Insurance Sector: Rural India Needs Sachet Insurance

By UKTN Singh

In 2000, foreign direct investment (FDI) was authorized in the insurance sector with a cap of 26% of participation in a joint venture with Indian partners. In 2015, then Finance Minister Arun Jaitley increased the FDI limit from 26% to 49% and current Finance Minister Nirmala Sitharaman further increased the FDI limit to 74%.

The penetration rate of insurance products in 2001 was 2.71% and it is currently 3.71%, which is well below the world average of 7.31%. The main reason given for driving the decision to increase the FDI limit was to improve insurance penetration in India, which remains low even after increasing the FDI limit from 24% to 49 % in 2015.

The untapped rural market
If we are to increase insurance penetration, we must have simple products that create value since 70% of the population still lives in rural areas. There has been an improvement in incomes and the acquisition of assets in need of protection among the rural population, creating opportunities for exploration and expansion of insurance business in the otherwise untapped rural market. All 57 insurance companies have a very strong presence in urban and metropolitan areas, but rural and semi-urban India needs better product and distribution coverage. Insurance companies can use the capital raised by FDI to expand in rural areas using appropriate technologies.

Labor in the unorganized sector
Almost 90% of the working population is in the informal sector without a minimum wage or any form of social security and with very low disposable income. According to an ILO report, in India more than 40 crore of informal workers could be pushed into deeper poverty due to the Covid-19 epidemic. These people need insurance the most. Insurance can prevent these people from getting trapped in the vicious cycle of poverty.

From push product to nudge product
While the Covid-19 pandemic has wreaked havoc across all sectors, it has proven to be a blessing in disguise for the life insurance industry in general and, in particular, health insurance. From being a push product, insurance has become a “push product” because of the uncertainties. People are more aware of insurance products, but affordability is an issue. The insurance industry should seek to provide sachet insurance products to cover the needs of this stratum of the population.

Confidence factor
The average Indian household owns 77% of its total assets in real estate, 7% in other durable goods, 11% in gold, and the remaining 5% in financial assets (such as deposits and bank accounts). savings, publicly traded stocks, mutual funds, life insurance and retirement accounts).

India is among the least insured countries and in 2019 the density of non-life insurance (which includes health) in the country was only 19%, and the main reason is lack of confidence. . While digitalization can be a way to cut costs, replacing the human touch with technology can have a detrimental effect, especially for long-term life insurance and annuity contracts.

Go forward
The increase in the FDI limit opens up opportunities for the insurance sector in terms of injection of foreign capital, which is expected to be $ 3.5 billion to $ 4.5 billion, as Indian insurance activity requires huge capital and deep pockets. The additional injection of capital into the business could enable the growth of the industry, but it cannot be considered the miracle drug to improve the penetration and density of insurance in India.

Particularly for customers at the bottom of the economic pyramid, insurers must implement new business models and new products to deliver and administer the risk mitigation solutions at scale that meet their needs. In this way, the insurance industry can also help close the protection gap.

The author is Director, Amity School of Insurance, Banking & Actuarial Science, Amity University