Aug 31 2015
Mobiles and Micro Insurance: A happy alliance
The advent of technology has led to changes in many aspects of life. Getting cost effective insurance services to those excluded from financial services is one area where technology is making a significant difference.
Insurance, or the transfer of pure risk to insurer for a premium, can be a lifeline for those population groups that are at the mercy of unpredictable life events and are excluded from the financial system. Micro Insurance products are same as normal insurance products but are targeted towards low-income groups which typically consist of people ignored by mainstream commercial and social insurance schemes, as well as people who have not previously had access to appropriate insurance products.
A micro-insurance product aimed at such a group would have two essential features- insurability or the capacity to buy a policy and saleability or the possibility to offer the product. It goes without saying that these products would have a small sum assured and a low premium. In a bid to ensure that those in rural and economically weak categories are catered to, the Insurance Regulatory and Development Authority, IRDA issued regulations for the micro-insurance sector in November 2005 for the very first time which were revised in March 2015. IRDA has set a minimum quota for every insurer in this sector. For example, when a company sets up its business, 7% of its new life insurance policies have to be for policyholders from rural areas in the first year– a quota which rises to 20% over ten years. Sanctions for failing to meet quota targets include fines and possible revoking of licences.
Despite the need for micro-insurance, the lack of financial literacy is the first hurdle that insurers face while trying to push their products, resulting in low demand. Talking about death is still considered taboo, so the task of convincing the target population to take life insurance becomes even more difficult. Another challenge lies in distribution; the high costs of penetrating the rural markets, combined with underutilization of available distribution channels, hinder the growth of rural insurance services. The mismatch between demand & available products, the contrasting perspective of those insured and the insurers leads to low customization of the products which in turn leads to low demand for available products. The absence of historical data on claims means more conservative premiums are in place, which makes the products costly and further reduces the demand. A number of insurance companies view micro-Insurance as charity/compulsion rather than a business opportunity. Hence it requires a lot of hard work and commitment to create awareness and generate demand.
In the face of challenges like these, technology has come to the aid of insurance companies looking to expand into the field of micro-insurance. One such innovation has been adopted by Tata AIG for insuring cattle which is using mobile telephones to not only enrol people into their insurance programmes but also in verifying claims. Use of technology has resulted in the enrolment process being reduced from 15 days to 30 minutes and valid claims settlement process from 30 days to 6 days.
Successful models in other developing countries for use of mobiles in the field of micro-insurance give hope for using the technology in India. The Nirvoy micro-insurance product comes free with the Grameenphone in Bangladesh, provided the customer commits to a minimum spend on the network. Launched in 2013, the life insurance product is based on the monthly recharge of a customer. For example, a registered subscriber who uses BDT 270 of airtime in June will enjoy BDT 20,000 of insurance coverage for the month of July. In Ghana, Airtel has a 3-for-free product which includes life, accident and hospitalisation insurance. In just over 18 months since its launch in January 2014, over one million policies have been initiated. The product covers Airtel subscribers with top-up of more than GHS 5 (USD 1.50) per month who receive free life, accident and hospital cover for the following month. The more a person tops-up, the higher the level of cover. Another service called Tigo in Ghana offers Family Care Insurance as a free product for Tigo voice customers who meet a threshold of airtime use in a given month. It also allows customers to double their coverage for a fee of US$ 0.68 per month. The point of this pricing model is to introduce customers to a new product free of charge in the hope that they will see its merits and agree to start paying premiums.
Improved telecommunication technology can further help in developing better, cost effective, and sustainable products in the area of weather-index based crop insurance, micro pensions, etc.