Given India's rural population of 800 million, ie, 80 crore, the micro insurance sector that offers insurance to the poorer sections of the society has the potential to generate premium income of Rs 8,000 crore (or $2 bn), split roughly 25:75 between the Life and non-Life sectors, according to the United Nations Development Program (UNDP).
The demand for micro-insurance is currently low due to poor product design and high distribution costs. Since 2002, the Insurance Regulation and Development Authority (IRDA) has mandated that life insurers must provide coverage in rural areas by setting sales obligations. For example, life insurers must derive 16 per cent of policies underwritten from rural areas by the fifth year of their operations.
The policy to support micro-insurance is strengthened further by another regulation introduced by the IRDA in 2005, which allows non-government organisations (NGOs) and self-help groups to act as insurance agents to distribute in rural areas as a means of lowering distribution costs.
The market potential of micro insurance is small in view of the small average premium sizes involved (50 per cent of the Indian population earns under $2 — or Rs 80 — per day). Nevertheless, this is not a segment insurers can ignore, given the significant population size and the continued rise in income levels in rural areas, suggests a recent study on Asian Insurance conducted by I-Sec, an arm of the ICICI group.
Looking at this growth potential perhaps, even some private insurance companies, which have in the past not looked at rural areas favourably, are now eyeing this sector, while some already have jumped on.
Max New York Life, for instance, is in the process of evolving a micro insurance product specifically targeting under-serviced rural households, while Tata AIG Life already has three specific products for this sector.