Guest contribution by Kim ‘t Hart.
Princess Maxima, advisor “inclusive finance” at the United Nations, opened in the beginning of April the first Dutch microinsurance conference at the University of Twente where she stressed the importance of research in the microinsurance field in order to gain more insight in the complex and fragmented market. In collaboration with the BoP Innovation Center and MART Consultancy, I have done research to the supply of and demand for cattle microinsurance at the Base of the Pyramid in rural India.
Demand for Cattle Microinsurance at the BoP in Rural India
Today, India is one of the most exciting emerging markets in the world. The country has a population of over one billion people and it belongs to the largest economies in the world. India is an agriculture-based economy with a substantial cattle market; the country leads the world in cattle population and milk production. Nearly 90% of the cattle market in India is owned by small and marginal farmers in the rural areas. However, these households face high risks due to poor veterinary services, various prevailing diseases and fluctuating supply of feed. I have found that the potential loss of cattle is one of the biggest concerns for cattle-holders at the base of the pyramid (BoP) as it leads to a substantial fall in their income.
Currently, there exist few risk mitigation mechanisms for the cattle-holders at BoP in the rural areas. According to ICICI Lombard, the cattle industry offers `substantial market potential for microinsurance.´ However, the market is still untapped and underdeveloped; less than 7% of the total cattle population is insured in India. One of the key issues pertinent to the weak market is the mismatch between the supply of and the demand for cattle microinsurance at the BoP. Therefore this research study focuses on discovering how the existing cattle microinsurance products differ from the demand at the BoP in rural India in terms of product design and product distribution.
I have discovered that the biggest challenge within the cattle microinsurance market lies in reaching the potential beneficiaries effectively. The awareness of microinsurance amongst the cattle-holders is very low, there is a lack of trust in insurance companies and application and claim settlement processes are inefficient. Therefore more emphasis should be put on innovative distribution methods. Second, product features of cattle microinsurance need to be improved and adapted to the conditions of the farmers. In general, the cattle microinsurance market is plagued by predetermined misperceptions and an inadequate effort of insurance companies to understand the market better. Cattle-holders demand a broader risk coverage, innovative bundling possibilities and better risk-mitigation techniques. It has become evident that there are too many gaps in the product design and product distribution of cattle microinsurance for it to become a successful product in its current state. It is crucial that these gaps are closed in order to increase the uptake amongst cattle-holders at the BoP in rural India and realize growth in the business.
Innovative Distribution Model
I have developed a distribution model which is a hybrid between a partner-agent model and a community-based model; insurance companies distribute cattle microinsurance through group-heads within well-established and operationally sustainable organizations such as SHG Federations and Dairy Co-operatives. The insurers are responsible for educating the group-heads, developing the microinsurance policy together with the group-head and carrying the financial risk. Group heads of communities are in charge of educating the farmers, leading the application and claim settlement procedures and scheduling appointments with paravets for risk-mitigation measures. Paravets act as a link between the group head and the beneficiaries, supplying all the necessary health, valuation and ear-tagging services. Within this distribution model I would recommend insurance companies to implement the RFID-technology and compulsory risk-management packages in order to decrease the fraudulent and moral hazard behavior of beneficiaries. After a sustainable and transparent distribution model has been established, insurance companies should customize the cattle microinsurance policy to the needs of the cattle-holders in terms of premium payments, risk coverage and bundling possibilities.
Significance of Cattle Microinsurance at the BoP in Rural India
There are significant investment opportunities at the BoP in rural India – both in providing the cattle insurance cover itself and because having cover against the unexpected is a vital component in economic growth. I have found that with the appropriate innovations in distribution channels and product features, cattle microinsurance at the BoP in rural India could become a profitable business model for insurance companies. It is an interesting market to invest in as today’s low-income policy holder is tomorrow’s middle class, a promising market for insurance companies. Further, the growth of the cattle microinsurance market could lead to a decline in the vulnerability to poverty for BoP households in rural India. Therefore penetrating the Indian cattle microinsurance market is not only valuable for insurance companies, cattle-holders at the BoP but also for the country as a whole.
Eline Kim ‘t Hart, 2012
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