Market Response to Insurance & Pensions for the Poor

You get the worst picture of financial inclusion in India when you talk of insurance and pensions for the poor. Unlike banking which has still covered some ground with no frill accounts, rural branches and banking correspondent, the insurance and pensions are at an incipient stage. 80 per cent of our 1.2 billion people are not covered for life, health or accident. The penetration of nonlife insurance is 0.7 per cent. The per capita premium, which is collected as insurance is about Rs 300 as against Rs 13,000 in the developed countries and Rs 6,000 to Rs 7,000 in some developing countries.

When it comes to pension, more than 87 per cent of working population has no security when it hangs up its boots. In other words, out of 77 millions of elderly population (United Nations projections) currently, less than 11 million have access to superannuation security. At this rate of growth, the number of unpensioned would grow to 146 million in 2025 and over 283 million in 2050.

Besides since life expectancy (according to UN estimates it will be 69 for males and 72 for females in 2020-25 and 73 and 77 respectively in 2045-50) is also increasing, unless we initiate some drastic measures to reach pension to the people, by 2050 when 326 millions will hit the old age, we will have a serious problem at our hands. Clearly the situation looks quite alarming and warrants for some serious, innovative and immediate insurance planning by the public as well private sector to secure the elderly. Unless this is done, there is a danger that more and more people will slide down from the Above Poverty Line (APL) category into the Below Poverty Line (BPL) bracket.

“Without risk mitigation product, you will find that people are above the poverty line but sliding down when there is a casualty”, warns T L Alamelu, Deputy General Manager, United India Insurance Company (UIIC), the public sector giant which has taken insurance to rural masses with implementation of Universal Health Insurance Programme of Government of India & Vijaya Raji Janani Kalyan Yojana (covering 4.5 million women in Madhya Pradesh), Tsunami Jan Bima Yojana (in 4 states covering .45 million families), National Livestock Insurance and many such schemes.

The situation looks grim when you count the number of problems, which plague general insurance and pension sectors. Take for instance general insurance. Foremost among the difficulties is that there is huge potential for moral hazards and frauds because the companies need somebody to physically go to the villages, verify and settle the claim. During 1970 to 2000 in particular when public sector insurance companies focused on rural insurance, they were hit by a plethora of frauds. New India Assurance had appointed veterinary doctors in large numbers to insure the cattle and huts under Janata Personal Accident Insurance etc. It had to grapple with moral hazard situation and frauds and most of the cattle seemed to die on Friday evening so the company will not have much of a chance to verify (Saturday and Sunday being government holidays).

Since the policies are small involving annual premiums of Rs` 500 to Rs` 1,000, for the insurance companies, it is not possible to make the business very attractive by paying more to the agents.

Moreover, since the policies are small involving annual premiums of Rs 500 to Rs 1,000, for the insurance companies, it is not possible to make the business very attractive by paying more to their agents. As per the guidelines, we cannot pay more than 15 per cent commission, say insurance companies in tandem. On the whole, the insurance policies, unlike banking or pension products, which satisfy immediate and future financial needs of the persons, always look dicey. Also not many people particularly among the poor sections are aware of the insurance products. “In case of a general insurance health product it would mean that we are telling you take this paper now and if you fall ill you will see some money. You may see the money, you may not see,” says Alamelu.
No wonder, leave aside villages, the coverage of insurance has not even reached tier II and III cities. “Even a large amount of urban population does not have access to pension,” admits PFRDA Chairman, Yogesh Agarwal. What has really added to the worries of the insurance industry is the dwindling number of agents involved in the job. Out of 3 million insurance agents, only one sixth of the agents are supposed to be active. The rest are only present on paper. Life Insurance products have a penetration of 2.4%. Non-life Insurance products have a penetration of 0.7%. The industry blames the poor remuneration system for this.

Some of the problems of insurance find resonance in pension sector as well. For instance, there is nobody to take the pension products to the poor masses. Plus there is hardly any awareness about these products. “Since National Pension Scheme is a new born baby, lack of awareness among people is a major hindrance,” discloses Balram Bhagat, Chief Executive Officer, UTI Retirement Solutions.

Without risk mitigation product, you will find that people are above the poverty line but sliding down when there is a casualty.” T L Alamelu, Deputy General Manager, United India Insurance Company (UIIC)

The coverage is mainly limited to government employees. Since gone are the days when family vocation was passed on from elders to the youngsters and that had in-built socio economic structure to take care of the elders, the situation is getting alarming. Now every member of a household has to fend for himself or herself and is dependent on a different vocation. Even the European model of government sustaining the pension schemes is failing as the economies there are not able to even estimate the burden of the pension funds. The time is not far when individual will have to secure his or her future in clear-cut terms. “What is required is when he (individual) is trying to plan for himself there is some regulatory assurance. Today we have a structure in place. What is required is deliverance from this structure. The structure’s benefits have to be carried to the people,” says V R Narsimhan, Chief Executive Officer, Kotak Mahindra Pensions, referring to PFRDA.

“Since National Pension Scheme is a new born baby, lack of awareness among people is a major hindrance.” Balram Bhagat, Chief Executive Officer, UTI Retirement Solutions

Worse while the number of people covered under pension is miniscule, there is a glut of regulators – SEBI, IRDA, PFRDA and EPFO – to regulate pension products. Bhagat suggests appointment of a single regulator for the purpose: “If all the pension funds are brought under PFRDA (Pension Fund Regulatory and Development Authority) or one regulatory authority, it will be easier for the subscribers to choose based on the performances, cost structure and merits and demerits of the scheme.”

“The idea is to avail of service providers in the existing space. Pension is added on as another service being provided by them in addition of the services they are already providing.” Yogesh Agarwal, Chairman, PFRDA

The imperative is that the government and private sector should join hands to spread awareness about insurance and pension products, design innovative and attractive schemes for the poor and make use of the networks like MGNREGS, banking, banking correspondents, SHGs, NGOs, MFIs, Gram Panchayats and e-Governance etc, to take them to the last mile.

The network is also the prescription Alamelu suggests to alter the dangerous possibility of APLs hurtling into BPL. She suggests a hybrid product, which would bundle banking, pension and general insurance products together. “It could be health, basically some small cover for property – hut insurance or tool insurance if you are a small farmer or a small agriculturist. It can be bundled together and sold”, Alamelu advises. To market the hybrid product, she seeks government subsidy, help from NGOs and ‘some sort of payment’ by the ultimate beneficiary of the policies.

It needs to be ensured that such networks are professional and readily accepts the addition of the new responsibility otherwise it may dent the reputation of the company the network represents. This is what New India Assurance Company experienced in the past.

Narasimhan wants the government to add life insurance and health benefits to Swavalamban scheme, which encourages people from unorganised sector to voluntarily save for their retirement. The scheme, which was launched in Finance Minister Pranab Mukherjee’s parliamentary constituency last year and which cuts down the cost of National Pension Scheme (NPS), guarantees a contribution of Rs 1,000 per annum from the central government to such a pension account.

The pension coverage under NPS, the scheme where costs involved are miniscule (0.35 per cent), according to Balram Bhagat, includes 2.1 million people out of which .7 million are non-government subscribers. Calling NPS ‘best in the whole financial sector’, Bhagat hopes the coverage will not just add but multiply in the coming years. Narasimhan demands that a token amount of Rs 10 or Rs 15 be deducted from the doles disbursed under MGNREGS and converted into pension wealth for the daily wager.

While the number of people covered under pension is miniscule, there is a glut of regulators – SEBI, IRDA, PFRDA and EPFO – to regulate pension products.

There is also a need to be pragmatic, not to target the entire population in one go and instead focus on small segments. There is no shame in accepting that there are still people who are too poor to buy general insurance. Therefore, one should not look at entire population as a potential population. You have to look at those households who can afford to pay the premium and take the policy.

Kishor Chitle, Head, India Local Business Services, Capgemini, wishes the stakeholders make use of department of posts to deliver insurance schemes to the people in rural and semi urban sectors. “The lowest level of chain is reached by a postman who goes to each village and last possible house in the village. Question is how do we integrate Department of Posts channel with insurance?” Chitle asks. The use of existing network does not only make it easier for the new product to reach the last mile but also cuts down the cost to a great extent. “The idea is to avail of service providers in the existing space. Pension is added on as another service being provided by them in addition of the services they are already providing,” adds Agarwal, the PFRDA Chairman.

The PFRDA has invented an aggregator model to make pensions popular in the unreached sectors. Under the model, the Authority picks up some organisations like micro-finance companies, Self-Help Groups or NGOs etc who are already working in the rural areas to sell pension to their existing clientele base. It has already approved about 25 aggregators. While the model helps the aggregators to make some extra money, for insurance companies it hardly adds any extra cost. Till June this year, the PFRDA has opened about .6 million pension accounts under the aggregator model and about half of the accounts had received the matching contribution from the government under Swavalamban.

The foremost requirement is that the masses should be educated about insurance and pension products along with banking, savings and credit. Presently for education and awareness, the insurance and pension companies are mainly dependent on coverage by media and efforts made by the regulators.

The good part of the story is that IRDA has just relaxed the persistency norms (quantum of active policy holders) to 50% from 75% for insurance agents. The reduction means it will be easier for agents to retain their licenses and is a step towards keeping them in the industry. The agency has also proposed promotion of longterm agents to the advisory level.