Why Insurance Giants Should Shake Hands with MFIs?

The insurance sector has penetrated only 4% of the total Indian population, most of which is urban. This leaves a huge market completely untapped. Around two-thirds of people living in tier two and three cities do not have insurance. This is either because they do not understand insurance or cannot access the right policies. Even small and micro enterprises remain excluded from traditional insurance products due to affordability or other constraints. The pandemic highlighted that only 5% of MSMEs had insurance coverage, with micro and small ones being more resistant, considering insurance as an “unnecessary expense.” Of the ones covered, most opt for the schemes mandated by the government or offered by MFIs and NBFCs serving in their region. 

Against this backdrop, the mission of ‘Insurance for All by 2047’ remains a distant dream. To turn this into reality, insurance companies in India need to reach underpenetrated regions and serve these markets with innovative products. Here’s a look at how strategic partnerships between insurance providers and microfinance institutions (MFIs) can play an instrumental role in driving growth for both sectors while enabling financial inclusion.

Enterprises Covered Under Insurance or Social Security

Pivotal Role of Insurance in Financial Inclusion

Insurance provides a safety net against unforeseeable events. Financial protection to individuals, families, and businesses offers several benefits, creating a more financially secure and resilient society.

Facilitates Risk Mitigation

A large part of the rural Indian population is employed in the agricultural sector. Crop insurance is among the most critical services to secure their financial future against natural disasters and weather-related crop fallouts. Health insurance also needs consideration, as it can empower the financially challenged to access quality healthcare.

Enable Financial Planning

Micro-insurance is among the primary requirements of the financially excluded MSMEs. Most have limited access to credit and are exploited by traditional moneylenders during challenging times. Combining microinsurance and microcredit can give these enterprises a new lease on life. Further, life insurance and term insurance can save families from being pushed into poverty or debt in case of the breadwinner’s untimely demise. It can even help pull them out of poverty. 

Minimise the Impact of Business Interruption

The very survival of small and medium-sized enterprises is threatened by financial crises during natural calamities, market slowdowns, or unpredictable business discontinuity. Access to facilities, such as business interruption insurance, motor breakdown insurance, loss of profit insurance, and natural disaster damage cover can provide the necessary financial padding to help them navigate difficult times. Group insurance facilities can significantly improve the quality of healthcare accessed by the employees of micro and small enterprises. 

Should Insurance Companies in India Collaborate with MFIs?

Insurance companies in India face several challenges in penetrating the financially excluded sections. MFIs can help bridge this gap as they have a strong foothold among the rural and disconnected population as well as small businesses. 

MFIs Are Poised for Growth

The Indian MFI sector grew by a whopping 24.6% in fiscal 2024, according to a report by Microfinance Industry Network. The Indian government has undertaken several initiatives, like Make in India, Digital India, and Start-up India, to support the financially unserved and underserved businesses. In line with its initiatives, the government also supports MFIs to enable MSMEs to access traditional financial services, such as credit and insurance at subsidised rates. 

The Union Budget 2024 highlights the government’s proactive approach to support and amplify access to financial services for thin-file female entrepreneurs in underserved regions. The goal is to build climate resilience and make lending accessible and affordable. The government also has special schemes to support MFI operations in PSIG states. The government’s emphasis highlights the role and capacity of MFIs to bring about a financial revolution in underserved markets.

Awareness Initiatives

MFIs have been at the forefront of financial inclusion. With over 200 institutions operating in 646+ districts, the microfinance sector offers insurance companies access to 122 million customers. With such a widespread presence, MFIs can drive mass awareness campaigns at the ground level.  They can introduce the underserved segment to the concept of insurance and the cost-benefit analysis. MFIs can also educate them about various insurance products and how to choose the most appropriate one.

Advocacy and Influence

Insurers often struggle to differentiate themselves and build trust, even in Tier-1 cities. MFIs have already gained the trust and are perceived as reliable sources of financial support. Insurance companies in India can harness this trust to communicate their terms and improve the efficacy of the claims settlement process. By being actively present in the value chain, MFIs can drive insurance penetration deeper.

Affordability

The perception of insurance premiums being unaffordable is a key barrier keeping SMEs and low-income individuals out of the serviceable group. Combining insurance products with the financial services that the remote group already uses can help lower insurance premiums.

Tracking and Evaluations

MFIs work at the granular level directly interacting with the markets unexplored by the insurance sector. This provides them insights into the needs, capabilities, and eligibility of the unserved and underserved. By piggybacking insurance products with MFI offerings, insurance providers can track their impact, assess risk, and monitor success closely. All this can be achieved with lower risk and a shorter turnaround time. 

A Case in Point

Since the government increased the permissible number of collaborations among corporations, renowned insurance companies in India have taken the first steps towards financial inclusion. For instance, Bajaj Allianz joined hands with the NBFC-MFI Satin Creditcare Network Limited to “work together to improve financial inclusion in rural India.” HP Singh, the Chairman and Managing Director of Satin Creditcare Network, highlighted the power of the collaboration stating that it positions the two organisations to “redefine industry standards and set new benchmarks in customer-centric innovation.”

How InsurTech Companies in India Can Support the Collaboration Between MFIs and Insurance Companies

Mobile penetration, which is already at a high 77%, is expected to almost touch 87% by 2026.  Despite this digital presence, insurance companies in India have a long way to go to capture remote markets. This is due to the lack of the necessary infrastructure, for distribution in those markets. InsurTech companies in India can be instrumental in offering a user-friendly interface to cater to these small and distributed markets across India, which can be a game-changer for growth.

While MFIs bring a wealth of knowledge about the underserved markets, cutting-edge InsurTech converts this to actionable insights from insurance providers. Insurers can use deep insights to create specific strategies for these markets. 

Tailoring insurance products to the needs of the underserved is crucial to penetrating these markets. InsurTech companies in India can facilitate policy design, premium setting, and claim process simplification to meet the unique needs of each target group.

Miles to Go

Extending the insurance facility to the underserved is critical for financial inclusion. This requires a collaborative effort from all stakeholders, including regulators, policymakers, financial institutions, and insurers. Partnerships between MFIs and insurers can enhance the outreach and delivery of insurance products. InsurTech companies in India are taking new strides in empowering MFIs and insurance giants to achieve their vision. Adopting an innovative approach can revolutionise policy distribution, claims processing, servicing customers and monitoring for the next leg of growth in the insurance sector.

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