The report of Reserve Bank of India’s Committee on “Comprehensive Financial Services for Small Businesses and Low Income Households”, commonly known as the “Mor Committee report” has generated unprecedented levels of exuberance, interest and debate. While most of the RBI committee reports are conservative and confirmatory in approach, this report talked about a paradigm shift in the sector. In addition, the report stands apart because of its focus on global learning, and an appreciative outlook towards India’s business entities and creating a vision for a financially included India.
Since insurance does not directly come under RBI’s regulatory purview, the report did not delve deep into the intended steps or activities for insurance. However, it suggested two important milestones that can impact the insurance and microinsurance sector in India.
- The report suggests that all districts of India should have 30% sum assured (for life insurance) to GDP (of the district) ratio by 2016, and that this ratio needs to reach 80% by 2020; and
- Banks and financial institutions need to insure their portfolio against natural disasters, or at least put rainfall insurance in place.
With a 3.17% insurance penetration (premium to GDP) level, overall the life insurance industry of India has probably already achieved more than 30% sum assured to GDP at a country level (minimum premium to sum assured is fixed at 10 times). However, Indian life insurers currently operate through a high operating cost model that requires them to focus on urban high income segments (See Securing the Silent- I for details of cost and performance of life microinsurance in India) . In the absence of low cost distribution solutions, they are unable to provide quality insurance solutions to the low income areas and segments (See IFN 88: Challenges of Microinsurance in India). Currently less than 5% of low income people in India are insured through micro life insurance products, a majority of which is contributed by term life products (individual and group) sold through microfinance institutions linked to their microcredit loan. If some alternative low cost distribution does not emerge, insurance companies are unlikely to take microinsurance seriously. If they are obligated to balance their portfolio geographically, the cooperative and regional rural banks would probably become their preferred conduit. These entities can help insurers achieve the first milestone (30% sum assured to GDP in all districts) through credit-life policies through the banks’ existing exposure to farmer and small value loans.
Achieving the next level of inclusion (80% sum assured to GDP), however, is going to be difficult for Indian insurers. The milestone demands overall growth of the industry (to achieve 5-7% insurance penetration) with a balanced geographical portfolio. To achieve this, insurers necessarily will need low cost third party distribution channels, so that growth can take place without compromising profitability. The proposed mobile and digital finance entities, with their massive outreach potential and low cost of operation are probably the only channels that can help insurers in the pursuit of this target (See Agent Banking and Insurance: Is There a Value Alignment?). So far insurers have shied away from using these entities due to considerations of quality and compliance. If the Mor Committee’s recommendations are implemented, Business Correspondents (BCs) and agent network managers may become more formal financial entities, giving confidence to insurance companies. In their new avatar, these entities can emerge to become the most attractive distribution partners for insurers to achieve the intended targets.
However the insurance regulator needs to consider that achievement of this milestone will not help the sector get resolve two persistent and pertinent issues.
- The milestone is biased in favour of life microinsurance and does not talk about other risk solutions, like health and property insurance. While state sponsored Rashtriya Swasthya Bima Yojana (RSBY) covers the poorest of the poor (Below Poverty Line) segments, it still leaves a massive missing middle of upper poverty line – lower middle class segment for whom health insurance remains and will remain a pending need.
- Since sum assured is a function of premium collected, the milestone only indicates a revenue surrogate, instead of an outreach indicator. Therefore the milestone, in absence of other measures to ensure outreach, will not be able to stop concentration of insurance business around high net worth individuals. Moreover, under the proposed targets, penetration of insurance will become a function of the area’s GDP and not the other way around. Given that the district level GDPs are skewed in India, poorer areas, where people live a life of enhanced vulnerability, might remain under-covered, even though the milestones are achieved.
The next milestone or recommendation proposes an extension of current practices followed in crop loan schemes in India. While the state sponsored NAIS (National Agriculture Insurance Scheme), mNAIS (Modified National Agriculture Insurance Scheme) and WBCIS (Weather Based Crop Insurance Scheme) programmes reached impressive scale due to their linkage with crop loan schemes, the Mor Committee goes a step further to recommend that all exposed loans be insured. In the absence of such cover, banks generally avoid lending to areas prone to natural disasters. Such a paradigm shift, therefore, will not only ensure soundness of the financial institutions, but could also improve the flow of financial services to low income communities in natural disaster-prone areas. However, such arrangements need to be supported by an increase in credit disbursements to the low income and vulnerable segments of the population. Otherwise these segments will continue to be unable to access proper insurance cover to mitigate disaster shocks.
Overall, the Mor Committee report proposes a new economic framework for banking and financial inclusion in India. Most of the recommendations make sense only if other recommendations are implemented too. If the regulator/s pick and choose the “easier” recommendations to implement, while leaving the revolutionary ideas aside, it will cease to impact the sector in any substantial way. In case of insurance inclusion too, the regulator needs to implement the economic logic of the recommendations, rather than translate the milestones blindly.