The Hindu Business Line : Insurance and rural market — Cost-effective delivery system holds the key

THE insurance industry market in India was liberalised in 2000 and the first private insurance companies opened shop that November. The industry has now witnessed more than two years of private sector participation. However, the overall market has not really expanded, in real terms, beyond the urban domains.

The penetration of insurance in India is pitiably low at just about 1.6 per cent of GDP. If the overall market has to grow and expand, insurance companies will need to look at newer segments rather than fight for a share in the same pie.

There exist a vast potential in the rural areas where more than 70 per cent of the population lives. But it is common perception and belief among the insurance companies that it is expensive to do business in the rural areas.

Most of them are focussing only on meeting the regulatory requirements from the rural areas and do not see them as commercially viable rural business opportunities, waiting to be exploited.

One of the positive and welcome outcomes of this year's Budget, presented by the Finance Minister, Mr P. Chidambaram, has been the revival of interest in the `resurgent rural reality'. Rural India has once again begun reclaiming its rightful space in the marketing strategies of most organisations. A number of senior corporate executives have been hotfooting to the interiors. Government plans of huge investments in the rural sector will certainly have the effect of pushing up rural incomes at a much faster rate. With higher purchasing power in the hands of the bulk of rural folk, the demand for goods and services is expected to rise in tandem. This is what most marketers would be interested in.

Saving habit

The strong saving habit is underscored by the finding that even the relatively low-income families tend to save about a third of their annual earnings.

Annual household money flows

The average annual incomes are Rs 54,000 in segment A, Rs 40,000 in segment B and Rs 32,000 in segment C. In segment A, the annual income range is Rs 20,000-2,00,000; in Segment B it is Rs 15,000-1,50,000 and in Segment C Rs 5,000-80,000.

According to a study by FICCI-ING Insurance promoted Foundation of Research, Training and Education, a high level of awareness about insurance, particularly life insurance, is seen. About one-third of the respondents owned some insurance product or the other. Among those who owned insurance, there was a feeling of being under-insured and those who did not have one, felt the need for insurance cover. Insurance was largely seen as a risk-cover instrument and not so much as an investment option.

Penetration of insurance products

The rural market is vibrant and holds tremendous potential for growth of insurance business, particularly because of the strong saving habit.

It is worth highlighting the existence of a continuum of economic activity between rural and urban areas. Intermediate settlements, such as important villages, kasbas and tehsil towns play a key role in the process of rural-urban economic integration. Several towns are essentially overgrown villages of the past and have continued to retain their essential rural character. These towns have, indeed, proved critical to rapid economic growth of the rural areas in their hinterland as they provide them significant marketing and financial support.

While the prospects in the rural sector are promising, the real challenge lies in distributing and delivering systems cost-effectively and efficiently. It is common knowledge that the cost of building exclusive delivery systems for selling insurance would be prohibitive. However, valuable data are available on the existence of extensive network built by the rural development agencies, banks, cooperative institutions, NGOs, micro-financing institutions, women's SHGs, youth clubs, panchayats and some industrial houses in the rural sector. Insurance companies would, therefore, be well-advised to harness this infrastructure and work out collaborative arrangements with these institutions to their mutual advantage.

These institutions, having spent huge amounts for creating the infrastructure, will be happy to collaborate and recover some of their costs. The insurance companies would save on large investments that would be required to build up dedicated distribution and delivery systems and leverage the existing network at marginal costs. This, indeed, is a unique `win-win' situation.

Since delivery channels would really hold the key to a successful strategy, a look at some:

Non-governmental organisations

A number of NGOs are working in the rural areas to enhance income opportunities, improve living conditions, make available health and education to the villagers. The focus of these efforts is largely the low-income households with whom they develop a close relationship (such as family). Their involvement in social causes generates goodwill among the locals also.

NGOs involved in micro-finance have the experience of extending loans and handling repayments. Their organisations provide micro-finance to SHGs.

A number of thrift and savings groups have been organised by government and non-government agencies across the country. These are mostly women groups of 15-20 members, which extend micro-credit to their members for starting an economic activity to augment family income.

Only these NGOs would be well suited for marketing insurance as they are already familiar with financial transactions and work extensively with the rural poor. Group insurance will be best-suited for women belonging to BPL (below poverty line) or low-income segments.

Utility of newly-emerging post-office

As per the Department of Post's Annual Report 2001-02, 1,55,279 post-offices, including 1,38,756 in rural areas, India has the largest postal network in the world. On an average, a post-office serves an area of 21.17 sq. km. and a population of 6614.

The advent of courier services, easy Internet facilities and modern telecommunications methods is forcing the postal services out from the urban markets.

However, this service continues to be relevant in the villages where the post-office is a place for savings deposit, postal services and also the village telephone (pay phone for public use). People are also largely satisfied with the services of the post-office.

The postal department also markets its own life insurance product because of which it may not commercially get involved in marketing insurance products of other companies.

Possible rural agents to market insurance policies

Efforts were made during the study to identify the potential rural agents. While the following categories of persons could be identified as potential agents, their competency to sell insurance products has to be ascertained by companies.

Postal agents

The post-office sells savings certificates such as Kisan Vikas Patra, National Savings Certificate and also generates recurring deposits through postal agents. These agents are recruited by the district savings officer, Office of the Collectorate, and given a three-year renewable licence.

Insurance companies can recruit and train these agents for marketing insurance products. The familiarity with financial instruments (savings) will be advantageous to these agents and to the insurance company as well.

TV cable operator

The Andhra Pradesh Government has, in one of its income generation opportunities for the youth, extended a loan of up to Rs 40,000 to set up satellite cable TV connections and to select number of educated unemployed youth.

Cable TV operators are educated and have access to all homes in the village that have a cable connection, that is, about 400 households in villages with a population of more than 5000. He visits the homes at least once a month to collect the subscription for the cable TV.

His accessibility to rural homes makes him a potential insurance agent.

Youth club members

The youth clubs in the villages of Andhra Pradesh are active and are in activities such as starting a library, digging village ponds, processing official documents for villagers and organising rural sports events and cultural shows to ensure better quality of life in the village. They are also part of government programmes where they get involved in spreading information and awareness on health and sanitation, government schemes and assist in government health camps.

These youth are educated and seek avenues for generating income for themselves.

Leaders of youth clubs can be selected and recruited for marketing insurance products by companies.

Doctors and school teachers

Registered medical practitioners and teachers are the more educated persons in a village and command considerable respect and influence. Villagers also trust them.

Many of them have worked as agents for LIC, post-office and other financial institutions.

As these persons are well-educated, they can be easily trained under the IRDA curriculum and appointed as insurance agent by the private agencies. Rural market is vibrant and holds tremendous potential for growth of insurance business. These are the markets, which would provide the future numbers and growth, and the companies which take early decision to enter these markets would certainly have the early mover advantage.

The general notion that it is expensive to do business in the rural areas due to its inaccessibility and other factors, does not hold good due to the institutional infrastructure there, which can be profitably harnessed for reaching out to these areas. The challenge of developing a cost-effective delivery system is not insurmountable and there is enough scope for innovative collaborations.

The process of penetration in the rural areas could be pushed further through an appropriate use of IT and a more pragmatic definition of `Rural'.

(The author is Chief Representative, ING Insurance International B.V., New Delhi.)

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