Insurance: A social security product

A lifeline in times of crises

A daily wage labourer living in a Delhi basti (colony) waded through knee-deep water every day to work for a week. As a daily wage labourer, not working meant not earning the money she needed to feed her kids and buy her medication. But thanks to an insurance programme she had purchased, she did not have to do that for long as she, along with 46,000 other women, received payouts from the insurance company during extreme weather conditions.

This financial support allowed them to avoid working in inclement weather while still providing for their families. For the daily wage labourer, the Rs 750 she received was enough to cover food and medication for a few days, offering her a lifeline during the monsoon deluge. There would be innumerable such cases that highlight how insurance now directly supports the lives of vulnerable populations by offering them financial security during crises.

 

Insurance: An investment or expenditure?

Insurance is not just a financial product; least an investment product. It is a shield that provides financial security to individuals and families. It enables, particularly the middle and lower-middle-class demographics, to meet unforeseen large expenses, such as medical or getting their vehicle damaged in an accident repaired or worse still, the death of a breadwinner in the family. Unfortunately, insurance is hardly sold as a product that provides financial, social security. Most of the time, insurance is sold as an investment product, that too among the affluent who are always in need of parking their surplus funds. Those not buying insurance, especially the youth, do so thinking it is an avoidable expense. It is about time insurance companies started selling insurance policies as a social security product, if indeed India wants to fulfill its dream of ‘insurance for all’ by 2047.

Economic and social benefits: Building a better tomorrow

India today boasts about demographic dividend. It is adding 4.75 million people to the workforce annually. This dividend is soon going to be ageing and will take India’s elderly (age 60 and above) population of 153 million today to 347 million by 2050. India does not have a social security programme through which the government pays money to a pre-defined group of people. Since the government discontinued the old pension scheme in 2004, the workforce also does not have a backup like provident fund or gratuity that the earlier generation had. The National Pension Scheme (NPS) which was introduced in 2004 for central government employees was extended to all citizens, including self-employed and unorganised workers in 2009.

NPS is, however, different from provident fund and gratuity which invested funds contributed by employees and employers during their work life in fixed income but safe securities. NPS invests the contributions in stocks and debt markets and as such the returns are dependent on the behavior of the stock market. The amount of pension that one will get at the end of one’s worklife would thus be uncertain and so they need additional support that will assure them of a certain sum as pension or a certain lump sum when their worklife ends either naturally or through unforeseen circumstances.

The government has already taken a huge step towards offering a lifeline to vulnerable sections of the population through a myriad of government schemes offering life and medical insurance. It today offers as many as 19 schemes for health insurance and at least four schemes for life insurance. These schemes are intended to provide financial security to a population below a certain income level. These medical and life insurance products offer a safety net by offering financial hardship to the target groups enabling them to maintain their standard of living in the face of unforeseen events.

The scope of business

The Swiss Re Sigma Report points out that insurance penetration of the life insurance sector in India marginally reduced from 3.2 per cent in 2021-22 to 3 per cent in 2022-23 and that for non-life insurance sector remained at a constant 1 per cent in both these years. As such, India’s overall insurance penetration reduced to 4 per cent in 2022-23 from 4.2 per cent in 2021-22. Although the life insurance density (calculated as the ratio of premium to population (per capita premium) marginally increased to $70 from $69 in 2021-22, non-life insurance density remained constant.

In 2022-23, the insurance density in India marginally increased from 91 in 2021-22 to 92 in 2022-23. It is though not clear if the slight increase in the premium paid is because of the higher premium paid by the affluent or because the insurance services could reach a larger part of the population. The low penetration, however, does highlight the strong need to make efforts to reach the underserved and the unserved. According to the latest (2022-23) Annual Report of the Insurance Regulatory Authority of India, India was ranked as the tenth-largest insurance market in the world with a premium volume of 131 billion (with 1.9 per cent share USD in global insurance premium). More importantly, the report stated that India’s insurance market is one of the fastest-growing insurance markets in the world and is projected to become the sixth largest by 2032. The report attributes the growth outlook for India to strong economic growth, rising disposable incomes, a young population, increased risk awareness, digital penetration, and conducive regulatory developments. This is a precious catchment segment of the population for insurance companies to sell insurance policies as a ‘social security’ product for their financially secure tomorrow. This is most definitely a low-hanging fruit if insurance companies exploit the opportunities available to them.

Reaching the populace

The fastest way to reach insurance to all is through bank branches, although Irdai has recently asked insurers to open more brick-and-mortar branches alongside stepping up digital offerings, stating that, “Physical presence through brick-and-mortar offices leads a long way in gaining customer confidence, particularly in remote locations of the country…”  True, physical presence does give more confidence to people located in remote areas. It is also true that of the three pillars of financial inclusion – basic bank account, access to remittance facility and micro-insurance – the first two have been extremely successful with government initiatives and technology. Microinsurance has, however, been a laggard.

Bancassurance, which is an agreement between a bank and an insurance company to sell insurance products through bank branches, has so far been successful in increasing accessibility all over the world. With over 300,000 brick-and-mortar banking outlets and a large number of banking correspondents that have brought essential financial services closer to underserved populations, insurance companies do not have to look further. Over the years, bank branches have also built trust. Since the bancassurance model in India has met with some success in generating business already, there is no point in creating another behemoth for insurance, given the cost and time required to build it. Piggybacking on the existing infrastructure of bank branches to increase its accessibility is the surest way to reach insurance to all. It is crucial to build on the progress made and fully exploit available synergies to ensure that insurance becomes a pillar of social security for all, creating a solid base for inclusive growth and a secure future.

Alpana Killawala is former Principal Adviser, Reserve Bank of India

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