Round Table on Microinsurance Regulation

»Hyderabad, February 19th, 2005«

In August 2004, IRDA issued a discussion paper on a proposed regulation for micro-insurance. IRDA in cooperation with FICCI conducted a round table to discuss IRDA's "Concept Paper on Need for Developing Micro-Insurance in India" (document can be downloaded on the right) on February 19th 2005 in Taj Krishna, Hyderabad. All stakeholders were invited to send comments and to participate in the meeting. About 65 representatives of insurance companies, NGOs, microinsurance and microfinance institutions and agencies followed the invitation to join the meeting.

Programme

Dr. Dror addresses the regulator

Among others, Dr. David Dror, Lead Expert of the project "Strengthening Micro Health Insurance Units for the Poor in India" addressed IRDA, represented by Mr Banerjee. Dr. Dror welcomed the fact that IRDA tackles the problem of regulating microinsurance units. "IRDA puts itself internationally on the forefront" Dror said. The Indian regulation will be the benchmark for many other countries to follow. But Dr. Dror expressed his deep concerns about the proposed regulation as well. He highlighted that especially three issues need to be reconsidered:
1. The proposed regulation only focusses on the partner-agent model. This will undermine the efforts by many microinsurance untis in place today. Other models of microinsurance provision have to be included.
2. The capital requirements are much too high. A microinsurer who wants to become a legal insurance for its clientele has according to this regualtion to provide equity shares of Rs. 100 crore (~ 19 Mio. Euro). Capital requirements have to be risk adjusted!
3. Unformity in data is required rather than uniformity in benefit packages. The regulator needs to provide regualtion for minimum data requirements in order to ensure stable operations of microinsurance units which can be backed up by a Reinsurance facility.

Dr. Dror concludes and recommends for further action:

1. "Regulation of micro insurance is a new endeavor. It needs to reconcile the specific needs of embryonic “insurers” with the tried-and-tested experience of regulating insurance activity. The overriding objective is of course protecting the clients against a risk that the insurance transaction, which may occur in the future, could be compromised by the inability of the insurer to meet its obligations.
2. This position paper has demonstrated that micro insurers operate under several models of incorporation. The record of all four forms of incorporation shows that all have made significant contribution to the development of insurance among the poor in India; in the case of health insurance, the mutual and provider-driven types of organization have made a larger contribution than the partner-agent type. The operative conclusion is that there are good reasons to enable all four forms to continue to develop. The reasoning provided in the CP does not justify the proposition to stifle three forms of incorporation in favor of one form of incorporation (the partner-agent model), all the more so as this model willy-nilly links all poor people to for-profit insurance companies. This is neither a universal choice of groups nor necessarily constructive, as some might claim that a rigid regulation impinges their basic freedom of choice, granted under the Constitution of India. Therefore, a separate regulation for different forms of incorporation may be more opportune.
3. Likewise, different regulations may be useful for different types of insurance; this is particularly pertinent in the case of micro health insurance.
4. A related issue may arise, that of the delineation of responsibility between various authorities dealing with registration of cooperatives, trade unions, charities, NGOs, hospitals etc. This issue has not been addressed in this position paper, as it has not been raised in the CP; the issue may require more thought. The experience of other countries on the question of delineation of activity (notably between healthcare providers and health insurers) may be useful in this regard.
5. The regulation must ensure that any person willing to buy insurance should be able to do so, on the same terms that others can. It would be both undesirable and short-sighted to introduce different insurance systems for different segments of the population, be it by age (as proposed by the CP) or by income, gender or other segmentation. There is no justification to limit this right to certain age groups, as such limit may later open the door to other unjustified limitations on access to insurance, e.g. according to region, or risk category etc. We submit that the regulator should resist any form of limitation that could give rise to de-facto “cream skimming” activity of insurers. Likewise, any group of persons wishing to buy insurance should be allowed to do so; defining in the regulation an unnecessarily large minimal size of what can constitute a “group” is counterproductive, as it does nothing to protect clients, and does not offer significant safeguards in terms of the actuarial considerations.
6. One of the critical issues that must be included in the regulation, and is absent from the CP, is the question of capital requirements. Considering that micro insurers represent relatively small groups, small premium volumes and small claim-load, the most appropriate method to determine capital requirements should be risk-based, without a minimum. Such capital requirements should be sufficient to protect the clients of micro insurers. As a matter of policy, barriers to entry should be kept as low as useful. The CP does not deal with concessionary regulations for micro insurers on this essential point. Hence, one needs to refer to the regulation of commercial insurers in the formal insurance market, and the minimum capital requirements in that market are set with a different client base in mind. These levels would exclude all parties that are active at present from this market. A decision to de-facto exclude all existing micro insurers from obtaining insurance license due to the excessive capital requirement must be removed because its implementation would be patently counterproductive to the extension of insurance to the poor. We submit that the regulator should also consider its position as stated in the CP document in order to retain its reputation as neutral agent. The excessive capital requirement barrier might raise queries about a possible “hidden agenda” to thwart competition from many small non-profit organizations. The regulator can surely devise better and fairer solutions that simultaneously ensure clients’ interests, a regime of solvency for micro insurers, and its own impeccable reputation as allowing the embryonic insurers to mature into fully fledged insurance carriers.
7. Another major missing piece in the CP document is reference to a technical standard that all micro insurers should meet for reporting and accounting. This issue lies at the heart of professionalizing the micro insurers. Ideally, whereas micro insurers should have the flexibility to devise many products and determine a wide range of premiums, they should abide by a uniform technical standard of insurance information system. This issue is very much in line with the guidance that regulators can give on technical standards, and is an indispensable platform for pooling of risks and resources can occur across many micro insurers, notably through reinsurance.
8. In this vein, the IRDA may wish to consider the role of (social) reinsurance in providing micro insurers both the technical and financial support. The most important and urgent services that micro insurers need is capitalizations, surplus relief, compliance assistance and underwriting assistance. Mentioning that micro insurers are allowed to meet the regulatory requirements by themselves or with the assistance of reinsurance could help in developing the sector as never before.
9. Training should be designed around domain-knowledge of micro-insurance, rather than on the classical business process that commercial agents perform.
10. Finally, there is no need to regulate the details of insurance products or premiums payable. These may change very frequently, and if micro insurers were required to obtain prior approval for each change in product or premium, they might have to engage in unending negotiations, which are costly, cumbersome and time consuming. The formula of success of micro insurers has hinged on their presence locally (proximity), their ability to offer cheap products (affordability) and their ability to explain the process in very simple terms (simplicity) and thus gain clients’ trust. The regulations of micro insurance should recognize these qualities, and adapt the requirements so that these features are safeguarded. On the premium and product design, suffice it that they meet the capital requirement obligation or secure reinsurance.
11. We conclude that the comments made on the draft CP by many stakeholders justify a revision of the draft text published last August. We would be particularly interested to offer input on regulations dealing specifically and separately with operation of micro health insurance units." (cited from the Position Paper on the IRDA’s “Concept Paper on Need for Developing Micro Insurance in India” elaborated by Dr. Dror on behalf of the project).