Embedded Value: Only a reasonable insurance cover can provide security to family in distress

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Published: May 24, 2016 7:05:20 AM

The Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and the Pradhan Mantri Suraksha Bima Yojana (PMSBY) have been a masterstroke by the NDA government in carrying the benefits of insurance to the common man.

The Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and the Pradhan Mantri Suraksha Bima Yojana (PMSBY) have been a masterstroke by the NDA government in carrying the benefits of insurance to the common man. Never before has any government scheme providing for self-financing by the beneficiaries had been embraced by the masses on such a large scale.

About 30 years back, the government had launched Landless Agriculture Labourers’ Group Insurance Scheme with LIC as the nodal agency to administer the scheme. This scheme was the largest group insurance scheme in the whole world with target of covering nine crore lives. But the premium amount was shared by the central and the state governments in equal proportion. Since the people did not participate in the scheme directly there was almost no awareness on their part and the government machinery involved in issuing death certificates and in completing claim formalities ensured the slow demise of the scheme.

This scheme was later revived by LIC in a different avatar and LIC succeeded in providing insurance cover to the under-privileged population to a large extent. But from the people’s side no involvement was envisaged leading to either total ignorance about such schemes or no commitment to continue with the scheme.

But the PMJJBY and the PMSBY have been formulated very differently. These schemes ensure direct participation by the people who belong to an identifiable group. The scheme targets to cover those people who would otherwise not be able to buy reasonable life and accident insurance protection for themselves. Another critical advantage is the adherence to the basic requirements of an insurance contract. Under the scheme, proper KYC procedure is completed with due verification of age and also declaration regarding health. The health declaration was, however, waived for the people joining the scheme at its commencement i.e. June 1, 2015.

All the people joining the scheme are necessarily bank account holders. Before opening the bank account the individuals must have completed necessary formalities for KYC. It is also very likely that bank employees would have personally interacted with such persons. On the other hand the bankers do not send names of the people to be insured to insurers. The people have to initiate the process themselves by completing necessary forms and by giving mandate to the banks to debit their account by the premium amount and send the same to the insurers.

All account holders who have attained the age of 18 years and are below 50 years are eligible to enter the life insurance scheme providing risk cover up to 55 years of age. For the accident insurance scheme, the benefit is available up to the age of 70 years. During the current month banks have started sending SMSes to the beneficiaries to maintain adequate balance so that premium could be deducted and remitted to the insurers.

This action may definitely ensure that the scheme successfully rolls into the second year. The banks have also been directed to motivate all the new account holders to join the scheme. It is expected that the number of beneficiaries will go up by 15% to 20% this year.

The future of these two schemes, however, would depend on the technical viability of the terms and conditions as well as the pricing of the insurance cover. The premium rate of R330 and R12 for the PMJJBY and the PMSBY, respectively have not been fixed by the product and pricing experts of the insurance companies. The first-year experience of the life insurers has not been very encouraging in the context of total receipt vis-a-vis the claims outgo. The total premium received does not form the corpus in the hands of the insurers. The amount is reduced by applicable stamp duty and service charges payable to the government and the banks.

The insurers also incur administrative expenses. Most of the insurers except LIC have preferred to obtain reinsurance cover in view of lack of any credible reinsurance data. This also results in less cash in hand for them. As on March 31, 2016 almost all insurers who stepped in to participate in the PM’s ambitious programme found themselves on a razor’s edge so far as the viability of the scheme is concerned. Almost all of them are fearing substantial losses when they would be booking claims incurred but not reported up to the finalisation of the book of accounts.

Even the national re-insurer GIC Re is unsure till today about its total liability for the PMJJBY for the year ended on March 31, 2016. But indications are that the pricing may have to be reworked to make the schemes beneficial for all the stakeholders. With the passage of time and with real experience on morbidity and mortality, it is likely that the schemes will be fine-tuned.

The Jan-Dhan Yojana has been a hit in the government’s efforts to promote financial inclusion, hence there is no doubt that riding on the PMJDY the two insurance schemes will provide permanent security to each family in the country. The need for financial security to the family in distress can be fulfilled only through a reasonable insurance cover.

The writer is former MD & CEO, SUD Life Insurance

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