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Riders : Overview

Micro-insurance is a key element in the financial services package for people at the bottom of the pyramid. The poor face more risks than the well-off, but more importantly they are more vulnerable to the same risk. Usually, the poor face two types of risks – idiosyncratic (specific to the household) and covariate (common, eg., drought, epidemic, etc.). To combat these risks, the poor do pro-active risk management – grain storage, savings, asset accumulation (specially bullocks), loans from friends and relatives, etc. However, the prevalent forms of risk management (in kind savings, self-insurance, mutual insurance) which were appropriate earlier are no longer adequate.

Poverty is not just a state of deprivation but has latent vulnerability. Microinsurance should, therefore, provide greater economic and psychological security to the poor as it reduces exposure to multiple risks and cushions the impact of a disaster. There is an overwhelming demand for social protection among the poor. Microinsurance in conjunction with micro savings and micro credit could, therefore, go a long way in keeping this segment away from the poverty trap and would truly be an integral component of financial inclusion.

Features of Riders Used On Insurance

    In case of life micro-insurance products, the cover amount for term insurance ranges between Rs. 5,000-50,000 for a minimum term of five years and maximum of 15 years.
    The entry age for this product is kept between 18-60.
    Endowment insurance policy provides cover for Rs. 5,000-30,000 for a minimum five years and maximum 15 years for people aged between 18 and 60.
    Further, an insurer can collect the premium for both life and general insurance components directly from the consumer or agents.

Why Riders Are Added to Insurance Plans?

A study commissioned by the United Nations Development Programme (UNDP) titled “Building Security for the Poor - Potential and Prospects for Microinsurance in India” states that 90% of the Indian population - some 950 million people - are not covered by insurance and signify an untapped market of nearly US$2 billion. This enormous “missing market” is ready for customized life and non-life insurance, but first, serious mismatches between the needs of the insured and the insurers must be overcome, pitting priorities against profits.

The UNDP report has analysed six key issues pertinent to the growth of the micro-insurance industry in India, capturing the concerns of different stakeholders as indicated below :

    (i) There are specific reasons for low demand for insurance in spite of intense need. Suppliers have their own concerns which helps to explain why there have been so little efforts at market development. Consequently, the rural market is characterized by limited and inappropriate services, inadequate information and capacity gaps.
    (ii) There are challenges in product design, which has resulted in a mismatch between needs and standard products on offer. Efforts at product development / diversification have been limited.
    (iii) Pricing, including willingness to pay and the availability of subsidies, influence the market. In the absence of a historical data base on claims, premium calculations are based on remote macro aggregates and overcautious margins. Building and sharing claims histories can help in aligning pricing decisions with actuarial calculations, thereby reducing prices.
    (iv) Difficulty in distribution is one of the most cited reasons for absence of rural insurance. The high costs of penetrating rural markets, combined with underutilization of available distribution channels, hinder the growth of rural insurance services. This adds to costs, both, managerial and financial. Like inclusive credit, inclusive insurance is expected to be a “low ticket” business, requiring volumes for viability.
    (v) Cumbersome and inappropriate procedures inhibit the development of this sector.
    (vi) Contrasting perspectives of the insured and the insurers, lead to low customization of products and low demand for what is available.

The UNDP report further states that micro-insurance solutions should, therefore, attempt at addressing key issues that will improve customer satisfaction (demand-supply gaps, appropriate products and pricing), provide distribution efficiencies for better outreach and remove procedural hassles facilitating easier renewals and claim settlements. With a view to reduce costs, the report has also suggested that the premia payable on micro-insurance be exempted from payment of service tax, which will also enable greater penetration in rural markets.