While government schemes are run by way of contributions made by the employers in the form of “Payroll Taxes”, the commercial insurance products are purchased by paying appropriate premiums.
The government plans to introduce job loss insurance (or unemployment insurance as known as in the US and EU countries) in India. It has sought suggestions from Irdai and the General Insurance Council of India on how the scheme can be developed for working class Indians.
India does not have a full-fledged job loss insurance in place at the moment. Some general insurers sell this insurance as one of the benefits available under health or home insurance products. These are more like bundled insurance products in the nature of loan protection insurance. For example, ICICI Lombard’s Secure Mind provides job loss insurance only if a customer buys SIP from ICICI Direct for a minimum investment of Rs 1,000 per month. HDFC Ergo’s Home Suraksha Plan offers three month’s EMI in case of job loss. EMI is restricted to 50% of net salary. This cover is available with a reasonable life cover only. If the home loan is for 20 years, the insurer has to pay only 1.5% of the total value of the loan.
These job loss covers are available only as incidentals to some other major financial products which are must costlier than the cover for the job loss component. This type of bundled product benefits the insurers more as they can sell multiple products at a time and mop up high volume of premiums quickly. The customer benefits only if the probability of losing a job soon after the purchase of such products is very high.
The probability of losing jobs varies with the nature of industries. Those employed in industries affected by rapid changes in technology carry a high probability of job loss. It may take several months for the employees to again get a job offering similar compensation. Temporary job losses can also take place because of some natural calamities or pandemics like Covid-19.
In the US, individual states provide unemployment insurance for a period not exceeding 26 weeks. Since the benefits are a percentage of the regular income, many opt for private insurance cover to supplement the benefits. While government schemes are run by way of contributions made by the employers in the form of “Payroll Taxes”, the commercial insurance products are purchased by paying appropriate premiums.
In EU countries, the arrangements are of a similar type but some provide benefits for a very short period (e.g. Hungary) while some such as Belgium pay the unemployment benefits for an indefinite time. In some countries, even the employees contribute money to the state exchequer so that the state is able to provide generous benefits to the unemployed for a reasonably long time.
Payroll tax: In India, people earning low incomes should ideally be getting financial support from the government. Employers should pay some sort of “Payroll Tax” to the government annually, which should be an agreed percentage of the total salary bills. Such schemes can be administered by a government department like EPFO. They should be priced on actuarial principles and can be in the nature of group insurance covers since each group brings a unique type of risk of losing jobs. Both employers and employees must pay a fixed proportion of their salaries as premiums to the insurers.
What customers need today is not credit insurance or loan protection insurance but job loss insurance which can enable them to work more peacefully and which can promote the welfare of the working class.
The writer is assistant secretary, Kolkata Audit Centre, LIC of India. All views expressed here are personal