Rural Insurance Market in India

Introduction

The growth in the insurance sector is higher than the GDP growth-rate of the country. The insurance premium income has grown from 1.77% to 2.59% of the GDP in the last one year. A careful analysis of post-liberalization period suggests that new insurance players did make a good start while the existing ones maintained consistent growth levels. This is also evident from the rise in the penetrations level-from 2.52% in the year 2000-01 to 3.56% in the year 2010-11.

A noteworthy observation here is the divergence in the penetration levels of the urban and rural markets. This is evident from the fact that there is a significant difference in the insurance coverage in these two markets.

Urban vs Rural Market

Indian insurance market can be dividend into urban and rural markets. These two segments are diverse in nature and have distinguished characteristics. The economic growth of the two has not been the same. A wide disparity exists between the per capital income and literacy rate, among other things, in these two sectors. From insurance perspective, statistics show that rural population has lower reach. The agent per 1000 persons is around 0.25, which is far low in comparison to that of the urban market. Insurers may use this knowledge in designing innovative products, need-based selling of insurance, better penetration, development of new channels etc.

Most new insurance companies started operating from metros and urban areas. As a result, the urban population got more attention and led to more penetration in urban than in rural markets. The urban segment in India is small compared to the rural segment. Hence, exploring the rural markets poses to be a Herculean task to the insurers. Expects are of the opinion that the urban markets are rapidly getting saturated, and the future growth potential lies in the rural areas. However, it does not signal that the whole of urban insurable population is roofed, but the percentage of the first time buyers would be on decline. It is a fact that the urban population has greater accessibility and reach to the insurance products. Also, most of this population is a part of the organized sector and have insurance cover either directly or indirectly. Their higher education status has led to better awareness about financial and insurance products. They are more informed about market conditions, and demand product innovations to suit their growing needs.

But the situation with rural populace is different. A majority of them are left uncovered although they are also exposed to risks similar to or even higher than their urban counterparts. The ratio of rural Indian population is very high and it has growing insurance needs; therefore, it is a fact that the potential growth of insurance industry lies in the rural market, both for life and general (non-life) insurance. A lot of study and research was and is being carried out in this direction to develop new strategies to explore the untapped area in Indian insurance market.

Opportunities and Threats in Rural Insurance Market

Opportunities and threats go hand-in-hand in every industry and insurance industry is no exception. Identification of opportunities and threats helps in better analysis of the market. An attempt is made to examine the opportunities and threats related to rural insurance markets and how insurers can get the most out of them.

Opportunities

Gigantic population: India has higher population growth rates. The rural population amounts to nearly 72% of the total population and as discussed earlier, majority of them are left uncovered. This can be a major avenue for the players in the insurance market.

Agriculture insurance: Agriculture is the major vocation and source of income for the rural India. This segment has vast potential, which cannot be overlooked.

Growth in income level of the rural population: The national income of the country as well as the individual income level is on the rise. The agriculture and allied sectors are showing steady growth rate. The rural market countributes up to 55% of the national GDP. It points out to the tremendous amount of potential available in rural areas.

High savings habit: Indians, and in particular, rural people have high savings habit. This may be due to uncertainties and perils they are exposed to in the rural areas. Hitherto, they had only a few investment avenues like post office savings or bank deposits, and insurance could be made an alternate investment opportunity with the benefit of life cover.

Falling interest rates: Insurance has become an alternative investment product. With the fall in the interest rates, insurance products can be made investment avenues, which give good returns with insurance protections.

Threats

Uneven distribution of population: Indian population is not evenly distributed. The percentage of villages with population below 200 is 20%, and the percentage of villages with population between 200 and 500 is 40%. The total villages exceed six lakh in number. The uneven population distribution could be a hurdle for the insurers to reach out the ultimate customer. On the other hand, insurance as a product is unique in itself. Unlike other products, insurance selling is effective through personal selling. Which involves high costs. The agents/advisors may not find it worthwhile to interact and procure business, when prospective customers are scattered. It will take a long time for the alternative channels of distribution to reap results in out country especially in the rural areas.

Low literacy levels and insurance awareness: Statistics suggest that literacy rate is as low as 65% and much has to be done in this area. Low literacy stands out as another major threat for insurers because communication the benefits and mechanism of insurance products to the illiterate or semi-literate masses may not be easy.

Rural employment condition: The major employment source for rural populace exists only in agriculture and allied activities. These professions need much muscle works, which affects the longevity of a person. The earning power of a person is a crucial point for life insurance underwriting, and insurers cannot ignore this fact.

Low earnings: As much as 30% of the Indian population lives below the poverty line. Majority of them are landless agricultural laborers and wage earners. Therefore, it is quite essential to design low rate products that are affordable by these people. For them to be able to meet their basic needs-food, clothing and shelter is the primary object and purchasing insurance is not a top priority. Nevertheless, they too have insurance needs, and selling insurance to them would be a major challenge. The quantum of insurance is another aspect to be looked into while designing the products. On the other hand, insurance as a means of tax saving device won’t help due to their low levels of income and also because agriculture income being their major source of income. Hence, covering this large segment would be a daunting yet challenging task.

Traditional saving habits: If we give a close look at the savings habit of rural population, we find that they prefer to invest in real assets than in intangible assets like bank accounts, insurance, post office schemes etc. The most favorable avenues for them are purchase of land, both agricultural and non-agricultural, gold and silver etc. To shift their savings habit from tangible to intangible asset would be a big challenge for the financial instituations.

Health conditions: With the efforts of the government and non-governmental organization there is some improvement in the health conditions of Indian population, especially in the urban areas. But much has to be done in the rural areas. Many of the villages still do not have minimum basic amenities like proper sanitation, drinking water facilities, good hygienic environment, health facilities etc., which have direct and indirect impact on their health conditions. Risk of contraction deadly diseases is also very high. Though they have higher need for health insurance, their affordability is a major question. One can only wait and watch as to how insurers would conduct themselves in this regard.

People’s psychology: The majorities of the Indians especially rural population believes in God and are superstitious to some extent. They tend to either retain the risk of avoid the risk, instead on managing or hedging the risk. This tendency should also be considered as a potential threat in selling insurance.

Credibility: The research studies conducted by FICCI in association with ING Insurance reveal that, one of the major factors influencing the marketing of insurance in rural areas is the credibility of insurers. In the past, there were cases of financial frauds, which affected the faith of the rural population adversely. Confidence building exercises need to be carried out, and the government and the IRDA need to join hands with the insurers in this regard.

Role of Government

Across the globe, governments have been playing a major and important role in the social welfare of their citizens. In India, the central government along with state governments has been active on this front. But, on the whole, it is lagging behind, when compared with other developed countries.

The workers group can be dividend into two parts viz., organized sector and unorganized sector. The organized sector is relatively a small portion of the total working group. The unorganized sector which constitutes a major section in population includes cultivators, agricultural laborers and workers who work in the unorganized manufacturing and service industries and it includes the self-employed.

To a large extent, the organized sector has been provided economic security. Poverty alleviation activities: Around 30% of our population is living below poverty line. Ironically, the risk exposure of this population is higher due to the kinds of perils they are exposed to and due to the absence of adequate protection compared to the population with higher income. Most of the people would not be able to afford insurance premiums to cover the perils they are exposed to. Taking these factors and facts into consideration, the Social Security Fund with a corpus of Rs. 100 cr was setup in the Union Budget of 1988-89. This fund was set up exclusively for funding the group schemes for weaker sections.

Jan Arogya Bima Yojana: This scheme provides low-cost and economical medical insurance to poorer sections of the society in the country. The age group of the population covered is between 5 to 70 years. The sum assured is Rs. 5,000. Raj Rajeshwari Mahilakalyan Yojana: This scheme was started to provide economic security to the women population in our country. Experience shows that the sum covered is very low in these schemes and the claim amounts may not be sufficient for the funeral expenses of the deceased. A lot of bureaucracy/red-tapism and involvement of middlemen is also a major negative factor in this regard.

India’s economy has been an agrarian economy, and she stands fourth in the world in terms of output and income generated from agriculture activities. Agriculture contributes 25% of GDP. A major portion of population is dependent on agriculture and allied activities. Indian agriculture is labor-intensive unlike in developed countries, where more scientific methods are adopted and modern tools are used in agriculture and farming activities.

Agriculture has been providing employment to major portion of out population Indian agriculture is highly dependent on the monsoons and crops are exposed to several risks. Traditionally, the risks are borne to a large extent by the farmers themselves and to some extent by the government. Crop insurance was almost negligible in earlier years. Hence, the importance of agriculture insurance need not be overemphasized. Crop insurance was taken up as group schemes for farmers availing loans from the banks. The direct advantage from this was that the premium was low i.e., between 1 to 2%.

In this direction, the National Agriculture Insurance Scheme (NAIS) was introduced in the year 2000, which replaced the existing Comprehensive Crop Insurance Scheme (operating since 1985). NAIS was primarily aimed at covering all food crops, oilseeds, and annual commercial/horticultural crops in respect of which the pas yield-data is available for adequate number of years. As many as 11 crops are covered under the NAIS. For small and marginal farmers, 50% subsidy was given (shared equally by the Center and the respective state government). On these lines, a Pilot Seed Crop Insurance Scheme was introduced in the same year to protect the seed breeders. The live stock insurance was one more step in this direction (provided by all public sector general insurance companies).

The Agriculture Insurance Corporation of India Limited is a new initiative in this direction. The public sector general insurance companies and NABARD promoted this company, and it was registered under the Companies Act, 1956. This body was set up with the objective of intensifying the agriculture insurance in our country. It is expected that the new initiative would result in a quantum growth in insurance. The new corporation will take care of insuring farms, agricultural properties, cattle, poultry, etc. The estimated size of the agricultural insurance business is around Rs. 1,000 cr, and is expected to grow over Rs. 10,000 cr in the years to come.

Of late, government has been enacting legislations, which made insurance compulsory. They are- Public Liability Act, Motor Vehicle Act, and Workmen’s Compensation Act, etc. Suitable legislations may also be brought out in the areas of personal lines of insurance, which would help improve the economic security of the people. To begin with, health and pension sector could be considered.

Role of IRDA

The role of Insurance Regulatory Development Authority (IRDA) is prominent in the development of the insurance sector in our country. IRDA has evolved as a strong regulator in our country. Greater independence and more powers could be the obvious reasons for this.

In order to avoid the possible negligence by the insurers towards rural markets (particularly the new players), IRDA formulated the “Obligations of Insurers to Rural Social Sectors.” And it was found that all the insurers both, life and general, complied on these counts, and that their performances were much above the required levels. Looking at the performances, the pertinent question would be on the need to revise such benchmarks.Another area where initiatives are to be taken by both IRDA and insurers is the health sector. There is scope for much work in this domain.

Role in Insurers

Insurers have a major role to develop insurance business. They should orient themselves towards market development to increase the penetration levels. As discussed earlier, the penetrations level has increased to 3.56% from 2.52% in the last couple of years. There has been overall growth in the insurance market. The entry of new players has not resulted in the division of the existing market but the market itself is on the growth path. However, there is much scope and room for developing insurance particularly in the rural context and work in this direction has just begun. Development of alternate channels of distribution: The insurers should work towards development of alternate channels for distribution insurance in order to increase the existing levels of penetration.

Bancassurance is one such distribution, which is yet to be adopted in complete manner. The experience in the countries where it is working in a full-fledged manner is extraordinary. It has emerged as a cost-effective tool for distribution of insurance products. In India, where the number of villages is above six lakh, selling insurance could be a challenging job. With the spread of bank branches in majority of the villages, tie-ups with them should help increase in penetration.

Tie-ups with NGOs/SHGs: The non-governmental organizations and the Self Help Groups could play a major role in increasing the penetration levels. There are informal groups, which provide avenue for insurance selling through the mechanism of group insurance schemes. Group insurance provides greater reach with low operation costs and fewer rates.

Product development and innovations: In insurance market, product development and innovation exercises area continuous process. New products should be developed keeping in view the rural market conditions viz. low average income, seasonal income, etc.

Reduction in operating costs: Cost reduction cannot be ignored especially when it becomes part of the premium to be charged. Business Process Outsourcing, Third Party Administrators, Bancassurance can be considered in this direction. This effort would lead to low rates, which will have mare acceptability in rural markets.

Need-based selling: Some products, which are popular in the urban areas, may not be suitable to the rural areas, as they might not cater to their needs. Hence, insurers should adopt need-based selling.

Health insurance: Health insurance is a segment, which is neglected by both public insurers and private insurers. Statistics suggest that only 3% of our populations has voluntary health insurance cover. The rural population is more in need of the health insurance, because of its inaccessibility to high medical costs and due to non-availability of proper health infrastructure facilities. The health insurance segment needs grater attention keeping these facts in view.

Pension and annuity market: statistics reveal that only 11% of our population has the privilege of the pension. A major segment is left without old age income. This market needs to be exploited to the full extent. And nobody can afford to ignore the rural segment. Products with in-built life cover and old age income should be developed.

Conclusion

At the end of the day, it is the opportunities and not compulsions, which would drive the old and the new players to rural India. There is a mutual cause served, as the rural folk, particularly the low income population, get their risks hedged, and the insurers can earn and retain bigger shares. The outcome would be a steady and secured economic growth.

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