Public and private sector insurance providers will have to come together to make the sector more inclusive and accessible, so that all stakeholders can benefit from its growth.
The rural insurance market differs from the urban market in its needs, demographic, levels of income, and in many other ways. These factors also influence the level of penetration that the sector has in rural areas. Both public and private insurance providers struggle with expanding this market for a number of reasons, some of them include:
1. Lack of awareness and education
Lack of education and overall financial literacy is a significant challenge in these regions. This affects how insurance products are viewed and the trust they enjoy. Families in rural India have relied on a number of alternate means to reduce risk, such as through gold investments, living in joint families, purchasing land, etc. There is a need for insurance companies to increase awareness regarding the benefits of spreading risk, and the role insurance plays in this, so as to increase investment in rural communities. Presently, most insurance in these regions is agricultural in nature, are provided by the government, and are not viewed as long-term risk protection mechanisms where individuals share in the risk through premiums. There is also a need to build trust and improve financial literacy among rural populations to improve penetration.
Government insurance schemes such as the Pradhan Mantri Jan Arogya Yojana, the Pradhan Mantri Fasal Bima Yojana, the Pradhan Mantri Suraksha Bima Yojana, and the Pradhan Mantri Jeevan Jyoti Bima Yojana, have all played a significant role in establishing trust, and have led to better coverage, especially in terms of non-life insurance.
Inaccessibility to insurance products in rural areas could be due to various factors such as complicated documentation, affordability, or lack of sources, among others. Many individuals in these communities do not possess documentation such as birth or death certificates, and are unable to obtain FIRs or other necessary paperwork to make insurance claims. This is not only the result of low awareness, but also because there is no standardised and universal system of documentation that is implemented in India.
Furthermore, the high premium prices of comprehensive insurance policies also hinder the penetration of the sector in this market, given that a large part of this population is agrarian, and
insurance is not affordable to them. Micro insurance and bite-sized insurance, delivered through digital platforms available on mobile phones could go a long way on this front.
3. Product Customisation
The needs of rural populations differ vastly from those of urban areas. Amongst agricultural or low income households in villages with limited financial capacity, pre-packaged comprehensive insurance is not an attractive investment. As the IRDAI has observed, insurance products for these demographics must be customised to include crop protections not covered by government schemes. The rural market, which is largely agrarian, is more likely to invest in insurance covers for their crops, farming machinery, property, and for needs that are unique to them.
4. Cost of distribution and servicing
The cost of delivering micro-financing is significantly high. Given the lack of buyers and the smaller and more widely distributed transactions, there are also fewer sellers in rural areas, resulting in a shift in market power. Since the volume of services delivered is low while fixed costs remain relatively high, insurance companies incur losses when they attempt to negotiate lower prices. Regulation caps on commissions in the insurance sector also affect the ability of insurance providers to find distributors; however, increasing such commissions could also have a negative impact on affordability. Significant attention will have to be paid to developing a strategy to make advertising, designing, and distributing such products economical enough to be viable.
5. High lapsation of policies
Since most insurance contracts are time bound, failure to pay premiums could result in the policy lapsing. This not only results in a loss of the risk coverage, but also a significant portion of the customer’s savings. Due to the high probability of this occurrence in India, insurers and customers alike are hesitant to invest in the market.
Legal reform to support the insurance sector in rural India is fast evolving. These policy changes will not only benefit insurance providers by assisting them in expanding the market, but also consumers in understanding how to spread their risk better, and to invest in insurance strategically, based on their needs. Public and private sector insurance providers will have to come together to make the sector more inclusive and accessible, so that all stakeholders can benefit from its growth.
Source: Business World