Micro-insurance and the empowerment of an entrepreneurial workforce

Access to capital and the existence of a financial safety net are vital components for any socio-economic group that finds itself wedged in the perilous no-man’s land between the boundaries of poverty and a lower-middle class lifestyle – Pic by Shehan Gunasekara

Access to financial products is a fundamental necessity for any society that seeks to foster and develop a thriving middle class. Such access complements the fulfilment of basic socio-economic needs, such as access to health care, education and the guarantee of property rights. 

Considering current socio-economic trends in Sri Lanka, a thriving middle class can emerge only through the development of an entrepreneurial class – one that is independent, dynamic and untethered to any dependence on the State for its welfare.

Access to capital and the existence of a financial safety net are vital components for any socio-economic group that finds itself wedged in the perilous no-man’s land between the boundaries of poverty and a lower-middle class lifestyle. It is not easy for this group to rise above its current economic predicament through sheer entrepreneurial effort. In this respect, access to micro-insurance can be a deciding factor in alleviating poverty and providing a financial safety net for this aspirational middle class. 

Micro-insurance refers to any financial product that provides some risk-mitigating function on the same basis as conventional insurance products. It can be distinguished from conventional insurance by the category and the (comparatively) low-value of what is insured, and the relatively small sums paid as premium. 

Owing to the fact that it is relatively cheaper, and potentially easier to access, a sound micro-insurance industry can provide middle-class entrepreneurs a viable avenue to managing their risks. Therefore, micro-insurance can provide an impetus for entrepreneurship in Sri Lanka.

While conventional insurance in Sri Lanka is regulated under the Regulation of Insurance Industry Act, no comparative legislation has been enacted to regulate micro-insurance. As such, products that may fall under the definition of micro-insurance are currently only offered by conventional insurance companies and regulated under this Act. 

The sale of micro-insurance products by traditional insurance companies is often constrained by supply side dynamics, such as low financial incentives for offering products that only generate low premiums, and a traditional distribution mechanism that allows little leeway for the mass distribution of such products. 

In a regulatory landscape that imposes stringent, and often necessary, capital requirements and compliance requirements on registered insurers, the profit incentive to develop such products is often constrained, and can only be mitigated by up-scaling the product distribution methodology. However, current laws also regulate the distribution process, as insurance brokers are also required to maintain adequate capital reserves, and to follow regulatory compliance requirements, including compliance with maximum commission rates payable on sales. 

In order to succeed, it is imperative that the sale of micro-insurance is undertaken by the private sector, as it is unrealistic to expect the State to take a lead in such a process. Private insurers must then be permitted to offer such products in ways that minimises the costs involved in developing such products and in bringing such products to market. 

Countries that have managed to develop a regulatory framework for micro-insurance have seen the private sector take the lead in marketing and distributing such products – often in dynamic and unconventional ways. 

In countries such as Thailand, for instance, micro-insurance products are often available in most convenience stores, such as a local seven-eleven. The wide availability of such products, using distribution channels outside the conventional distribution mechanisms available in Sri Lanka, has resulted in a wider penetration of insurance within society. 

A counter argument to the wide-scale promotion of insurance products is that it offers consumers little insight into the terms and conditions of the products on offer. In such a context, the risk of mis-selling such products can emerge. This is a valid concern, and also something that insurance regulators, including the Insurance Regulatory Commission of Sri Lanka (IRCSL), have grappled with.

The IRCSL, tasked by statute with both developing the insurance sector in Sri Lanka, and ensuring the safety of all policyholders, has had to tread carefully in this regard. It has aimed to ensure that any proposal to increase the penetration levels of insurance in Sri Lanka, through the development of micro-insurance regulations, does not have a harmful effect on the financial security of the policyholders who may purchase such products.

Concerns with regard to micro-insurance, though valid, should not act as a barrier to the exploration of various regulatory mechanisms that would cover micro-insurance. No regulatory mechanism, in any industry, is fool-proof, and the threat of misuse will never cease to exist. Therefore, a visionary and open-minded approach to the development of this sector is needed. 

Some leeway must be given for private entities that may not be currently regulated to develop micro-insurance products, and for the authorisation of a distribution mechanism that is not constrained by current regulations. Ultimately, such an approach can lead to the development of a sound micro-insurance industry, which will no doubt help the advancement of an entrepreneurial class in 

Sri Lanka.

(The writer is an attorney-at law and a founding partner at LexAG.)