income, stability of household income via food sufficiency and ownership of nonland assets, and the probability of being above or below the poverty line. They propose that this relationship is quite important for the food security of the families. A study by Akter et al. (2011) on micro flood insurance in Bangladesh revealed that the administration costs of micro flood insurance determines their viability in the long run. There is extensive research being done in the field of micoinsurance. Dercon et al. (2008) and Bock and Gelade (2012) provide a good overview of the literature in the microinsurance domain.

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4.1

Microinsurance in India
Landscape

Microinsurance both in theory and practice has gained huge impetus in India. India, with it’s huge population and with most of it having low incomes, is 8

the perfect market for microinsurance. According to Roth et al. (2005) there were many informal microfinance sources in India. These were run by churches, co-operatives, societies, NonGovernmental-Organizations and similar institutions. An early pioneer of microinsurance in India was the SEWA Bank. SEWA Bank had integrated schemes that covered the womens’ lives, their husbands’ lives and comprehensive insurance that included loss of property.5 . The subcomponents of the insurance was covered by mainstream insurance companies like the Life Insurance Corporation (LIC). However SEWA was not able to begin it’s own insurance company due to strict regulations and capital adequacy requirements imposed by the insurance regulator. There are other mutual insurance schemes in India. A good example of this is the Yeshasvini health insurance scheme for farmers in Karnataka. The scheme was started by the renowned cardiac surgeon Dr. Devi Shetty and provides insurance facilities akin to the cashless facilities provided by conventional term health insurance policies.6 . The typical Indian microinsurance client has the following characteristics7 :1. The average family size is five members or more. 2. Agriculture is the main income source. 3. The poverty of the client increases his risk profile above average. 4. The closely knit communities facilitate internal surveillance.
See Fisher and Sriram (2002) See Micro-Credit Ratings International Limited (2008) 7 See Microinsurance: Demand and Market Prospects ? India, UNDP Report http://www.undp.org/content/dam/ aplaws/publication/en/publications/capacity-development/ microinsurance-demand-and-market-prospects-for-india/Microinsurance.pdf
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5. Lower literacy levels means the information about the insurance products must be done through medium other than the written word. 6. Inadequate infrastructure in rural areas increases cost of selling and servicing the products. Microinsurance faces many impediments in India. These include8 :1. Lack of expertise in selling low value high volume products. 2. High fixed costs of sales and distribution. 3. Lack of awareness of clients. 4. High risk allocation of clients by actuaries. 5. Low premiums hence low commissions. 6. Client migration. 7. Low sum assured compared to actual loss. There are a variety of products on offer in India. According to Mukherjee (2012c) these include individual life insurance products, savings linked life insurance products, individual and group general insurance products and group (term) life assurance products. This is in addition to the informal community based products already available. Conventional insurers are active in the microinsurance domain. According to the ’Compendium of microinsurance products’ released by the Centre for Microfinance, there were around 43 products that covered life and non life types. 9 . A comprehensive study was done in the year 2005 by the International Labour Organization which listed the companies that provided
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See Mukherjee (2012a) http://www.srtt.org/institutional_grants/pdf/compendium.pdf

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microinsurance and their products.

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. The Insurance Regulatory and Devel-

opment Authority (IRDA) website that provides similar information however is updated only until the year 2009. In a study by Ito and Kono (2010), the researchers find that the reason for low microinsurance acceptance especially in the health insurance is due to well established economic behaviour. They say that people are risk loving when it comes to losses and hence do not take up insurance which they find consistent with prospect theory. They also find evidence of adverse selection where families with more sick people take insurance. Since microinsurance health products seldom require comprehensive health checkups, the problem of adverse selection is bound to be high. However Bauchet et al. (2010) observe that microinsurers direct their insured to hospitals that have better facilities than the ones the clients would have visited had they not been insured. However they also find that just being insured does not guarantee better quality care. Rusconi (2012) studies four microinsurance products in India offered by established insurance companies. He observes that insurance products with a savings component attached are quite suitable for the poor customers as the poor are able to see some value for the premium that they have paid. This substantiates the observations made by Bannerjee and Duflo (2011) where they observed clients moving from one microfinance institution that made insurance compulsory to another. This is attributed to the question of trust and this is achieved in a savings linked insurance product where the client can see his savings firsthand.
See Special Studies: Insurance products provided by insurance companies to the disadvantaged groups in India: Working paper http://www.ilo.org/public/english/ protection/socsec/step/download/823p1.pdf
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4.2

Legislations impacting microinsurance

A number of legislations were primarily responsible for the development of microinsurance in India. The first was the regulations released in the year 2002 by the Insurance Regulatory and Development Authority (IRDA) titled ’IRDA (Obligations of Insurers to Rural Social Sectors) Regulations, 2002’. The original document stated that any insurer carrying on the business of insurance after enactment of the Insurance Regulatory and Development Authority Act, 1999 has to achieve some specified targets during the first five financial years. For a life insurer in the rural sector, the targets were 7%, 9%, 12%, 14% and 16% in the five years respectively of total policies written that year. For the general insurer it was 2%, 3% and 5% of the total gross premium income of that year. Apart from this it also specified limits for all insurers with respect to the social sector. This was five thousand, seven thousand, ten thousand, fifteen thousand and twenty thousand lives to be covered in the first five years respectively. Besides the general insureres were also asked to provide agricultural insurance for crops. Here rural sector was defined as a place which according to the current census had a population of less than five thousand, a population density of less than four hundred per square kilometre and more than 25% of the male population engaged in agricultural pursuits (cultivators, agricultural labourers and workers in livestock, forestry, fishing, hunting and plantations, orchards and allied activities). The social sector included the unorganized, informal sector, economically vulnerable or backward classes in both urban and rural areas. This was followed by a concept note released by IRDA in 2004 titled ’Concept Paper on Need for Developing Micro-Insurance in India’. This paper laid down the foundations of new microinsurance regulations in India. It broadly spoke of the requirement to adapt formal insurance mechanisms to 12

suit the needs of the micro-economy and providing an impetus to the nonformal sources of insurance. In the year 2005, the IRDA issued the IRDA (Micro Insurance) Regulations, 2005 and also amended its earlier regulations. The new regulations provided definitions of microinsurance products, microinsurance agents and other key terms. It also laid down some rules with regard to tie-ups between life and non-life insurers, distribution of products, appointment of microinsurance agents, their code of conduct their remuneration, filing of the policy design, issuance and underwriting of the contracts, capacity building and similar matters. The amendments to the old regulations included a target for the sixth year. This was that in the case of life insurers, 18% of the total policies written should be in the rural sector. In respect of non-life insurers, 5% of direct gross total premium must be from the rural sector. It also mentioned that in respect of all insurers twenty five thousand new lives had to be insured in the social sector. The 2002 regulations were amended twice in the year 2008. In the third amendment, the targets are further revised for the sixth year and new targets on similar lines as in the original regulations are specied for the seventh to the tenth year. The fourth amendment is a technical one where an insurance company that has commenced operations in the second half of the year and has less than six months of operations is exempt from rural and social sector obligations for that year and it’s first year starts from the beginning of the year after it’s commencement of operations. However the insurance companies do not find microinsurance enticing enough. According to Mukherjee (2012b), the LIC is the major player in the microinsurance market since it is state owned. The rest of the companies focus on high value business while just managing to meet the target requirements.

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A few important statistics on the microinsurance industry in India can be provided to support the above statement.11 Table 1: Individual - Number of policies: Life Company Aviva Bajaj Allianz Birla Sunlife HDFC Standard ICICI Prudential Metlife Sahara Tata AIA Private Total LIC Industry Total 2008-09 310 10226 280659 2009-10 3757 127 568647 2010-11 11222 290395 2011-12 6322

256226 176464 234299 344926 324889 321009 734 125 3501 9243 604 324 1483 6282 84019 80903 68243 18114 610851 998809 699733 793660 1541218 1985145 2951235 3826783 2152069 2983954 3650968 4620443

Table 1 shows the number of life microinsurance policies issued by the various insurance companies. The growth of the business seems to be uneven. By the year 2011-12, ICICI Prudential has the most number of microinsurance policies. LIC has the most number of policies in total in all the years. Table 2 shows the premium collected from life microinsurance polcies. In the year 2011-12, HDFC Standard has collected the highest premium amount. Table 3 shows the average premium per policy. It can be seen that the premium per policy is different for different insurers. Many companies overpriced during the initial years with prices settling after the first two years. The most radical change is seen in both Bajaj Allianz and Metlife. Birla Sunlife and ICICI Prudential has consistently maintained low premiums. They are also the companies that have some of the highest business volumes. Apart from individual life microinsurance business, the companies also
Handbook on Indian Insurance Statistics 2011-12, Insurance Regulatory Development Authority (IRDA) Publication
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Table 2: Individual - Premium Amount (in Lakhs): Life Company Aviva Bajaj Allianz Birla Sunlife HDFC Standard ICICI Prudential Metlife Sahara Tata AIA Private Total LIC Industry Total 2008-09 1.52 85.47 147.69 122.05 18.69 8.21 154.17 537.81 3118.74 3656.55 2009-10 18.17 2.42 263.72 2010-11 58.87 186.00 2011-12 36.40

168.14 352.93 288.18 256.08 281.44 7.19 4.21 10.63 4.90 12.24 39.43 255.20 217.69 75.25 839.78 735.09 964.22 14982.51 12305.76 10603.49 15822.29 13040.85 11567.71

Table 3: Individual - Average Premium per policy Company 2008-09 Aviva 490.32 Bajaj Allianz 835.81 Birla Sunlife 52.62 HDFC Standard ICICI Prudential 52.09 Metlife 2546.32 Sahara 1359.27 Tata AIA 183.49 Private Average 88.04 LIC 202.36 Industry Average 169.91 2009-10 483.63 1905.51 46.38 83.55 5752 1512.35 315.44 84.08 754.73 530.25 2010-11 524.59 64.05 78.82 120.25 825.35 318.99 105.05 416.97 357.19 2011-12 575.77 65.62 200.00 87.67 115.01 627.67 415.42 121.49 277.09 250.36

insure in groups. The tables below provide data on group insurance policies. Table 4 shows the number of schemes per company. By far LIC has the maximum number of schemes. In the private sector Birla Sunlife and SBI Life have the highest number of schemes. Table 5 shows the number of lives covered. Again LIC covers the maximum number of lives. In the private sector Aviva, IDBI Federal and SBI Life have covered the maximum number of people.

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Table 4: Group - Number of policies: Life Company Aviva Birla Sunlife Canara HSBC DLF Pramerica IDBI Federal ING Vysya Sahara SBI Life Shriram Private Total LIC Industry Total 2008-09 2009-10 1 2010-11 1 2011-12 5 63 1 1

1 1 2 2 1 7 14 6883 6897

1 13

1 5 1 12 3 23 5446 5469

1 1 17 5190 5207

39 3 112 5461 5573

Table 5: Group - Number of lives covered: Life Company Aviva Birla Sunlife Canara HSBC DLF Pramerica IDBI Federal ING Vysya Sahara SBI Life Shriram Private Total LIC Industry Total 2008-09 872244 2586 2602 22602 40000 50 558910 2009-10 1548820 2010-11 896377 2011-12 110415 63357 15125 315400

7500 41442

10010 648835

69 281856 70683 15525 357563 1498994 1895143 1983537 11052815 14946927 13275464 12551809 16842070 15259001

108829 137429 750555 9444349 10194904

Table 6 documents the amount collected as premium. LIC still has the maximum premium collection while in the private sector, the maximum premium collected is by SBI Life and Aviva. Table 7 shows the average premium per policy. In most cases, the premium is substantially lower than individual policies which can be explained by economies of scale. However the premiums reduce and then show an in16

Table 6: Group - Premium (Rs. Lakhs): Life Company Aviva Birla Sunlife Canara HSBC DLF Pramerica IDBI Federal ING Vysya Sahara SBI Life Shriram Private Total LIC Industry Total 2008-09 16.75 2.34 0.01 2.97 0.78 0.10 3303.85 2009-10 834.79 2010-11 1118.30 2011-12 547.82 20.17 0.03 116.34

0.01 11.02

1.00 178.41

622.17 78.23 4.10 343.20 3326.80 1472.09 1719.14 17268.54 22869.72 13803.67 20595.34 24341.81 15522.81

246.44 219.88 1150.67 9831.63 10982.30

Table 7: Group - Average Premium per policy: Life Company 2008-09 Aviva 1.92 Birla Sunlife Canara HSBC 90.49 DLF Pramerica 0.38 IDBI Federal 13.14 ING Vysya 1.95 Sahara 200 SBI Life 591.12 Shriram Private Average 221.94 LIC 156.24 Industry Average 164.08 2009-10 53.9 2010-11 124.76 2011-12 496.15 31.84 0.2 36.89

0.13 26.59

9.99 27.5

220.74 26.41 77.68 153.01 144.53

110.68 95.98 86.67 103.98 101.73

226.45 160 153.31 104.1 107.72

creasing trend. On an average LIC has a fairly stable average premium per person.

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4.3

Effect of microfinance legislations on microinsurance

Microfinance Institutions (MFIs) are the most prevalent vehicles for carrying on microinsurance business. However in the recent times, the microfinance industry has come under scrutiny by the Government. The Government has enacted laws for regulating the microfinance business. This includes the Andhra Pradesh Microfinance Institutions (Regulation of Money lending) Act, 2011 (hereinafter the AP Act) in the state of Andhra Pradhesh and the Microfinance Institutions (Development and Regulations) Bill, 2012 (hereinafter the Bill) at the national level. The regulations severely impact the MFIs in conducting business as they previously used to by curbing their freedom in setting interest rates, fixing instalment periods and other similar conditions. The AP Act does not define microfinance services. However the Bill defines microfinance services and insurance falls under its ambit. This creates an interesting scenario since the insurance business in India is regulated by the IRDA. The Bill states that the Reserve Bank of India (RBI) has the power to issue directions to the MFIs in respect of "levy of processing fees, interest, life insurance premium and other terms relating to micro credit facilities including the ceiling on the percentage of margin to be maintained by a micro finance institution." The clause is confusing as it relates microinsurance and microcredit which are two different products. The Bill has not been passed in the Parliament. Only then will more clarity emerge on it’s effects on the microinsurance business. However the trends do not seem quite promising. According to the year 2012 annual report of Bhartiya Samruddhi Finance Limited, a leading MFI, the revenues from microinsurance business have fallen from |216 million in the year 2010-11 to 18

|124 million in the year 2011-12.12 Similarily in the case of SKS Microfinance Limited, the only publicly listed MFI in India, the revenue from insurance decreased from around |11 crores to |2 crores in the same period.13 .

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Allianz: A study with focus on India operations

Allianz is one of the world’s prominent financial services institution that specializes in insurance. Based out of Germany, Allianz is the world’s largest diversified insurance company.14 Allianz started it’s microinsurance business in the year 2004 in India with the microfinance institution ’Activists for Social Alternatives’. In the year 2006, it set up a partnership with CARE International to offer microinsurance in the coastal regions of Tamil Nadu. Again in the year 2007, in Tamil Nadu, it launched a mutual health insurance scheme with CARE International. In the next year with the same partner in the same State, it launched general insurance products. In the year 2008, it began a savings linked life insurance scheme with SKS Microfinance. In the year 2010, it launched a savings linked life insurance scheme with the Punjab Dairy Federation.15 As on October, 2013, Allianz has five products in India.16 Out of these, two are life products (one individual and the other group) which is distributed by Bajaj Allianz Life Insurance Company and the rest are non-life products
See Bhartiya Samruddhi Finance Limited Annual Report 2011-12 See SKS Microfinance Limited Annual Report 2011-12 14 According to the Forbes website http://www.forbes.com/global2000/list/#page: 1_sort:0_direction:asc_search:_filter:Diversified%20Insurance_filter: All%20countries_filter:All%20states 15 See ’learning to insure the poor: microinsurance report, allianz group, 2010 16 See Microinsurance Product Pool, Overview and assessment of Allianz microinsurance products, Allianz SE, October 2013
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that are sold by Bajaj Allianz General Insurance Company. The life products include a pure life product and a life insurance with savings product. The non-life products include a cattle and livestock insurance product and personal insurance products. The main channel of distribution of these products are MFIs. Other channels include banks, co-operatives, Regional Regional Rural banks and banking correspondents. The common channel is the MFI. This would help Allianz achieve penetration in the rural market and widen it’s customer base. Allianz’s business model in India primarily had three partners CARE International, SKS Microfinance and the Punjab Dairy Federation. In Tamil Nadu, Allianz partnered with CARE International to develop a product that would suit the poor fishermen of the coastal areas. The product was a general insurance policy that covered multiple risks. It also included an education grant for a single child. Premium payments were monthly. From March 2008, sixty three thousand five hundred policies were sold in the first nine months. The benefit of the insurance was felt in the year 2008 when the cyclone ’Nisha’ hit the eastern Indian coastline in November 2008. Allianz settled over sixteen thousand claims in forty four villages. Allianz increased it’s premium but people understood the benefits of insurance. Again with CARE International in Tamil Nadu, Allianz started a mutual insurance scheme. In the case of mutual insurance, technically the insurane company is owned by the policyholders. The drawback of this method is that the size of the claim could easily exceed the resources thus forcing the scheme into bankruptcy. The Allianz model with CARE International as the intermediary was such that the smaller risks were mutually insured while the larger ones were taken care by Allianz. CARE International partnered with local NGOs like Kodi Trust to setup mutual schemes. Focus was on

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complete family coverage including maternity. People could be insured till they were seventy years old. Of the premium collected, two thirds would remain in the group while Allianz would get the remaining one third. The adverse selection problem is settled as only direct referrals by members are given insurance. The problem of moral hazard is solved by doctors referring patients to the concerned hospital at pre-determined prices. The principle of mutuality negated fraud. In April, 2008, Allianz partnered with SKS Microfinance to launch a savings linked life insurance product. SKS Microfinance provided Allianz with a huge captive base of clients. The premium was paid weekly for five years. In case of death, the claim was serviced else the amount deposited is returned with interest. SKS Microfinance made the insurance compulsory and it saw many clients leave the company for it’s competitors. Allianz partnered with the Punjab Milk Federation to provide savings linked life insurance. The three tier structure of the co-operative dairy industry with the Village Co-operative at the lowest level, the District Union at the middle level and the State Federation at the top level provided a solid foundation on which the insurance business could be built. The policy was at a group level and could be customized as per the requirement of the union. The intermediation was done by the dairy unions themselves and premiums were collected when payments to the dairy farmers were disbursed. Microinsurance for Allianz has been a reasonable success. As on October, 2013, Allianz has covered over 21,332,000 individuals. This is 19,100,000 people under group term life, 1,900,000 people under life endowment, 333,000 people under personal accident, 2,000 people under personal accident with hospitalization and 45,000 cattle under the cattle and livestock plan.17
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See the Microinsurance at Allianz Group 2013 Half Year Report

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Allianz’s major partners are MFIs. The MFIs have both the knowledge and scale to penetrate rural markets. However MFIs have been having a tough time in India due to regulatory issues as discussed earlier in this paper. For example in the case of the product supported by SKS Microfinance, premium collections are weekly. People who default on loan instalments would also be likely to default on premium instalments. This would be detrimental to Allianz’s microinsurance business as a whole. Both commercial banks with their expertise in financial services and the postal services with it’s extensive networks are channels of distribution that Allianz can explore. The hope however would be that the MFI regulations would come in place and lend more clarity to the whole matter.

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Conclusion

In purely commercial terms, microinsurance is an extremely viable and profitable business proposition. The customer base is extremely large and if operations are scaled up, the thin margins might be more than adequately covered by the volume of business. An insurance is an asset. It is an accepted collateral in a bank for availing of loan facilities. Microinsurance too helps in asset formation of a similar sort but at a much smaller level. The future of the microinsurance industry would depend on how the Government frames rules and regulations in this domain and the reaction to the same by the various functionaries in the business chain. This would include large insurers (almost all major private insurance companies have entered the microinsurance business) who design the products, the MFIs who distribute the products and ultimately the consumers who purchase the product. The

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voices of the first two are most loudly heard whereas that of the last, dissappears into silence.

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References
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