Microinsurance: Prospects and Way Forward, an article by Dr. Rabindra Ghimire

The first microinsurance practice in Nepal was initiated by Livestock Insurance Programme was initiated in Nepal by Agriculture Development Bank (ADB) through Small Farmers Development Project (SFDP) established in 1975. Credit Guarantee Centre (CGC) was established in 1974 to implement the insurance schemes against the loan provided to farmers by the project, which is currently known as Deposit and Credit Guarantee Fund (DCGF). DCGF continues its protection schemes to the depositors and loanees of banks and financial institutions. The SFD program was terminated and the legacy was handed over to Small Farmers Development Bank (Sana Kisan Bikash Bank) which is converted into Sana Kisan Laghubitta Bittiya Sanstha Limited in 2018 and remains the same to date.

Small Farmers Agriculture Cooperatives (SFAC) had initiated a livestock protection program. A livestock insurance fund was created by farmers depositing 50% of the total premium and 50% of the premium is provided by the government as a grant through Small Kisan Bikash Bank and deposited into the fund. If an animal dies suddenly, 80-90% of the insured amount will be provided as compensation to the farmer. The fund also pays to technical staff viz. Rural livestock health workers and, livestock health offices, who certifies the death of the livestock. as well as compensation. Until July 2021, total animals valued at Rs. 15.02 billion were insured, and Rs. 881.7 million was collected as a premium and Rs. 699.7 million has been collected through the livestock protection fund by SFAC. DCGF, SKBB, and SFAC aimed to safeguard the poor against the agriculture risk who got the agriculture loan from bank and financial institutions. These products were not coined as microinsurance products until microinsurance directive was issued by the Insurance Board of Nepal.

Micro health insurance was initiated by United Mission to Nepal in Lalitpur in 1976.  After that many organizations launched such program including government run Primary Health Care Centre, NGOs, and private organizations, hospitals etc

.First time in Nepal Microinsurance Directives issued by NIA in 2071 (2014) clearly defined the concept if microinsurance. According to the Directive issued by NIA in 2071 and revised in 2075/04/24, following (as mentioned in Table 1) microinsurance products are available in Nepalese insurance market. These products were sold by commercial insurance companies.

Types of Micro insurance Products:
1. Home insurance 200,000  Premiums Rate:0.20%
2. Health Micro 50,000 Premiums Rate: 4.00%
3. Accidental insurance 300,000 Premiums Rate: 0.10%
4. Agriculture insurance 150,000 Premiums Rate: 5%
5. Crop insurance 50,000 Premiums Rate: 5%
6. Micro Enterprises insurance 700,000 Premiums Rate: 0.20%
7. Term Life 300,000 As per age
8. Endowment Life 300,000 As per age
9. Micro Enterprises Term Life insurance 700,000 As per age
Source: https://nia.gov.np/law/directive

The commission to agent is provisioned 15% for Sno.1 to 6 while it is not fixed by NIA for Sno. 7-9, so company can decide itself. Details of Whole life insurance is not mentioned in the table but the product is mentioned in Directives 4(Ga). The directive does not specify to whom the microinsurance policy is to be sold, minimum policy to be sold by each insurer during the fiscal year.

Similar to traditional insurance, Microinsurers are categorized as life and nonlife insurance. After establishing three Micro life Insurance companies (Guardian, Crest and Liberty) and four Micro non-life Insurance companies (Nepal, Protective, Star and Trust) in Nepal, these companies are allowed to sell only prescribe microinsurance products. Under the Life insurance products, Term Life and Endowment Life plans and under the Non-Life, Home Insurance, Auto insurance (comprehensive and third-party liability), Agriculture insurance (Farming, Livestock, Herbs) are sold.

Prospects, Challenges and Way Forward

Since one fourth of the population living below the poverty line, the scope of Microinsurance market is optimistic in Nepal. Commercial insurers have shown reluctant to do small ticket business considering the cost effectiveness. They have limited branches and staff and the delivery channel is not micro friendly. Micro-insurers can get the benefits from this situation and reap the untapped market.
Subsidy based agriculture insurance and compulsory third-party liability are the opportunities to the MIC. There is a large number of Microfinance institutions, saving and credit unions, and microenterprises which is the potential market for the MIC.
Increasing insurance awareness among the potential customers, mandatory of the insurance in trade and industry, subsidies from Government also fueling the demand of the insurance in the positive direction.
Microinsurance companies in Nepal have faced various challenges in the inception phase of their business, however, the market potentiality of insurance is great. The future of microinsurance is bright but it is equally tough and hard hitting to achieve the goal.

There are some challenges to microinsurance that to be considered while initiating the business. First, MICs have lack of working experience in the field of microinsurance since it is new phenomena in Nepalese context. The scale of premium is low so that they have to increase their number of clients multifold to meet the break-even level. Second, unless, companies adopt digital and mobile distribution channels, they
cannot reach to target customers on time, cannot cover the target customers in economical way. Massive use of information technology is another challenge of the microinsurance. Distribution through the traditional agents may threats if they depend solely on agents. MICs
should have reliable alternative distribution channel in long run. Third, building trust among the potential customers is must in insurance industry.
Large segments of the population have less awareness and have not proper idea about the insurance. In this context, selling the microinsurance products to the poor is really a challenge. There is no demarcation between the traditional and microinsurance market.
Overlapping of two different markets brings cut throat competitions and confusions. In this situation, it would be difficult to the microinsurers to prove their rational and necessity to the economy. Commercial viability and financial sustainability is another challenges to MIC since Nepalese economy is small but number of players are more. The operating cost of each MIC is higher due to adverse geographical landscape, scattered population, and lack of digitization of operation.

The Way Forward

Micro-insurance is gaining popularity as an important tool for protecting low-income people from unforeseen events. Microinsurance is a part of insurance industry and nowadays, more insurers are entering the microinsurance market. Considering the abundant opportunities
of insurance and inherent challenges, MICs need to formulate the more practical strategies and move forward to grab the opportunities. Regulatory provision should quite flexible, government should create amicable environment, and technology should be affordable to the
users of the microinsurance. Insurance companies need to reach in rural areas and focus on developing insurance products that are appropriate for them. Espousing such actions could lessen the challenges and greater opportunities will be explored in the future.

This article is the abstract of the original article published on the 56th anniversary issue of the Nepal Insurance Authority.

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