What can help the poor in managing financial risks is micro insurance, says the Institute of Chartered Accountants of India in a recent publication titled ‘Micro Insurance’ (www.icai.org). The Institute sees health insurance as a top priority for the low income households.
In the case of life insurance, another priority for the poor, one-off payment may not be apt, says the ICAI. “The product should be designed in such a way that the nominee/ legal heir may get periodical payments, called annuity, in lieu of the sum assured.”
The publication also emphasises on the need for affordable pricing to create demand for micro insurance products. “To avoid undermining policyholders’ trust, frequent or substantial change in premium should be avoided.” An example cited in this context is of a trust in Karnataka, which found that over a third of its clients did not renew their polices when the premium was doubled.
Minimise lapses
Appropriate timing of premium payments can minimise lapses and maximise renewals because the micro insurance market is characterised by irregular and unpredictable cash flows, the Institute notes. If the interval of premium collection is short, such as weekly and fortnightly, policyholders may find the insurance product affordable.
The ICAI highlights the need for innovative methods to tackle lapses. For example, if the client misses premium, the insurer may deduct the amount from the accumulated value of the policy to keep the cover in force. And, to encourage payment discipline, incentives in the form of lower premium can be offered to those who pay regularly.
Useful reference for the accounting professionals.
