In a country of over a billion, there is a significant section of the society which lacks the basic needs and are the most vulnerable section in case of a calamity. There are only as little as 27% of households having access to formal credit sources. Credit i.e. loan products are still too inflexible besides savings and insurance services that the poor need are not widely available due to regulatory barriers. In India social security is virtually non-existent.
Hence, there is an urgent need to create awareness about financial protection, amongst both the masses and the classes. Moreover for a country’s positive growth, providing Social Security cover to its citizens becomes a subject of nation-wide importance. It is required for various contingencies like savings need in case of illness or disability, retirement needs, etc.
Size of the market
Despite broad consensus on the importance of financial inclusion as a powerful social development instrument, it is estimated that over two billion people continue to be financially excluded from the formal financial sector. With over 135 million financially-excluded households, India is home to the world’s second largest financially-excluded population after China. Only 34% of the Indian population is currently engaged with the formal financial sector and the urban rural divide is very apparent.
In a growing economy, there is a large segment of the population that remains uninsured. Around 80% of the population remains excluded in the life insurance category and 90% out of non-life insurance category. Over 93% of the workforce belongs to the unorganised sector. The well designed social security system for the workers in the unorganised sector will help in improving productivity, contribute to the harmonious labour relations and thus to socio-economic development. It will encourage and propagate the social peace by reducing the frequency of industrial conflicts, increase the willingness to work, make it easier to meet delivery commitments and lead to improved quality product, a better investment climate and thereby enhancing the competitiveness of the economy.
Within the traditional structure and operation of the financial services industry, consumers have little choice in terms of selecting financial instruments and delivery channels. Thus specialised financial institutions such as MFIs/NGOs/PSU Banks, etc are playing a role in providing information and finance to help reduce the impact of individuals and households. So it is quite understood that they are the one who can really help the consumer while creating awareness about other financial instruments like insurance, savings, etc.
Apart from this financial literacy & awareness program through these institutions will definitely help understanding the consumer that the:
Risks that households are exposed to
Importance of instruments like Insurance to manage risk
Challenges in product design
A normal life insurance product cannot be offered to this segment. Basically the product should be simple to understand as majority of people are illiterate. It should suit their need such as erratic income whereby lapsation could be higher. The biggest challenge is to devise a mechanism to collect just Rs. 45 a month against yearly premium and ensure the cost effectiveness of operations. We also have to grapple with lack of documents to ascertain age, health, education etc. In case of offering a health insurance the challenge is lack of proper hospitals and this segment is more prone to common illnesses due to poor state of hygiene and sanitation.
Reaching the target segment
Accessing the market is an important area, where focus is necessary, because traditional distribution doesn’t generate sufficient volumes. So we have to create a new distribution channel itself. We need to develop relationships with the distribution partners like MFIs/lead banks mainly regional rural banks & few public sector banks, which have access to such segments in the market.
As the target segment being highly illiterate, we need to have simple and less documentation. The premium being low imposes that a whole new underwriting processes has to be created and service delivery processes have to be considerably improved. Pricing is also a challenge as there is no past data and therefore has to rely purely on experience. In addition to this premium collection mechanism has to suit the paying capability and customer habits.
Once the challenges in terms of product and operations are addressed, then we would be able to crack this unique customer segment. The distribution model also has to be addressed carefully as the partners should have the reach and understanding of the segment. They should also be willing to go that extra mile in servicing claims and other policy related transactions.
The author is the MD & CEO of Bajaj Allianz Life Insurance
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