5 challenges faced by the insurance sector when it comes to rural market

For the longest time, the prime focus of insurance companies has been urban-oriented due to various reasons.

Although there has been a silent economic revolution in the rural segment resulting in a significant growth since the late 1960s, factors such as low literacy rates, minimal awareness, and the complexities of insurance documents have posed major challenges for both the private as well as public entities of this industry. 

Through planned efforts and thorough commitment, great dividends can be generated from rural areas. Both the central government and private insurance companies need to step up to meet the severe need for expansion of this domain in rural areas.

This situation is often further aggravated by the imperfect or partial availability of necessary data. Despite several reforms to facilitate the sector, market growth has been slow.

Some of the challenges that insurance companies have to surpass in rural India include the following.

1. Low penetration and density rates

Lack of penetration in most of the rural geographies has been a decade-long problem as a large section of their population remains uninsured. Due to relatively few buyers and sellers of insurance in rural areas, market power shifts to insurers and results in high prices, which further leads to lower penetration.

Additionally, due to lower volume of services delivered, the fixed costs remain relatively high, making insurance companies less willing to negotiate lower prices, thereby putting the insurance market at a disadvantage. As per a 2018 Lloyd’s report, there is an insurance gap of $27 billion in India, with rural areas contributing greatly to this gap.

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2. Poor rural participation and low household investment 

As per the IRDAI, lack of awareness about health insurance remains one of the major hurdles. Not surprisingly, less than 15 percent of the populace purchase a health insurance policy. Despite liberalisation, insurance companies have consistently ignored rural markets.

Increasingly, there has been a reduction in the number of private life insurers in rural areas even while the concentration of insurance providers in urban areas has consistently gone up. Additionally, only about five percent of Indian household savings are held in financial assets.

Rather than investing in ex-ante insurance against risks, households rely on ex-post high-cost borrowing, keeping the penetration rates of insurance low, especially in rural India. 

3. Lack of adequate capital investments

Partly, low insurance penetration can be attributed to inadequate capital with insurers. The expansion to the unpenetrated markets of the country remains a challenge due to insufficient capital that needs to be invested. A 2018 IMF technical note had indicated that the IRDAI would have to concentrate resources on public sector companies like the LIC and NIC to maintain adequate solvency levels.

Additionally, the COVID-19 pandemic only made things worse. The insurance sector saw its profits plummet significantly through 2020.

While some PSU insurers saw an increase in their net profits in FY21, resulting in a decline in underwriting losses, most are still reeling from the aftermath of the pandemic. The sector has lost its pricing discipline, and even less attention is being paid to the rural insurance market, given its lower potential to generate profits. 

4. Accessibility and lack of financial literacy

The insurance sector is less accessible to people in rural areas for a number of reasons, including pricing and lack of awareness. An important step in the right direction would involve increasing access to low cost and simple products, given the gap between pricing and affordability. There is also a need to build trust and improve financial literacy among rural populace to improve penetration.

Government insurance schemes such as the Pradhan Mantri Jan Arogya Yojana, the Pradhan Mantri Fasal Bima Yojana, the Pradhan Mantri Suraksha Bima Yojana, and the Pradhan Mantri Jeevan Jyoti Bima Yojana have played a significant role on this front, and have led to better coverage, especially in terms of non-life insurance. 

5. Predominance of traditional products and distribution channels

As it has been observed over the years, insurance products are offered and marketed in traditional ways that make it tougher for advanced insurance plans to gain traction, especially with regard to rural India. While online and point of sale channels are slowly gaining popularity, supported by regulations by the IRDAI, the insurance sector also continues to rely heavily on traditional distribution channels.

Introducing and implementing new channels of distribution is essential to improve rates of penetration and density. Additionally, given the disproportionately greater risk that rural areas face in general and during catastrophes, the limited availability of catastrophe insurance is concerning. 

Alternate capital and insurance-linked securities like catastrophe bonds are opportunities that the insurance sector is often unable to explore in rural areas given capital deficits.  

There is a huge domain of untapped market that gets neglected; even though insurance players have opened Tier II and III branches in cities, they have no presence in the rural hinterlands. Despite the various legal reforms put in place to buttress the insurance sector in rural India, there is much room for growth.

In order to make the market more competitive and inclusive, regulators and insurers alike will have to reform their approach to penetration and face these challenges head on to overcome and make a footprint in this industry.