Published in Mint on 16th April, 2018. Written by Kapil Mehta.
Insurance penetration in India is low, particularly for general insurance, which includes motor, health, property and liability covers. We buy about Rs750 of general insurance per person per year compared to over Rs6,500 in Russia, China or Brazil, according to a report by the International Monetary Fund (IMF). If we measure premiums as a proportion of GDP, India is at 0.7% as compared to a world average of 2.8%. General insurance is colloquially referred to as non-life, a reflection of its poor-cousin status compared to the larger life insurance sector.
It is important, however, that more people buy general insurance. A well-developed general insurance industry mitigates the risk of ill-health, accidents, catastrophes and litigation. In its technical note on insurance sector regulation and supervision in April 2018, IMF identified poor insurance penetration as a major industry priority.
Why do we buy such little insurance? A common notion is that buyers are not confident that claims will be paid. However, that’s a myth because many claims are paid, and settlement ratios are reasonably high. The issue is different. People buy less general insurance because they don’t know where to buy from, products are not adequately tailored to their needs, and regulation does not require them to buy these insurance covers compulsorily.
Distribution outside large cities is poor. General insurers have about 10,000 branches, of which 57% are in tier I cities with a population of over 100,000. For the private sector, 96% are in these larger cities. Brokers, typically a large distribution channel for general insurance, have 85% of their 385 corporate offices in just seven states, most in the large capitals of Mumbai and Delhi. This means that there are large parts of the country where access to general insurance is limited. The reason insurers and distributors do not build a presence in small towns is that it is unviable. A salesperson in a tier 2 town will have to sell over 10 covers a month to just recover her salary. That’s extremely difficult. In the much better distributed life insurance sector, agents sell just 3-4 insurance covers each month. The solution to this is to allow distributors to earn more when they step outside large cities.
Fewer product innovations
While many essential products to mitigate risk are available, there are gaps in the insurance product portfolio that leaves large risks uninsured.
For example, out-patient medical expenses, which are a major expenditure, are not covered under health insurance. Expensive dental treatments are uninsured. Title insurance to protect against forged land ownership is not available. Farmers find it hard to cover several cash crops that are not in the government’s notified list. We will see considerable product innovation over the next few years as several new insurers enter the market and address these unmet needs.
A problem that has worsened over the years is that insurers have been focusing on growing sales even if that creates a distortion in pricing for individuals.
Health insurance illustrates this flaw. This is a large segment that accounts for over 20% of the industry and is broadly split into group insurance (sold to relatively large companies) and individual policies. The loss ratio, which is claims as a proportion of premium, is over 120% for group health sold to companies and less than 80% for individual policies. Yet, insurers are increasing premiums on individual covers, and lowering prices for group health because that drives sales growth. This is counter-productive as companies will buy group cover even if prices are raised. It is individuals who are price sensitive. The reason this anomaly takes place is poor underwriting control and focus on sales growth rather than writing sustainable business. As more insurers get listed, these issues will be highlighted and addressed.
Lack of mandate
We leave the decision of buying insurance on buyers. This is democratic but not always good. Most people are not able to assess the impact of a catastrophe—something that causes huge damage but is unlikely to happen. We don’t expect to be diagnosed with cancer. We don’t think an earthquake can destroy our home. We don’t believe anybody will sue us. As a result, penetration of these covers is low. Even in case of third-party motor insurance, which is mandatory, there are about 40% uninsured vehicles on the road.
Internationally, mandating purchase of insurance covers is common, particularly in areas where an employer needs to be nudged to provide a cover to employees. In China, motor insurance, professional indemnity, health insurance, public liability insurance, work-related injury insurance and environment liability covers are mandatory for segments most exposed to these risks. The UK requires most services to buy professional indemnity and comprehensive general liability, apart from standard motor insurance.
The government in India should consider mandating property, catastrophe and certain liability insurances. Making these compulsory will result in prices falling to an extent that these become marginal incremental costs.
A recent study by the Journal of the American Medical Association tracked 8,714 middle-aged individuals for over 20 years and found that individuals who suffered a serious financial loss were twice as likely to die in the following 20 years than peers with more financial stability. There are many causes for financial loss but insurance, both life and general, can go a long way in managing that risk. Ultimately, if people buy high-quality insurance, they will live longer and with more financial security. That’s an objective worth aiming for.