Microinsurance & InsurTech: The perfect match-up?
Microinsurance, as the name suggests, evolved from the traditional insurance definition targeted towards low-income customers. The risk premium in these products is lower to make them affordable for the target segment. This fact makes the business model quite tricky for large insurers to crack. The product has been around for decades; however, the penetration number is far from the addressable market. So, what are the challenges plaguing this industry, and what can be done about it? Let’s try to find out.
Govt. of India came out with the IRDA (Micro Insurance) Regulations, 2005. These were further refined with the following IRDAI (Micro Insurance) Regulations, 2015, intending to grow the sector in India. Social Security schemes like PMJJBY, PMSBY and PMJAY have also been in place; however, they are primarily introduced when a new government comes to power, so there needs to be a coherent policy approach[i]. The multiplicity of such programs leads to unequal population coverage, with some getting more than the required access while others are entirely neglected. The lack of a professional approach also limits the effectiveness of such a social security system.
India’s insurance penetration (measured as a % of GDP) stands at 4.2% compared to the global average of 7%[ii]. We also lack another critical measure, insurance density ($91 against a worldwide average of $874), the risk premium an individual pays[iii]. Microinsurance is crucial to increasing insurance penetration in a country where 65% of the people live in rural areas. But the prominent insurers in the country, who do the bulk of their business in the urban areas, are not very keen towards this idea. A report by National Insurance Academy stated that only 14 out of the top 58 insurers in India had a microinsurance product in their portfolio[iv].
So why are these large insurers uninterested in this product which boasts a huge market size? To understand that, we need to look at the delivery model for this product.
Broadly, there are four ways in which Microinsurance is delivered to the market: Partner-Agent Model (PAM), Full-Service Model, Provider Model and Community-based (Mutual) Model. Let’s look at each of these one by one:
Partner-Agent Model: The insurance provider (partner) responsible for designing the product ties up with an ‘agent’ tasked with delivering and marketing microinsurance products to prospective clients.
Full-Service Model: Here, both the role of the partner and the agent is played by a single entity. It may be a large insurer or a small MFI. They develop the product, distribute it and absorb the risk.
Provider Model: An extension of the full-service model, here the service “provider” (e.g. hospital) develops and distributes the product in addition to risk absorption.
Community-based (Mutual) Model: Policyholders/clients take over the insurer’s role and manage the design, development and distribution of insurance products in partnership with service providers.
Now that the value chain has been established, we can look at challenges faced by each stakeholder.
Challenges Faced by Stakeholders[v]
Policyholder/Client:
· Lack of Awareness and Knowledge: At the ground level, people are unaware of the concept of insurance and often end up confusing it with savings expecting some returns. Therefore, insurance fails to create a value proposition for the client in the short term. The inability of the distributors to develop mass understanding often results in mis-selling of the product.
· Lack of trust: In rural areas, private players are often seen with a sceptical lens and when there is a cheaper benchmark product (Social security schemes like PMJJBY, PMSBY and PMJAY), microinsurance products pale in comparison.
Together, these factors result in a low willingness to pay from the client side.
Distributor (Agent):
· Lack of Professionalism: Not having a clear understanding of the product results in mis-selling of the product.
· Low Commission: Since the product is cheaper, margins are lower, which puts a cap on the commission earned per unit sold.
· Mistrust: There is low trust between the CSE-VLEs (Village Level Entrepreneurs) and the insurance companies.
· Regulatory Hurdles: Firms engaged in some financial services find it difficult to become agents due to regulations.
These factors result in a lack of incentive for the agents to grow sales.
Insurers:
· Lack of Data: Insurers fail to make innovative products due to a lack of sufficient data about the rural market
· Weak Distribution Network: “Insurance is a product which is sold, not bought.” You need a strong network on the field to get volumes. Large insurers have established huge networks in the urban market; however, the same is yet to be done in rural areas. We saw above how the product/market dynamics result in the low willingness of the agents to be onboarded.
· High Transaction Costs: High distribution costs and low ticket size make the business model unsustainable.
So, we identified that distribution/delivery is the major hurdle in India becoming a highly insurance-penetrated country. However, things have started changing in the last few years. Jio Revolution democratised data and made it accessible to the masses. Many fintech rose in subsegments like Payments, Lending, Wealth and Insurance. This digital revolution made delivery of products to the masses at almost nil costs. It became profitable to sell small ticket-size products online.
Many InsurTechs (Insurance Technology companies) have recently popped up that are following a modular approach by unbundling standard solutions provided by large insurers and delivering to the mass market in no time. Therefore, it is now time to redefine the term ‘microinsurance’.
“Time-efficient unbundled insurance solutions delivered digitally to cater to very specific, niche needs of customers.”
The most interesting thing to note here is the innovative business models being crafted by these fintechs to increase insurance adoption. Let’s discuss a few of them here:
Toffee Insurance: Found in 2017, this insurtech firm sells byte-size products catering to very niche customer requirements. Examples include pet-dog insurance for Rs 315/year and eyewear insurance for Rs 150/year.
Snack by Income: Singapore-based insurtech founded in 2019 allows you to link debit/credit card with the platform, spend on the marketplace in-built in-app and earn rewards which can be redeemed for insurance premiums.
Riskcovry: This Mumbai-based firm founded in 2018 went a step ahead and built an Insurance-in-a-box product which third-party platforms can utilise to start offering insurance products in almost no time.
We have seen how fintech firms are redefining microinsurance in India; however, their reach is still limited to urban and mostly millennial customers. However, they show a lot of promise in solving the delivery issue holding back the growth in the rural market. Growing smartphone penetration and targeted marketing by fintech will help increase this old but nascent industry’s growth.
Before signing off, here are a few recommendations for the stakeholders in this ecosystem.
· Not many options: The assortment of products available is not wide, with most related to life insurance. There is a need for modular, simple and cheap products coupled with flexible payment terms.
· Mutual Model Shift: If the Govt. of India truly wants the penetration to touch the global levels, it needs to facilitate the mutual distribution model where the design and distribution are handled by the policyholders/clients.
· Awareness Issue: Awareness is another major challenge in the growth of microinsurance in India. Dissemination of information through all forms of media in vernacular will go a long way in increasing penetration.
· Fostering Fintech Ecosystem: We have seen how fintech has evolved in this industry and its potential to deliver the product to the masses at low transaction costs. A conducive regulatory environment with accelerators, sandbox etc., can further speed up the process.
· Education at the core: The concept of insurance must be inculcated in the students at the school level to make them understand its need. Also, it must be introduced in Skill India Initiative for insurance agents.
[i]https://smartnet.niua.org/sites/default/files/resources/giz20142d0001en2dindia2dmicroinsurance2dsocia2dprotection.pdf
[ii] https://cafemutual.com/news/insurance/28335-insurance-penetration-is-just-42-much-less-than-the-global-average-of-7
[iii] https://www.moneycontrol.com/news/mcminis/what-is-insurance-density-10101611.html#:~:text=It%20is%20the%20ratio%20of,the%20global%20average%20of%20%24874
[iv]https://niapune.org.in/uploads/researchreports/Micro%20Insurance%20in%20India%20Challanges%20and%20Solutions.pdf
[v] Ibid
