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Photo: istock
Photo: istock

How to tackle under-penetration and protection gap of insurance in India

The twin challenges of the insurance sector need systemic policy redressal

Statistics about insurance in India don’t make for happy reading. According to the Insurance Regulatory Development Authority of India’s (Irdai) latest annual report, dated December 2019, the penetration of life insurance is a mere 2.74%. Not only is this well below the global average, the figure has declined from a high of 4% in 2009. There is an even more worrying statistic—even among the insured, the average sum assured is a paltry 8% of the amount that might be required to protect a family in the case of the breadwinner’s death, as per Irdai’s report.

The social and economic cost of being uninsured and under-insured can be massive. The economic progress Indian families have made over decades can get wiped out in the unfortunate event of the chief wage earner’s death. Unfortunately, the importance of income protection or health insurance becomes evident only in times of crises. When the world is faced with an unprecedented global health and economic crisis in the form of covid-19, it is perhaps a good time for individuals, policymakers and insurance industry stakeholders to collectively address the issue.

Historically, insurance has been positioned as a financial product that combined very little insurance with a lot of investments. Pure protection products were considered to be an “expenditure" that were either avoided or parked away for another day.

In India, the mortality protection gap, the difference between the resources needed and those available, is the highest in the Asia Pacific region at 92.2%. This means consumers have savings and insurance of just 7.8 for every 100 needed for protection, a gap of 92.2, according to Mortality Protection Gap Report, Asia -Pacific, by Swiss Re. They often tend to ignore increasing inflation, one-time expenses like children’s higher education, and underestimate retirement needs when calculating the sum assured.

Policy push

Both under-penetration of insurance and the protection gap need systemic policy redressal.

Let us first look at the more fundamental of the two problems—low levels of insurance penetration in the country.

The purchase of any kind of pure insurance, commonly known as term insurance, helps protect from financial shocks due to death or any major illnesses, covered by critical illness riders taken along with a term plan, to the earning member of the family. And considering there is no formal security system in place for a large part of the populace, promoting these plans is critical.

Two policy steps could be taken towards this. First, eliminate goods and services tax (GST) for term and health insurance. Second, introduce a separate section under the Income-tax Act (over and above Section 80C) that gives a tax benefit on the premium paid towards pure life and health insurance policies. These changes will help provide the much-needed incentives for the wider spread of insurance products.

Sound financial plan

In India, people often tend to shy away from discussing death. Hence, there is little awareness about the necessity of life insurance. By contrast, people are growing increasingly conscious of the importance of health insurance. This growing awareness can be traced back to the rising costs of healthcare and recently due to the covid-19 shock. Life insurance, however, continues to remain unappreciated because most people only view it as a tax-saving option rather than being used for its primary objective of protection against death, disease and disability.

The other reason why we do not buy adequate life cover is because they rarely develop a proper financial plan for their lives. They tend to buy products in an ad hoc manner relying on the advice of family and friends. When consumers plan investments for insurance needs with well-qualified financial planners, they can better assess their current and future financial requirements.

Research shows that those buying online insurance as part of a proper financial plan tend to opt for term insurance with higher covers. One of the big benefits of the online channel of insurance sales is that it has driven private insurance companies to offer very simple and extremely competitively priced term insurance products. The cost of a 1 crore term plan that can easily be purchased online today is 70% less than what it was in 2008.

This new-found affordability of term insurance gives individuals the perfect opportunity to close the protection gap. At a personal level, buying a cover equivalent to at least 10 times the annual income, plus protection for a big-ticket loan like home loan is a good way to go about insurance planning.

India needs an education and policy push to tackle the twin challenges of insurance. The industry stakeholders need to keep explaining the need for protection and the government could step in with a few targeted steps to nudge demand for protection products. This is the only way that the middle class of the country can protect itself from the 3 D’s—death, disease and disability.

Sarbvir Singh is CEO of Policybazaar.com

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