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MICRO-INSURANCE – LIVELIHOOD NEEDS OF THE POOR

MICRO-INSURANCE – LIVELIHOOD NEEDS OF THE POOR. G.N. BHASKAR RAU IIRM / HYDERABAD. INSURANCE: RURAL & SOCIAL SECTORS. What is “rural” ?. INSURANCE: RURAL & SOCIAL SECTORS. Several definitions for ‘rural sector’ RBI : 4 different entities ….all based on population size only

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MICRO-INSURANCE – LIVELIHOOD NEEDS OF THE POOR

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  1. MICRO-INSURANCE –LIVELIHOOD NEEDS OF THE POOR G.N. BHASKAR RAU IIRM / HYDERABAD GNBRAU/IIRM/HYDERABAD

  2. INSURANCE: RURAL & SOCIAL SECTORS What is “rural” ? GNBRAU/IIRM/HYDERABAD

  3. INSURANCE: RURAL & SOCIAL SECTORS • Several definitions for ‘rural sector’ RBI : 4 different entities ….all based on population size only Density or the occupations of the populations are not considered Area with population less than 10000……….Rural GNBRAU/IIRM/HYDERABAD

  4. INSURANCE: RURAL & SOCIAL SECTORS Census of India (1991) : considers size of population; occupations pursued by the population; and also the density of the population • Defines ‘urban area’ only as an area with:…. Minimum population : 5000; 75% of population of male workers engaged in non-agricultural pursuits; population density of at least 400 / sq.km. All other areas are rural GNBRAU/IIRM/HYDERABAD

  5. INSURANCE: RURAL & SOCIAL SECTORS IRDA definition of ‘rural’ area: Population less than: 5000; 75% of population of male workers engaged in agricultural pursuits; population density of at least 400 / sq.km. GNBRAU/IIRM/HYDERABAD

  6. INSURANCE: RURAL & SOCIAL SECTORS Insurers obligations to rural sector Life insurer: 1st Financial year : 5% of the new policies to be sold 2ndFinancial year : 7% of the new policies to be sold 3rd Financial year : 10% of the new policies to be sold 4th Financial year : 12% of the new policies to be sold 5th Financial year : 15% of the new policies to be sold GNBRAU/IIRM/HYDERABAD

  7. INSURANCE: RURAL & SOCIAL SECTORS Insurers obligations to rural sector Non - life insurer: 1st Financial year : 2% of total gross premium written 2ndFinancial year : 3% of total gross premium written 3rd Financial year onwards…….: 5% of total gross premium written GNBRAU/IIRM/HYDERABAD

  8. INSURANCE: RURAL & SOCIAL SECTORS SOCIAL SECTOR sub-category of ‘rural’ category mostly economically underprivileged in rural areas GNBRAU/IIRM/HYDERABAD

  9. INSURANCE: RURAL & SOCIAL SECTORS SOCIAL SECTOR Also includes in both rural and urban areas: unorganized sector informal sector economically vulnerable sector backward classes….etc. GNBRAU/IIRM/HYDERABAD

  10. INSURANCE: RURAL & SOCIAL SECTORS Insurers obligations to social sector For both Life and Non - life insurers: 1st Financial year: 5000 new lives 2nd Financial year: 7500 new lives 3rd Financial year: 10000 new lives 4th Financial year: 15000 new lives 5th Financial year: 20000 new lives GNBRAU/IIRM/HYDERABAD

  11. INSURANCE: RURAL & SOCIAL SECTORS Over the past two decades economists and policy-makers have recognized the need for a newer approach to economically up-lift the rural masses THE NEW VERSIONS ARE MICRO-FINANCE AND MICRO INSURANCE GNBRAU/IIRM/HYDERABAD

  12. MICRO-INSURANCE :ISSUES, CHALLENGES AND STRATEGIES • THE MARKET: The size, the nature and the variety • THE ENTRY BARRIERS: The Physical barriers, the Mindsets, and the Level of Comprehension GNBRAU/IIRM/HYDERABAD

  13. MICRO-INSURANCE :ISSUES, CHALLENGES AND STRATEGIES • MICRO-INSURANCE UNITS: The Individual or the Household? Or the Guilds? • MICRO-INSURANCE TOOLS:The Basic Tools of Micro-insurance and the connected Issues • THE STRATEGIC IMPLEMENTATION: Distribution Channels, The Banking Network, The NGO Network, The Performance Process etc GNBRAU/IIRM/HYDERABAD

  14. MICRO-INSURANCE :ISSUES, CHALLENGES AND STRATEGIES • MICRO-INSURANCE RISKS: Yield Risk – Event Risk – Price Risk • MICRO-INSURANCE PERILS: Named Perils – All Perils – Packaged Perils • MICRO-INSURANCE PRODUCTS: Suggested Model GNBRAU/IIRM/HYDERABAD

  15. MICRO-INSURANCE : • THE CORE CONCEPT: POVERTY ALLEVIATION POVERTY MITIGATION DISCUSSIONS ON “ANTI-POVERTY” PROGRAMS DATES BACK TO 1901. GNBRAU/IIRM/HYDERABAD

  16. MICRO-INSURANCE : EARLIEST PROGRAMS: INDEPENDENT INDIA LAUNCHED: • NATIONAL RURAL EMPLOYMENT PROGRAM • RURAL LANDLESS EMPLOYMENT GUARANTEE PROGRAM ETC. GNBRAU/IIRM/HYDERABAD

  17. MICRO-INSURANCE MARKET : THE SIZE: “RURALITY” AS THE BASIS: 70 % OF INDIA’S POPULATION LIVES IN RURAL AREAS GNBRAU/IIRM/HYDERABAD

  18. MICRO-INSURANCE MARKET : THE SIZE: (contd) “POVERTY LEVEL” AS THE BASIS: 1/3 OF INDIA’S POPULATION LIVES IN POVERTY GNBRAU/IIRM/HYDERABAD

  19. MICRO-INSURANCE MARKET : THE NATURE OF THE MARKET: AGRO-BASED ILLITERATE TRADITIONAL MALNUTRITION AND HEALTH ISSUES EXPLOITED DISPERSED GNBRAU/IIRM/HYDERABAD

  20. MICRO-INSURANCE MARKET : THE VARIETY OF THE MARKET: WIDE VARIATIONS FARM AND NON-FARM POVERTY SOME PARTS PARTLY UNDER EFFECT OF “GREEN REVOLUTION” GNBRAU/IIRM/HYDERABAD

  21. MICRO-INSURANCE MARKET : THE VARIETY OF THE MARKET: (contd) VARIED SIZES OF FARM UNITS MORE OF SMALL-SCALE FARMERS SUBSTINENCE FARMERS SPREAD OF UNITS GNBRAU/IIRM/HYDERABAD

  22. MICRO-INSURANCE MARKET : THE VARIETY OF THE MARKET: (contd) “RURBANS”…? GNBRAU/IIRM/HYDERABAD

  23. MICRO-INSURANCE MARKET : ENTRY BARRIERS : LOW LITERACY LEVELS LACK OF INFORMATION LESS PRONE TO NEW CONCEPTS GNBRAU/IIRM/HYDERABAD

  24. MICRO-INSURANCE MARKET : ENTRY BARRIERS :(contd) COMMUNITY DECISIONS BY THEIR “ELDER” SMALL AND SUBSTINENCE FARMS LOW YIELDS AND PROFITS INSURANCE NOT ATTRACTIVE GNBRAU/IIRM/HYDERABAD

  25. MICRO-INSURANCE MARKET : ENTRY BARRIERS :(contd) WIDE DISPERSION OF FARMS DISTRIBUTION ISSUES LOSS ASSESSMENT ISSUES LOCAL POLITICAL INFLUENCE GNBRAU/IIRM/HYDERABAD

  26. MICRO-INSURANCE MARKETING UNITS: INDIVIDUALS? HOUSEHOLDS? ORGANIZATIONAL UNITS? GNBRAU/IIRM/HYDERABAD

  27. MICRO-INSURANCE MARKETING BASIC RISKS TO COVER: YIELD RISK EVENT RISK PRICE RISK WITH OR WITHOUT REINSURANCE ? GNBRAU/IIRM/HYDERABAD

  28. MICRO-INSURANCE TOOLS: PERILS: NAMED PERILS? ALL-PERILS? PACKAGED PERILS? GNBRAU/IIRM/HYDERABAD

  29. MICRO-INSURANCE TOOLS: PRODUCTS: AGRICULTURAL INSURANCE RODUCTS? CROP INSURANCE PRODUCTS? WEATHER INSURANCE PRODUCTS? PACKAGED / BUNDLED PRODUCTS? GNBRAU/IIRM/HYDERABAD

  30. MICRO-INSURANCE TOOLS: DISTRIBUTION CHANNELS: GOVRNMENT ORGANIZATIONS? NON-GOVERNMENT ORGANIZATIONS? SELF HELP GROUPS? GNBRAU/IIRM/HYDERABAD

  31. MICRO-INSURANCE TOOLS: DISTRIBUTION CHANNELS: FARMERS’ COOPERATIVES? BANCASSURANCE MODELS? MICROFINANCE COMPANIES? GNBRAU/IIRM/HYDERABAD

  32. MICRO-INSURANCE TOOLS: SUGGESTED MODEL : SUGGESTED UNITS: ORGANIZATIONAL UNITS Ex: Co-operatives GNBRAU/IIRM/HYDERABAD

  33. MICRO-INSURANCE TOOLS: SUGGESTED MODEL : SUGGESTED UNITS: ORGANIZATIONAL UNITS : ADVANTAGES: INCLUDE ALL THE MEMBERS EVEN THE SMALLEST FARMER EASY FOR MARKETING EASY FOR CLAIM SETTLEMENTS GNBRAU/IIRM/HYDERABAD

  34. MICRO-INSURANCE TOOLS: SUGGESTED MODEL :SUGGESTED UNITS:(contd) ORGANIZATIONAL UNITS : ADVANTAGES: MOST OF THE ENTRY BARRIERS CLEARED see the next slide GNBRAU/IIRM/HYDERABAD

  35. MICRO-INSURANCE TOOLS: SUGGESTED MODEL : SUGGESTED UNITS:(contd) Entry barriers cleared: LOW LITERACY LEVELS ; LACK OF INFORMATION; LESS PRONE TO NEW CONCEPTS; DECISIONS BY THEIR “ELDER” ; SMALL AND SUBSTINENCE FARMS ; LOW YIELDS AND PROFITS; INSURANCE NOT ATTRACTIVE ; WIDE DISPERSION OF FARMS ; DISTRIBUTION ISSIES GNBRAU/IIRM/HYDERABAD

  36. MICRO-INSURANCE TOOLS: DISTRIBUTION CHANNELS:(suggested) FARMERS’ COOPERATIVES + MICROFINANCE COMPANIES OR GNBRAU/IIRM/HYDERABAD

  37. MICRO-INSURANCE TOOLS: DISTRIBUTION CHANNELS:(suggested) FARMERS’ COOPERATIVES + BANCASSURANCE MODELS GNBRAU/IIRM/HYDERABAD

  38. MICRO-INSURANCE TOOLS: SUGGESTED DISTRIBUTION CHANNELS: advantages: Combination of Farmers’ Cooperatives and Microfinance Companies • Microfinance companies’ credit risk gets micro-insurance cover • Micro-insurance cover for Farmers’ Cooperatives gets Microfinance benefits on better terms GNBRAU/IIRM/HYDERABAD

  39. MICRO-INSURANCE TOOLS: SUGGESTED DISTRIBUTION CHANNELS: advantages: Combination of Farmers’ Cooperatives and Bancassurance Model • Wider Banking Network • Banker of Farmers’ Coops can provide micro-insurance • Easier Accounting GNBRAU/IIRM/HYDERABAD

  40. MICRO-INSURANCE TOOLS: SUGGESTED RISKS TO COVER: YIELD RISK : AN AGREED AMOUNT YIELD VALUE COMMENSURATE TO INPUT VALUES IF THE FARMERS’ COOPS ARE ALSO STAKE-HOLDERS THE INPUTS VALUES AND YIELD VALUES ARE EASIER ARRIVED AT GNBRAU/IIRM/HYDERABAD

  41. MICRO-INSURANCE TOOLS: SUGGESTED RISKS TO COVER: EVENT RISK : THE EVENT COULD BE: CLIMATIC RISKS WEATHER RISKS RAINFALL – LOW / HIGH GNBRAU/IIRM/HYDERABAD

  42. MICRO-INSURANCE TOOLS: SUGGESTED RISKS TO COVER: EVENT RISK LEADS TO YIELD RISK HENCE YIELD RISK IS SUGGESTED; EASILY MEASURABLE; VARIATION OF EVENT RISKS OVER REGIONS AVOIDED GNBRAU/IIRM/HYDERABAD

  43. MICRO-INSURANCE TOOLS: SUGGESTED RISKS TO COVER: PRICE RISK YIELD NORMAL; PRICES CRASH; LOSS OCCURS; NEED FOR INSURANCE COVER HENCE SUGGESTED RISKS…………. GNBRAU/IIRM/HYDERABAD

  44. MICRO-INSURANCE TOOLS: SUGGESTED RISKS TO COVER: BASIC COVER ON ……YIELD RISK AGREED AMOUNT COMMENSURATE TO INPUTS ADDITIONAL COVER….PRICE RISK MINIMUM GUARANTEE OF PRICE BASED O PREVIOUS YERS’ PRICES(AVERAGE) GNBRAU/IIRM/HYDERABAD

  45. MICRO-INSURANCE TOOLS: SUGGESTED PERILS TO COVER: PACKAGED PERILS Uniformity is achieved; Beneficiaries not knowledgeable to choose perils; Pricing and costing to the yield risk coverage made easier GNBRAU/IIRM/HYDERABAD

  46. MICRO-INSURANCE TOOLS: SUGGESTED PRODUCTS: SINCE THE MODEL SUGGESTS …. PACKAGED PERILS…. THE SUGGESTED PRODUCT IS ALSO PACKAGED PRODUCT GNBRAU/IIRM/HYDERABAD

  47. MICRO-INSURANCE TOOLS: THE RATIONALEFORTHE SUGGESTED MODEL RURAL POOR ….BASICALLY EXPOSED TO CREDIT RISK INCURRED FOR LIVELIHOOD (PRODUCTION) GNBRAU/IIRM/HYDERABAD

  48. MICRO-INSURANCE TOOLS: THE SUGGESTED MODEL: THE RATIONALE (CONTD) “CREDIT” IS A DIRECT FINANCIAL RISK AFFECTED BY CERTAIN OTHER INDIRECT (NON)FINANCIAL RISKS WHICH ALSO REQUIRE COVER GNBRAU/IIRM/HYDERABAD

  49. MICRO-INSURANCE TOOLS: INDIRECT (NON)FINANCIAL RISKS BEYOND CONTROL OF BENEFICIARY THAT AFFECT THE DIRECT CREDIT RISK • Loss of life of the beneficiary • Temporary Disability due to health issues • Permanent Disability due to accidents / sickness • Damage to tools / equipment • Fire / Theft / Storage loss due to floods or rains GNBRAU/IIRM/HYDERABAD

  50. MICRO-INSURANCE TOOLS: MICRO-INSURANCE POLICY BENEFITS (SUGGESTED) • “C” IS THE BASIC AMOUNT OF BENEFIT • “C” IS BASED ON (YIELD RISK + PRICE RISK) • “C” : VALUE OF THE DIRECT “CREDIT RISK” • “C” : PAYABLE IF ONLY “YIELD” AND / OR “PRICE”ARE AFFECTED (contd) GNBRAU/IIRM/HYDERABAD

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