1. Pricing Micro Insurance Products: Experience from the Field Atish Govil October 14, 2005

2. 2 Need for Micro Insurance Our Offering Price Contributors and our Responses Presentation Path Key Enablers Role of Stakeholders

3. 3 Need for Micro Insurance Our Offering Price Contributors and our Responses Presentation Path Key Enablers Role of Stakeholders

4. 4 Risks in Rural India Agriculture Wage Labour Micro Enterprise LivelihoodHousehold Asset Individual Animal Husbandry

5. 5 Why Micro Insurance? Agriculture Wage Labour Micro Enterprise Livelihood Animal Husbandry WeatherAsset Loss Loss of Wage Days Death of Animals Consequence Production Systems Risk Effects Solution Income and Revenue Loss Change of Vocation No credit availability Distress SaleSuicide Risk Mitigation through Insurance Uninterrupted Credit Stable Income Increased Investments Reduced Poverty Advantages

6. 6 Individuals and Families Household Personal Assets HealthDeath Asset Loss Increased Expenditure Components Risk Effects Solution Income and Revenue Loss Risk Mitigation through Insurance Protection to familyStable IncomeReduced Poverty Advantages Loss of Savings Accident Why Micro Insurance?

7. 7 Current Mechanisms… Self Insurance Community Insurance Ex-ante Under investment Over diversification Ex-post Use of savings Distress sale of assets Ex-ante Under investment Over diversification Ex-post Use of savings Distress sale of assets Community insurance schemes Risk funds Community insurance schemes Risk funds Calamity relief Subsidies Minimum Support Prices Calamity relief Subsidies Minimum Support Prices Government Support

8. 8 Need for Micro Insurance Our Offering Price Contributors and our Responses Presentation Path Key Enablers Role of Stakeholders

9. 9 Effective Risk Management Rural Risk Managemen t Product Innovation and Customisation Efficient and Effective Servicing Cost Effective Distribution

10. 10 Crop Risks Weather Insurance Asset Risks Credit Risk Home / Tractor / Micro- Enterprise Loan Care Death Risks Life, Personal Accident Insurance Health Risks Health Insurance, Critical Illness Livelihood Risks Household Risks Customised Risk Management Solutions..

11. 11.. In Collaboration with Our Group Companies

12. 12 Need for Micro Insurance Our Offering Price Contributors and our Responses Presentation Path Key Enablers Role of Stakeholders

13. 13 Commission cost Pure risk based on historical probability Risk of adverse selection Policy administration Costs Risk cost Factors Affecting Price of Insurance Products Risk of moral hazard Customer acquisition cost Margin cost Marketing and distribution cost Process and Claims costs

14. 14 Risk Cost: Pure Risk Based on Historical Data Challenges Lack of past data relevant for pricing “micro” insurance products For instance, data on past average health incidences and average health expenditure among the rural and urban poor is not available Current practice Using area specific data for bulk deals Data sourced from the partner based on their experience Extrapolating the rates developed for regular markets Learning from our own experiences…limited Leading to high premium rates

15. 15 Risk Cost : Adverse Selection and Moral Hazard Challenge Data on contribution of adverse selection and moral hazard to premiums not available Current practices to control these risks Target groups through MFIs and NGOs with mandatory coverage for all members Bundling of micro-insurance products with loans Specific product features – for instance excluding pre-existing diseases in the first year of health insurance coverage Process innovations– for instance taking the photograph of the cattle along with ear tagging

16. 16 Policy Administration Costs Challenges: Process Costs Data on the insured to be collected over vast and inaccessible geographies Process requirements like photographs Challenges: Claims Administration Individual assessment of value of the insured and value of the damage incurred For instance, in crop insurance, the cost of assessing the actual loss due to a drought is very high Lack of infrastructure in the rural sector Hospitals, village level weather stations, trustworthy veterinary network Cost of claims goes up due to large distances to be covered by surveyors, for instance in motor claims

17. 17 Policy Administration Cost Contd. Current practices Index-based products Weather insurance Product designed to be independent of infrastructure available Critical Illness Insurance Collaborate with MFIs, NGOs for claims settlement Cattle Insurance claims to be vetted by the MFI Network with private and medical institutions with low occupancy rates

18. 18 Customer Acquisition Cost Largest contributor of cost as compared to a regular insurance product Challenges Low awareness amongst the target segment Underdeveloped delivery channels Restriction on permissible commission – may not be in line with the high expenses of the channel Strict entry norms for agents

19. 19 Customer Acquisition Cost Contd. Current practices Leverage existing channels of delivery of other products like credit, farmer inputs NGOS, MFIs, Co-operative Societies The key is to collaborate with entities that have a very good rapport with the client group Our experience of weather insurance has shown that sales through local MFI’s and Co-operative Banks are better than through our own Direct Sales channel Use of multi-product platforms to distribute Internet kiosks Franchisees

20. 20 Need for Micro Insurance Our Offering Price Contributors and our Responses Presentation Path Key Enablers Role of Stakeholders

21. 21 Key Enablers Data Bank of past claims Data sharing by various stakeholders Investment in low cost technology solutions Village level weather stations Identification devices for cattle Unique identification numbers/cards for individuals which will be linked to her/his health history Awareness building Financial literacy programmes Sector level awareness campaigns

22. 22 Key Enablers Regulatory support Commission to be in line with the high cost of distribution of the channel partner Entry norms for agencies should be modified to suit the sector Improved infrastructure Privatisation of Government health facilities Increased weather station network Telemedicine facilities Improved connectivity

23. 23 Need for Micro Insurance Our Offering Price Contributors and our Responses Presentation Path Key Enablers Role of Stakeholders

24. 24 Role of Stakeholders IRDA Policy level issues Modifications in tariff products to suit the requirements Eg: Excess clause in fire insurance Insurance education Extensive support on educating the concept of insurance Involve various grass-root level agencies

25. 25 Role of Stakeholders IRDA Data support Data banks for usage by stakeholders For product design For underwriting Micro insurance funds For data acquisition from Medical Council, TPAs, Research agencies Dissemination of sectoral level data Creation of digital data libraries

26. 26 Role of Stakeholders Government Exemption from service tax Deals with the economically vulnerable segment Infrastructure building For rural health – health care infrastructure Weather/Crop – Strong meteorological network Micro insurance fund For product innovations Piloting of new products

27. 27 Role of Stakeholders Industry Focused approach to this segment Invest in Product design Micro insurance education Developing simple and acceptable claims service standards

28. 28 Role of Stake Holders Partners Focus on insurance education Risk management / Mitigation Maintenance of data banks Have access to the client segment Help in administering the programme Enrolment Claim intimation Initial claim servicing

29. 29 Thank You