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Why does India have such a low insurance coverage ratio?

Nov 01, 2018 | 2 years ago | Read Time: 4 minutes | By Manan Vyas

If you manage to read any article about the insurance sector and its worldwide penetration, you will find out that India remains to be one of the few very populous markets where the insurance industry has failed to make its mark very significantly. Whether we are talking about traditional life or health insurance models, coverage across insurance sectors is very low in India. While a mere 8-10% of the rural population has any form of life insurance coverage in India, less than 20% has any form of health insurance coverage. Similarly, if we talk about property insurance we discover that around 95% of Indian housing societies do not have any form of insurance cover.

When we explore the causes behind this low rate of coverage across the country, two sets of reasons primarily come to surface: the internal challenges faced by the insurance industry, as well as the external challenges of awareness and financial lucrativeness in the eyes of the consumer. Understanding these are the key to overcoming this gap in insurance provision in the country and ensuring that the Indian insurance industry is able to overcome these roadblocks to enter a new phase of growth.

Low awareness

Overall there are very low levels of awareness in India about insurance products, and thereby, even when people opt for insurance policies, they aim to pay the least premium which not only doesn’t provide them with adequate coverage, but is highly ineffective in providing security, thereby, defeating the major purpose of having the policy in the first place. Furthermore, when we talk about the economic diversification of channels available to spread awareness about the importance of insurance products, we come across another major roadblock: people in rural areas are even less aware of financial security through insurance products. Around 700 million of Indians live in rural areas, and around two-thirds of the workforce engaged in agricultural and allied activities, indicating the rural nature of India’s economy. Even when economically backward populations are aware of such policies, they do not have the distributional or cash flow means as their incomes tend of be tied to the seasons to opt for policies that would provide them with adequate coverage.

Value-utility dilemma for customers

Understanding Indian household savings patterns are key to understanding why India’s insurance coverage ratio is so low. Despite the fact that India is one of the fastest growing economies in the world, and its GDP per capita is expected to reach $3274 in 2021 from $2135 in 2018, in terms of GDP, and the proportion of financial assets, the economy of the country tells a very different story. Since March 2010, in terms of GDP the proportion of financial assets have been constantly falling. From total household savings, the most significant were life insurance premiums which have fallen from 26% in 2010 to around 19% in 2015. In addition to this, as highlighted in a report by consulting firm Pricewaterhousecoopers, India has a low sum assured as a percentage of GDP, which reflects an overall preference for savings rather than protection.

Figure: Sum assured as a percentage of GDP for India and similar economies

Internal roadblocks in the insurance sector

Given the vast geographic and economic variations of India it is no surprise that the failure of the insurance sector to cater to these differing markets has been one of the key reasons for the low coverage rates prevalent across the country. Distributional challenges, such as last time access, lack of sustainable products, transactional inconvenience have been some of the key internal challenges plaguing insurers in the country and are also responsible for the low rates of coverage.

In order to create accessible models and products for the rural and economically backward population of India, insurance companies have to adapt technologically savvy solutions and models. Furthermore, with the economic reforms brought forward by the Jan Dhan accounts, Unified Payment Interface (UPI) and Aadhaar integration, these models will be quickly adapted in the digital landscape of the growing rural economy, guaranteeing a whole new market for insurers.

Figure: GDP Per Capita at Current Prices* (US$)

A report produced by the Boston Consulting Group entitled “The changing face of Indian insurance,” highlights that recently unveiled insurance schemes such as the Pradhan Mantri Fasal Bima Yojana (PMFBY) has driven crop insurance coverage by 6% and the Rail Insurance Scheme introduced in September 2016 has already covered more than 9 crore passengers. There would be multiple reasons why each of these schemes has succeeded: the involvement of stakeholders including specialists, the forward-looking policy framework, as well as the use of technology as an enabler to reach a large base. The key point is to learn from the individual models and implement the relevant learning in specific areas to expand general insurance coverage.

There has been a growing interest in insurance due to innovative product offerings through distribution channels designed specifically for the Indian market. Despite being one of the most populated countries in the world, India currently only accounts for 1.5% of the world’s total insurance premiums, making it a huge unexploited market.


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