MR Microinsurance_2012_03_29.indd - International Labour ...

552 Infrastructure and environment for microinsurance
Box 25.1 Taking active steps to develop a microinsurance market in India
When India’s insurance regulatory body was established in 1999, it was named the
Insurance Regulatory and Development Authority (IRDA), refl ecting the strong
developmental role that the Government envisaged for the regulator to support the
orderly growth of the insurance market. Th is approach resulted in a large and
dynamic microinsurance industry through insurance legislation compelling compa-
nies to sell insurance to the “rural and social” sectors, which is roughly equivalent to
microinsurance.
As described in Chapter 20, the growth of microinsurance in India, and the
proliferation of innovation in distribution, product design and product range,
has been heavily infl uenced by the IRDA’s development role. Although some
insurers perceive the mandates as a cost of doing business, the regulation did
send important signals to induce the industry to discover the low-income seg-
ment.
However, approaches need need to be evaluated carefully to ensure that insurance
providers have a genuine business interest and that the Government’s policy
creates a sound and sustainable market. Critics of the rural and social sector
mandates often do not realize that many insurers have regularly exceeded their
targets. To assess whether such an approach would be eff ective in other countries,
it is important to consider whether the insurance products are viable and
whether they are providing value for money, by analysing the surrender and lapse
rates and utilization levels.
Source: Author.
To balance this potential trade-off , policymakers have an important role in
creating the right incentives and competitive environment for fi nancial institutions
to respond to the opportunities in fi nancial inclusion. If insurers and
intermediaries are to take advantage of this prospect, they must achieve economies
of scale. Th is requires markets to grow to an optimal size, which is not
possible without capital. Investors and lenders are comfortable providing more
funds only if such entities are well regulated. In other words, a sound regulatory
and policy framework for insurance also plays a key role in encouraging investment.
As summarized in the introduction to this volume, access to insurance has
positive eff ects on the economy in that it narrows development imbalances,
complements social safety nets, reduces high precautionary saving, stimulates
domestic demand, increases infrastructure spending and enhances public-sector
and corporate governance – all leading to higher overall economic effi ciency.
With the right reforms, the insurance sector can be an important vehicle for