The Rise of Context-Based Insurance – Microinsurance

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Reading Time: 4 minutes

Key Takeaways

  • Microinsurance is a type of insurance that offers customized policies for specific needs at affordable prices.

  • It is designed to make insurance more accessible to everyone and cover specific risks.

  • Similar to conventional insurance, it is available for numerous specific risks: health, term life, death, injury, livestock, disability etc.

Ever wanted to insure a very specific asset you own? One where you don’t have to pay large sums of premium for the larger risks? Like insuring yourself for a specific family health concern or insuring your laptop for a trip. Microinsurance is exactly what you are looking for. Today, on #AssureBuzz we will look at what #microinsurance is.



In our monthly series called #AssureBuzz, we take buzz-worthy insurance terms and simplify them for you and us. Insurance is for everyone and should be easy to understand. Our last AssureBuzz article was – Click here to check it out.

Let’s get started with the most important and basic question –



What is microinsurance?


Microinsurance is a type of insurance that is designed to offer insurance coverage for specific risks. The aim is to make insurance products more affordable and cover risks that would traditionally not be covered. It breaks away from traditional insurance to form something smaller – coverage for a one-day trip, one-time injury, one-time event, or other specific health needs.



The idea is to pay insurance for only what you need. It can also help people from lower-income households and give insurance access to residents of developing nations.



How does microinsurance work?


Microinsurance is a small ticket-sized contextual insurance. It insures specific scenarios or items to reduce the risk for specific situations. It has found much success among third-world countries as a means to afford insurance coverage, especially for health-related needs. It is quite a popular insurance option in countries such as India, China, South Africa and Brazil.



Like traditional insurance, microinsurance is available for several risks such as health, property, protection, savings etc. Some risks include crop insurance, cattle/livestock insurance, term life insurance, death insurance, disability insurance, health insurance to name a few. In the US, pay-as-you-go auto insurance is a popular microinsurance product wherein you only pay insurance for the miles one drives.



All of these are designed as independent insurance products, allowing families to pick what they want based on their budget.


In India, microinsurance business can be done through non-governmental organizations, self-help groups or micro-finance institutions.


Benefits of microinsurance 


In all, one of the biggest benefits of microinsurance is that it opens up the possibility of contextual insurance products. In a broad sense, it means that soon your insurance will have the ability to adjust your insurance’s price according to your circumstances. Making insurance more customized to fit you better while also being more affordable.



It also opens up the ability to be there where the customer is to insure specific risks that the customer might face. Helping customers be safer when they know they are in a risky situation. For example, if your family genetics are prone to heart diseases you can insure your heart with microinsurance.



While a total cover will still be recommended but a higher cover for your heart specifically can ease some financial burden.


Microinsurance also helps households get protection for some of their most valuable assets. This brings security to low-income families who are otherwise unable to afford conventional insurance products.


There is greater transparency and the ability to handle insurance claims faster with greater accuracy. Due to this, people are willing to take more business risks, which is a good sign for the economy as well.



It is predicted that microinsurance could be feasible and attractive to not just people in rural or low-income households. In a fast, millennial, gig-driven economy, microinsurance products could be attractive and beneficial for young, tech-savvy people who want to meet their needs.  



How is microinsurance different from normal insurance policies?


Microinsurance is a small, ticket-sized contextual insurance. It reduces the risk for specific situations or scenarios.


For example, you can purchase malaria insurance if you feel that you are likely to get it. In order to do this, you’ll need to buy a microinsurance product. If you want to insure your health, on the whole, you will need to purchase normal health insurance (for which you’ll have to pay larger premiums).



Microinsurance in India


The Insurance Regulatory and Development Authority of India (IRDAI) created microfinance policies to promote insurance coverage among the economically vulnerable sections of the population. The first regulations came into effect in 2005 and have been amended from time to time.



According to IRDAI Micro-Insurance Regulations 2005, a microinsurance policy is a general or life insurance policy with a sum assured of Rs 50,000 or less.



The IRDAI also defines a general microinsurance product as any health insurance contract, contracts covering belongings such as livestock, tools, hut or personal accident contract. These can be taken on an individual basis or group basis.



However, it has been found that in India, outside of the government-sponsored social security schemes, coverage through microinsurance still remains on the lower side. The liberalisation of the insurance sector and the presence of government schemes created more opportunities, awareness and demand for microinsurance. Despite this, the market penetration is low. In rural areas, there is a huge market for microinsurance but the protection gap is huge as well.



Examples of micro-insurance policies

  1. Mosquito bite insurance: this is a critical illness policy, but pays out only upon contracting mosquito-spread illnesses(malaria, dengue, etc)
  2. Trip insurance: this is a personal accident/disability policy, that is only active for a certain trip, like a cab ride


Challenges faced by microinsurance in India

  • A majority of the target population does not understand what insurance is. Even if they have some basic idea about it, they are unable to differentiate between general and life insurance products.
  • There is a lack of long-term planning in low-income households. Their focus is on short term financial decisions due to job insecurity and unpredictable living conditions.
  • There is a lot of misconception about insurance in the masses. A lot of the time, people who buy insurance are looking for guaranteed returns. The low-income market looks for immediate and tangible returns for the investment they are making.
  • There is a lack of access and reliable distribution channels in the market.
  • On the supply side, ie the insurer’s side, there is also the problem of renewals. Many of those who purchase a microinsurance product do not renew it if they did not get to claim in the past year, as they do not see the “benefit” of the product. Lack of renewals makes it harder for the insurer to maintain a low price on the product.




While still new and with its own share of challenges, microinsurance has been growing at a rapid pace in recent years. A challenge it faces today is that it requires a robust distribution system on the back-end. With the rise in new technologies like IoT and InsurTechs, we are sure it won’t take too long to overcome the current challenges.

What microinsurance product do you wish existed? 

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