The government should exempt micro-insurance from payment of service tax to make products cheaper and encourage penetration of insurance services in low income rural and social sectors, a UN report has suggested.

"The service tax of 10.2 per cent on premiums adds to the price of insurance. To help keep premiums low for rural poor, government could consider waiver of service tax on micro-insurance products for a limited period," the UN Development Programme (UNDP) report said.

Micro-insurance sector has the potential to generate a business of two billion dollars (over Rs 8,000 crore) in the next two-three years in India, Anuradha K Rajivan, author of the report, 'Building security for the poor: Potential and prospects for micro-insurance in India', said.

The report suggested partnership of insurance companies with micro-finance institutions for providing such products to the rural populace according to their specific needs.

"Insurance products made for the urban populace cannot be suitable for their rural counterparts. They may need insurance for a single tree or insurance against snake-bite, the things that affect them more frequently and directly," Rajivan said.

The report suggested pooling of data between insurance companies and the government as building and sharing claims histories can help in aligning pricing decisions with actuarial calculations, thereby reducing price.

The report added an investment of 1.65 million dollars would be needed to develop the micro-insurance business and tap the growth potential.