The we look into the history of insurance

The Indian financial system, after the
introduction of liberalization measures in 1990s, has become more advanced in
response to various needs of the economy. An organized financial system is
characterized by the existence of an integrated, developed and regulated
financial markets and institutions that cater to the financial needs of both
the household sector and corporate and government sector. Despite the best
efforts by the financial institutions, a large number of the poor are unable to
get their due share in institutional finance. Micro insurance in union with
micro savings and micro credit could go a long way in keeping this segment away
from the poverty trap and would truly be an integral component of financial
inclusion. In India where poverty is very high with its large population, the
anti-poverty programmes of financial services to the poor and underprivileged
got top priority.

Every individual is exposed to innumerable risks
connected with his life and business. As a human being man is interested in
escaping such risks and searches for protection. In such situation, insurance
can play a greater role to mitigate the risks attached to human life.  As there is tremendous scope for insurance
firms in both life and non-life categories the Insurance Industry can take it
as a challenge to address such urgent financial needs of the poor and the
country at large. In a growing economy like India’s, a large segment of the
population remains to be insured. Insurance is
fast emerging as an important strategy even for the low-income people engaged
in wide variety of income generation activities and who remain exposed to a
variety of risks mainly because of lack of financial literacy or perhaps of
absence of cost effective risk hedging instruments.

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When we look into the
history of insurance in India, we know that it remained as an unrealised dream
for majority of the Indian population. Especially the rural population remained
unbanked and uninsured even after a few decades of the birth of insurance in
India. There was a great awakening during 1990s in the financial service sector
to address the financial crisis faced by the poor and the marginalised. Thus, in
the anti-poverty programmes, provisions of financial services to the poor and
the underprivileged got top priority. Financial institutions like banks are
involved in rural development programmes. It was realised that further efforts
are required to address the credit needs of the poor. Financial institutions
and financial service providers began thinking in terms of micro finance, micro
credit etc. Among the micro finance products micro insurance is the recent
one. 

Objectives of
the Study

The main objectives of the
study are:

·        
To evaluate the
progress made by micro finance.

·        
To create
awareness about the provisions of credit and funds available in the Indian
Financial System.

·        
To study the
role played by micro insurance in micro finance.

Theoretical insights
from the Literature

Micro Finance

Microfinance is a way for fighting
poverty, particularly in rural areas, where most of the world’s poorest people live. Most poor people cannot
get good financial services that meet their needs because there are not enough
strong institutions that provide such services.
Accessing small amounts of credit at reasonable interest rates give poor people
an opportunity to set up their own small business. Microfinance has become an important instrument in reaching credit to
the poor and to tiny enterprises. These must reach the poor in far greater
numbers and build their capacities to absorb higher amounts of credit. The key
to the empowerment of all people is education and the assurance of gainful
employment. Today’s challenge is to ensure that the benefits of economic growth
and development translate into productive employment for all, including women. Micro
financial services include both financial intermediation and social
intermediation. Micro finance activities usually involve the following:

§ 
Small loans, typically for working capital.

§ 
Informal approach of borrowers and investments.

§ 
Collateral substitutes such as group guarantees
or compulsory savings.

§ 
Access to repeat and larger loans based on
repayment performance.

§ 
Streamlined loan disbursement and monitoring

§ 
Secure saving products.

Some MFIs provide enterprise development services such as
skill training and marketing and social services such as literacy training and
health care.

When poor people have
access to financial services, they can earn more, build their assets, and
cushion themselves against external shocks. Poor households use
microfinance to move from everyday survival to planning for the future: they
invest in better nutrition, housing, health, and education. Many studies show
that poor people are very keen in following the rules, trustable with higher
repayment rates than conventional borrowers. Flexibility is important for the
poor because it helps them to manage money. The need for micro financial services
arises on account of the following reasons:

Women
Empowerment

Poverty
alleviation

  
   Need
  
for Micro
   
Finance
 

                                                                             

             

 

   Harnessing talents

    Credit delivery

 

 

                                                 

                                          
Figure: 1.1-Need for micro finance

Ø 
Poverty alleviation: In a country like
ours, there is an urgent need to alleviate poverty. Micro finance is considered
as a potential instrument for combating poverty in a sustainable manner. One of
the means to accomplish this is through the promotion of sustainable livelihood
by providing easy and affordable access to credit and other complementary
services.

Ø 
Women empowerment: Micro financial
services are essential for the empowerment and upliftment of women. Women play
major roles as farmers and business people, however, many lack financial
capability. Micro finance serves as a tool, by mobilizing women, organizing
them into groups, building their capacity for self-management at the grass
roots and enabling them to access wide range of financial services. Thus micro finance helps in bringing out
the hidden and untapped potential of the poor and the women.

Ø 
Harnessing talents: Micro financial services are needed to help
harness the talent leadership and entrepreneurial abilities of the poor. Micro financial
services facilitate enterprise development and provide for employment
generation in rural areas.

Ø 
Credit delivery: Micro financial services are needed to ensure
effective credit delivery system. The system seeks to ensure rational
allocation of resources in the form of subsidized credit especially in rural
areas.

Micro finance
revolution provides abundant stimulus for taking the process
of poverty reduction forward. A financially sustainable institution can
continue and expand its services over the long term. Achieving sustainability
means lowering transaction costs, offering services that are more useful to the
clients, and finding new ways to provide banking services to the poor.

Micro credit

Micro credit is “Loan of very small amount”. Microcredit and microfinance
have received extensive recognition as a strategy for poverty reduction and for
economic empowerment.  Micro Credit is
provided to those individuals that lack collateral, steady employment and a
verifiable credit history and therefore cannot meet even the most minimal
qualifications to gain access to traditional credit. Observations and
experience show that women are a small credit risk, repaying their loans and
tend more often to benefit the whole family. In another aspect it’s also seen
as a method giving the women more status in a socio-economic way and changing
the current conservative relationship between gender and class when women are
able to provide income to the household. Micro credit is based on the premise
that the poor have skills which remain unutilized or underutilized.

There are many reasons why women have become the primary
target of micro finance services. Giving women access to micro credit loans
therefore generates a multiple effect that increases the impact of micro
finance institution’s activities. Microcredit must reach the poor, building
their capacity to absorb higher credit, and also ensure greater availability of
credit for small enterprises. This group of individuals includes artisans, tiny
and small industries, grocers, vegetable vendors, rickshaw pullers, roadside
retailers and the like. Other activities include farming, poultry, cattle rearing,
piggery, fishery etc. It is amazing to know how many people are desperately
looking forward to getting money to kick-start their lives. It is also
unfortunate to know that larger banks are not yet willing to lend money. As a
result the credit demands in India remain unfulfilled. There are some restrictions regarding what the
money is used for. Usually micro credits can´t be used for the purposes like:

§  Payments of other
loans or other debts;

§  Production of tobacco
and liquor;  

§  Establishing trading points;

§  Forming turnover
capital of trade and intermediary business;

§  Organization or
purchasing products for gambling;

§  Purchase of property
that´s not used for business etc.

The
microcredit loan cycles are usually shorter than traditional commercial loans with
terms from typically six months to a year with payments plus interest, paid
weekly. Shorter loan cycles and weekly payments help the borrowers stay current
and not become surprised by large payments. MFIs also have big personnel and
administration costs.

NGOs provided SHGs access to funds by linking them to banks
which provided financial services (including thrift, credit etc.) to them
directly. NGO’s role was to ensure financial discipline of the SHGs. SHGs, typically a group of 20 women, save as well as offer
credit to its members from money sourced from commercial banks. Apart
from this there were state government run SHG programmes. Thus microfinance in
this phase was government driven.

Financial Literacy

The growth in any sector can be measured by their consumption. Even after great
efforts by financial sector and institutions the rural population remains
unbanked or financially excluded. A large chunk of the Indian population
especially rural population is still remaining financially excluded. What could
be the reason for financial exclusion? Is it due to lack of fund or credit
available in the market? Or lack of awareness among the needy ones? We need to
seriously think what more could be done in this regard?  To create awareness about such financial
services mass financial literacy programmes can be taken up. Here it is
appropriate to mention what we mean by financial literacy. Financial literacy is an ability to understand money and how it works
– including its management, investment, and expenditure. Being financially
sound and aware always works in your favor as it enables you to make choices on
investments that can help you double your balance. Even when you are busy with
your professional or personal life, putting your money in the right places
i.e., the stock market or the money market can help you become more profitable.
It is definitely not the lack of skills that make the poor people poor
but lack of awareness and proper distribution of available funds and its
management.

As per the Directory of Microfinance Companies
2017-2018, the last few years have seen the microfinance industry in India grow
by extraordinary leaps and bounds.
The Finance Ministry and the Reserve Bank of India have recognized the
important role played by MFI’s in the economy by granting them banking
licenses. MFI’s are today leading the financial inclusion drive in the country.
Microfinance Companies has seen their outreach, impact and sustainability grow
exponentially. MUDRA loan financing now makes it easy for microfinance
companies to access funds.

The poor need, like all of us, a secure place to save their
money and access to insurance for their homes, businesses and health. In micro finance
sector there are other services expanding as well. Microfinance institutions
are now innovating new products to help meet these needs, empowering the
world’s poor to improve their own lives. Products commonly used in the
microfinance sector today are:

     1. 
Micro Savings

 

        Common
   Micro finance
        Products

                                                
      

    2. Micro
Insurance

 

    3. Micro
leasing

              

 

   4. Money
Transfer

 

                                                   

                                 Figure 1.2-
Common micro finance products

1.     
Micro savings: It is a possibility
to save money with no minimum balance. It allows people to retain money for
future use or for unexpected expenses. In SHGs the members save small amounts
of money, as little as a few rupees a month in a group fund.

2.     
Micro insurance:  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.

3.     
Micro leasing: For
entrepreneurs or small businesses who cannot afford to buy at full cost
equipment, agricultural machinery or vehicles, they can instead lease
them. 

4.     
Money transfer:  A service
for transferring money, mainly overseas to family or friends. Money transfers
without opening current accounts are performed by a number of commercial banks
through international money transfer systems such as Western Union, Money Gram
etc.

Importance of Micro insurance in micro
finance

Insurance
Industry also has come up with a number of innovative products, especially
micro insurance products, under both life-insurance and non-life insurance. It
gives the entrepreneurs the chance to focus
more on their core business which drastically reduces the risk affecting their
property, health or working possibilities. Insurance is
fast emerging as an important strategy even for the low-income people who are engaged
in wide variety of income generation activities and who remain exposed to a variety of risks mainly because of lack
of financial literacy or perhaps absence of cost effective risk hedging
instruments. The need for financial protection is paramount for the
underprivileged sections in India. These sections, however, do not actually
have any protective financial umbrella, thus Insurance can address this need by
providing cover to the people across the country that need it the most.

Insurance is an important financial
service available in today’s world as it provides security and safety against the loss on a
particular event. The security and safety in turn affords peace of mind, which
tends to stimulate to more work done. After the reform process, this sector has been
changed according to the needs of the present days. Poor people are exposed to a wide array of risks,
which make them vulnerable to income
shocks. Micro insurance is a powerful weapon to fight such income shocks in
life.

Micro
insurance makes it possible for people
to take more risks. For example, when farmers are insured against a bad
harvest (resulting from drought), they are in a better position to grow crops
which give high yields in good years, and bad yields in years of drought.
Without the insurance however, they will be inclined to be more conservative
and do the opposite; since they have to safeguard a minimal level of income for
themselves and their families, crops will be grown which are more drought
resistant, but which have a much lower yield in good weather conditions. According to IRDA, Micro-Insurance
Regulations announced in 2005, micro
insurance can be a life or general insurance policy with a sum assured of
Rs 50,000 or less and the average ticket size ranges between Rs 500 and Rs
1000.

A general micro-insurance product is any: 

Health insurance contract
Livestock
Tools or instruments or
Any contract covering belongings such as
Hut
Any personal accident contract
They can be on an individual or group basis

A life micro-insurance product is:

A term insurance contract with or without
return of premium
Any endowment insurance contract or
A health insurance contract
They can be with or without an accident
benefit rider and
Either on an individual or group basis.

Different
Categories of Products:

There are different categories
of products and they are:

1.    
Endowment/ Savings/ Pension: Under
this category, there is life protection, both on survival and death. Pension
can also be built into the product. The sum is capped between Rs 30,000 and Rs
50,000. A majority of the insurers offer policies under the non-medical scheme
and automatic acceptance if size of the group is more than 200
members. 

2.    
Protection (Term insurance): Life
risk with accident benefit is generally being offered under term products. A majority
offer accident benefit and some offer permanent disability benefit too under
term products.  The sum assured is capped between Rs 5,000 and Rs 50,000
or is defined as 100 times the annual premium.

3.    
Health: Disability, hospitalization,
loss, etc Popular format of Health insurance cover is a fixed sum in case of
the hospitalization (Pre, during and Post). Generally, benefits are 150 Rs/day hospitalization
expenses, consultant fee up to Rs 4500/hospitalization, diagnostic
expenses up to Rs 4500/hospitalization, transportation expenses Rs 350 per hospitalization.
One overall limit for hospitalization may be defined as Rs 15,000 and overall
sum insured for one year defined as Rs 30,000.

4.    
Property: This category is
mainly meant for rural and urban poor. Making good damage cover/loss/ input
costs/ recurring costs due to natural causes/theft/accidents/burglaries/cover
against diminished agricultural input/loss due to electrical/mechanical
breakdown. Loss to livestock due to death, disease and accident dwellings –
Fire policy for dwellings and contents Breakdown of agricultural implements
cover for poppy/crops against inadequate/variation in fall/variations in
different weather parameters. Actual  loss/market value whichever is less
is reimbursed in case of Live Stock all indigenous, cross bread animal/birds
defined Submersible/non-submersible Pump set up to 25/30 HP defined Building
(Structure) / contents (belongings)/both defined.

5.    
Personal Accident: Under
this category low income groups/Kissan Credit card holders/girl child
parents/married ladies. Death/Permanent Total Disablement/Total and
irrecoverable loss of limb/eye sight Medical expenses during/pre/post hospitalization
Percentage of Sum Assured on case by case basis entire family is covered under
one Sum Assured any number of times. All fees for
surgeons/anesthetists/consultants/associated expenses of hospitalization under
one Sum insured Parent of girl child /women covered with beneficiary as the
girl child/insured women for death/PTD/ Total and irrecoverable loss for a
limit.

6.    
Jeevan Madhur: A simple savings related life insurance plan for low income persons
was launched in 2006. It is a government sponsored micro life insurance
product. On surviving to the date of maturity, sum assured is paid along with
vested bonus if any. On death of the policy holder, death benefit amount equal
to the total premiums payable during the entire term of the policy will be paid
along with vested bonus if any.

7.    
Jeevan Mangal: LIC’s second Micro Insurance product was launched in 2009. It is
a term insurance plan with return of premiums paid on maturity, provided the
policy is in force. On death during the term of the policy, the sum assured
under the basic plan is payable, provided the policy is in force.

8.     Jeevan Deep: The third product was launched on Sep.3rd,
2012. This plan provides for a sum assured or
risk cover ranging from minimum of Rs 5,000 to maximum of Rs 30,000 with an
optional accident benefit rider, together providing for total benefit equal to
double the sum assured, on death due to accident, it said. Flexible modes of premium payment have
been provided ranging from monthly, quarterly, half-yearly and annually, it
said adding a single premium payment option has also been provided.

The
above mentioned are only a few. There is
flexibility in the regulations for insurers to offer composite covers or
package products that include life and general insurance covers together. There
are varieties of innovative micro insurance products available in the market.
From the above mentioned list we know that micro insurance plays a significant
role in micro finance. More of financial literacy programmes are to be
conducted to educate ourselves and others in this regard.

Conclusion

Many new products are being introduced every year. The
distribution infrastructure has also been considerably strengthened and the new
business has shown a decent growth, though the volumes are still
small. Micro-insurance business was procured largely under the group
portfolio. Life Insurance Corporation of India (LIC) contributed the most both
in terms of policies sold and number of micro-insurance agents. Finally,
we can say that micro insurance is heading towards the financial inclusion in
India. With the notification of the IRDA (Micro-insurance) Regulations 2005, by
the Authority, there has been a steady growth in the design of products catering
to the needs of the poor. Micro insurance is recognized as a useful
tool in economic development. It is
time to set aside the financial anxiety
and take one’s bank balance into one’s own hands. Let us save and invest
wisely. We need to educate ourselves and others. Let us light a lamp and keep
it burning rather than cursing the darkness. As a well-informed and financially
literate consumer, one adds to economic stability because well-informed
consumers make sound investments which help to inject funds into the economy. In
other words, have the capacity to be a lender and not a borrower. Only then we
can build India as a developed nation. 

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