Insurance Industry – Role in Financial Inclusion

Financial Inclusion:-

Financial inclusion is the delivery of financial services at affordable costs to sections of          disadvantaged and low income segments of society. It is argued that as banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of public policy. The term "financial inclusion" has gained importance since the early 2000s, and is a result of findings about financial exclusion and its direct correlation to poverty. Financial inclusion is now a common objective for many central banks among the developing nations. Financial exclusion is the unavailability of banking services to people living in poverty. It is believed to be one factor preventing poor people from exiting poverty, by forcing them to manage their finances on a cash-only basis and restricting their access to equitable sources of credit. Financial exclusion can make poor people vulnerable to loan sharks. Microfinance and Islamic banking are approaches used to reduce financial exclusion. Financial Inclusion in united nation on 29 December 2003, Former UN Secretary-General Kofi Annan said:”The stark reality is that most poor people in the world still lack access to sustainable financial services, whether it is savings, credit or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives.”

According to the United Nations the main goals of Inclusive Finance are as follows:

1. Access at a reasonable cost of all households and enterprises to the range of financial services for which they are “bankable,” including savings, short and long-term credit, leasing and factoring, mortgages, insurance, pensions, payments, local money transfers and international remittances
2. Sound institutions, guided by appropriate internal management systems, industry performance standards, and performance monitoring by the market, as well as by sound prudential regulation where required
3. Financial and institutional sustainability as a means of providing access to financial services over time
4. Multiple providers of financial services, wherever feasible, so as to bring cost-effective and a wide variety of alternatives to customers (which could include any number of combinations of sound private, non-profit and public providers).

Financial inclusion in India:-

The Reserve Bank of India has set up a commission (Khan Commission) in 2004 to look into financial inclusion and the recommendations of the commission were incorporated into the mid-term review of the policy (2005–06). In the report RBI exhorted the banks with a view of achieving greater financial inclusion to make available a basic "no-frills" banking account. In India, Financial Inclusion first featured in 2005, when it was introduced, that, too, from a pilot project in UT of Pondicherry, by K C Chakraborthy, the chairman of Indian Bank. Mangalam Village became the first village in India where all households were provided banking facilities. In addition to this KYC (Know your Customer) norms were relaxed for people intending to open accounts with annual deposits of less than Rs. 50,000. General Credit Cards (GCC) were issued to the poor and the disadvantaged with a view to help them access easy credit. In January 2006, the Reserve Bank permitted commercial banks to make use of the services of non-governmental organizations (NGOs/SHGs), micro-finance institutions and other civil society organizations as intermediaries for providing financial and banking services. These intermediaries could be used as business facilitators (BF) or business correspondents (BC) by commercial banks. The bank asked the commercial banks in different regions to start a 100% financial inclusion campaign on a pilot basis. As a result of the campaign states or U.T.s like Puducherry, Himachal Pradesh and Kerala have announced 100% financial inclusion in all their districts. Reserve Bank of India’s vision for 2020 is to open nearly 600 million new customers' accounts and service them through a variety of channels by leveraging on IT. However, illiteracy and the low income savings and lack of bank branches in rural areas continue to be a road block to financial inclusion in many states. Apart from this there are certain in Current model which is followed. There is inadequate legal and financial structure. India, being a mostly agrarian economy, hardly has schemes which lend for agriculture. Along with microfinance we need to focus on Microinsurance too.

• In its platinum jubilee year, the Reserve Bank of India (RBI) wants to connect every Indian to the country s banking system.
• RBI is currently working on a three-year financial inclusion plan and is discussing this with each bank to see how to take this forward, KC Chakrabarty, deputy governor, RBI said.
• "Nearly forty years after nationalization of banks, 60% of the country's population does not have bank accounts and nearly 90% do not get loans," he pointed out.
• Despite heightened focus on financial inclusion, Indian banks still somewhat failed to bring the under- and un-banked into the mainstream banking fold.
• India has currently the second-highest number of financially excluded households in the world. Approximately, 40% of India s population has bank accounts and only about 10% have any kind of life insurance cover, while a meager 0.6% has non-life insurance cover.

• According to United Nations, "A financial sector that provides 'access to credit for all "bankable” people and firms and to savings and payments services for everyone. Inclusive finance does not require that everyone who is eligible use each of the services, but they should be able to choose use them if desired.
• Report of the committee on financial inclusion in India (Chairperson: C. Rangarajan) (2008) "The process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost."
• As per “treasury committee, house of commons, uk, (2005) “Ability of individuals to access appropriate financial products and services.”  

Major Three Aspects of Financial Inclusion' Make people to

• Access financial markets
• Access credit markets
• Learn financial matters (financial education )

FINANCIAL INCLUSION INCLUDES ACCESSING OF FINANCIAL PRODUCTS AND SERVICES:-

• Savings facility
• Credit and debit cards access
• Electronic fund transfer
• All kinds of commercial loans
• Overdraft facility
• Cheque facility
• Payment and remittance services
• Low cost financial services
• Insurance (Medical insurance)
• Financial advice
• Pension for old age and investment schemes
• Access to financial markets
• Micro credit during emergency
• Entrepreneurial credit

Financially Excluded People The financially excluded sections largely comprise:

• Marginal farmers
• Landless labourers
• Oral lessees
• Self employed and unorganized sector enterprises
• Urban slum dwellers
• Migrants
• Ethnic minorities and socially excluded groups
• Senior citizens
• Women
• The North East, Eastern and Central regions contain most of the financially excluded population.

Factors affecting access to financial services

• Legal identity : Lack of legal identity like voter id , driving license , birth certificates ,employment identity card etc
• Limited literacy: Particularly financial literacy and lack of basic education prevent people to have access from financial services.
• Level of income: Level of income decides to have financial access. Low income people generally have the attitude of thinking that banks are only for rich.
• Terms and conditions: While getting loans or at the time of opening accounts banks places many conditions, so the uneducated and poor people find it very difficult to access financial services.
• Complicated procedures: Due to lack of financial literacy and basic education, it is very difficult for those people who lack both to read terms and conditions and account filling forms.
• Psychological and cultural barriers: Many people voluntarily excluded themselves due to psychological barriers and they think that they are excluded from accessing financial services.
• Place of living: As the name suggests that commercial banks operate only in commercially profitable areas and they set up branches and main offices only in that areas .People who lived in under developed areas finds it very difficult to go to areas in which banks are generally reside.
• Lack of awareness: Finally, people who lack basic education do not know the importance of the financial products like Insurance, Finance, Bank Accounts, cheque facility, etc.

Consequences of Financial Exclusion Major Two Threats:

• Losing opportunities to grow: In the absence of finance, people who are not connected with formal financial system lack opportunities to grow.
• Country's growth will retard: Due to vast unutilized resources that is in the form of money in the hands of people who lack financial inclusive services.

• Business loss to banks: Banks will loss business if this condition persists for ever due to lack of opening of bank accounts.
• Exclusion from mainstream society: The people, who lack financial services, presumed that they are excluded from mainstream society.
• All transactions cannot be made in cash: Some transactions can be made in cash. In this technological world everybody wants to have electronic cash system like debit and credit cards and also EFT.
• Loss of opportunities to thrift and borrow: Financially excluded people, may lose chances to save their some part of livelihood earnings and also to borrow loans.

• Employment barriers: Nowadays all salary and other financial benefits from various sources like Governments scholarships, any compensation, grants, reliefs, etc are paid through bank accounts.
• Loss due to theft: Banks provide various schemes of safety locker facility. It mitigates the risk due to thefts.
• Other allied financial services: People who do not have bank accounts may not go to bank as for as possible. So they lack basic financial auxiliary services like DD, Insurance cover and other emergency need loans Etc.

Benefits of Inclusive Financial Growth

• Growth with equity: In the path of super power we the Indians will need to achieve the growth of our country with equality. It is provided by inclusive finance.
• Get rid of poverty: To remove poverty from the Indian context all everybody will be given access to formal financial services. Because if they borrow loans for business or education or any other purpose they get the loan will pave way for their development.
• Financial Transactions Made Easy: Inclusive finance will provide banking related financial transactions in an easy and speedy way.
• Safe savings along with financial services : People will have safe savings along with other allied services like insurance cover , entrepreneurial loans , payment and settlement facility etc,
• Inflating National Income: Boosting up business opportunities will definitely increase GDP and which will be reflected in our national income growth.
• Becoming Global Player: Financial access will attract global market players to our country that will result in increasing employment and business opportunities.

Relationship between Financial Inclusion and Development Indicators

• Economic growth follows financial inclusion. In order to achieve the objective of growth with equity, it is imperative that infrastructure is developed with financial inclusion.
• Savings and credit accounts - indicators of financial inclusion.
• per capita income - indicator of economic development
• Electricity consumption and road length -indicators of infrastructure development.

• All the above influence economic development which follows adequate financial and credit facilities

Expectations of poor people from financial system taking into account their

• Seasonal Inflow Of Income from agricultural operations,
• Migration from one place to another,
• Seasonal And Irregular Work Availability and Income; the existing financial system needs to be designed to suit their requirements.
• Security and safety of deposits
• Low transaction cost
• Convenient operating time
• Minimum paper work
• Frequent deposits
• Quick and easy access
• Product suitable to income and consumption

MICRO INSURANCE:-

Access to insurance is an important strategy for reducing poverty. Inability to manage vulnerability caused by sudden death of a family member, illness, or loss of income or property perpetuates poverty. Financial markets – and insurance services in particular – can play an important role in mitigating welfare losses resulting from such risks.  These services however are generally out of reach for millions of the poor and disadvantaged groups. Despite the growing importance and rapid expansion of “microinsurance” (i.e., insurance services geared to low-income people), many microinsurance schemes are quite small in coverage, leaving the vast majority of poor people without adequate protection.  This focus note presents an overview of the findings from the Colombian component of a five-country case study on the role of regulation in the development of microinsurance markets. With case studies examining the specific policy landscapes in Colombia, India, the Philippines, South Africa and Uganda, the project aims to cultivate a broad understanding of the ways different regulatory policies and practices can encourage or impede the growth in availability of microinsurance.  The ultimate intention is that an enhanced understanding of the legal, regulatory and supervisory frameworks will lead to the creation of some key guiding principles upon which new, more effective institutional regimes can be built.  Better regulatory frameworks, in turn, should stimulate the growth of the microinsurance sector in developing countries. The project is majority funded by Canada’s International Development Research Centre (IDRC) and the Bill and Melinda Gates Foundation.

SALIENT FEATURES OF THE COLOMBIAN MICROINSURANCE MARKET:-

Cooperatives dominate the formal microinsurance market. The insurance market in Colombia is comprised of 43 insurance entities, of which 41 are corporates and two are cooperatives. Total microinsurance penetration by the formal sector is estimated at 2.74m individuals (9% of the adult population). Though 17 insurers provide some form of microinsurance products, the two insurance cooperatives, La Equidad and Solidaria, are the microinsurance pioneers and remain the largest players in the microinsurance market. Together they are estimated to account for 62% of the total formal microinsurance market (1.7m policy holders). At 3.7m, total cooperative membership in Colombia extends well beyond the current insurance base of the two cooperative insurers. It therefore represents a significant expansion opportunity for microinsurance. Voluntary microinsurance plays a large role in Colombia compared to international experience. Compulsory credit life insurance is estimated to currently account for only 27% of all microinsurance clients, though it is growing strongly on the back of strong credit expansion. Informal insurance (most notably funeral insurance provided by so-called funeral entities) also plays an important role. Industry sources estimate the informal market to reach up to 3m clients, making it slightly bigger than the formal market. The salient features of the Colombian microinsurance market can be represented as follows:

Figure 1. Estimated composition of the Colombian microinsurance market.

Note: “MI” denotes “microinsurance”

A number of product innovations targeting the needs of the low-income market, as well as increasing prominence of cell phone insurance. The most popular life microinsurance products are funeral insurance, followed by credit life insurance. Innovative new products are also increasingly marketed on the non-life side, including motorbike insurance, insurance tailored to cover the stock of small businesses, repatriation insurance for migrant workers, products providing benefit pay-outs in the form of grocery vouchers or education fee coverage, and cell phone insurance. The industry association Fasecolda’s research estimates 60% of the microinsurance market to be comprised of the category property insurance, which is in turn largely made up by cell phone insurance. 30m (about 64%) of the Colombian population, 72% of which are classified as lower income, now own a cell phone. Traditional broker and agent distribution channels do not feature prominently in the microinsurance market. Instead, a variety of innovative distribution channels have emerged. Microinsurance is distributed largely through cooperatives, as well as through micro credit NGOs requiring compulsory credit life insurance. Direct sales, bancassurance and distribution through utilities (with the insurance premium added as a separate item to a person’s monthly utility statement) are also emerging as important intermediation channels:

Distribution channel	Share in total microinsurance distribution
Cooperatives	22%
NGOs specialised in micro credit	18%
Direct sales	18%
Bancassurance	11%
Utilities	9%

Table 1. Microinsurance distribution channels in Colombia.

Source: Caceres & Zuluaga (2008), unpublished Colombia country report

Additional channels such as hospitals, educational establishments, large retail outlets/networks and funeral homes could also potentially be used as distribution channels. The potential of cell phones to support distribution in the low-income market is of yet untapped.

          Key insights and lessons from Colombia:-

Impact of liberalisation and crisis. Colombia’s experience of financial liberalisation and subsequent crisis contributed to shape the microinsurance market: liberalisation brought more competition for domestic clients and prompted a move downmarket by domestic insurers (partly in light of the fact that many wealthy individuals started to procure insurance abroad). In Voluntary sales still dominate microinsurance, but compulsion on the rise. Voluntary purchases rather than compulsion have thus far driven microinsurance in Colombia. Recently, credit life insurance has however grown rapidly on the back of microfinance expansion. Funeral insurance is the most popular insurance product, followed by credit life insurance. Non-life insurance, especially cell phone insurance, is proving increasingly popular among the low-income population. This bodes well for the expansion of access to insurance to low-income groups. Increasingly, products of relevance to this market segment are being found in the market, and distributed through increasingly innovative means. In Central role of cooperatives. The cooperative sector has been central to the development of microinsurance in Colombia and accounts for more than 60% of all policy holders. The sector’s role has been facilitated by the fact that the regulation of the cooperative sector was strengthened by the financial sector reform necessitated by the crisis. In Financial inclusion policy driving current trends. The Opportunity Banking Policy represents a significant push for financial inclusion by government, initially focusing more on access to credit, but in the process also stimulating the credit life insurance market. In Development without dedicated regulatory framework. The Colombian experience illustrates that microinsurance can develop where the regulator has a fairly open stance, even without a dedicated microinsurance regime. However, this can only happen if the overall regulatory burden imposed by regulation, particularly on the market conduct side, is relatively low. But lack of intermediate step may undermine further development. Yet microinsurance is still largely driven by two large cooperative players who entered when regulatory requirements were lower. The current system may not provide the same process for new cooperative insurers, therefore prudential requirements mean that it remains difficult to provide microinsurance “from the bottom up”, as no intermediate step or tier with reduced regulatory cost is available to new underwriters who want to enter the market providing microinsurance only. Future of microinsurance in Colombia? The Colombian case illustrates two main trends: (i) a traditionally open approach by the regulator to new and low-income targeted market approaches, which illustrates how microinsurance can develop even in the absence of dedicated, tiered regulation; and (ii) a recent government move towards financial inclusion involving a drive for greater financial inclusion mainly through microfinance. The combination of an open regulatory stance and the recent financial inclusion policy therefore largely shapes the Colombian microinsurance market. However, some market aspects point towards limited access for new cooperative and other insurers imposed by the uniform regulatory regime, suggesting that it is inclusion policy more than anything else which drives the recent growth in microinsurance uptake (via compulsory credit life coverage on the back of microloans). Overall, microinsurance penetration however remains low. This begs the question whether a regulatory framework that makes no particular provision for microinsurance, even if fairly accommodating, can continue to unlock large-scale uptake of insurance among the low-income population.

Conclusion:-

Many challenges in micro insurance like best distribution channel, claim process, authentic document for claim process, and mechanism of MFI (micro finance institution) because it used micro insurance for large number of poor people. It insured poor people (clients) in form of group. In group, problems are data management, submit authentic document for claim, premium and sum insured of client and violation of insurance regulation by MFI. Micro insurance is very helpful for achievement of financial inclusion. Life insurance industry of India can learn many things from Colombian micro insurance market. Life insurance companies must take in account of all above issues. So, life insurance industry can take major step for achievement of financial inclusion.