Micro Insurance and the Interface between Insurers and Insured Households

Basel Development Studies

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Basel Development Studies

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The starting point of the present work is the assumption that micro insurance schemes work well and contribute to risk mitigation and poverty reduction by transferring risk onto third parties. However, if and to what extent these goals are achieved, or why they are not achieved, is not really understood. The present work analyses the Partner-Agent Model that is one delivery channel used to provide micro insurance. Within the Partner-Agent Model, insurers (the partner) work together with an organisation or institution that has an existing interface with the low-income market (the agent) to reach policyholders. There are flaws in the delivery of micro insurance and in particular in the Partner-Agent Model. The highest need for improvement in the PartnerAgent Model is at the communication level. The observation that beneficiaries had to wait too long for the insurance money requires a more efficient claim settlement process from the insurance companies (the partner) and the facilitators (the agent). Micro insurance is recognized as being beneficial, whereas the potential benefits have not been completely realized due to flaws in the operative management. Micro insurance is rather a starting point in the process of reducing poverty and vulnerability, as it does not completely replace losses. Having insurance means that policyholders use the benefits of micro insurance schemes for bridging a gap instead of replacing the loss.

Micro Insurance in Gujarat, India

Micro insurance, micro credit and micro savings are part of micro finance. Micro insurances operate like commercial insurance systems, but with a different target group: the poor. Household and business assets of the poor are often unprotected against perils. Insurance can serve as a solution to this vulnerability, if it is affordable and accessible. With 2.6 billion people worldwide living below the poverty line, there is a high demand and an unexploited market potential for micro insurance schemes.

Micro Insurance and the Interface between Insurers and Insured Households – an Analysis of the Afat Vimo Partner-Agent Model of Micro Insurance in Gujarat, India

University of Basel, Department of Environmental Sciences Geography / Urban and Regional Studies 2012 www.humgeo.unibas.ch Basel Development Studies vol. 4, 2012 ISBN-Nr. 978-3-7965-2893-4 CHF 32.–

Schwabe Verlag Basel www.schwabeverlag.ch

Claudia Saalfrank

Claudia Saalfrank

Claudia Saalfrank

Micro Insurance and the Interface between Insurers and Insured Households – an Analysis of the Afat Vimo Partner-Agent Model of Micro Insurance in Gujarat, India

ISBN: 978-3-7965-2893-4 © C. Saalfrank, 2012 All rights reserved Layout: Veronika Frei Cover Design: Claudia Saalfrank Photo: Earthquake-affected people in Bhuj, Gujarat, India. C. Saalfrank Herstellung/Verlag: Schwabe AG, 2012 Doctoral thesis University of Basel, 2011 This research was funded by: Science and Policy Platform of the Swiss Academy of Sciences (SCNAT), KFPE - Commission for Research Partnerships with Developing Countries, Programme „Echanges Universitaires“, founded by the Swiss Agency for Development and Cooperation (SDC); Freiwillige Akademische Gesellschaft (FAG), Basel. In cooperation with AIDMI - All India Disaster Mitigation Institute, Ahmedabad, India.

Table of Contents Foreword by the editor ...................................................................................VI Acknowledgements ................................................................................................... IX Executive Summary .................................................................................................. XI Glossary and Acronyms ........................................................................................ XIV List of Figures .......................................................................................................... XV List of Tables .......................................................................................................... XVI List of Boxes ......................................................................................................... XVIII List of Maps .......................................................................................................... XVIII

Part I – Introduction, Theoretical Background and Case Study ......... 1 1 Micro Insurance for Reducing Poverty ........................................................... 3

1.1 Introduction .......................................................................................................... 3 1.2 Conceptual background and objective ................................................................. 6 1.3 Relevance ............................................................................................................. 9 1.4 Hypotheses and research questions .................................................................... 10 1.5 Data and methodological approach .................................................................... 12 1.6 The case study .................................................................................................... 13 1.7 The structure of the thesis .................................................................................. 14

2 Micro Insurance and Institutions .................................................................... 17 2.1 Micro finance ..................................................................................................... 18 2.1.1 The role of micro finance in development................................................. 18 2.1.2 Micro finance and NGOs in India ............................................................. 19 2.1.3 Micro finance challenges........................................................................... 20 2.2 The concept of micro insurance ......................................................................... 21 2.2.1 Micro insurance products ......................................................................... 22 2.2.2 Micro insurance delivery: the Partner-Agent Model ................................ 25 2.2.2.1 The Full-Service Model and the Community-Based Model ......... 25 2.2.2.2 The Partner-Agent Model ............................................................. 26 2.2.3 Opportunities of micro insurance .............................................................. 29 2.2.4 Excursus: Risk profile and risk management of uninsured households .... 32 2.2.4.1 Risk profile of uninsured households ........................................... 33 2.2.4.2 Uninsured household’s knowledge and attitude towards insurance ...................................................................................... 35 2.2.4.3 Willingness to pay and affordability ............................................ 37 2.2.4.4 Risk management strategies of uninsured households.................. 37 2.2.4.5 Conclusion of uninsured households ............................................ 40

II

Table of Contents

2.2.5 Challenges in offering micro insurance .................................................... 41 2.2.6 Research on micro insurance .................................................................... 43 2.3 Institutions and development ............................................................................. 45 2.3.1 Institutions................................................................................................. 46 2.3.2 Institutions in India ................................................................................... 47 2.3.3 Institutions involved in micro insurance delivery ..................................... 48 2.4 Summary of micro insurance and institutions .................................................... 49

3 India’s Insurance Industry and the Partner-Agent Model AIDMI – Afat Vimo ............................................................................................ 51 3.1 Micro insurance in India .................................................................................... 52 3.1.1 India’s insurance industry ......................................................................... 52 3.1.2 Micro insurance industry........................................................................... 53 3.2 The Partner-Agent Model AIDMI – Afat Vimo................................................. 56 3.2.1 The micro insurance scheme – background and approach ........................ 56 3.2.2 The insurance system ................................................................................ 62 3.2.3 The insurers (the partner) .......................................................................... 63 3.2.4 The facilitating agency (the agent) ............................................................ 65 3.2.5 The households – client profile of micro-insured households ................... 68

Part II – Study Area, Methods, Sample Description ............................... 77 4 Study Area ............................................................................................................ 79 4.1 Poor disaster-affected India ................................................................................ 79 4.1.1 India, country at risk ................................................................................. 79 4.1.2 Poverty and vulnerability in India ............................................................. 85 4.2 The Gujarat Districts selected ............................................................................ 89 4.2.1 The West Indian State of Gujarat .............................................................. 89 4.2.2 Ahmedabad City ....................................................................................... 94 4.2.3 Bhuj ........................................................................................................... 97 4.2.4 Kheda City .............................................................................................. 100 4.2.5 Vadodara City ......................................................................................... 103 4.2.6 The City Radhanpur and villages in Patan District ................................. 103

5 Methodological Approach ............................................................................... 107

5.1 Research question and its operationalisation.................................................... 107 5.2 Sample selection, sample size, and pilot test.................................................... 109 5.2.1 Sample size and sample selection ........................................................... 110 5.2.2 Pilot test .................................................................................................. 112 5.2.3 Procedure of the surveys ......................................................................... 112 5.3 Analysing the Partner-Agent Model at the interface between households and insurers from the policy-holder’s view – rationale and variables selected............................................................................................................. 113 5.3.1 Objective and subjective measurements ................................................. 113 5.3.2 The structure of the sample ..................................................................... 115 5.3.3 Functionality of micro insurance schemes .............................................. 121

Table of Contents

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5.3.4 Cost structure, handling of premiums, and financial impact ................... 123 5.3.5 Perception and satisfaction...................................................................... 123 5.4 Expert interviews related to micro insurance ................................................... 125

6 Characteristics of the Sample......................................................................... 127

6.1 Rural and urban distribution............................................................................. 128 6.2 Socio-cultural and socio-demographic characteristics ..................................... 129 6.2.1 Religious affiliation ................................................................................. 129 6.2.2 Household size ........................................................................................ 130 6.2.3 Age structure ........................................................................................... 131 6.2.4 Gender ratio ............................................................................................ 131 6.2.5 Household composition........................................................................... 133 6.2.6 Educational attainment ............................................................................ 133 6.2.7 Educational influence on knowledge and awareness............................... 135 6.3 Household income, poverty status, and assets ................................................. 137 6.3.1 Household income................................................................................... 137 6.3.2 Source of income from labour work or micro enterprises ....................... 138 6.3.3 Poverty status .......................................................................................... 139 6.3.4 Households’ assets .................................................................................. 141 6.4 Disaster experience of policyholders ............................................................... 147 6.4.1 Disaster impacts and damages incurred by policyholders ....................... 147 6.4.2 Insured versus occurred disasters ............................................................ 151 6.4.3 Losses due to disasters ............................................................................ 153 6.5 Claims made, entry into the insurance scheme, premium payment ................. 154 6.5.1 Insurance track record ............................................................................. 154 6.5.2 Entry of households into insurance system ............................................. 155 6.5.3 Premium payment – costs and modalities ............................................... 157 6.6 Summary and conclusions of the characteristics of the sample ....................... 158 6.6.1 Specific needs of the target group ........................................................... 159 6.6.2 Possible difficulties in premium payment ............................................... 160 6.6.3 High risk profile ...................................................................................... 160 6.6.4 Low efforts related to insurance implementation .................................... 161

Part III – Empirical Part .................................................................................. 165 7 Functionality of the Partner-Agent Model .................................................. 167

7.1 Cases of damage, communication problem, not claiming ................................ 168 7.1.1 Knowledge about insurance coverage and claim procedure ................... 169 7.1.2 Notification of claims submitted ............................................................. 169 7.2 Claim settlement and main difficulties ............................................................. 174 7.2.1 Acceptance or rejection of claims ........................................................... 175 7.2.2 Time period until reimbursement is made............................................... 176 7.2.3 Amount of reimbursement ...................................................................... 179 7.3 Summary and conclusions of the functionality of the Partner-Agent Model ... 182 7.3.1 Lack of knowledge .................................................................................. 182 7.3.2 Deficits in the claim settlement ............................................................... 183

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Table of Contents

8 Cost Structure, Handling of Premiums, and Financial Impact on Households .................................................................................................... 187

8.1 Financial handling of and response to insurance cost ...................................... 187 8.1.1 Cost of micro insurance and financial burden ......................................... 188 8.1.2 Household handling of insurance cost .................................................... 191 8.1.3 Assessment of price/performance ratio ................................................... 193 8.2 Financial impact of micro insurance ................................................................ 195 8.2.1 Reimbursement for paying debts............................................................. 195 8.2.2 Investment into livelihood....................................................................... 196 8.2.3 Further spending options ......................................................................... 196 8.2.4 Factors influencing the spending behaviour ............................................ 196 8.3 Summary and conclusions of the cost structure, handling of premiums, and financial impact of micro insurance on households................................... 198 8.3.1 Difficulties with premium payments ....................................................... 198 8.3.2 Misuse of insurance funds....................................................................... 200

9 Perception of and Satisfaction with Micro Insurance .............................. 203

9.1 Replacement value ........................................................................................... 204 9.2 Policy renewal and confidence ......................................................................... 205 9.2.1 Satisfaction after claims .......................................................................... 205 9.2.2 Influence of micro insurance on living conditions .................................. 208 9.2.3 Policy renewal ......................................................................................... 210 9.2.4 Expected impacts of micro insurance...................................................... 211 9.2.5 Trust in micro insurance ......................................................................... 213 9.2.6 Influence of micro insurance on life improvement.................................. 215 9.3 Unmet needs ..................................................................................................... 219 9.3.1 Uninsured health care needs.................................................................... 220 9.3.2 Neglected agricultural insurance ............................................................. 222 9.3.3 Cost structure and affordability of additional coverage .......................... 222 9.4 Summary and conclusions of perception of and satisfaction with micro insurance ........................................................................................ 224 9.4.1 Incapability to fully restore livelihood .................................................... 224 9.4.2 Confidence in and satisfaction with micro insurance .............................. 225 9.4.3 Need for health-related coverage ............................................................ 227

Part IV – Synthesis .............................................................................................. 229 10 Synthesis .............................................................................................................. 231

10.1 Major findings ................................................................................................ 232 10.2 Implications and recommendations ................................................................ 235 10.2.1 Strategies of micro insurance provision .............................................. 235 10.2.2 Institutional efficiency ........................................................................ 236 10.2.3 General insights .................................................................................. 236 10.3 Conclusion ..................................................................................................... 237

Table of Contents

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Bibliography ............................................................................................................. 239 Literature cited ............................................................................................................. 239 Internet sources ............................................................................................................ 248 Interviews / Personal communication .......................................................................... 249 Data .............................................................................................................................. 250 Appendix ................................................................................................................... 251

VI

Foreword

Foreword by the editor Background. Micro finance is concerned with basic services such as credit, savings accounts and insurance for those who, due to lack of access to credit, are not served by conventional banks, generally referred to as the “poorest of the poor”. Micro finance, therefore, is an important instrument of development policy on the micro development level, specifically community development. Micro finance is useful in places where people possess no resources except for their own labour, ideas and entrepreneurial skills with which to secure a transition to independence if provided with sufficient start-up capital. Micro finance institutions and NGOs, which act as intermediaries/agents between micro finance clients and large financial institutions, provide micro credit or negotiate micro insurance which is guaranteed in ways other than traditional creditworthiness criteria, namely through collective forms of organisation. Frequently these are savings groups or cooperatives of women’s/self-help groups (SHGs) which ensure regular repayment of micro credit loans or honest notification of micro insurance claims through exerting strong social control in the community. Micro finance, which has been a recipe for success in micro development (community development, micro enterprise sector, women’s empowerment) for almost 30 years, has nevertheless become the subject of criticism in recent years. Excessive levels of debt of micro finance customers, high interest rates, and dubious practices in the micro finance sector have been exposed. Whether micro finance can deliver on its promises is consequently being publicly discussed in the international development organisations. Against this background, the author has studied the Partner-Agent Model of micro insurance, in which intermediary organisations such as NGOs bring together insurers and micro enterprises or households on the community level and act as service channels for handling insurance (premium payment, administrative procedures, processing of claims and administration of insured sums in cases of damage claims). The Partner-Agent Model of micro insurance is therefore characterised by the fact that the insurance products are developed through cooperation between the insurer (partner) and the intermediary institution (e.g. NGO), which is engaged in micro development at the interface with a community where it organises self-help groups and where it has detailed knowledge of poor households. The partner issues insurance policies, carries the risk in the event of damage and processes claims. Through its community-based development work, the intermediary enables the insurer to tap the market potential of poor households – in aggregate, a market of millions of people, and furthermore allows poor households access to insurance products which they could not obtain on the open market. The author addresses the general research question of if and to what extent the intermediary interface, which is central to the success of this model, functions; where impediments which could lead to sub-optimal effectiveness of this model

Foreword

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may exist and where candid criticism of its mode of operation is appropriate, which could explain why micro insurance remains less than successful in reaching its goal of protecting the poor from risks and loss of livelihood. Goal and Method. The research question was operationalised with the aid of surveys in Gujarat and the following dimensions were summarised and operationalised as individual questions: • • • •

knowledge of the mode of operation of micro insurance processing of reported losses cost structure of the insurance and utilisation of compensation payments by the policyholder degree of satisfaction with the insurance cover.

These dimensions were studied empirically for the example of the micro insurance scheme Afat Vimo, a micro insurance program in the Indian state of Gujarat, administered by the Indian NGO All India Disaster Mitigation Institute (AIDMI) in collaboration with the Life Insurance Corporation of India and the United India Insurance Co. Ltd. For a service charge (insurance premium) of 215 rupees (4 CHF), Afat Vimo protects a household against 19 different cases of damage affecting life and livelihood, including accidents to or the death of the main provider for a poor household or poor micro enterprise. The quantitative investigation) is based on an original survey developed by the author) of 256 micro insurance policyholders, of which 62% (158 households/micro enterprises) incurred loss and submitted a claim for damages and had the claim processed, and 38% which had suffered damage but had not submitted a claim for compensation from the insurance, namely the intermediary. This sample was taken from a basic population of 5391 micro insurance policyholders insured by AIDMI. The survey was conducted in urban slum communities and rural villages from July to October 2008. The project treats the subject of micro finance from the perspective of institutional economics and the question of allocative efficiency, in which the deployment and management of resources by institutions stand at the centre. Credit should be given to the author who, with a sharp focus on the economic perspective, has worked in a research gap that has only recently attracted the attention of researchers. In this way the (neoliberal) notion wherein market economyoriented organisations such as insurers (or western-trained) local NGO staff are inherently biased towards allocative efficiency are challenged. Likewise the modernisation theory approach is questioned in the search for areas where lack of success of micro development measures results in the cultural imprisonment of the “planning victims”. Both assumptions have been excluded from the development debate for too long, and neoliberal-oriented institutions, to which local NGOs may also belong, may themselves be part of the problem. It is to the author’s credit that she focusses on these problems with targeted rigor and thereby has extracted essential ground-breaking new insights.

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Foreword

The author’s work primarily identifies inappropriate management practices on the part of the intermediary interface agent who do not direct approved claims and notification and disbursement of compensation quickly enough to policyholders. It is therefore the institutional intermediary, in this case the NGO, which can be the cause of delays in the disbursement of compensation payments of up to six months after the case of damage. Therefore, under circumstances of total destruction of livelihood, the policyholder is forced to borrow money for basic survival due to the delay in disbursement of compensation. It is therefore an institutional, in this case NGO, failure which is a major contributing factor when the compensation payment, which is frequently below the value of the goods/ livelihood to be replaced, is spent on repayment of debts incurred for survival measures (purchase of food), and is no longer available for rebuilding livelihood. The dissertation demonstrates that policyholders who believe themselves to be safe from risks through their insurance and have understood the system as such, may ultimately find themselves in a more wretched situation than previously, and realise that the insurance policy is indeed of no use as a means of ever bringing back the lost existence. A micro development scheme which a priori is considered beneficial can therefore, in the reality of its execution, contribute to impoverishment. It is such findings regarding this taboo subject of the presumed allocative efficiency of neoliberal-influenced institutions and the functioning or non-functioning of the system which provide valuable impetus for its rectification. The project is an integral part of a research program “Poverty Reduction in India”, conducted by Basel University’s Department of Environmental Sciences/ Geography/Urban and Regional Studies since 2004. The program focusses on (1) the basic services in selected developing countries which belong to the new markets; (2) the social stratification within impoverished groups with a focus on the determinants which can effect the possibility of either social upward mobility or further impoverishment; (3) differences in regional development and the promotion of local potential. The empirical work was conducted in partnership with local NGOs in Ahmedabad, Gujarat and financed by the KFPE Commission for Research Partnerships with Developing Countries and the Freiwillige Akademische Gesellschaft Basel. The project was conducted in a difficult environment which required a multi-year approach, trust-building measures and an enormous logistical effort, since it was impossible to question urban slum dwellers or rural micro entrepreneurs without broad local support and the help of NGOs. The author should be given credit for navigating this complex environment while never losing her ability to criticise the deficiencies of the same institutions which were instrumental in assisting with the empirical research. Basel, Autumn 2012 Rita Schneider-Sliwa

Acknowledgements

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Acknowledgements Prior to the introduction to this book, I would like to make acknowledgements concerning the work on this research, which was only rendered possible by the support and encouragement of various people. I would like to express my gratitude to the following persons and corporations: Prof. Dr. Rita Schneider-Sliwa, Professor of Geography/Urban and Regional Studies, University of Basel; for the opportunity to accomplish this study, for supervising this work and for providing much needed professional support. Her extraordinary knowledge and her fruitful input and support were essential for this research. I highly appreciate her professional knowledge and her personality. Prof. Dr. Justin Winkler, Professor of Geography and Cultural Geography, University of Basel and University of Graz; who kindly acted as a co-advisor and gave me professional appraisal of the thesis. I thank all the associates from the Ahmedabad-based non-governmental organisation All India Disaster Mitigation Institute. They invested their time and their effort to coordinate and to facilitate the research stay in Gujarat, India. In particular, I would like to give sincere thanks to Mehul Pandya (project guidance), Hasmukh Sadhu (project guidance and fieldwork facilitation), Sanchit Oza (fieldwork facilitation and project support), Pushkar Gupte (technical support and responsibility for personal affairs), and Kalpesh Prajapati (fieldwork facilitation). My thanks are presented to every local volunteer in Ahmedabad City, Bhuj, Kheda City, Vadodara City, and the City Radhanpur and villages in Patan District, Gujarat, India, for helping in finalizing the fieldwork. Rajesh and Sandhya Bhat of Swapath Trust (formerly Matrusmruti Trust), Ahmedabad, India; for their professional support, enriching advice, and fruitful discussions. Their excellent knowledge related to local conditions and continuous support during the process of writing were indispensable for the thesis. Usha Pandya, who let me live at her home like a family member and offered unstinting care and support during my stay in India. I would like to extend my warmest thanks to all my friends and colleagues for their encouragement and continuous support during the whole process of research. In particular, Dr. Heike Schmidt for her help with literature research, Claudia Erismann, Esther Gloor and Christine Griebel for fruitful discussions regarding the analyses, Leena Baumann for illustrating the maps, and Charlotte Ciprian for her indispensable emotional support. I also thank the Commission for Research Partnerships with Developing Countries - Platform Science and Policy of the Swiss Academy of Sciences, founded

X Acknowledgements

by the Swiss Agency for Development and Cooperation (SDC) and the Freiwillige Akademische Gesellschaft, Basel for their financial support of the research. Many thanks to the Geographisch-Ethnologische Gesellschaft Basel, the Max Geldner-Stiftung, the Josef and Olga Tomcsik-Stiftung, the Dissertationenfonds der Universität Basel and the Freiwillige Akademische Gesellschaft Basel for their printing costs subsidies. I am grateful to my parents Elfriede and Robert Saalfrank for enabling university studies and for everything they taught me, and to my friends Sandra Eichenberger and Annick Staub for their encouragement and continuous support during the whole process of research. My final and greatest appreciation goes to Thomas Baumgartner, who encouraged me in writing the PhD thesis and has always been supportive in any situation.

Executive Summary

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Executive Summary Conceptual background. Micro insurance, micro credit and micro savings are part of micro finance. Micro finance emerged in the form of micro credit in the 1970s in Bangladesh and since then has been disseminating throughout the developing world. Nowadays micro credit is well established as a tool of development. By contrast, the concept of micro insurance is rather novel and not all aspects have been studied as yet. Micro insurances operate like commercial insurance systems, but with a different target group: the poor. Household and business assets of the poor are often unprotected against perils. Insurance can be a solution, if it is affordable and accessible. Commercial insurance schemes are usually difficult to access and too costly, whereas micro insurance schemes are regarded as both accessible and affordable. Micro insurance schemes address low-income people and as 2.6 billion people worldwide live below the poverty line, there is a high demand and an unexploited market potential for micro insurance schemes. Objective. The starting point of the present work is that it is generally assumed that micro insurance schemes work well and contribute to risk mitigation and poverty reduction by transferring risk onto third parties. However, if and to what extent these goals are achieved, or why they are not achieved, is not really understood. It is entirely possible that micro insurance does not accomplish its goals or that there are still flaws in the system which constitutes the insurance propagating institutions (supply side). It is conceivable that there are deficits on the demand side, such as poor knowledge and misconceptions about insurance benefits or inappropriate spending behaviour of the reimbursement funds after a case of damage. However, these deficits on the demand side can also be due to flaws in the system of providing micro insurance. It is possible that, particularly at the interface between insurance providers and the insured, the system does not fully function. There can be differences between the theoretically postulated development benefits of micro insurance and the operational management of facilitating agencies, which can diminish the current benefits of micro insurance. The present work analyses the Partner-Agent Model that is one delivery channel used to provide micro insurance. Within the Partner-Agent Model, insurers (the partner) work together with an organisation or institution that has an existing interface with the low-income market (the agent) to reach policyholders. Data and methods. This empirical study predominantly applied quantitative methodology. The quantitative analyses were based on a social science survey analysis carried out in July, August and October 2008 in Gujarat, India in cooperation between the University of Basel, Switzerland and All India Disaster Mitigation Institute, Ahmedabad, India. The empirical work was funded by the Commission for Research Partnerships with Developing Countries of the Swiss Academy of Sciences, with research funds from the University of Basel and the

XII

Executive Summary

Freiwillige Akademische Gesellschaft of Basel. The sample consists of 158 policyholders who had claimed under the micro insurance scheme Afat Vimo and a control group of 98 policyholders who had not claimed. Complementing illustrative elements, such as in-depth interviews with experts from non-governmental organsiations, insurance companies and insurance agencies were used. Study area and case study. The study area is located in the West Indian state Gujarat in the districts of Ahmedabad, Kachchh, Kheda, Patan, and Vadodara. Those districts were chosen as they included all policyholders who had submitted claims in the State of Gujarat since the inception of the scheme. The study is based on Afat Vimo, the micro insurance scheme of All India Disaster Mitigation Institute, an Indian non-governmental organisation dedicated to relief planning and advocacy for India’s poor in disaster situations. The micro insurance scheme operates in the Indian context and covers low-income households against damage and loss of household and livelihood assets in cases of 19 natural and man-made disasters, loss of life, and accident. Characteristically, Afat Vimo policyholders are disaster-prone, low-income households, who are engaged in micro enterprises in the informal sector that is unorganized with no social security, and have low assets and savings. Findings. The data analysis revealed the following results with respect to the operation and management of micro insurance: 1. A high share of the insured did not claim, even if they were entitled to benefits. This is due to lack of knowledge about insurance benefits and about how to settle claims. Moreover, justified claims were rejected due to lack of knowledge on the part of the policyholders. For instance, policyholders were unaware of how to adequately prove their losses. 2. The majority of the policyholders who claimed received their demands. However, most households were paid less than the maximum insurance sums, and these maximum payouts were already insufficient to compensate the loss. 3. The settlement of claims took on average five months, which is too long. Poor households with few means to cope with disaster impacts are highly dependent on insurance to replace the damage as fast as possible in order to return to normal life. Insured people use the same coping mechanisms that uninsured households use after disaster, which questions the benefits of micro insurance. Moreover, insured people are even worse off than those with insurance, because while waiting for insurance funds they face loss of wages or they live in damaged houses. 4. It is striking that only a small proportion of the insured households actually used the money to replace damaged items. This is noteworthy because the real purpose of insurance is to replace damaged or lost items. As a result of the long waiting period, households used the insurance money for other pur-

Executive Summary

XIII

poses. They repaid debts they had to accumulate in the interim to compensate for loss of earnings and to buy basic items of daily use, and not for repair or replacement of the damaged assets. 5. There is a high demand for insurance from at-risk, poor households even if the scheme has weaknesses and there is still need for improvement. Policyholders were willing to undertake additional efforts in order to afford premiums. Further, they perceived micro insurance as a means to restore their livelihood following a disaster. Implication. There are flaws in the delivery of micro insurance and in particular in the Partner-Agent Model. The highest need for improvement in the PartnerAgent Model is at the communication level. In other words, policyholders are insufficiently informed about possible benefits and about how to make a claim. Communication mechanisms must be improved at the lowest level. The observation that beneficiaries had to wait too long for the insurance money requires a more efficient claim settlement process from the insurance companies (the partner) and the facilitators (the agent). Then policyholders probably would not use the insurance money for debt reduction, as there would be less or even no need to incur debts while waiting for reimbursement funds. Households see in the insurance scheme a form of social security that is not provided to them, either by the state or by other organisations. This implies that households are content with the system and all its defects. Overall, then, micro insurance is recognized as being beneficial, whereas the potential benefits have not been completely realized due to flaws in the operative management. Micro insurance is rather a starting point, as it does not completely replace losses. Having insurance means that policyholders use the benefits of micro insurance schemes for bridging a gap instead of replacing the loss.

XIV

Glossary and Acronyms

Glossary and Acronyms Afat Vimo

Gujarati term for disaster insurance, the micro insurance scheme analysed

Afat Vimo policyholder

Individual who is insured under the micro insurance scheme Afat Vimo

Agent

The intermediary between the insurer and the policyholder

AIDMI

All India Disaster Mitigation Institute is an Ahmedabad, India-based NGO

Beneficiary

A policyholder who experienced a settled claim and received insurance funds

BPL

Below Poverty Line is an economic benchmark and poverty threshold used by the government of India to indicate economic disadvantage and to identify individuals and households in need of government assistance and aid. It is determined using various parameters which vary from state to state and within states. This concept is much disputed, as it is only based on average incomes.

Claim

A request for payment of insurance funds when insured risk occurs

District

An administrative division of an Indian state or territory. Districts are further subdivided into sub-districts or also called talukas. India has about 610 districts.

Household head

For this study the person interviewed is defined as the household head.

Rupee

Currency of India, 100 Rupee = 2.14 USD (dated October 2008); all currency data refer to this exchange rate.

Taluka

Gujarati term for a sub-district of a district

List of Figures

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List of Figures Fig. 1.1 The provision of micro insurance via the Partner-Agent Model and institutions involved ......................................................................................... 7 Fig. 1.2 Research design of the empirical study ............................................................ 8 Fig. 2.1 Outline chapter 2 ............................................................................................ 17 Fig. 2.2 Most common types of micro insurance products .......................................... 22 Fig. 2.3 Three key actors in the Partner-Agent Model ................................................. 28 Fig. 2.4 Micro insurance can break the cycle of poverty ............................................. 31 Fig. 2.5 Today's and future approaches to cope with disaster impacts of uninsured households ................................................................................. 33 Fig. 2.6 Institutions involved in micro insurance delivery........................................... 49 Fig. 3.1 Outline chapter 3 ............................................................................................ 51 Fig. 3.2 Approach of the facilitator.............................................................................. 58 Fig. 3.3 Micro insurance for increasing the economic level ........................................ 59 Fig. 3.4 The insurance system and its stakeholders (exemplified by Afat Vimo) ........ 63 Fig. 4.1 Outline chapter 4 ............................................................................................ 79 Fig. 4.2 Influence of poverty, vulnerability and disaster on livelihood, infrastructure, and environment ...................................................................... 88 Fig. 4.3 Typical housing in Dudheshwar (in the old part of Ahmedabad) ................... 94 Fig. 4.4 Old town of Ahmedabad................................................................................. 94 Fig. 4.5 Earthquake-affected houses (Bhuj Community Jayprakashnagar) ................. 97 Fig. 4.6 Earthquake-affected houses (Bhuj Community Ashapuranagar).................... 97 Fig. 4.7 The water level mark of 2005 flood (Indiranagar Community in Kheda) .... 102 Fig. 4.8 River bed in Hanumannagar Community ..................................................... 102 Fig. 5.1 Outline chapter 5 .......................................................................................... 107 Fig. 5.2 Overview of the research methodology ........................................................ 108 Fig. 5.3 The policyholders surveyed as a share of the total of Afat Vimo policyholders ................................................................................................ 109 Fig. 5.4 The procedure of the sample selection ......................................................... 110 Fig. 5.5 During the pilot test on June 30th, 2008 in Dudheshwar Community, Ahmedabad ................................................................................................... 112 Fig. 5.6 Instruction of volunteers in Hanumannagar Community, Kheda ................. 112 Fig. 5.7 Factors influencing each other ...................................................................... 114 Fig. 6.1 Outline chapter 6 .......................................................................................... 127 Fig. 7.1 Outline chapter 7 .......................................................................................... 168 Fig. 8.1 Outline chapter 8 .......................................................................................... 187 Fig. 8.2 Decision-making triangle ............................................................................. 188 Fig. 9.1 Outline chapter 9 .......................................................................................... 203

XVI

List of Tables, Boxes and Maps

List of Tables Tab. 2.1 Tab. 2.2 Tab. 2.3 Tab. 2.4 Tab. 3.1 Tab. 3.2 Tab. 3.3 Tab. 3.4 Tab. 3.5 Tab. 3.6 Tab. 3.7 Tab. 3.8 Tab. 3.9 Tab. 3.10 Tab. 3.11 Tab. 4.1 Tab. 5.1 Tab. 5.2 Tab. 5.3 Tab. 5.4 Tab. 6.1 Tab. 6.2 Tab. 6.3 Tab. 6.4 Tab. 6.5 Tab. 6.6 Tab. 6.7 Tab. 6.8 Tab. 6.9 Tab. 6.10 Tab. 6.11 Tab. 6.12 Tab. 6.13 Tab. 6.14 Tab. 6.15 Tab. 6.16 Tab. 6.17 Tab. 6.18 Tab. 6.19 Tab. 6.20 Tab. 6.21 Tab. 6.22

Risk profile of uninsured households............................................................. 34 Damage incurred by uninsured households through disaster ......................... 35 Losses uninsured households faced from 2004 to 2008 ................................ 35 Risk management strategies of uninsured households ................................... 36 Micro insurance coverage in India................................................................. 55 Contingency risk and insured sum ................................................................. 57 Distribution of all Afat Vimo policyholders, by state.................................... 71 Information leading to adoption of insurance ................................................ 71 All Afat Vimo policyholders, by gender........................................................ 71 Age structure of all Afat Vimo policyholders................................................ 73 Proof of age of all Afat Vimo policyholders ................................................. 73 Relation of first and second nominee to Afat Vimo policyholders ................ 75 Occupation of all Afat Vimo policyholders ................................................... 75 Yearly incomes of all Afat Vimo policyholders (in Rupees)......................... 76 Ownership of house or flat of Afat Vimo policyholders ................................ 76 Facts about the Gujarat districts selected ....................................................... 90 Sample selection of micro insurance policyholders in Gujarat, by district.. 111 Overview of the variables utilised ............................................................... 116 Classification of occupations in India .......................................................... 119 Interviewed experts...................................................................................... 126 Geographic distribution of the sample ......................................................... 128 Religious affiliation ..................................................................................... 130 Household size ............................................................................................. 130 Age structure ............................................................................................... 132 Gender ratio of household head ................................................................... 132 Gender ration of all household members ..................................................... 134 Household composition (relation to household head).................................. 134 Educational attainment of indivudal household members ........................... 136 Educational attainment of household head, husbands and wives ................ 136 Household income, per household and per capita........................................ 140 Source of income of contributing household members ............................... 141 Types of micro enterprise ............................................................................ 142 Poverty status............................................................................................... 142 Average daily income of household members, by rural and urban areas, based on 256 households ............................................................................. 143 Comparison of poverty line definitions ....................................................... 143 Land and house ownership .......................................................................... 144 Other assets .................................................................................................. 145 Investment in household articles and business items 2004 to 2008 (in Rupees)................................................................................................... 146 Type and frequency of disasters experienced (risk profile) ......................... 148 Damage incurred from six most frequent disasters...................................... 150 Damage incurred from all disasters ............................................................. 153 Total losses from all disasters 2004 to 2008 (in Rupees) ............................ 154

List of Tables, Boxes and Maps

Tab. 6.23 Tab. 6.24 Tab. 6.25 Tab. 6.26 Tab. 6.27 Tab. 7.1 Tab. 7.2 Tab. 7.3 Tab. 7.4 Tab. 7.5 Tab. 7.6 Tab. 7.7 Tab. 7.8 Tab. 7.9 Tab. 7.10 Tab. 7.11 Tab. 7.12 Tab. 8.1 Tab. 8.2 Tab. 8.3 Tab. 8.4 Tab. 8.5 Tab. 8.6 Tab. 8.7 Tab. 8.8 Tab. 8.9 Tab. 8.10 Tab. 8.11 Tab. 8.12 Tab. 9.1 Tab. 9.2 Tab. 9.4 Tab. 9.3 Tab. 9.5 Tab. 9.6 Tab. 9.7 Tab. 9.8 Tab. 9.9 Tab. 9.10 Tab. 9.11 Tab. 9.12 Tab. 9.13 Tab. 9.14 Tab. 9.15 Tab. 9.16 Tab. 9.17

XVII

Insurance track record total, by religious affiliation and poverty status ...... 155 Entry of households into insurance system.................................................. 156 Total membership a ...................................................................................... 157 Premium payment ........................................................................................ 158 Summary of major findings Chapter 6 ......................................................... 162 Knowledge about insurance coverage ......................................................... 170 Knowledge about the claim procedure ........................................................ 170 Claim reasons (2004 to 2008) ...................................................................... 171 Disaster impacts reported and claims made ................................................. 172 Reasons for not submitting claims ............................................................... 173 Whether or not a claim is accepted .............................................................. 176 Reasons for rejected claims ......................................................................... 176 Time period until reimbursement is made ................................................... 177 Duration of claim settlement, by religious affiliation and poverty status .... 179 Reimbursement funds and premiums........................................................... 180 Amount of reimbursement (in Rupees), by incident .................................... 181 Summary of major findings Chapter 7 ......................................................... 185 Financial burden .......................................................................................... 189 Financial burden, by religious affiliation ..................................................... 190 Financial burden, by poverty status ............................................................. 190 Household handling of premium payments ................................................. 192 Household handling of premium payments, by religious affiliation ............ 192 Household handling of premium payments, by poverty status .................... 192 Assessment of price/performance ratio........................................................ 194 Assessment of price/performance ratio, by education of household head ... 194 Assessment of price/performance ratio, by religious affiliation .................. 194 Spending of reimbursement funds ............................................................... 197 Spending of reimbursement funds, by religious affiliation and poverty status ............................................................................................... 197 Summary of major findings Chapter 8 ......................................................... 199 Replacement value ....................................................................................... 204 Satisfaction with the micro insurance .......................................................... 207 Satisfaction after claims, by religious affiliation and poverty status ........... 207 Reasons for satisfaction ............................................................................... 207 Reasons for dissatisfaction .......................................................................... 208 Influence of micro insurance on living conditions ....................................... 209 Micro insurance influence on living conditions, by religious affiliation...... 209 Micro insurance influence on living conditions, by poverty status .............. 210 Policy renewal ............................................................................................. 211 Expected impacts of micro insurance .......................................................... 212 Trust in micro insurance .............................................................................. 214 Trust in micro insurance, by religious affiliation ......................................... 214 Trust in micro insurance, by poverty status ................................................. 215 Influence of micro insurance on life improvement ...................................... 217 Influence of micro insurance on life improvement, by religious affiliation . 217 Influence of micro insurance on life improvement, by poverty status ......... 218 Disaster experience with and without micro insurance ............................... 218

XVIII

List of Tables, Boxes and Maps

Tab. 9.18 Differences for household with micro insurance compared to without insurance ......................................................................................... 218 Tab. 9.19 Need for further coverage ............................................................................ 219 Tab. 9.20 Unmet needs ................................................................................................ 221 Tab. 9.21 Financial burden affording the micro insurance for households with unmet needs ......................................................................................... 223 Tab. 9.22 Estimate of share of annual income, by premium........................................ 224 Tab. 9.23 Summary of major findings Chapter 9 ......................................................... 226

List of Boxes Box 2.1 Box 3.1 Box 3.2 Box 3.3 Box 3.4 Box 4.1 Box 4.2 Box 4.3 Box 4.4 Box 4.5 Box 6.1

The Partner-Agent Model ............................................................................... 27 The four post-disaster phases ......................................................................... 60 The insurance companies................................................................................ 65 The NGO AIDMI ........................................................................................... 66 Characteristics of micro insurance policyholders ........................................... 70 Disasters ......................................................................................................... 81 Disaster management in India ........................................................................ 83 Vulnerability ................................................................................................... 86 Below Poverty Line (BPL) in India ................................................................ 87 Critique on poverty lines and current discussion ............................................ 88 Micro enterprises .......................................................................................... 139

List of Maps Map 3.1 Map 4.1 Map 4.2 Map 4.3 Map 4.4 Map 4.5 Map 4.6 Map 4.7 Map 4.8 Map 4.9 Map 4.10 Map 4.11 Map 4.12

Outreach of the micro insurance scheme Afat Vimo, by Indian state 69 Vulnerable population of India 82 Selected natural disasters in India 84 Disaster map of Gujarat 85 Surveyed cases in selected Gujarat Districts 92 Satellite view of surveyed areas ................................................................... 93 Satellite view of Ahmedabad City ................................................................. 95 Satellite view of Dudheshwar Community in Ahmedabad ............................ 96 The City of Bhuj, District of Kachchh ........................................................... 98 Four of the study areas in Bhuj, Gujarat ........................................................ 99 Satellite view of Kheda City ........................................................................ 101 Satellite view of Vadodara City ................................................................... 104 Satellite view of Patan District .................................................................... 105