Running for cover: access to insurance in India
According to a report published by Lloyd’s late last year, India has the second largest insurance gap in the world. Insurance gap is the difference between insurance cover availed and the actual cost of recovering from major catastrophic events. For instance, if an individual needs insurance worth Rs. 1 lakh, but has purchased a cover of Rs 30,000, then the insurance gap is Rs 70,000. As per this definition, the aggregate insurance gap in India is approximately $76 Billion. Such a massive gap implies that Indians are not buying insurance to adequately cover their risks and are paying for losses out of their own pockets.
For instance, consider the levels of uptake of the predominant insurance product in the Indian market. Despite the relative popularity of the product, approximately 75 percent of the population or 988 million Indians are not covered by any form of life insurance.
In addition, an average Indian is covered for only eight percent of the financial shock incurred from the death of an earning member of their family. The protection gap in life insurance alone is unsettling.
Such alarming figures take on an even more ominous ring in the Indian context where over 75 percent of the workforce or roughly 400 million people are employed in the informal sector. These are people who work as hired semi-skilled or unskilled workers, drivers, maids, delivery persons, factory workers or run micro-businesses like tea stalls, vegetable carts or grocery stores.
They are exposed to high levels of income volatility, irregular cycles and sources of employment. With little protection against job/business loss and with limited access to social security, this segment of the population is extremely vulnerable to shocks arising from adverse life cycles, and economic or environmental events. Protective insurance coverage for this segment is a critical need that remains under-provisioned.
What’s the score? Is the industry taking insurance to those who need it most?
Now, the good news is that the insurance industry in India is on a high growth trajectory and is expected to grow in the range of $99 billion (India Insurance Report- Q1 2019, Fitch Solutions) to $280 billion by 2020. Despite the wide variation in estimated figures, the projections indicate significant growth over the $81 billion worth of the industry in 2016.
From 2015 onwards, regulatory reforms have infused a much-needed vibrancy into the insurance industry in India, propelling exceptionally high rates of growth in the non-life segment, and fuelling the growth of technology-led innovative product offerings. However, there is a catch — in order to become relevant to the vast underinsured customer segment in India, a majority of which sustains on unpredictable income flows, have low assets and capital base, rely on informal sources of finance and lie on the lower end of financial and digital literacy spectrum, the established product driven model of insurance, itself, must undergo a profound transformation.
As such, traditional fixed rate, one-size-fits-all insurance products do not work for this segment. Premiums are too expensive and fixed recurring payment cycles are not suitable. The industry’s response to the unsuitability challenge has been to create micro-insurance products for low and middle-income segments. In simple words, micro-insurance started off as sachet-isation of traditional products to render protection at a fraction of the cost for smaller coverage, thereby making insurance affordable.
This was accompanied by the development of small ticket insurance products that cover life, livelihood and risks that are specific to low-income individuals and families. These included products like micro life insurance (coverage up to Rs 50,000), micro cattle insurance for dairy farmers, agricultural pump-set insurance, micro personal accident insurance etc. (IRDAI Annual Report, 2016–17).
Micro-insurance could be a high growth play in the largely underserved market in India. In fact, according to Munich Re and GiZ, India accounts for nearly 65 percent of Asia’s micro-insurance market. Yet, despite the significant potential, micro-insurance has so far failed to become ubiquitous.
This can be attributed to two major factors.
1. Given that the target customer segment primarily operates in cash — outside of formal financial institutions, risk evaluation, scoring and product suitability remains a challenge.
2. The micro-insurance business by its very nature is only viable at scale. Scale on the other hand is difficult to achieve on account of high costs of servicing via traditional distribution channels, and the obvious difficulties of migrating to low touch digital channels with customers who have little comfort with or confidence in digital solutions.
Where is the action? — The changing face of insurance
The big question, therefore, is how must the insurance industry transform in order to overcome the impairments of traditional and micro-insurance, and effectively close the insurance gap in India? Thankfully, one does not need to dredge too deep to determine how this is possible. A clear pathway opens up for us if we pay attention to the way insurance worldwide has changed over the recent years.
Over the past few years, traditional insurance providers across the world have faced stiff competition from non-traditional insurance providers like fintech firms and technology giants, who have leveraged technology to digitise insurance value chains in favour of significant time and cost advantages. This has encouraged traditional businesses to adapt and develop synergies with new players in the ecosystem.
Insurance is transitioning from a product-oriented offering to a client-centric model, where insurers are positioning themselves “as risk managers and partners in the daily lives of customers” (Ten years of impact insurance, 2018, ILO, World Insurtech Report, 2018, Capgemini). Insurers are doing this by building complex customer profiles using data from all accessible components of a customer’s digital footprint. Such profiles are built, updated and analysed in real-time to assess the needs, preferences and priorities of customers with unprecedented granularity.
From using online behaviour of customers to discover specific needs of target segments and designing intuitive products like insurance linked rent contracts for millennials; to designing dynamic insurance solutions based on user behaviour, such as health insurance adjusted to information flowing from fitness apps and wearables, insurers are transforming insurance into a deeply customized and personalized service. The underlying takeaway here is that insurance can no longer be a standalone product. Instead, it needs to be a comprehensive service that is aligned to every need, preference, purchase and experience of a customer.
New game, new rules! — Reimagining insurance for LMI customers
This insight when carried over to developing insurance solutions for customer segments that cannot be assessed using standard tools of risk evaluation shows the way forward for insurance for the un/under-served in India.
The key then is to develop innovative strategies to plug insurance as a value added service to cover risks across all business and lifecycle needs of individuals in the target customer group.
Let us imagine what such an exercise would look like by following the story of a representative individual.
Meet Kishore
Kishore, 33-years-old, runs a small kirana (grocery) store in his village outside Jalgaon, Maharashtra. Two years back, he invested all his savings, which added up to Rs 60,000, to set up the store in the outer compound of his two-room semi-pucca family home. Over two years in business, Kishore has found a steady clientele — almost all neighboring households have opened a monthly khata (Facility to buy groceries on credit) with him. It also helps that Kishore’s house is by the side of a road that leads to the nearby town. The location draws passing bike riders. Kishore’s store doubles up as a tea stall for them.
Kishore’s monthly turnover averages to Rs 40,000 earning him Rs 6,000 in profits. As with his customers, he works with his suppliers on credit. He makes all his business transactions in cash and tears kachcha bills (Rough paper receipts) for his customers.
Kishore is married and has two young children. He was born to a family of share-croppers, an occupation he carried on with after the passing of his father. About five years ago, a severe monsoon failure pushed several small and medium landowners in the village to the edge of bankruptcy, leaving Kishore and his family struggling to meet basic sustenance. To cope with this distress, Kishore and his wife migrated to sugarcane plantations in Sangli for three seasons to work as harvesters. They eventually accumulated their wages from the job to start ‘Mangal Provision Store’.
In difficult months, Kishore finds himself strapped of cash and seeks the help of friends and relatives to pay suppliers. The nearest small business lending company is not confident of lending to Kishore. His business is too small and the company is unsure of whether he will be in a position to repay in the event of unexpected adversity. The local branch manager speaks from experience when he says, “their business fund becomes their personal fund in emergencies, it is too risky to lend to them”.
Kishore has studied till class 8. He has a savings bank account, uses a smartphone and knows how to use a remittance app on his phone. His wife manages the household. The couple alternately takes up farm work locally during the harvest season to supplement the family income. Kishore continues to identify himself as a farmer. He hopes to invest profits from the kirana store into buying a plot of land. However, at the moment, he has managed to achieve little towards that end.
Take the entrepreneurial quest!
Now you are an entrepreneur wondering how you can build insurance solutions for Kishore. You observe that Kishore is excluded from access to working capital loans. You also find that Kishore falls into debt with informal lenders to pay off suppliers in months where he incurs unexpected lump sum expenditures. One of your potential plays could be to team up with an SME lender and offer credit insurance on working capital loans extended to Kishore. Not only would this incentivise the lender to lend to Kishore, but it would also prevent Kishore from reaching out to informal lenders to arrange money for repayment.
To do this, the question you aim to resolve is, “What if there was a way to quantify Kishore’s profile for a short-term lender to assess the risk of the loan and plan the terms of the loan in such a way as to minimise risk?” This kind of quantification or scoring could help a hard-working person like Kishore differentiate himself in the market and get much-needed working capital.
Further, it will help the lender choose their borrowers using better data and not just from experience or stereotypes they might have around certain professions. Could you then work with small business lenders to co-create an insurance product to secure repayments using data points from Kishore’s transactions?
Further, you observe that Kishore and his family have no protection against personal and business losses. This implies that a bout of dengue or a small fire in the store can set Kishore back by years. As an entrepreneur, you may ask, “What if there is a way to insure Kishore without taking on undue under-writing risk?” Could you offset your risk by offering an integrated credit insurance solution that covers threats to health and assets as well; and in doing so fortifies both Kishore and the lender against all risks that could lead to livelihood impairment and repayment default?
People like Kishore require a comprehensive suite of insurance solutions to overcome constraints to income and wealth generation. The market opportunity, as indicated earlier, is immense and service innovations can create significant positive impact.
How do you see a startup catering to this segment? What challenges do you foresee? What opportunities do you think are at the cusp of breakthrough ideas? Can you think of other insurance solutions that could protect customers like Kishore against life’s uncertainties? Let us know your thoughts.
Special thanks to Mohammed Riaz, Co-founder and CEO of Xtracap Fintech India for sharing invaluable insights and learnings of this industry with us.