Hinterland can prove to be a goldmine for insurers

Micro insurance as a concept and business model is at a very nascent stage in India. But as insurers increasingly reach out to customers with customised products and solutions, it is fairly certain that this opportunity will grow in leaps and bounds.

There are some challenges and opportunities for the insurance industry in rural markets. Innovative products, when they are customised for specific groups of people, can help the category as well as individual brands to penetrate these markets better.
Let me focus on the challenges first. They can be classified as under:

Fundamentals
A large percentage of India’s population is illiterate. Nearly 50% of them do not even hold a bank account. This makes the task of selling them a financial product even more difficult. Even the concept of saving money periodically is not very common here. To add to this, the very concept of insurance is not well understood in these markets. A lot of groundwork needs to be done to make people realise the importance of being insured.
A large percentage of rural consumers earn just enough to meet their basic needs of food, water and shelter. Hence, buying insurance is the last thing on their mind. The mindset is, “We can’t afford to buy any kind of insurance.”

Our country’s diversity makes it challenging for insurers to create customised products, processes and price points to suit different communities, languages, cultures, traditions and the like. A product offered in one state is not necessarily suitable or acceptable in another state.

Infrastructure
It is time-consuming to reach out to a customer in remote areas because of the large distance to be covered. The long distance between villages in many states and the difficult terrain add to the difficulty of reaching out to them. Physical infrastructure in rural areas (in the form of road, rail, air and telecom connectivity, power and healthcare), though developing, is far from adequate. All this makes the task of reaching out to these markets cost ineffective for most insurers, leading to a high - and, therefore, unviable - transactional cost per policy sold. This also deters insurance intermediaries and insurers from targeting rural markets.
Manpower
There is a serious shortage of educated people who can be employed as agents for distributing insurance and other financial products. Hence, the organised distribution network of intermediaries is inadequate.

Trust gap
Rural customers tend to be suspicious of urban marketers and see them as smart, shrewd businessmen out to steal their hard-earned money. This serious trust gap marketers need to fill with investments of time and painstaking efforts, before one can even start a (sales) conversation.

Insurance solutions are offered without understanding rural customers’ mindset. Such products are usually photocopies of what is sold to urban consumers. Understandably, these offerings do not elicit much acceptance in rural markets and reinforce the belief that the micro insurance model is unviable.
Profitability

High transactional costs and pressure to keep the pricing low make protection of both financial and underwriting losses and the bottomline in rural markets a massive challenge for insurers. Also, there are higher-than-average chances of ‘adverse selection’* in many rural markets due to the deficiency (or even absence) of basic facilities. (*It is a market condition where sellers have information about product features that buyers don’t (or vice-versa). Insurers fight adverse selection by lowering exposure to large claims by limiting coverage or raising premiums.)

People, therefore, are likely to buy insurance, knowing that there are high chances of them making a claim. The challenge is to check and avoid adverse selection wherever possible - and failure to do this could throw all calculations off-track.

Various models of risk management have been tried in various parts of India. The industry, however, still lacks a proficient risk management practice for the poor, which could have benefited all stakeholders in the long term, helping the industry to scale up.
Investors in rural markets struggle to get good returns on their investments because the products are of low-ticket size. And high transactional costs reduce the profit margin for insurers, often making it negative.

So much for the challenges. Now, let me focus on the intrinsic opportunities:

Large, untapped population
Add to it low penetration. This offers a huge opportunity for insurers to expand their business geographically and bulk up volumes. A large population and their assets are uninsured and have never been approached to buy insurance. They can be brought within the ambit of insurance, by helping them to take up risks in their (agricultural) businesses.

Growing economy
Average rural spending is increasing at a faster pace than that in the urban market. This helps increase the affordability of insurance for a large section which is open to cover their lives and assets. Like urban consumers, they also have aspirations to acquire assets.

Distribution
Since insurance is a distributor-led business, these markets present untapped opportunities for distribution tie-ups. There are entrepreneurs and organisations like microfinance institutions, NGOs, credit societies, common service centres, rural banks, cooperative banks, banking correspondents and the like in rural and semi-rural markets, which have an extensive reach and large base of members, customers and loan account holders. These institutions are also keen to increase their product portfolio, as this adds value to their customers.

Technology
Technology is a game-changer: it turns micro insurance into a profitable business. Reaching the rural market could be cost-effective, if policies are sold in large volumes to counter the low-ticket size issue. It has always been a challenge to reach remote locations, but the rapid advance of IT and mobile technologies is helping insurers optimise their sales and distribution efforts.

So, if one is committed to the cause and realises the need to understand the mindset of these consumers and uses this knowledge to create customised and innovative products and distribution channels, these markets can contribute substantially to the overall business.

Rural markets - and, more specifically, micro insurance as a model - are not just viable and critical to India’s social and economic growth; they are rapidly becoming an engine for growth and profitability for insurers. The key is to invest in the right kind of people, product mix and market understanding.

The writer is head of rural business at Future Generali India Insurance Company. He may be contacted at verma.ajay@futuregenerali.in