Financial inclusion in India and micro-insurance, the new buzz word

'Greater financial inclusion' figures prominently on the economic development agenda set by the Indian government in recent times. The much-talked-about UID project which aims to provide unique identity numbers to all Indian citizens, and links the number up with a compulsory bank account is indeed a bold step towards realizing that goal. The recent buzz word, however, in discussions on financial inclusion seems to be micro-insurance. The Finance Minister, in his recent address at the Global Insurance Summit, stressed on the need for popularizing micro-insurance in semi-urban and rural areas of the country. The attention on micro-insurance seems to have come at a right time, when the success of several government sponsored welfare schemes for the rural poor in India like the National Rural Employment Guarantee Scheme (NREGS) depends quite a lot on the ability of the financial system to mitigate the risks arising out of unforeseeable natural calamities and other disasters. In this context, the increasing efforts of insurance companies in tapping semi-urban and rural markets are an encouraging sign. Insuring the vast rural population against losses from disasters is indeed a big challenge for the Indian insurance industry, when at the same time it is important to ensure that premiums remain affordable. IRDA, the Indian insurance regulator, has in a recent exposure draft on a standard insurance product suggested that the premiums will be decided by the regulator and insurers might not get any leeway in this regard. The regulator’s goal of promoting financial inclusion is laudable, but greater freedom to insurance companies to design products and price them might be more desirable. The regulator has also proposed that insurers will have to mandatorily offer the standard product. The draft also talks about placing restrictions on selling other products with higher premium and lower benefits. Overall, it could be surmised that the regulator is concerned about insurance agents pushing expensive endowment products to the poor, which is a very valid concern. It would be interesting to monitor developments in this area for the next few months, as IRDA is also considering a proposal to allow cross-selling of micro-insurance products which would essentially provide insurance companies access to the large network of public sector banks for selling their products. The banks would benefit too as it would enable them to enlarge their portfolio of products.