By Aastha Behl
Risks are a central part of life. It has been widely recognized that vulnerability and poverty reinforce each other, in the sense that vulnerability is both a cause and a symptom of poverty – the poor are vulnerable to risks because they have limited financial resources to combat unexpected shocks, and because they are vulnerable to risks, shocks easily erode their incomes and push them into poverty. Microinsurance is considered one of the most effective ways for poor households to manage risks and reduce their vulnerability by ensuring protection against livelihood shocks and costly informal coping strategies. Microinsurance not only makes insurance accessible to low income households to whom formal insurers might be reluctant to extend insurance amidst asymmetric information and high transaction costs, but also offers the poor increased and effective access to risk management. Understanding and analysing the factors that inhibit or encourage the demand of microinsurance products can provide insights on the plausible reasons of the low patronage of these products. Accordingly, changes in policy and product design and delivery may be made to increase the adoption of microinsurance products. Insurance demand has been traditionally explained by the classical expected utility theory. According to the classical expected utility theory, risk averse individuals should fully insure themselves against high magnitude risks as long as premiums are actuarially fair, implying that individuals with high risk aversion are more likely to purchase the insurance given the risk probabilities.
Microinsurance schemes were traditionally launched by NGOs, MFIs, trade unions and cooperatives to develop the micro finance activity among the marginalized section of society. The thrust behind micro insurance regulations is to help these sections of society with affordable insurance products to help them cope with and recover from common risks. Confronted with a shock, the rural poor usually look for a variety of resources, including formal and informal credit and savings and seeking out additional work or income generating opportunities to meet their expenses.
The Microinsurance products covers risks associated with critical illness without reimbursement of hospitalization expenses. Although the reach of the same has not gone so far, but has enormous potential in eliminating the risks of the underserved segments of the population. Microinsurance might not be suitable for ultra poor sections of the society, yet it has greatly benefitted the rural poor. Government of India constituted a Consultative Group on Micro Insurance in 2003 to examine existing insurance schemes for poor, especially rural population with specific reference to pricing, products, outreach, servicing and promotion.
In order to facilitate micro insurance schemes to the rural poor, Insurance Regulatory and Development Authority (IRDA) has created microinsurance policies to promote insurance coverage amongst the economically weaker sections of the society. The IRDA Microinsurance Regulations, 2005 provides a platform to distribute insurance products and services, which are affordable to the rural and urban poor. The regulations essentially promulgated a quota system to force new private sector insurers to sell a percentage of their insurance policies to de facto low-income clients. It suggested the product boundaries in terms of minimum and maximum assured, term of the product, allowable age group, categories of agents and their commissions and fulfillment of both the rural and social obligations of the Microinsurance products. Hence, a safety net should be provided to the most marginalized section of the society through building up strong policies, covering single risks but for a longer period of time, with lower premiums. Money back guarantee scheme would also help the beneficiaries in helping them to invest their savings into the microinsurance.
By Ms. AASTHA BEHL
Assistant Professor
