Business

Community approach for viable rural insurance

Product innovation to suit local conditions is a key requirement for success

"WE WILL capture a majority segment of the Indian rural market in less than 10 years," said Stuart Purdy, Managing Director of Aviva India, at a recent Insurance Summit held in Istanbul.

The life insurance company is a subsidiary of Aviva plc, a 300-year-old British insurer. Mr. Purdy's declaration signals the determination with which private players are planning to enter rural India to sell insurance products.

Rural India is a target market for many players in the financial sector, and insurance companies are no exception. While public sector insurance companies boast that they have already captured this area, the extent of penetration of the insurance majors into rural India is not yet clear.

With the reform process, public sector banks reduced their branches in rural areas. This was not because rural branches were not viable, but because they had accumulated non-performing assets due to their inability to recover loans.

To reduce this NPA burden, the PSBs offered employees a voluntary retirement scheme handshake and cut down branches to bring down overhead expenses. However, during the recent bicentennial celebrations of India's premier bank, State Bank of India, Prime Minister Manmohan Singh stated that the rural branches of banks should be restructured for the benefit of the rural poor. Finance Minister P. Chidambaram also stated that these banks should be selling many innovative products and not serve merely as collection centres for deposits.

Private players move in

The private players, especially the foreign banks, have strategically begun to fill these gaps by spreading their operations to rural areas via self help groups and non-government organisations, micro-finance institutions and cooperatives as agents. Professor Ramesh Bhat of the Indian Institute of Management, Ahmedabad, says, "Private companies are trying to adopt insurance schemes where they will focus on a particular group who are members of a community-based organisation like micro-finance institutions.

For example, Aviva sells insurance through SEWA in Ahmedabad and Basix India, Hyderabad."

There have been many similar initiatives in earlier times for foreigners to venture into the Indian rural market. Fast Moving Consumer Goods giants like Hindustan Lever and Proctor & Gamble grew in India by penetrating the rural markets. Foreign players in the financial sector are also coming out with suitable products for different sections of the rural market. Two major questions sparked by the entry of private players are whether nationalisation of insurance companies has really helped the Government to do anything for the poor and whether private foreign players are socially interested in this market.

Nationalisation and after

The real impetus to the insurance industry came with the enactment of the Insurance Act 1938, which led to an insurance wing being attached to the Ministry of Finance.

When life insurance was nationalised in 1956, there were 176 (life and non-life) companies in the industry. Before this date, there were only rules relating to specification of minimum equity capital requirements for life insurance companies, stricter control over investments, submissions of periodical returns, appointment of administrators for mismanaged companies and ceilings on expenses on management and agency commissions. Nationalisation gave the industry a more structured form.

However, Prof. Bhat notes that there are major issues such as relatively low coverage, functional inefficiency of public sector insurance companies, and untapped potential for mobilising long-term contractual savings in the form of premium for infrastructure development in the country.

The passage of the Insurance Regulatory and Development Authority (IRDA) Act marked the opening up of this sector to new private players, including health insurance.

The bill also envisages the creation of a regulatory authority to oversee the operation of various players in the insurance market. The main aim was to increase efficiency and ensure to customers good and relevant products and service.

Poor record

As agents of the Government, public insurance companies could have played a major role in insurance for the poor. This did not happen and the goal of universal insurance could not be achieved.

The Universal Health Insurance scheme sponsored by the Government was implemented by public insurance companies, but "the results were not very encouraging," Prof Bhat notes. He admits that the private players too have not been very successful in accomplishing universal insurance: "Universal insurance is very difficult to achieve, since it includes all people in a particular region, irrespective of their income, sex or age."

Hence, as he points out, they emphasise community-based organisations, to reach particular segments.

Distribution and servicing are two key areas in developing rural business. ICICI Prudential has a robust rural distribution model, involving tied agents, brokers as well as referral arrangements with NGOs, micro-finance institutions and corporates.

"We work closely with our partners like Uttaranchal Co-operative Marketing Federation, Gramasiri (an MFI), Cargill, Anarde Foundation, ICICI Bank and ITC's e-Choupal, to educate people about how life insurance can be used as a protection and savings instrument," says Shikha Sharma, CEO & MD, ICICI Prudential Life Insurance. Through these relationships ICICI Prudential is present in more than 15 States, including Andhra Pradesh, Madhya Pradesh, Tamil Nadu, Rajasthan and Uttar Pradesh.

"We have long been convinced of the need for and long-term potential of life insurance in rural India. Certainly, covering the lives of those in rural areas presents several unique challenges. We have remained true to our customer first philosophy by developing specific products and introducing simplified underwriting and claims guidelines, to help the rural customer secure his or her financial future," says Ms. Sharma.

ILO review

The IRDA mandate on obligations of insurers to the rural and social sector and its concept paper on micro-insurance is aimed at encouraging micro-insurance for the rural and disadvantaged sector in India.

Currently a number of private sector insurance players are working towards increasing their coverage in rural areas with the involvement of NGOs. The ILO (International Labour Organisation) review of insurance schemes in India for the disadvantaged and rural sector is as follows:

Product and payment structure: There are 42 life insurance and 41 non-life insurance products in the market.

However, overall private insurance companies have three times more products than the public companies.

Public insurance company products: 21

Private insurance company products: 62

Rural Sector Coverage: In 2002-03, there were 13.2 million new rural policies from public companies and the corresponding figure from private companies are 6.5 lakh. Life insurance accounts for 4.6 million policies and non-life insurance for 9.2 million policies in the rural sector.

Social Sector Coverage: Public companies account for 36.8 million policies in social sector, while private companies have 1.05 million policies in this sector.

"I think the route to universal insurance would be through micro-insurance. Community involvement and ownership of schemes is critical for achieving universal coverage," says Prof. Bhat.

Issue of coverage

A major issue is that of product innovation for rural contexts. When private players talk about insurance for the rural market, the issue is whether they are to insure life, farm equipment and machinery like tractor and rural produce (crop). Insurance practice in India is divided into life and non-life general insurance.

Non-life general insurance has products to suit crop, agricultural equipment, weather risks and so forth. However, many of these products are on an experimental basis and not pure commercial products. In micro-insurance, the product must cover health, life and protection from the loss of assets.

The ownership of the scheme — a mechanism by which the insurers, the insured and the State share the costs involved — is an essential component, especially for rural insurance schemes. This is achievable through community participation in the management and implementation of the scheme, as it can reduce the element of moral hazard. Thus, ownership of the scheme is more visible in community-based health insurance and micro-insurance initiatives in India. Micro-insurance faces only a few challenges, which private insurers plan to overcome, so that the business can be made viable through product innovations and the involvement of communities at large.

Oommen A. Ninan

in Mumbai

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