Managing risks of informal workers: role of micro and public insurance programmes

Anoop Satpathy Providing insurance services to the working poor in the rural sector is a major challenge for both community-based organisations and the government alike. Micro and public insurance programmes present an interesting opportunity to enhance the social protection level of poor households by managing their risks significantly. In India, about 93 per cent of the total 398 million workforce depends on the informal economy for employment and earnings (NSSO, 2000/01). The size of the formal sector, characterised by higher earnings and job security, is very small. Within the informal economy a large majority of workers work primarily in the rural agricultural sector as cultivators and agricultural labourers. Low productivity and earnings, in this sector result in very high incidence of poverty among all categories of informal workers’ household in general, and that of the rural agricultural households in particular. The low-income position and other deprivations make the rural households highly vulnerable to a wide array of risks relating to their lives and livelihoods. With low income and hence, low cumulative saving and asset base, it becomes extremely difficult for them to fight risk and crisis on their own means. Financial loss arising out of such risks can be effectively addressed through insurance services. The coverage of these households under formal sector social insurance programmes are hindered by problems of imperfect information, and costly enforcement. The private insurance companies have also left rural market untouched due to reasons such as low profitability, high transaction costs and moral hazard problem. Types of risks/insecurities The designing of an appropriate risk management strategy entails understanding and identification of various types of risks, frequency of their occurrences and extent of losses. The low-income households in the informal economy face a combination of risks and contingencies such as multiple health, harvest, income, price and labour market risks etc. apart from fighting for daily survival needs. Unni and Rani (2003), have classified these risks into two categories: (i) random shocks which are both economic (loss of job, price rise, social expenditure and death) and natural (crop failure, drought, cyclone and earthquake) that hit households from time to time or contingencies such as illness and untimely death and (ii) risk and income insecurities that are embedded in the structural characteristics of the households and individuals such as – age, marital status, gender, activity status, education and skill level, income and asset distribution and caste. Responses to risks and its management As vulnerability to risks is a significant contributor of poverty, therefore risk management strategies assume importance. Poor households, community based organisations and government have distinct risk management strategies either in anticipation of a shock (ex-ante) or in response to a shock (ex-post). The former measure intends to reduce or mitigate the exposure to a shock and the latter to relieve the impact of a shock after it occurs. In this section, we will focus on ex-ante risk reduction and mitigation strategy adopted by households, community based organisations, and governments. Household and group based response Poor households individually reduce and mitigate risks in an ex-ante situation by diversifying their crops and income sources, intercropping and lastly by migration. Additionally, at the community and group level, income soothing is attained through informal savings (at home, through rotating savings and credit associations), informal borrowings (from friends and relatives, money lenders, employers, and traders), insurance including self-insurance (accumulation of assets) and informal insurance (reciprocal transfers, gifts and loans) (Brown and Churchill, 1999; World Bank, 2000). By resorting to these strategies however, households manage to protect themselves from only 10 to 40 per cent of the risk-induced losses (Morduch, 1998). Community based micro-insurance programmes The most noteworthy development in addressing risks of the poor and low-income households in recent years has been the provision of access to financial services. Micro-finance by providing easier access to loans and accumulated savings in times of need and with flexible savings/repayment schedule has the potential to offer greater protection and an improved standard of living compared to informal means. However, savings and credit products have certain limitations. They can’t provide complete protection against risks, which are highly uncertain and involve greater losses than what a household can save or repay (Churchill and Brown, 1999; FWWB, 2001). Therefore, these households still remain vulnerable to unexpected events. A single unfortunate event can nullify the growth-enhancing effects of saving and credit and reinforce poverty and indebtedness. For example, harvest failure due to insufficient monsoons may result in reduction in farm income; increase indebtedness and illness among poor households. To face such an eventuality effectively, it is argued that the members of existing micro-finance programmes need to be protected through specialised insurance instruments. In response to this, in India and elsewhere, most of the micro-finance institutions such as SEWA, SHARE, MYRADA, etc. have added insurance into their product portfolio as a complementary tool to include poor people in the social protection net. A number of micro-insurance schemes are presently operating in various parts of the country. These provide protection against risks such as: health, life, personal accident, disability, asset and property insurance, maternity benefits, death relief and rehabilitation etc. The community based micro-insurance schemes are running successfully in many parts of the country because of reasons such as affordability, accessibility, acceptability, credible services and active participation of target groups. However, their coverage in terms of types of risk and target population is extremely limited. Further, these programmes focus on risks that usually have a large idiosyncratic component such as illness and injury, death, disability, loss of assets and property. None of the schemes have made any effort till now to mitigate co-variant production and market risks faced by millions of farmers. There is a need to promote and up-scale these schemes and to expand their benefit basket to provide comprehensive coverage by including covariant production and market risks. Table 1:Community Health Insurance Schemes in India Name, Location & year of initiation Target Groups Coverage Remarks ACCORD, Tamil Nadu, 1992 Scheduled tribes and PTGs 13,070 Linked with the New India Assurance Company BAIF, Maharashtra, 2001 Poor women 1,500 Linked with United India Insurance Company BULDHANA Urban Cooperative and Credit Society, Maharashtra Farmers 175,000 Linked with United India Insurance company DHAN Foundation Tamil Nadu, 2000 Poor women 19,049 No linkages, the women operate the scheme themselves Karuna Trust, Karnataka, 2002 Total population with focus on SC, ST 634,581 Linkage with National Insurance Company MGIMS Hospital, Maharashtra, 1981 The small farmers and landless labourers 30,000 No linkages, the organisation operates the scheme Navsarjan Trust, Gujarat, 1999 (Discontinued in 2000) Select scheduled caste individuals - Linkage with the New India Assurance Company RAHA, Chhattisgarh, 1980 Poor people 92,000 Have their own providers SEWA, Gujarat, 1992 SEWA union women members and their husbands 1,067,348 Linkage with National Insurance Company Student’s Health Home, West Bengal, 1952 Full-time student from class 5 to university level 5,600,000 Have their own health facilities Voluntary Health Services Centre, Tamil Nadu, 1972 Total population 104,247 Have their own hospital and health centres Yeshasvini Trust, Karnataka, 2003 Members of the cooperative Societies 2,500,000 Operate their own programme Source: Devadasan et. al (2004) Government programmes to manage risks In contrasts to micro-insurance programmes, the government’s risk management strategy has been designed to meet both idiosyncratic and co-variant risks. Crop-insurance scheme Agriculture is highly prone to weather induced production, market (or price) and input risks. To manage production risk and to protect farmer’s income, the central government introduced for the first time a Comprehensive Crop Insurance Scheme (CCIS) in Kharif 1985 season on the basis of ‘area approach’. The scheme links insurance with credit wherein the sum insured is equal to the crop loan disbursed, subject to a maximum of Rs. 10,000 per farmer. The premium was fixed at two per cent of the sum insured for paddy, wheat, millets and one per cent for oil seeds and pulses. Fifty per cent of the premiums payable by the small and marginal farmers were subsidised. The performance analysis suggests that the scheme failed in its basic objective of underwriting the farmer’s losses or at least absolving him, fully or partially of his crop loan liability from institutional agencies (RBI, 1989). Another major argument was that of the total all-India cumulative amount claimed. Gujarat state alone received 48.8 per cent for one single crop namely, groundnut. As the premium of the scheme is not based on actuarial rates, therefore low premium to claim ratio (19.3 per cent) threatened the viability of the scheme. Lastly, the scheme failed to make any significant impact due to limited coverage of the farmers (64.5 million). Due to above mentioned weaknesses, the CCIS scheme was replaced with National Agricultural Insurance Scheme (NSIS) from 1999-2000 Rabi season. It is being implemented in 23 States and two Union Territories on the basis of the ‘area approach’. The scheme intends to cover all food crops (cereals, millets and pulses), oil seeds and annual horticultural/commercial crops in respect of which farm level panel data of past yield is available for adequate number of years. All farmers, irrespective of their land holding or indebtedness, are being covered under the scheme and like the CCIS, small and marginal farmers were given a fifty per cent subsidy in the premium. The CCIS and NAIS protect a farmer’s income partially as they cover only production risks and have no mandate to cover market (price) risks. Therefore, the Farm Income Insurance Scheme (FIIS) was launched on a pilot basis in 18 districts of 12 states during Rabi 2003/04 season to protect the farmer from both types of risks (Economic Survey, 2003/04). Currently, the scheme is covering only two crops i.e., wheat and paddy from which NAIS has been withdrawn. Gradually, the scheme would be expanded to cover all Crops by eventually replacing NAIS. The crop insurance scheme has succeeded to a large extent in reducing the income loss of millions of farmers from production risks. However, the coverage is still quite limited; the programme is restricted to beneficiaries of government-sponsored schemes; and insurers don’t participate actively in delivering these products on a large scale. The viability of the schemes is also threatened by low premium to claim ratio. There is a need to improve the effectiveness of the scheme by expanding coverage, greater public-private partnership, fixing premium on the basis of actuarial rates and covering input risks, apart from production and market risks. Health and life insurance schemes Apart from managing agricultural production risks, the government has two specific welfare schemes i.e., Janshree Bima Yojana (2000) and Universal Health Insurance Scheme (2003) to manage non-production/livelihood related risk relating to life and health. Both the schemes are targeted towards persons from below poverty line households and informal sector workers. The former scheme intends to provide access to affordable hospital care whereas the latter aims to provide protection against untimely death/permanent disability by accident or for other reasons. In both the schemes, the insurance premium is highly subsidised. The reviews of performance of both the scheme show several weakness such as: extremely limited coverage compared to other developmental schemes of the government; lack of participation and ownership of target groups; weak administrative and implementional set up etc., to name a few. The above-mentioned weaknesses reflect limited effectiveness and utility of the programmes in managing risks of millions of the poor. One of the important constraints that hinder the spread of various insurance products in rural areas is the information problem. Role of ICT in promoting insurance By providing access to information and services, ICT has a significant role to play in promoting insurance products and has the potential to deliver insurance services at the doorsteps of illiterate-low-income-geographically spread rural communities in the most cost effective manner. The field-based Mobile Computing Technologies developed by BASIX, Hyderabad and Computer Munshi programme of PRADAN are successful efforts in this regard and there is a need to replicate these experiences. The following are some of the potential ways in which ICT could be utilised to spread insurance services among the rural poor households. ICT can be used for developing database, analysis, controlling distribution and transaction costs, developing suitable and affordable rural insurance products, providing better services besides speedy claim servicing; As most of the transactions happen in the field, ICT will ensure better contract with insurers, regular monitoring and tracking of premium repayment, providing information to customers etc.; ICT can enable insurers to feed in their preferences and complaints to providers so as to bring about improvements and change; ICT can help in promoting and up-scaling micro, crop and other insurance programmes by spreading information and awareness among illiterate target groups about features and benefits of insurance products and their positive role in managing risks to life and livelihoods; By disseminating advance information about weather and market price situation to farmers, ICT would help in preventing production and variable price risks. Conclusion Micro and public insurance programmes present an interesting opportunity to enhance the social protection level of poor households by managing their risks significantly. These programmes are reportedly benefiting some of the poorest groups such as adivasis, dalits, farmers and informal women workers. There is an urgent need to promote and upscale these efforts so as to cover all informal sector workers and their families. Successful experiences suggest that ICT has a significant role to play in extending the outreach of various schemes. ICT enables the most cost effective delivery of insurance products by providing access to and dissemination of information, ideas, knowledge and services. So the future challenges lie in channelling the opportunities extended by technology towards replicating and formulating innovative insurance products to enhance the reach of the insurance coverage to marginalised communities. References Brown, Warren and Churchill Craig (1999), “Providing Insurance to Low-Income Households”, November, 1999. Devadasan, N. et. al., (2004), “ACCORD Community Health Insurance: Increasing Access to Hospital Care”, Economic and Political Weekly, July 10, 2004. Government of India (2004 and 2005), Economic Survey, Ministry of Finance (Economic Division), New Delhi. FWWB (2001), “Orientation Material on Micro-insurance for Micro-Finance Institutions”, Friends of Women’s World Banking. ILO (2002), “Decent work and the Informal Economy ” International Labour Conference, 90th Session, Geneva. Morduch (1998), “Between the Market and State: Can Informal Insurance Patch the Safety Net”, World Bank Research Observer, World Bank. National Sample Survey Organisation (2001), Consumer Expenditure Survey (1999-2000), Sixth Quinquennial Survey, NSS 55th Round (July 1999-June 2000), Department of Statistics and Programme Implementation, Government of India, New Delhi. Ranson, M.K. (2003), “Community Based Health Insurance Schemes in India: A Review”, National Medical Journal of India, Vol. 16, No.2, pp 79-89. Rosenzweig (1988), “Risks, Implicit Contracts and the Family in Rural Areas of Low-Income Countries”, The Economic Journal, Vol. 98, pp. 1148-1170. RBI, (1989), Agricultural Credit Review Committee, (Chairman: A. M. Khusro), Bombay, Reserve Bank of India. Unni, J and Uma Rani (2003), “Social Protection for Informal Workers in India: Insecurities, Instruments and Institutional Mechanisms”, Development and Change, Vol. 34, No. 1, pp. 127-161. World Bank (2000), “Attacking Poverty”, World Development Report, New York, Oxford University Press. Author: Anoop Kumar Satpathy is Associate Fellow, V.V.Giri National Labour Institute, Government of India.

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