Insurance is not only a form of risk management, but also a mechanism to protect our economy. Even after liberalization in 1999, the insurance penetration is hovering around 3.9% of gross domestic product, which is far behind the world average of 6.5%.
In India, insurance continues to be sold; not bought. Unless the population tastes the feel of insurance, it cannot understand the importance of it. This may change thanks to the Narendra Modi government’s initiative to introduce the Pradhan Mantri Jeevan Jyoti Bima Yojana that offers insurance coverage of Rs.2 lakh at a premium of Rs.330 per annum for those aged between 18 years and 50 years, and the Pradhan Mantri Suraksha Bima Yojana, which is accident insurance plan at a premium of Rs.12 per annum for age group of 18-70. The government has also introduced Atal Pension Yojana, which offers fixed monthly income between Rs.1,000 to Rs.5,000 during old age depending upon the contributions.
Before these schemes, in 2014, to improve financial inclusion, the government had announced the Jan Dhan Yojana with an objective of bringing many people under the banking fold. Many rules were relaxed for enrolment. Motivational factors were attached to this account, such as subsidy credit, loan credit, RuPay card with free accident insurance coverage of Rs.1 lakh, and more. Despite these benefits, official statistics show that only 155.9 million accounts were opened and of these, 85 million hold zero balance, as on 13 May 2015. This means that about 50% of these accounts are yet to be operational. So, mere numbers does not mean financial inclusion.
A similar fate may befall the insurance schemes as well if some amount of flexibility is not exercised at this point itself. For starters, these schemes do not have any great subsidy component, which means that the premium may fluctuate year after year depending on experience. Also, the target age group of 18-50 years for life insurance could be a cause of concern as people in this age group are generally confident of higher normal longevity. But all would be unsure of accidental death and hence want to get insurance for it. Statistics prove this. As on 20 May, 76.1 million insurance and pension schemes were bought; 58 million for accident insurance, 18 million for life insurance and a mere 7.8 million for pension. This means that people are already aware of accident cover and are buying it, while policies for life insurance and for pension are not that popular.
Moreover, premium rate also depends upon continuity, lapses, new member enrolment, claims made and other factors. The lapsation ratio in the industry in general is high. So, if 30% policies lapse during the second year, the premium rates for continuing members will increase, which will lead to further lapses in the following year. Also, the expense component charged in the premium is very less, about 15%. It may not be enough to probe claims thoroughly and can lead to an increase in the number of fraudulent claims. If that happens, it will indirectly increase premium. So, while people may leave by lapsing, lack of control may motivate fraudsters to join, thus creating a double blow. (Though the government foresees no upward revision of premiums in the first three years, there is also a disclaimer “due to unforeseen circumstances”).
One way to avoid such a situation is to enrol more genuine people in the schemes. Studies indicate that the insurable population in India is expected to be around 750 million in 2020, with life expectancy reaching 74 years. Therefore, we need to have penetration of bank accounts to that extent.
To bring more people under this net, extending the product design would be a good move. According to Indian Assured Lives Mortality (2006-08) Table, effective 1 April 2013, the probability of death compared with age of 50 (which is the current maximum age limit for enrolment) increases multifold at the ages of around 58, 63, 67 and 70. Hence, charging extra premium for older categories, without denying insurance, could be an option. Proper controls can cut losses.
Bringing higher age groups under insurance also has a sociological angle to it. These days many families struggle with paying for themselves and taking care of their children’s needs such as education and marriage. Big financial challenges come up after a person turns 55. Charge them extra premium, but allow participation. This will increase the population base.
Frauds are prevalent to the tune of 15-20% in the insurance sector. To reduce this, make it mandatory for claims to be settled only through processes such as using Aadhaar wherever possible. In an era of statistical advancements in analytics at reasonable costs, use fraud analytic techniques to spot possible fraud patterns and create a system of mobile phone alerts to avoid frauds.
The insurers should understand that the government is enabling the population to experience insurance. Hence, it is important for insurers to leverage more cross-selling and up-selling of regular insurance schemes. For example, selling simple general insurance schemes such as home insurance or jewellery insurance will help cross-subsidize any losses arising from the government schemes in the long run.
In the past, many social insurance schemes have been launched but have failed to achieve their objectives. Comparatively, the current government has taken good steps to make sure that its policies work. Bridging gaps will make it bigger. As we are nearing the commencement date of 1 June, and the normal enrolment window is for three months up to 31 August, quicker changes would help a lot.
S. Jayaprakash is co-founder and vice-president, Nanobi Data and Analytics Pvt. Ltd.