In an era where India is trying to reach the higher and at the same time steadier levels of growth, reaching out to the entire population and extending basic and necessary services like banking and insurance without any discrimination of any kind, is the major milestone yet to be achieved. A report by Team Inclusion
Though banking institutions headed by the RBI have done and are still doing much to provide access to banking throughout the country, insurance is a sector where a lot of work is still pending. Specifically, a lot needs to be done for the penetration of funds into the untapped sections of the Indian democracy.
“About 90% of India’s population, is not covered by life insurance,” points out A S Narayanan, Head (Bancassurance, Group and NRI Business), Bajaj Allianz Life. The figures are even more discouraging as far as health insurance is concerned — only a meager 5% of the population so far has any kind of access to any kind of health insurance!
With the GDP being targeted in the double figures, it is very appalling to note that the insurance contributes to only 0.6% of it. “The penetration of general insurance has been fairly stagnant for the last one decade,” says G Srinivasan, CMD, United India Insurance. With the sector’s potential of reaching out to the large masses and helping achieve a growth that literally every individual can contribute to, the figures are very wanting.
In a country that has more than fifty billionaires, the average amount spent in insurance is a weak 250 rupees. And this is so after more than sixty years of independence and after the elevation of the country from an underdeveloped to a developing nation.
“You need to engage in an intensive publicity campaign, through the print, TV and electronic media to reach out. Also educate children in schools so that they act wisely when they become adults.”
G Srinivasan, CMD, United India Insurance
New India Assurance CMD, M Ramadoss says, “The lack of awareness and product knowledge is one of the primary factors hampering the deepening of insurance penetration.” Most people find it very difficult to digest the concept of paying out a sum of money for transferring risk to an insurance company. In rural areas, potential customers often want to know whether, at the end of the year, they will get their money back if they haven’t made any claims. It all calls for simplicity of the system to make it more feasible and trustable for the audience.
Also, the insurance companies have to deal with the lower income margins in rural areas where only small ticket policies can work. However, Ramadoss says that this has a solution. “Insurance companies can ride piggy-back on other financial distribution channels like banks, rural banks and MFIs.” This can help as the company policies with a maximum premium of 1000 rupees, can be clubbed with the processing of microfinance loans given by rural banks and public sector banks, rather than asking individual agents to go to rural areas and sell individual policies. With a maximum premium of thousand rupees, as they can be clubbed with the processing of micro-finance loans given by rural banks and public sector banks, rather than asking individual agents to go to rural areas and sell individual policies. However, there is a need for the definition and expansion of ”microfinance” and ”micro-agents” so that the policies can be sold by a grocer too.
Another important aspect is the approach of delivering policies. The issuing of electronic policies, and the IRDA’s relaxation of regulations for definition of micro-agents critical to deepening insurance penetration calls for approach by SMS and other electronic media to which the large part of the population is already easily connected. The success of the Rashtriya Swasthya Beema Yojana (RSBY) in rural areas could be an example to follow.
Srinivasan is also of a similar view. “It needs to be made clear that a person or a firm can be comfortable only when they have an insurance plan so that the wealth they have accumulated over a number of years doesn’t get washed away overnight by an accident taking place.” This message has to reach out to all as the penetration is lacking in the illiterate as well as the educated classes.
The insurance industry has been trying to come out with simple products at an affordable cost, so a large section of the people can easily afford to pay the premium and avail of insurance services. People who do not think of insurance as a necessity are unlikely to come in search of an insurance company or an insurance agent. Complex paperwork, lengthy documentation and majestic advertisements seem like something away from people instead of being close to them. Ads in local languages and appointment of local agents are ways to bridge that gap.
“Only when this trust gap has been bridged will people start to think of insurance as a means of protecting themselves,” explains Srinivasan.
Even when it comes to the packages, there are challenges in designing a product. The target market will not really understand a complex kind of product and also the irregular incomes are a major hurdle. “Introduction of a scheme where the amount of premium to be collected is as low as 50 rupees, may not be enough to provide complete life cover but will at least enable the insurance companies to make a start” suggests Narayanan.
Right pricing is another aspect that needs addressing for a successful implementation. Low priced insurance products in areas where penetration has been achieved could mean trouble for companies and would not be in the customers’ interest either. Also the distribution of the policies has to be done wisely. Long-term savings can be one of the mechanisms, which can help people to come out of indebtedness and build a corpus for themselves; hence they must be integrated into the insurance payback schemes.
As far as the pensions are concerned, the field to be covered is larger. To begin with, pension is something that people associate with a time of life when no income is available. Thus the thought is not very appealing. So at one end you have economically sound people who rely on investment options, on the other, you have a low income individual for whom saving for the future is a luxury while he strives to gather a sound wage.
“By the year 2050, we will have 330 million people aged 60 and above and so pension has to included in the plans right from the day you start earning!” says Rani S Nair, Executive Director, Pension Fund Regulatory and Development Authority (PFRDA). “We rely on human capital to accumulate financial wealth but human capital is a risky asset at best.”
She further points out that not more than 10-15% of the people are covered by pension schemes; but you look at OECD countries, they have 70% pension coverage. This and the need to reach out to all sections of the population quickly, which is only possible with the use of technology are areas that need addressing.
There could be a solution for this in the shape of the New Pension System, launched by the Government of India in 2009. It helps people to move across locations and across jobs; to carry their pension corpus and not be tied down to one employer. It has the facility of investment in a tier 1 account — savings account from which you cannot withdraw; and of a tier 2 account from which you can withdraw.
In an effort to encourage investment in the NPS by the masses, the government has launched a ‘Swavalamban’ initiative, under which it will contribute 1000 rupees per year for a period of 4 years to every NPS account.
The initiative aims at encouraging people from the unorganized sector to invest in the NPS, and thereby guarantee the provision of some financial security for their old age. In recent years this has been the most sincere step taken by the Government in the regard.
Nair also points out that the distribution of the scheme has to be such that it caters to all without any differentiation. “Unless the workers of the unorganized industries are provided with credit, insurance, health insurance and pension benefits, we will have disparities in our society which could make things difficult.” Very logically so, if people have access to an annuity, even if their families don’t care for them, there will be organizations who will look after them.
A lot of ground has to be covered before any major achievement can be claimed in the field of insurance and pension; the launching of the NPS and the gradual awakening of the government to bring the scattered sections of the society together and to cater to them equally, is evidence of a change in the scenario.
H Sadhak, CEO of LIC Pension Fund says, “one of the areas that pension fund managers need to think about is designing a strong distribution mechanism. For any pension fund to succeed, and sustain, there has to be in existence a certain set of preconditions.” However it must also be kept in mind that the OECD countries lost about over 3 trillion dollars in pension fund assets. To avoid such a situation occurring in India, we need to have a stable macro-economic system. There must also be a number of investment options available to pension funds. The NPS has provided the best rate of return in the market, but PFRDA regulations restrict investment options. Investment in equity markets is capped at 50%. The funds need to invest around 40% in corporate debt, which incidentally is not very well grown.
In India, there are also no risk management instruments for a 30-35 year product investment; while developed countries come out with 50- year long term inflation protected bonds. Unless there is a long-term inflation protected instrument, it is very difficult for pension fund managers to look forward and to devise an inflation phasing mechanism. If similar measures are launched in India, pension fund efficiency will improve, and financial deepening will become an effective and efficient instrument once the pension system takes strong root in the Indian economy.
All however, is not good news and there are people who have reservations about the plans. Sayee Srinivasan, Head Product Strategy, Bombay Stock Exchange (BSE) says, “the restriction of exposure to the equity funds to 50% of the corpus goes against conventional wisdom. I hope that as managers get more experience, more comfortable with this model, there will be more flexibility from the pension authority, and we will have more funds with higher exposure to equity.”
Another issue is a lack of incentives from the mutual fund companies. Less than 50% of the mutual fund assets are in equity, and whatever equity we have is in actively managed funds. So the whole concept of passive, long-term investing doesn’t really exist in our system. Despite SEBI cutting back on entry loads and others, there is still an incentive to push existing funds, where payoff is going to be higher and revenue is going to be higher, than pushing a pension fund where today, given that the corpus, the assets under management is small, there’s no incentive for them to push.
Srinivasan says, “In the US market, there’s an equivalent product called the 401K Plan, where you sign on to the plan and choose which investments you want to make and what percentage of your salary you want to invest in it. In most companies, there’s a point where you have to opt in.” It is important to focus on the way companies display choices to their consumers. It influence the buying decisions or purchasing decisions of the audience and once this is given its due importance, other apprehensions will fall into place.
“To succeed in the market, you need more emphasis on less documentation, lower premiums, and lower operational costs, combined with speedy service delivery.”
A S Narayanan, Head (Bancassurance, Group and NRI Business), Bajaj Allianz Life
As far as the unorganized sector is concerned, people in this sector mostly have cash incomes. Many people don’t have bank accounts and even fewer have PAN accounts. To get these people on board a pension scheme, where they have to get a registration number and other things to invest in it, is going to be a challenge. So presently, to popularize the NPS the focus should be on the organized sector. Once that has been achieved, a big part of the unorganized sector will automatically come into its fold.
But saying something and doing it is a different thing. And doing something and achieving the goal is further still. Agreed that a lot of ground has to be covered before any major achievement can be claimed in the field of insurance and pension; the launching of the NPS and the gradual awakening of the government to bring the scattered sections of the society together and to cater to them equally, is evidence of a change in the scenario.
Inclusion is the first magazine dedicated to exploring issues at the intersection of development agendas and digital, financial and social inclusion. The magazine makes complex policy analyses accessible for a diverse audience of policymakers, administrators, civil society and academicians. Grassroots-focused, outcome-oriented analysis is the cornerstone of the work done at Inclusion.