From being a push product, insurance is now a nudge product due to rising uncertainities in the time of Covid but affordability is a big issue
By AP Singh
In the year 2000, foreign direct investment (FDI) was allowed in the insurance sector with a cap of 26% stake in joint venture with Indian partners. In 2015, then finance minister Arun Jaitley increased the FDI limit from 26% to 49% and the current finance minister Nirmala Sitharaman has further increased the FDI limit to 74%.
The insurance products penetration in the year 2001 was 2.71% and currently it is 3.71% ,which is way below the global average of 7.31%. The prime reason stated to have been behind the decision to raise the FDI limit was to enhance insurance penetration in India which remains low even after increasing the FDI limit from 24% to 49% in the year 2015.
The untapped rural market
If we must grow the penetration of insurance, we must have simple products which create value since 70% of the population still lives in rural areas. There has been an enhancement in incomes and acquisition of assets that need protection amidst the rural population, creating opportunities for exploration and expansion of insurance business in the otherwise untapped rural market. All the 57 insurance companies have a very strong presence in urban and metro areas but rural and semi-urban India require better coverage in products and distribution. Insurance companies can use the capital raised by FDI to expand in the rural areas with the help of appropriate technologies.
Workforce in unorganised sector
Nearly 90% of the workforce is in the informal sector with no minimum wages or any kind of social security and with very low disposable income. According to an ILO report, in India, more than 40 crore informal workers may get pushed into deeper poverty due to Covid-19 outbreak. Insurance is needed by these people the most. Insurance can prevent these people from getting entrapped in the vicious circle of poverty.
From push to nudge product
While the Covid-19 pandemic has wreaked havoc across sectors, it has proven to be a blessing in disguise for the life insurance sector in general and, particularly, health insurance. From being a push product, insurance has become a “nudge product” due to the uncertainties. People are more aware about insurance products, but affordability is an issue. The insurance industry must look at providing sachet insurance products to cover the needs of this strata of the population.
An average Indian household holds 77% of its total assets in real estate, 7% in other durable goods, 11% in gold, and the residual 5 %in financial assets (such as deposits and savings accounts, publicly traded shares, mutual funds, life insurance, and retirement accounts).
India is among the least insured countries and as of 2019, the density of non-life (which includes health) insurance in the country was a mere 19%, and the biggest reason for this is the lack of trust. Although digitalisation can be a way of cutting costs, replacing the human touch with technology can have detrimental effect, especially for long term life and annuity contracts.
Increase in FDI limit brings opportunities for the insurance sector in terms of foreign capital infusion which is expected to be $3.5-4.5 billion as the Indian insurance business requires huge capital and deep pockets. Additional infusion of capital into the business could enable growth of the industry, but this can’t be considered as the wonder drug to improve the insurance penetration and density in India.
Especially for customers at the base of the economic pyramid, insurers must implement new business models and products to provide and administer the risk mitigation solutions at scale that meet their needs. This way the insurance sector can help close the protection gap as well.
The writer is director, Amity School of Insurance, Banking & Actuarial Science, Amity University