Micro insurance is the protection of low-income people against specific perils in exchange for regular premium payment proportionate to the likelihood and cost of the risks involved. This definition is exactly the same as one might use for regular insurance except for the clearly prescribed target market: low-income people.
The target population typically consists of persons ignored by mainstream commercial and social insurance schemes, as well as persons who have not previously had access to appropriate insurance products. Definitions of micro insurance 1. Micro insurance is insurance with low premiums and low caps / coverage. In this definition, “micro” refers to the small financial transaction that each insurance policy generates.
“General micro insurance product means health insurance contract, any contract covering the belongings, such as, hut, livestock or tools or instruments or any personal accident contract, either on individual or group basis, as per terms stated in Schedule-I appended to these regulations”; and “life micro insurance product” means any term insurance contract with or without return of premium, any endowment insurance contract or health insurance contract, with or without an accident benefit rider, either on individual or group basis, as per terms stated in Schedule-II appended to these regulations.</ref> as those within defined (low) minimum and maximum caps.
The IRDA’s characterization of micro insurance by the product features is further complemented by their definition for micro insurance agents, those appointed by and acting for an insurer, for distribution of micro insurance products (and only those products). 2. Micro insurance is a financial arrangement to protect low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved.
[1] The author of this definition adds that micro-insurance does not refer to: (i) the size of the risk-carrier (some are small and even informal, others very large companies); (ii) the scope of the risk (the risks themselves are by no means “micro” to the households that experience them); (iii) the delivery channel: it can be delivered through a variety of different channels, including small community-based schemes, credit unions or other types of microfinance institutions, but also by enormous multinational insurance companies, etc.
3. Micro insurance is synonymous to community-based financing arrangements,[2] including community health funds, mutual health organizations, rural health insurance, revolving drugs funds, and community involvement in user-fee management. Most community financing schemes have evolved in the context of severe economic constraints, political instability, and lack of good governance. The common feature within all, is the active involvement of the community in revenue collection, pooling, resource allocation and, frequently, service provision. 4. Micro insurance is the use of insurance as an economic instrument at the “micro” (i. e. smaller than national) level of society.
[3] This definition integrates the above approaches into one comprehensive conceptual framework. It was first published in 1999, pre-dating the other three approaches, and has been noted to be the first recorded use of the term “micro insurance”. [2] Under this definition, decisions in micro insurance are made within each unit, (rather than far away, at the level of governments, companies, NGOs that offer support in operations, etc. ). Insurance functions on the concept of risk pooling, and likewise, regardless of its small unit size and its activities at the level of single communities, so does microinsurance.
Micro insurance links multiple small units into larger structures, creating networks that enhance both insurance functions (through broader risk pools) and support structures for improved governance (i. e. training, data banks, research facilities, access to reinsurance etc. ). This mechanism is conceived as an autonomous enterprise, independent of permanent external financial lifelines, and its main objective is to pool both risks and resources of whole groups for the purpose of providing financial protection to all members against the financial consequences of mutually determined risks.
The last definition therefore, includes the critical features of the previous three: 1. transactions are low-cost (and reflect members’ willingness to pay); 2. clients are essentially low-net-worth (but not necessarily uniformly poor); 3. the essential role of the network of micro insurance units is to enhance risk management of the members of the entire pool of micro insurance units over and above what each can do when operating as a stand-alone entity.
Micro insurance delivery models One of the greatest challenge for micro insurance is the actual delivery to clients. Methods and models for doing so vary depending on the organization, institution, and provider involved. As Dubby Mahalanobis states, one must be thorough and careful when making policies, otherwise micro insurance could do more harm than good. Tricky challenges In general, there are four main methods for offering micro insurance[1] the partner-agent model, the provider-driven model, the full-service model, and the community-based model. Each of these models has their own advantages and disadvantages.
Partner agent model: A partnership is formed between the micro insurance(partner as MFI) scheme and an agent (insurance companies), and in some cases a third-party healthcare provider. The micro insurance scheme is responsible for the delivery and marketing of products to the clients, while the agent retains all responsibility for design and development. In this model, micro insurance schemes benefit from limited risk, but are also disadvantaged in their limited control. Micro Insurance Centre is an example of an organization using this model.
Full service model: The micro insurance scheme is in charge of everything; both the design and delivery of products to the clients, working with external healthcare providers to provide the services. This model has the advantage of offering micro insurance schemes full control, yet the disadvantage of higher risks. Provider-driven model: The healthcare provider is the microinsurance scheme, and similar to the full-service model, is responsible for all operations, delivery, design, and service. There is an advantage once more in the amount of control retained, yet disadvantage in the limitations on products and services.
Community-based/mutual model: The policyholders or clients are in charge, managing and owning the operations, and working with external healthcare providers to offer services. This model is advantageous for its ability to design and market products more easily and effectively, yet is disadvantaged by its small size and scope of operations. Micro insurance scheme A micro insurance scheme is a scheme that uses, among others, an insurance mechanism whose beneficiaries are (at least in part) people excluded from formal social protection schemes, particularly, informal economy workers and their families.
The scheme differs from others created to provide legal social protection to formal economy workers. Membership is not compulsory (but can be automatic), and members pay, at least in part, the necessary contributions in order to cover benefits. The expression “micro insurance scheme” designates either the institution that provides insurance (e. g. , a health mutual benefit association) or the set of institutions (in the case of linkages) that provide insurance or the insurance service itself provided by an institution that also handles other activities (e.g. , a micro-finance institution).
The use of the mechanism of insurance implies: Prepayment and resource-pooling: the regular prepayment of contributions (before the insured risks occur) that are pooled together. Risk-sharing: the pooled contributions are used to pay a financial compensation to those who are affected by predetermined risks, and those who are not exposed to these risks do not get their contributions back. Guarantee of coverage: a financial compensation for a number of risks, in line with a pre-defined benefits package.
Micro insurance schemes may cover various risks (health, life, etc. ); the most frequent micro insurance products are: Life micro insurance (and retirement savings plans) Health micro insurance (hospitalisation, primary health care, maternity, etc. ) Disability micro insurance Property micro insurance – assets, livestock, housing Crop micro insurance Dirk Reinhard provides a good list summarizing reading pertinent to micro insurance.
The principles of micro insurance are: (1) Risk-sharing and Pooling of Resources: The main principle of any micro-insurance scheme is that a group’s (community) resources are pooled to share risks (such as health, death, pension, accidents etc) in order to organise protection directly for themselves. (2) Specified Risks Only: A micro-insurance scheme can be designed to protect only against specified risks for which the likelihood of that risk can be calculated. This specifically applies to health risks. (3) Not Covariant: Risks covered by a micro-insurance scheme can affect only a relatively small proportion of the total insured population at a given time.
If a risk, such as an earthquake or an epidemic for example, is likely to cause a similar damage to a large portion of members at the same time, a single occurrence of the risk would bankrupt the scheme. (4) Democratic Participation: It promotes democratic participation in the sense that it cannot refuse membership on the grounds of race, sex, ethnicity, religion etc and there is active participation of members in decision-making (5) Social Movement and Solidarity: It is a social movement as it binds the people who are kept away from the formal systems of social protection.
It promotes solidarity as it pools local resources and serves those in needs. (6) Large Membership: Micro-insurance schemes work by sharing risks across a large population. From a technical point of view, one observes that the greater the number of subscribers to micro-insurance scheme, the better will be the functioning. A limited number of subscribers increase the risk of financial burden over the scheme. It the pool of members is too small, the volatility in the number of claims can lead to an unexpected increase in claims, thereby bankrupting the schemes.
It is therefore necessary to bring in large number of people into the scheme. (7) Not-for-Profit: Micro-insurance schemes are usually non-profit. Only in some cases the scheme is organized by players independently of members, therefore it is difficult to rule out that there may be a certain profit margin. However, as a rule, any surpluses made by the schemes are either reinvested in the organization or used to improve or add to existing services for all the members. The surplus can also be used to improve the quality of care.
Usually the rules of micro-insurance scheme stipulates that surpluses should be used to build a reserve fund up to a certain level to withstand times of adversity, to improve current services, to address additional needs of members or eventually reduce the amount of contribution from members. (8) Control of Major Risks: The ability of members to control major risks will help only those who are in dire need of the benefits.
LICENSE ISSUING PROCEDURE (1) In order to obtain a license a person will have to apply to the Authority in the prescribed form specified in Annexure A.
(2) Upon receipt of application mentioned in sub-clause (1) the Authority will evaluate the information provided with the application and upon satisfaction will request for payment of the License Fee mentioned in section 15 of the Rules. (3) The Authority will issue the license in the form specified in Annexure B within 10 (ten) days of receipt of the license fee from the applicant as mentioned in sub-clause (2). (4) If the application is rejected the Authority will notify the applicant in writing within 30 (thirty) days of rejection. 4. CONDITIONS OF LICENSE, ETC.
– The following will be the conditions of the License: (a) The licensed organization must adhere to the law and all the rules of this Microcredit Authority Rules 2010; (b) The licensed organization will not be able to run its Microcredit Activities outside the area of operation permitted by the registration authority; (c) The full addresses of the Head Office and Branch Offices of the organization must be informed to the Authority; (d) Any change of address of the Head Office must be notified to the Authority in advance; (e) Changes in the address of the Head Office or Branch Offices must be notified to the Clients and all other relevant parties; (f).
The licensed organization will have to pay annual fees as specified in section 15; (g) The licensed organization must provide all information as required by the Authority and extend all co-operation in carrying out any inspection and investigation by the Authority.
SOURCES OF FUND OF THE MICROCREDIT ORGANIZATION (1).
The sources of fund for the Microcredit Organization will be as follows: a) Grants received from the members of the General Body under a well defined contract; b) Approved national or international grant having clear documentary proof and the organization willing to accept such grant must be registered with the Bureau of NGO Affairs; c) Deposits received from the Clients;
d) Loans obtained under official contracts from legally recognized local financial institutions and organizations; e) Loans from foreign sources subject to permission obtained from the relevant government agencies; f) Funds received through securitization from recognized financial institutions subject to permission from the Authority; g).
Funds received from the capital market subject to permission from the Authority; h) Loans obtained from a person other than the Client under a well defined contract. (2) The loans under sub-clause (1)h) must not carry an interest rate higher than the interest rate payable to Clients and Depositors on their compulsory deposits and the person from whom loan is obtained must not be parent, child, spouse or sibling of any employee of the Microcredit Organization. (3) Sub-clause (2) will also be applicable for interest on loans obtained from the members of the General Body.
(4) The Microcredit Organization will maintain all deeds and documents of the funds obtained and preserve it at its head office.
19. RESTRICTIONS ON USES OF FUNDS OF MICROCREDIT ORGANIZATIONS (1) The funds of the Microcredit Organization: a) will not be usable for any purpose other than its operational activities specified under the rules and regulations and specified heads of expenditure; and b) will not be used for extending loans or grants to any external person or organization or to any member of the General Body or Council of Directors of the Microcredit Organization; However, if the member of the General Body or Council of Directors is a Client of the Microcredit Organization, this rule will not be applicable.
TYPES OF DEPOSIT AND DURATION (1) The Microcredit Organization may receive the following deposits: a) Compulsory deposit that will be collected at a uniform rate subject to unanimous agreement by the Clients of the Samity and which will be included in writing in the resolution book of the Samity; b) Voluntary deposit that will be collected from consenting Clients at a uniform rate in the open meetings depending upon the nature of the Samity of the organization;
And c) Term deposits collected from the Clients under a written contract for a specified period upon which interest will have to be paid at the specified rate. (2) In general the total deposit balance of any Microcredit Organization will not exceed 80% (eighty percent) of the principal loan outstanding at any given time. 28.
CONDITIONS FOR VOLUNTARY DEPOSIT – the Microcredit Organization may collect voluntary deposit from the Clients under the following terms and conditions: (a) The organization must have a minimum of 5 (five) years of experience in conducting microcredit operations; (b) It should have documentary evidence of running the operation profitably for the last 3 (three) years; (c)
Accumulated loan recovery rate must be at least 95% and current loan recovery rate must be at least90% during the past 5 (five) years; (d) It should maintain liquidity of deposits as specified in section 34(1); and (e) The total voluntary deposit will not be more than 25% of the total capital of the organization. 29.
CONDITIONS FOR TERM DEPOSIT – the Microcredit Organization may collect term deposit from the Clients subject to prior approval of the Authority under the following terms and conditions: (a) the organization must have a minimum of 10 (ten) years of experience in conducting microcredit operations; (b) It should have documentary evidence of running the operation profitably for the last 5 (five) years; (c) Collection of loans during the past 10 (ten) years must be at least 95% for accumulated loans and 90% for current loans; (d) It should maintain liquidity of deposits as specified in section 34(1); and (e) The total term deposit will not be more than 25% of the total capital of the organization.
DETERMINATION OF INTEREST RATE ON DEPOSIT (1) The Microcredit Organization will set the interest rate on deposit by the Clients consistent with the maximum annual Service Charge applicable to microcredit loans. (2) Every Microcredit Organization must declare the applicable rate of interest on deposits in advance and must not pay interest at a lesser rate under any circumstances. (3) Monthly interest will be calculated on average balance determined on the basis of balances of the deposit at the beginning and end of every month.
CLASSIFICATION OF LOANS AND PROVISIONING
(1) The Microcredit Organization will classify loans as “Regular”, “Watchful”, “Sub-standard”, “Doubtful” and “Bad Loan” on an annual basis. (2) After classifying loans as mentioned in sub-clause (1) the Microcredit Organization will maintain provision at the following rates: Loan Classification | No.
Of Days Outstanding | Percentage of Principal | Regular | Loans with no overdue instalments | 1% | Watchful | Loan default duration between 1 and 30 days | 5% | Sub-standard | Loan default duration between 31 and 180 days | 25% | Doubtful | Loan default duration between 181 and 365 days | 75% | Bad Loan | Loan default duration above 365 days | 100%.