You are here: Home » PF » Features » Insurance
Business Standard

Is life insurance penetration low in India?

Harsh Roongta 

"Tea demand continues to be robust, with per capita consumption growing from 690g per person in 2006 to 750g per person in 2013," says a Tea Board official. Why am I starting this personal finance article with an imaginary quote from the Tea Board? Bear with me for a minute and it will be clear to you.

"The life penetration has declined from 4.6 in 2006 to 3.10 in 2013." This or similar statements appear frequently in the media. I have found it strange, as it measures the life premium paid as a percentage of gross domestic product (GDP). It is akin to the Tea Board official saying that the amount of money spent on tea as a percentage of the GDP has come down. Whilst market forces decide on the price paid per kilogramme of tea, the Tea Board official is right in feeling satisfied that the per capita consumption has gone up, as his job is primarily in promoting the use of tea.

Contrast this with the statistics that the sector or Insurance Regulatory and Development Authority of India (Irdai) concentrates on - even the per capita consumption is measured in terms of premium paid per person. For the record, that has gone up from $33.2 in 2006 to $41 in 2013 (figures are from the Irda Journal). That's a growth of around three per cent, probably just around the inflation rate for the dollar for that period. What amazes me is that nobody is focusing on the actual life insurance figure (called sum assured) and these figures are not directly available. For example, from data I could gather, the sum assured as a percentage of the GDP has remained rock-steady at 41 per cent from 2006 to 2013, despite the decrease in "penetration". My attempts to get reliable data on sum assured per capita were not successful but crude calculations indicate it would have marginally crept up.

The total sum assured data was not easily available for 2014 but I have no doubt that it would also show some improvement, mainly due to the increasing emphasis on online term insurance. In any other sector, that would have led to some satisfaction and encouragement of the factors that led to this small improvement in "penetration". But in this sector, the regulator has come out with rules that seriously impair the prospects of the online web aggregators which have led the online term insurance revolution. The misguided focus on the total premium paid, with no focus on the sum assured, is resulting in the slower "penetration" of life insurance in India.

The reason for the incorrect focus is not far to seek. Among all the tax incentivised "investment" products, life insurance (a misnomer to call it so) is the only one that provides such high agent commissions and, hence, hardsell by them leads to large new premium collections. The spreads for an insurance company are also good and the government is happy, since the life insurance sector is a captive source of long-term funding. All this comes at the cost of the common investor, whose savings are appropriated at cheap rates. Media focus on this issue and the increasing financial literacy is, however, leading to the low "penetration" of life Insurance.

Clearly, there is a dire need to better define what life insurance penetration means. If the focus shifts to the amount of protection rather than the price paid for it and success is measured in terms of improvement in these ratios, we will have a financially more secure India. Once the regulator decides to focus on "sum assured", it will invariably come out with measures to improve that statistic substantially. One simple way would be for the agent's commission to be much higher on that portion of the premium that goes for pure protection and commission on the balance portion of the premium should be in line with other investment products. One theory the sector puts forth is that consumers are put off by high insurance amounts and, hence, will only opt for policies that have a high investment portion, which needs to be guaranteed. In that case, why should the government use insurance companies as an intermediary?

The government can experiment with a variant of any long-term tax-incentivised investment product (say, the 10-year NSC or the ever-popular PPF) and keep high intermediary margins comparable to a life insurance policy on that product by reducing the maturity value accordingly. The intermediary will also be happy pushing a government-guaranteed investment product with high commissions and the consumer will also be happy, as he will get better returns than from an insurance policy. A side benefit will be that intermediaries might stop pushing Ponzi schemes. The more enlightened consumers will not opt for this product but then, it is not meant for him in the first place. In the current environment when new ideas abound and there are no holy cows, this suggestion might be worth considering. It is better to implement this when there is a choice, rather than do it under compulsion in the future.

The author is director, Apnapaisa

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Sun, February 08 2015. 22:44 IST