Let micro insurers help cover the whole country with insurance protection

In August 2020, the IRDAI published a report of the Committee on the Standalone Micro-insurance Company, which was constituted to study the feasibility of SAMIs in India. After a cross-jurisdictional analysis of the merits of letting SAMIs operate, the panel concluded that their establishment was essential to increase the spread and reach of micro-insurance in India.

A move towards the introduction of SAMIs was expected to enable over 500 million Indians below the poverty line to procure financial protection. However, half a decade on, no steps have been taken towards this end.

Specialized SAMIs can provide micro-insurance products for the benefit of people in rural areas and those reliant on India’s informal or unorganized sectors for livelihood.

These can be simple low-cost technology-driven products that are tailored to their needs. SAMIs are also expected to utilize a mandatory common digital technology platform for their end-to-end operations, even as they use community-based and non-government organizations (NGOs) for product distribution and a focus on penetration measured by the number of people protected rather than premium volume.

It is expected that the initial minimum capital requirement set for SAMIs to enter the Indian market will be less than the current regulatory level of ₹100 crore.

In November 2024, the department of financial services under the Union ministry of finance published an office memorandum on proposed amendments to the Insurance Act of 1938 which included a proposal to empower the IRDAI to specify a lower minimum capital requirement (not less than ₹50 crore) for insurers that address India’s under-served and unserved segments of the market.

This is a welcome idea. A regulatory insistence on the same capital requirement as traditional insurers for these specialized insurers may be too onerous for them.

For a standalone micro-insurance company to be viable in India, other cumbersome regulatory stipulations under the principal statute may need to be modified across virtually all major regulatory areas.

For example, solvency margins could potentially be set lower than 1.5 times, which broadly means ₹1.5 of capital held for every ₹1 of liability, until the insurance industry transitions to a risk-based capital framework.

Limits on management expenses could be eased too. Also, third-party obligations for motor insurance and special rural/social sector obligations (in case SAMIs serve these exclusively) could be relaxed.

In short, the regulatory framework would need to be recalibrated to suit the scale, simplicity and target market of micro insurance operations, but without compromising policyholder protection. If done, it could prove instrumental in deepening India’s level of insurance penetration.

A role model exists in the way small finance banks (SFBs) have contributed to the deepening of financial inclusion in India. Recall that SFBs were introduced by the Reserve Bank of India (RBI) in 2015 with the specific objective of promoting financial inclusion by offering banking services to underserved and unserved populations in the country.

Since then, SFBs have significantly enhanced financial inclusion under stringent regulatory mandates that require 75% priority sector lending (versus 40% for universal banks), 50% of loans kept under ₹25 lakh and 25% of all branches set up in unbanked rural centres; as of March 2023, over three-fourths of SFB branches were in rural and semi-urban areas.

The small finance banking sub-sector has demonstrated robust growth, with deposits increasing at a compounded annual growth rate of 48% to reach above ₹1.6 trillion in 2022-23 and assets under management growing at a compounded rate of 29% annually from 2017-18 to 2022-23. SFBs captured 17% of total microfinance loans while expanding their market share of deposits, thereby channelling formal financial services to small borrowers, farmers, micro enterprises and underserved populations.

As the government and the country’s insurance regulator work towards increasing insurance penetration in India, the time is ripe for differentiated insurers to join the national effort. SAMIs with ‘fit and proper’ promoters and credibility in serving unserved and marginalized market segments should be allowed to enter the Indian insurance market.

With regulatory support in the form of rule relaxations for SAMIs, this initiative could make a sizeable contribution to meeting the country’s broader policy objective of providing ‘Insurance for all’ by 2047.

The authors are, respectively, head, insurance, and principal associate, Cyril Amarchand Mangaldas.