Micro life insurance is one of the most widespread financial services available in developing countries. Opportunities to save, however, are still rare. A new policy from Bajaj Allianz now provides both life insurance and savings.
 | An Indian moneychanger sits in front of his temporary shop in the old quarters of Delhi, India. Moneychangers do an extraordinarily lucrative trade because many poorer peopel have no access to the electronic banking and savings system (Photo: Reuters) |
Economic development needs credit, and while everyone has been busy talking about foreign direct investments in recent years, domestic savings have remained the primary source for capital investment in most economies.
Looking at a country’s savings rate therefore tells a lot about its economic prospects. Indians, for example, save a bigger share of their income than Americans. In 2004, Indian households were saving about 29 percent of their available income, while Americans only saved 4.7 percent of their income.
The disadvantages of the U.S. model became apparent when the credit crisis hit Americans. When credit dried up, U.S. citizens had little savings to fall back on. India has weathered this storm better, its banks are less vulnerable, and its higher savings rate has granted some respite.
India’s savings record isn’t flawless. With more than 80 percent of India’s population working in the informal sector, the number of those that can actually save something is very small. “What is more,” remarks Kamesh Goyal, CEO of the Indo-German joint venture insurance company Bajaj Allianz, “more than 50 percent of India’s population doesn’t have access to any kind of financial products.”
Another big difference between savings rates in rich nations and developing countries is how people save, explains Michael Anthony, microinsurance expert at Allianz in Munich. “In India, many people have to do their financial planning on short intervals, because they have to manage an extremely small amount of money on a weekly basis,” Anthony says.
And while premiums paid are much lower, the significance of insurance in the rural communities is much higher than in western households. “People in our rural communities simply have no other collateral,” says Yogesh Gupta, responsible for microinsurance saving products at Bajaj Allianz. “They feel the impact of natural catastrophes or other shocks much harder than people in western countries who have better protection.”
 | Access to Microinsurance (click on the image to enlarge)Fraction of households with access to microinsurance coverage in percent (Graphic: Allianz) |
But the picture is changing. Thanks to a rapidly expanding network of microfinance providers, financial literacy and demand for savings products is growing. Many microfinance institutions (MFIs) started handing out microcredits to allow poor people to set up their own small businesses.
“People now have an interest in taking out further financial products,” says Gupta. “And insurance is an obvious choice for those who want to go into savings.” Bajaj Allianz conducted client research to better understand how and why people wanted to save. “Most people stressed the education of their children. That’s what they would most likely use it for,” explains Gupta.
Saving the day
People in rural parts of India, however, have few means of putting aside money for future investments. Realizing this need, Bajaj Allianz started offering a savings life insurance.
“It’s like a pension scheme, where you pay in a set amount of money every week,” Gupta explains. “If the holder dies, his beneficiaries receive the money. If he doesn’t die, he will receive his savings plus interest after five years.”
More than one million clients in central and southern India have signed up to the offer so far, an impressive figure after just one year. One key to its success is a dense network of local partners. Bajaj Allianz is cooperating with more than 200 institutions on the ground ranging from agricultural banks, to religious organizations, microfinance institutions, or trade unions.
“We are looking for social aggregators with lots of members and they must have a social agenda and provide social services,” explains Gupta.
Having partners who know the situation on the ground is crucial, because the lack of financial literacy is still widespread. “Having them realize the use of savings usually helps them realize the advantages of insurance too. Insurance is even more abstract than saving, but through savings people understand insurance.”
India’s neighbor, China, shows the way ahead. Savings rates in China have climbed to nearly 50 percent since 2000, the highest in the world. These outstanding figures are one of the reasons why China managed to outgrow India, even if the world’s largest democracy had long been better off than its non-democratic neighbor.
Saving, long thought of as outmoded and detrimental to growth, has once again become a virtue for rich and poor alike.
editor: Thilo Kunzemann
publishing date: June 9, 2009
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