PROJECT REPORT ONMICRO-INSURANCE

IN PARTIAL FULFILLMENT OFTHE DEGREE AWARDED AT

B.COM ( BANKING & INSURANCE )SEMESTER VI

SUBMITTED TOUNIVERSITY OF MUMBAI

FOR ACADEMIC YEAR 2014 2015

SUBMITTED BY,NAME : KAILASH. R. RAI

ROLL NO : 71

VIVA COLLEGE OF ARTS, COMMERCE AND SCIENCEVIRAR ( WEST )401303

DECLARATION:I hereby declare that the project titled MICRO-INSURANCE is an original work prepared by me and is being submitted to university of Mumbai in partial fulfillment of B.com (Banking & Insurance) Degree for the academic year 2014-2015.To the best of my knowledge this report has not been submitted earlier to the University of Mumbai or any other affiliated college for the fulfillment of B.com (Banking & Insurance) Date: Name: KAILASH. R. RAI

Place: Sign:

ACKNOWLEDGEMENT

I, MR. Kailash. R. Rai, the student of Viva College pursuing my B.COM (BANKING & INSURANCE), would like to pay the credits, for all those who helped in the making of thisThe first in accomplishment of this project is our Principal Dr. R.D. Bhagat, Vice-Principal Prof. Prajakta Paranjape and Guide Prof. Nilima Bhagwat , Course Co-ordinator Prof. Roshani Nagar & Teaching & non- teaching staff of Viva College.I would also like to thank all my college friends those who influenced my project in order to achieve the desired result correctly.

INSURANCEINTRODUCTIONInsuranceis the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form ofrisk managementprimarily used tohedgeagainst the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount ofmoneyto be charged for a certain amount of insurance coverage is called the premium.Risk management, the practice ofappraisingand controlling risk, has evolved as a discrete field of study and practice.The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives acontract, called theinsurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

HistoryEarly methodsMethods for transferring or distributing risk were practiced byChineseandBabyloniantraders as long ago as the3rdand2ndmillenniaBC, respectively.Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famousCode of Hammurabi, c. 1750 BC, and practiced by earlyMediterraneansailingmerchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen or lost at sea.Modern insuranceInsurance became far more sophisticated inEnlightenment eraEurope, and specialized varieties developed.Lloyd's Coffee Housewas the first marine insurance company.Property insuranceas we know it today can be traced to theGreat Fire of London, which in 1666 devoured more than 13,000 houses. The devastating effects of the fire converted the development of insurance "from a matter of convenience into one of urgency, a change of opinion reflected in SirChristopher Wren's inclusion of a site for 'the Insurance Office' in his new plan for London in 1667".A number of attempted fire insurance schemes came to nothing, but in 1681,economistNicholas Barbonand eleven associates established the first fire insurance company, the "Insurance Office for Houses", at the back of the Royal Exchange to insure brick and frame homes. Initially, 5,000 homes were insured by his Insurance Office.InsurabilityRisk which can be insured by private companies typically shares seven common characteristics:[17]1. Large number of similar exposure units: Since insurance operates through pooling resources, the majority of insurance policies are provided for individual members of large classes, allowing insurers to benefit from thelaw of large numbersin which predicted losses are similar to the actual losses. Exceptions includeLloyd's of London, which is famous for insuring the life or health of actors, sports figures, and other famous individuals. However, all exposures will have particular differences, which may lead to different premium rates.2. Definite loss: The loss takes place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy.Fire,automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory.Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place, or cause is identifiable. Ideally, the time, place, and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.3. Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be pure, in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks or even purchasing a lottery ticket, are generally not considered insurable.4. Large loss: The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims5. Affordable premium: If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, then it is not likely that the insurance will be purchased, even if on offerIf there is no such chance of loss, then the transaction may have the form of insurance, but not the substance (see the U.S.Financial Accounting Standards Boardpronouncement number 113: "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts").6. Calculable loss: There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.MICRO-INSURANCEMicro-insuranceis the protection of low-income people (those living on between approximately Rs.100 and Rs.400 per day) against specific perils in exchange for regular premium payment proportionate to the likelihood and cost of the risks involved. This definition is exactly the same as one might use for regular insurance except for the clearly prescribed target market: low-income people. The target population typically consists of persons ignored by mainstream commercial and social insurance schemes, as well as persons who have not previously had access to appropriate insurance products.The institutions or set of institutions implementing microinsurance are commonly referred to as a microinsurance scheme.Definitions of microinsurance1. Microinsurance is insurance with low premiums and low caps / coverage. In this definition, "micro" refers to the small financial transaction that each insurance policy generates. "General microinsurance product means health insurance contract, any contract covering the belongings, such as, hut, livestock or tools or instruments or any personal accident contract, either on individual or group basis, as per terms stated in Schedule-I appended to these regulations"; and "life microinsurance product" means any term insurance contract with or without return of premium, any endowment insurance contract or health insurance contract, with or without an accident benefit rider, either on individual or group basis, as per terms stated in Schedule-II appended to these regulations as those within defined (low) minimum and maximum caps. The IRDAs characterization of microinsurance by the product features is further complemented by their definition for microinsurance agents, those appointed by and acting for an insurer, for distribution of microinsurance products (and only those products).2. Microinsurance is a financial arrangement to protect low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved.[2]The author of this definition adds that micro-insurance does not refer to: (i) the size of the risk-carrier (some are small and even informal, others very large companies); (ii) the scope of the risk (the risks themselves are by no means "micro" to the households that experience them); (iii) the delivery channel: it can be delivered through a variety of different channels, including small community-based schemes,credit unionsor other types ofmicrofinanceinstitutions, but also by enormous multinational insurance companies, etc.3. Microinsurance is synonymous to community-based financing arrangements,[3]including community health funds, mutual health organizations,rural healthinsurance, revolving drugs funds, and community involvement in user-fee management. Most community financing schemes have evolved in the context of severe economic constraints, political instability, and lack of good governance inrevenuecollection,pooling,resource allocationand, frequently, service provision.4. Microinsurance is the use of insurance as an economic instrument at the "micro" (i.e. smaller than national) level of society.[4]This definition integrates the above approaches into one comprehensive conceptual framework. It was first published in 1999, pre-dating the other three approaches, and has been noted to be the first recorded use of the term "microinsurance".[3]Under this definition, decisions in microinsurance are made within each unit, (rather than far away, at the level ofgovernments,companies,NGOsthat offer support in operations, etc.).Insurance functions on the concept of risk pooling, and likewise, regardless of its small unit size and its activities at the level of single communities, so does microinsurance. Microinsurance links multiple small units into larger structures, creating networks that enhance both insurance functions (through broader risk pools) and support structures for improved governance (i.e. training, data banks, research facilities, access toreinsuranceetc.). This mechanism is conceived as an autonomous enterprise, independent of permanent external financial lifelines, and its main objective is to pool both risks and resources of whole groups for the purpose of providing financial protection to all members against the financial consequences of mutually determined risks.The last definition therefore, includes the critical features of the previous three:1. transactions are low-cost (and reflect members willingness to pay);2. clients are essentially low-net-worth (but not necessarily uniformly poor);3. the essential role of the network of microinsurance units is to enhance risk management of the members of the entire pool of microinsurance units over and above what each can do when operating as a stand-alone entity.

Background

Risk is pervasive in the lives of poor and low-income groups. Economic, social, natural, and other factors distort households risk management capability and their struggle to come out of poverty.

Faced with multiplicity of risks, poor and weaker sections are often forced to deplete their financial, physical, social and human assets just to cope with the contingencies. Some common risks they confront with are unemployment, illness, and accident, death of main earning members of the family, crop loss, loss of livestock, fire, theft, drought, flood, and loss in petty trading activity due to market factors. Some groups are more vulnerable to many of these risks than the others and unable to cope with risk events. Hence, uninsured risk leaves many poor households more vulnerable to the losses from negative shocks. However, impact of such risks lingers for a longer period depending on the nature and severity of risks and strategy adopted by the household for coping. On the other hand, household exposure to risks not only results in substantial financial losses but also the suffering accentuates the fear and uncertainty relating to the risk. Because of this perpetual apprehension, many poor households are less likely to take advantage of income-generating opportunities which could be a way out of poverty.

Risk pooling and informal insurance are not entirely new to many low income households. Informal risk-sharing practices have been around for generations. Options for protecting against risks includes diversifying household resources and income, building assets, stocking food, investing in livestock, renewing & strengthening social networks, saving and borrowing from informal sources, participating in public social security programme, enrolling in insurance schemes etc. The risk management approaches differ under socio-economic and agro-climatic conditions and also depending upon its exposure to risk. Unfortunately, risk coping mechanisms are limited in assuring benefits and typically cover only a small portion of the total loss of income and income generating opportunity. Households informal means to manage risks may not provide adequate and long term protection, especially to poor and low income groups who are prone to loss of entitlements incurred due to variety of risks. Households follow variety of coping strategies to manage different kind and nature of risks that affect their income and consumption smoothing. But many informal risk coping strategies come at a cost, as assets are depleted when trying to cope with risk such as distress sale during crises, reduction of household expenditure on food, withdrawing children from school, postponing or avoiding expenditure on health, social functions etc. It has both short term and long-term adverse impacts on households. Though household diversification often viewed as positive response against risk events many such coping strategies followed by the poor do compensate the entire loss. If household risks are not carefully designed and strategically handled it may result in bigger welfare losses. The situation would be worse when risks to life and livelihoods recur more frequently and there is limited risk managing options. So provision of formal insurance cover to these vulnerable groups could be useful to protect them against risks and supplement their risk managing capacity. As formal insurance can directly impact on householdsex-post risk coping mechanisms, it is believed that households participation in insurance would help to maintain income and consumption soothing and avoid asset loss. But access to and provision of formal insurance is limited for the poor and low income groups. State-provided social security measures are inadequate to cover all kinds of household risks. Under this condition many poor households may tend to behave as resilient to risk events or their risk coping behaviour may result in huge welfare loss due to wrongly managed or unable to manage risks. It may also induce many poor households to focus on low risk and low return activities or rely on a range of informal ex-post options, relief measures, public social security measures etc. It provides huge scope for policy interventions as well as business opportunity.

Therefore, it is important from policy point of view to understand different household risks and risk-management strategies in one hand and the need and demand for insurance products, particularly for low income groups. On the other hand, interestingly micro insurance has drawn attention of the policy makers, insurers, business leaders and others in recent years. Micro insurance has been seen as one of the major risk managing tools for the poor and low income groups and a potential market for business. Experiences across countries in the world show that micro insurance has potential to reduce household risk impacts and to provide business opportunity. By offering a payout after the loss, it may avoid more costly ways of risk coping by the poor household and leaves their future income earning opportunities intact. The sense of security linked to being insured through micro insurance augment household welfare with positive impacts. Poverty and vulnerability among low income groups mainly stems from their poor risk management capacity and exclusion from the financial markets. Hence it is important to understand their need as well as demand for financial products including insurance. Many poor and low income households may involve in activities or enterprises of smaller scale but higher risk and uncertainty. It makes them disadvantageous because they are more prone to economic and financial collapse. Under this situation it is interesting to analyze how micro insurance can play a meaningful role in household risk managing efforts, in rural credit and insurance market and providing business opportunity. In this regard we like to focus on current scenario of outreach and efficacy of micro insurance in India, major factors that encourage and prevent growth of micro insurance and other related issues for achieving broader objectives such as financial inclusion and inclusive development.

Micro Insurance in India

In India development of micro insurance sector and related policy discussions has started few years back. Within very short period, the sector has drawn attention of policy makers due to its importance both at household level and the economy as a whole. Two major and recent studies by the ILO (2004a and 2004b) depict broad picture of micro insurance sector in India. As regard to the micro insurance products the study highlights that out of 80 listed insurance products 45 cover only a single risk and only two or three products cover multiple risks. Majority of the insurance products cover life (52%) or accident-related risks and addressed to individuals. Out of the 12 currently available health insurance products seven products have been designed and restricted to groups and five products have chosen to coverage to some critical illness at individual level but not the reimbursement of hospitalization expenses. Most of the products require a single payment of premium (i.e., a one-time payment) upon subscription. Private insurers had three times more products than their public counterparts.

Some important observations about the demand for micro insurance in India are made in a recent study by ILO (2004b). The study provides details of micro-insurance schemes operational in India. Out of 51 schemes that are operational in India most schemes have started operations during the last few years. As regards to beneficiaries, about 43 schemes, for which the information is available, cover 5.2 million people. About 66% of the micro insurance schemes are linked with micro finance services provided by specialized institutions or non-specialized organizations. Twenty two percent of the schemes are implemented by community based organizations, and 12% by health care providers. Life and health are the two most popular risks for which insurance is demanded. Twenty-five out of 37 schemes received some external funds to initiate their schemes. Twenty out of 32 schemes received external technical assistance in the form of advisory services, technical services, training or even referral services for their schemes. As regard, to the regional distribution of micro insurance outreach about 74 % of total schemes operate in 4 southern states constituting Andhra Pradesh (27%), Tamil Nadu (23%), Karnataka (17%) and Kerala (8%). Development of micro insurance is often related to microcredit, particularly in developing countries like India. Though microcredit has dominated in microfinance market the entry of micro insurance is only in recent past. In India micro insurance is a relatively new financial service and its outreach is rather limited and unevenly distributed across states. The overall performance of micro insurance in India is not very encouraging. According to a recent study by UNDP (2007), the outreach of micro insurance is around 5 million people covering only 2 percent of the poor in the country. It shows there is huge potential for micro insurance market in the country. A conservative estimation of size of micro insurance market (both life and non life) in India ranges between INR 62,304.70 to 84,267.55 million (US$ 1,384.55 to 1,872.61 million). In case of life insurance, the market potential is estimated to be between INR15,393 to 20,141 million (US$ 342.07 to 447.58 million) and in case of non-life insurance, it is between INR46,911.70 to 64,126.55 million (US$1,042.48 to 1,425.03 million).Observation on MicroinsuranceMicroinsurance is believed as compensation paid on the event of physical and financialloss of a microcredit client. It safeguards the loss in income of the family in case of riskevent. Worse affected groups are women members of the family and particularly on theevent of the death of spouse and the children or death of parents. Micro insuranceproducts are covering life of client. Sometimes their health care was arranged in selectedhospitals. On the occurrence of the death of a client, the claim amount would take care ofthe loan liability or assist other family members to sustain their earnings.

Methodology

While working in the company, I worked on two different projects, which included field work. They come under Electronic Benefit Transfer (EBT) scheme of government and company. The two topics are mentioned below:

Micro Insurance

Customer Enrolments.

Micro Insurance: In this, we were supposed to do the insurance of the rural people and achieve our targets. Their normal strategies to do insurance are:

Word of mouth

Door to door

However, this time we adopted some new ones.

We chose villages with maximum number of customers enrolled with biometric cards.

We chose the time of the month when pensions are being distributed.

We chose the same place for our camps where pensions are being distributed.

Customer Enrolments: In this, we were supposed to get new customers enrolled with our company so that they can get benefit from our bio metric cards.

They do not have any specific strategy for the same. Bandhu, who is our employee and a person belonging to village (most of the times) used to do it randomly. Bandhu is also responsible for the transactions from the particular village, he is assigned to.

However, this time we adopted a new methodology i.e. to held camps. But while holding camps, we carefully worked to the data given to analyse, where to hold them.

We chose a village where the number of customer enrolments is less as compared to others.

We chose villages where the numbers of enrolments are average; however the numbers of transactions are less.

These are the two different methodologies; we worked on while working on two different projects.

Scope & Limitations

Scope

Word of mouth is very strong.

Money is there.

Investment is there but not with banks.

Limitations Transportation Problem

Language Barrier

Financial Illiteracy

Industry Analysis

Porters Model

A means of providing corporations with an analysis of their competition and determining strategy, Porter's five-forces model looks at the strength of five distinct competitive forces, which, when taken together, determine long-term profitability and competition. Porter's work has had a greater influence on business strategy than any other theory in the last half of the twentieth century, and his more recent work may have a similar impact on global competition.

Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability.

Company Profile

About

FINO founded in year 2006, headquartered in Mumbai, India, has emerged as a leading inventor, innovator and implementer of integrated technology solutions for institutions like Banks, Microfinance Institutions, Government entities, Insurance companies to enable financial inclusion environment for the micro customers.

FINO caters to the industry needs across market segments by undertaking complete electronic payment platform projects. FINO solutions are anchored around using biometric smart cart, hand-held devices and Micro Deposit Machines to perform field operations and biometric authentication.

Today FINO, with its leading edge solutions plays a key role in India's quest for developing branchless banking infrastructure.

Vision

"To provide innovative technical & management services for the masses, in both financial and non-financial domains making a positive impact on their living standards and creating wealth for all stakeholders"

Mission

"To achieve a breakthrough in the scale, relevance and reach of financial services for the un-served and under-served masses throughout the world"

Management

Manish Khera (Chief Executive Officer)

Manish Khera is the Chief Executive Officer and Whole Time Director of FINO Limited. Since FINO's inception in 2006, Manish has lead FINO's efforts to connect micro-customers with businesses, banks, government and investors. Under his leadership FINO has dramatically increased its institutional acceptance, market leadership and global repute.

Manish's career began with ICICI Bank Ltd. in 1993. During his 13 years at ICICI, Manish has worked in various areas including credit, government & rural banking, technology and alternate channels. His last role in ICICI was of Joint General Manager heading Alternate Channels Group.

For his leadership and business vision, Manish was conferred as the Young Global leader by World Economic Forum in March 2011.Manish holds an M.Phil in Environment & Development from the Cambridge University, UK. He also holds a MBA from Faculty of Management Studies (FMS, Delhi) and a BE (Electrical) from Delhi College of Engineering (DCE, Delhi).

Rishi Gupta (Chief Financial Officer)

Rishi Gupta is the Chief Financial Officer and President - Sales and Marketing of FINO Limited. His responsibilities include Corporate Finance, Fund-raising, Investor relationships and Business Development.

Rishi has more than 15 years of experience in manufacturing, banking and international institutions. His career has overseen budgeting, accounting, project finance, corporate finance and relationship management.

Rishi's illustrious career began with Maruti Udyog Limited where he went on to head Budget and MIS department. Rishi then moved on to join ICICI Bank. Prior to joining FINO, he was working with the regional office of International Finance Corporation in New Delhi.

In 2011 Rishi was awarded "CFO100 Roll of Honor" - an effort to recognize the top 100 senior finance professionals in India, who have made a difference with their acumen, attitude and energy.

Rishi is a certified chartered accountant and cost & works accountant. He did his article training with Price Waterhouse Coopers (PwC). Rishi also holds a bachelors degree in commerce from University of Delhi.

Rajeev Arora (Director - Products & Operations)

Rajeev Arora is the Director and President - Products & Operations at FINO Limited. He is responsible for strategizing and overseeing the field & central operations and product development. Rajeev has over 19 years of experience in operations and banking.

Rajeev began his career with National Thermal Power Corporation (NTPC). Prior to joining FINO, he was associated with ICICI Bank in Corporate Banking where he was managing relationship with large corporate, specializing in the infrastructure sector. He has also managed relationship with various state and central governments extensively to work on various large e-Governance projects focused on government to citizen interaction and payments.

Rajeev has done is post-graduation in business administration (MBA) from Indian Institute of Management, Calcutta and holds a bachelors degree in electrical engineering.