With Jan-dhan Yojana, the government expects more than 10 crore account holders to benefit from the scheme.
After the success of direct benefit transfer for LPG consumers across the country, the NDA government has launched a campaign to link insurance cover with bank accounts for citizens from a segment where financial security is needed the most. Both life and accidental insurance are being provided under two separate policies issued by life and non-life insurers.
For the life cover, bank account-holders between the age of 18 and 50 are eligible, but the cover would continue till the age of 55. For accidental insurance, any adult account holder below 70 can join the scheme. The cover would cease on reaching 70. As with Jan-dhan Yojana, the government expects more than 10 crore account holders to benefit from the scheme. It is following up with banks vigorously to popularise the scheme and a massive publicity campaign has been launched. The idea to provide insurance to people through an organised set-up, where KYC and ease of paying premium are assured, is definitely a novel one and this may enable the country to put in place a smoothly accessed and self-financed social security system.
The life cover premium and conditions regarding the health declaration, however, defy the scientific standards usually applied by insurers to assess risk, fix premium and to prevent anti-selection. In such schemes, the tendency of bad lives entering the scheme is usually very high. Premiums of just Rs 12 and Rs 330 for accidental insurance and for a life cover of Rs 2 lakh, respectively, appear to be quite aggressive. Though the accidental insurance scheme provides for payment of Rs 2 lakh on death or permanent disability only, yet — in view of rising deaths due to fast growth in the number of vehicles and more frequent occurrences of natural disasters — insurers may start bleeding very soon.
Of the life cover premium of Rs 330, the insurer will get only Rs 289 after payment of commission and service charges to banks. A reference to census-based mortality data, known as crude mortality rate, indicates that unless and until the average age of bank accountholders is under 35, the scheme would hit the insurers adversely and they may not be able to support it even in its second year. Even if the mortality table based on the data of Indian assured lives is taken, the premium does not seem sustainable for people beyond 40-45. The risk of sick and those over 60 sneaking into the scheme is very high, in such an open-door model.
Ideally, this type of risk is covered through reinsurance arrangements. But the existing rules on reinsurance do not permit reinsurers to step in for sum assured as little as Rs 2 lakh. Irdai has not come up with guidelines in this regard, though insurers have been lobbying for a special reinsurance framework to transfer some of the excess risk to another entity. However, it is very likely that multinational reinsurers may not be willing to take on risk under this kind of scheme.
The government’s attempt is definitely a noble one and it comes close to the universal social security scheme available in many advanced countries. However, slightly better preparedness would have enhanced chances of instant success. The success of an insurance scheme lies in prompt and efficient claim settlement. An accidental claim procedure normally requires a police report and, to process all claims, a valid death certificate will have to be submitted to the insurers. Will the banks find time to assist the claimants in procuring these documents quickly or even to guide them? They will probably be too busy mobilising deposits and managing NPAs to take care of such humble responsibilities.
As far as the insurance sector is concerned, these schemes are not likely to give a substantial boost to penetration or insurance density, which appears to be another indirect objective of the government. Insurance penetration is the ratio of total insurance premium to GDP and insurance density is the per capita premium. As on March 2013, India’s penetration was 3.96% and insurance density as on March 2012 was $ 53.2.
On the same date, the global average of penetration was 6.3%. It is obvious that such low-cost insurance schemes may be effective as populist measures, but may not impact the insurance industry positively and substantially. In the next budget, the government may have to allocate a good amount of taxpayer’s money to fulfil its political ambitions through the two schemes floated in the name of the prime minister.
The writer is former MD & CEO, SUD Life