Making micro life insurance work – Practical issues and solutions
The big problem of poor families
The benefits of micro insurance are often underestimated. It is normal for the poor families to take micro loans. If a member of a below poverty line (BPL) family dies or falls prey to critical illness, the family is impacted very badly financially. The micro loan taken by that member becomes a huge burden to the family in case of death. In case of critical illness like cancer, it’s far more fatal. That person is not in a position to repay the loan in any case. The cost of treatment is a bigger burden. With this double whammy, the family is trapped under severe financial crisis. Even those families who are not below poverty line till then, are sliding to below poverty line in case of death / critical illness of the bread winner of the family.
Mega advantage of Micro insurance
The micro insurance can do wonders under these situations. The micro loan can be repaid by insurance in case of death or critical illness. And that can be a big financial relief to the family who is under agony. This, if implemented effectively, can help governments also in reducing poverty. And ofcourse, it is business to insurers. It is thus a win win situation to all stakeholders.
However, micro insurance so far has not yielded desired results. If it is so beneficial to all stakeholders, why is it that it is not yielding desired results? There are various issues.
Reaching out to all eligible families and covering them is an issue. Most of them don’t realize the advantage and hence don’t appreciate the value of insurance. Many of them don’t appreciate that the premium changes with age and questions why a different premium is charged to his friend or neighbour. This is not a small problem on the ground which forces the insurers charge flat or banded premium. This obviously is resulting into many paying more premium than what they need to. Ease of administration is another reason why a flat or banded rate is charged.
Due to the geographical spread of the members of this segment and the small ticket size, the cost of distribution is very high compared to the cost of mortality. Since this cost is factored into the premium, the insurance turns out to be costly to the micro customer.
Once they pay premium and policy is issued, they expect the money should be available any time for any financial emergency. This is not unfair given the low income nature of this segment. However, insurance policy gives no or small value in case of early surrender. While insurer is justified in paying such a low surrender value due to the high initial costs involved, micro customer is more than justified in expecting a good surrender value. How to meet the requirements of both these parties is the issue.
One big issue that is holding the micro insurance back from growing, is fraud. Some micro distributors are resorting to frauds and enrolling sick people or pre-deceased people. It is difficult to verify this due to the geographical reach of the micro members and ticket size of the benefit. Establishing fraud is extremely difficult. Traditional fraud control measures don’t work here. These distributors are doing an irreparable damage to micro insurance and making it unviable. Some of them charge a heavy administration charge to make super normal profits. This increases the burden of premium further.
Why doing micro insurance business then?
Due to all these issues making the business unviable, many insurers are staying away from this business. However, if there is any segment that requires insurance desperately, it is this micro segment. It can change the lives of many poor families and provide them security. Hence, in my view, it is the responsibility of insurers to offer this security. However, any business can’t sustain for long if it is not viable. How to make this business viable then?
The biggest issue that needs to be tackled is fraud. And the key is to ensure that the member is alive at the time of enrollment. It helps a lot to get the access to the data of the micro administrator rather than relying solely on the data sent by them for the purpose of insurance. The administration issues and the cost issues can be sorted out by going digital. This can also help minimizing fraud. It’s important to collect details of nominee at the time of enrollment. It might help a lot to make Aadhar mandatory. When it comes to profit, you can’t expect the same profit margin in this line of business. The game is to get small margins from large volumes.
It’s important to monitor the experience and take corrective action in case anything goes wrong with price and/or process. Each segment is unique, issues and solutions also can be unique. If you can build a viable business with reasonable benefits to the customer, you are doing a great service to the nation, in my view, at least.
There are many more issues around micro business. Issues related to product design, persistency, regulatory requirements and enablements etc. Will discuss them at a later opportunity.