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Risk is an unavoidable fact of life on earth. When one steps out of his house in the morning, one doesn’t know what awaits him. Human beings may be risk lovers, risk averse or risk neutral, depending on the affinity one has towards risk as an element and yet most people find an uncertain misfortune unappealing. In an age where we claim to know it all, human beings don’t like to be defeated. Instead, they want to be ready for anything that comes their way. It is this attitude towards the uncertain that makes way for the need of insurance. D.S.Hansell, author of ‘Introduction to Insurance’, defines insurance as, “A social device providing financial compensation for the effects of misfortune, the payment being made from the accumulated contributions of all parties participating in the scheme.”

A two-sum game

Insurance ensures the outcome of an uncertain future. Whether or not you will be involved in an accident may be uncertain. Yet, once you do meet with an accident, you can rest assured that your insurance will cover your bills. What happens if you don’t ever meet with an accident?  You keep paying the premium all your life, lose an enormous amount of money in doing so, and virtually end up with nothing in return, at least in your lifetime. Your family members get paid an amount after your death, if that counts.  Insurance basically transfers one loss into another. When you lose, you don’t bear the burden alone. Other payers of premium bear the brunt of it as well.  Like most financial instruments, insurance puts forward a two-sum game. What person A gains in the transition is exactly what person B loses, if there are the only two people involved. In reality, thousands of people are involved in the process. While all of them pay the premium regularly, only a handful actually claims their return. This is why insurance is essentially a risk-sharing contract.

Boost for growth

Insurance is generally of two types. The first type is life insurance, where the policy holder is paid a sum at his death or maturity and general insurance. The latter part includes health insurance, mediclaim policies, personal accident policies, business insurance and fire insurance policies among others. There are around 57 companies in the insurance sector in India. Out of this, 24 are in the life insurance sector. The only public sector company in the field of life insurance which is also the largest player is Life Insurance Corporation of India (LIC).

The insurance sector is of great importance from a macro-economic perspective. Insurance provides long term credit which is extremely essential for investment in infrastructure which has a long gestation period. Without development of infrastructure, it is not possible for a country to proceed or develop. The function of the insurance market is appropriation of funds. It makes the funds deposited by the insured to those who needs such funds. This increases investment in the economy. Given everything else, this should directly translate into increase in the Gross Domestic Product (GDP) of a country.

The government perspective

The insurance sector is fast developing in India. Recently, there have been magnificent changes in the Indian insurance sector. The establishment of the Insurance Regulatory and Development Authority of India IRDAI) in 2000 has opened the sector to private companies and to foreign investment. The limit on Foreign Direct Investment (FDI) was raised from 26% in 2000 to 47% in 2014. In the recent Union Budget, it has been said that 100% FDI will be permitted for insurance intermediaries. This has both positive and negative impacts.

Rilina Basu, Professor, Financial Economics, Department of Economics, Jadavpur University told BE, “This means that they will open the insurance brokerage sector to foreigners. As a result, domestic brokers may be harmed. There are already two or three major global players in the Indian insurance market. I am doubtful whether or not this will be able to bring in further penetration on what already exists. Further, the global players will take the profits back to their countries. This might lead to a massive capital outflow in the near future.  The boon is that FDI is inductive to economic growth. Foreigners might come with all sorts of technological and financial innovation and this might strengthen the insurance sector. Both are possibilities. Which of the two will actually happen is difficult to predict.”

 The Central Budget of 2019 has also initiated efforts for the Indian insurance sector to become part of the global financial system, which will in turn “mobilise savings in the global market, mostly institutionalized in pension, insurance and sovereign wealth funds.” The government is also contemplating on organising a global investor meet in India to rope in top insurance funds. This is likely to boost the insurance sector in India. There will also be relaxation of the FDI norms for the insurance sector but the extant of this relaxation remains undecided as of now.

The inclusion of private companies since 2000 has led to expansion of the insurance sector. In fact, it has experienced a boom from both supply and demand aspects. There has been a surge of demand for insurances that come with affordable rates of premium.  As a result, the government has taken interest in providing further boost to the insurance sector. Support is provided to poverty stricken policy holders through implementing programmes like the Pradhan Mantri Suraksha Bima Yojana (PMSBY), Rashtriya Swasthya Bima Yojana (RSBY) and Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY).

Staggering rates

However, insurance penetration of India was only 3.69% of GDP as reported by the IRDAI in 2019. It was 2.71% in 2001 but the trends have been falling 2010 onwards. Especially, life insurance has registered a fall in the rate of penetration. It has fallen from 4.4% in 2010 to 2.7% in 2015. The rate of penetration has been hovering around 0.7% for non-life insurance over the five year period from 2010 to 2015.This figure gives the value of the total premium collected by insurance holders and is one of the lowest in the world. The main reason for this is very low availability of disposable income for investment. The fast emerging economies in Asia namely Thailand, China and Malaysia all have higher rates of penetration than India.  Per capita premium underwritten, which is the insurance density, in India in 2016-17 was $59.7 which has increased from $54.7 in 2015-16. Again, Thailand, China and Malaysia performed better than India with respect to this parameter.

Anup Rau, Chief Executive Officer of Reliance Life Insurance, said, “The larger issue here is that if you take away the top four-five players, top line and access to distribution is a challenge. The agency channel of distribution is not as viable. Hence, unless channels like banks open up to sell products of more than one insurer, distribution will be an issue.”

According to a report by The Economic Survey in 2018, “There was a significant decline in the proportion of deployment of financial savings in bank  deposits and life insurance funds and an increase in share of currency, provident and pension funds, claims on government (primarily in small savings) in 2015-16.”

Way out

In spite of this, new plans with very low insurance premium have been developed, which is gradually improving the acceptance of insurance in India.  The need of the hour is to improve the rate of penetration of the sector which may be possible only with increased awareness, once the basic necessities of life have been provided.