Micro Insurance in India—Achievements and future challenges Dr R Kannan Member (Actuary)

1. Micro Insurance in India—Achievements and future challenges Dr R Kannan Member (Actuary) Insurance Regulatory and Development Authority INDIA Cape Town March 5 2010

2. Micro Insurance – Definition • Micro insurance is defined as insurance provided for low-income people by a variety of insurers, run in accordance with generally accepted insurance principles, and funded by premiums Comprises of risk-pooling products • Appropriatefor the low-income market cost, terms, coverage,anddelivery mechanisms • Micro Financehelps people improve livelihoods • Micro Insurancehelps them to protect the gains in the event of any unfortunate events Cape Town March 5 2010

3. Micro Insurance Potential • Potential market for insurance in developing economies estimated to be between 1.5 and 3 billion policies. • Significant demand for a range of insurance products – health, life, agricultural and property insurance, catastrophe cover • Success of microcredit worldwide has shown that people with low incomes are a proven market for financial services if given appropriate products, processes, and knowledge. • Microinsurance already covers around 135 million people, or 5% of the potential market. In many countries, annual growth is 10% or more. • Microinsurance is effective even in markets with little experience of insurance, as long as products, procedures and policies are simple, the premiums are affordable, the administration is efficient, and distribution channels are innovative. Cape Town March 5 2010

4. Role of Policymakers and Regulators • Increasing access to financial services • allows financial sector development • consumer empowerment by catalyzing the market provision of risk management tools for poorer households • Facilitate effective supervision and enforcement • safeguard thesolvency and the soundness of institutions providing insurance • increase the growth,competiveness and efficiency (innovation and investment) • protecting consumersanddeveloping trust • An enabling policy and regulatory environment is the prerequisite for a micro insurance market to develop to its true potential Cape Town March 5 2010

5. Micro Insurance Regulations in India • Objective is to bring low income people under the ambit of insurance • Targeted sectors - Life, non life, pension and health • The existing regulations on rural and social sector obligation was thought to be not sufficient to cover the low income group at desired level • In order to meet the specific objectives, the IRDA issued Micro Insurance Regulations on 10th November, 2005 Cape Town March 5 2010

6. Micro Insurance Regulations • The Insurance Regulator (IRDA) has the role of regulating, promoting and ensuring orderly growth of insurance and reinsurance business. • Obligations to rural and social sector is a licensing requirement • In general life insurers cannot offer non-life products and non-life insurers cannot offer life covers. • This is the first occasion where both are allowed to join together and offer a combined product. Cape Town March 5 2010

7. Micro Insurance Regulations • MI agents exempt from licensing requirements – relaxation in distribution rules. • MI agents can not sell any product other than MI products. • Simplified product design and comply with ‘F&U’ procedure. • All MI policies sold recognized for the fulfillment of obligations to rural and social sector. Cape Town March 5 2010

8. Micro Insurance Regulations Cape Town March 5 2010

9. Micro Insurance Regulations (Life) product design Guidelines Cape Town March 5 2010

10. Micro Insurance Regulations (Non-Life) product design Guidelines Cape Town March 5 2010

11. MI Product Feature • Both on individual and Group basis • Individual - Pure Term - Pure Term with return of premium - Endowment Assurance on Non-par basis - Accidental death rider only • Group: Only pure term and yearly renewal basis • Minimum size of group is 25 Cape Town March 5 2010

12. Micro Insurance Product Statistics Cape Town March 5 2010

13. Micro Insurance Product Statistics Cape Town March 5 2010

14. Micro Insurance Product Statistics Cape Town March 5 2010

15. MI Vs. Regular Products - Few Actuarial Issues Cape Town March 5 2010

16. MI Vs. Regular Products - Few Actuarial Issues Cape Town March 5 2010

17. MI Vs. Regular Products - Few Actuarial Issues • Actuarial assumptions vary greatly because of the specific characteristics of the target market • Interest rate – on long term basis at the time of filing the product • Higher mortality – No underwriting • In general commission rates are higher in MI products • Lower death benefit and higher per unit cost. • Higher profit margin with higher volatility • Variation is less seen in all counts for products other than pure term. Cape Town March 5 2010

18. MI Vs. Regular Products – Other Issues Cape Town March 5 2010

19. MI Vs. Regular Products - Other issues Cape Town March 5 2010

20. Challenges ahead • Low insurance awareness among the targeted segment • Need of more innovative but simple and flexible products taking into account the life style and needs of the low income group people • Simplification • Product development—exclusions must be made clear and simple • Proposal approval • Premium payment • Maturity / death claim settlement Cape Town March 5 2010

21. Challenges ahead • Grievance redressal mechanism • Affordability of premium—limited disposable income • Mobility of the targeted population • High volatility and uncertainty of income • Enhanced role of SHGs • All documents must be in vernacular language • Developing insurance awareness amongst the low income band people Cape Town March 5 2010

22. Challenges ahead • Need to develop Health micro insurance products • Need of good quality data • Standardizing underwriting procedures for MI. • Regulatory assistance Cape Town March 5 2010

23. Thank You Cape Town March 5 2010