The BFSI sector is considered the fulcrum of any country's economic activities. The involvement of the entire financial sector is critical for the growth and development of our economy. Banks, NBFCs and Mutual Funds are already considered important players in the investment of people’s money in financing public and private sector projects. However, the role of the insurance industry has not yet appeared in serious public discourse although investments of insurance companies in general and LIC in particular have always financed a significant portion of five-year plans of the country since independence. The problem of not accepting insurance as a vital enabler in promoting economic growth is also because it is difficult to quantify the contribution made by insurance industry in increasing a nation’s prosperity. The importance of term plans and health insurance plans as risk management mechanism are acknowledged quite irregularly here and there. Covid had created a need for insurance cover among all sections of the population and put insurance sector into limelight for a couple of years. Now that Covid is remembered only as the worst possible nightmare, the interest in insurance has never really grown in this land.

The crux of the matter is, no concerted efforts have ever been taken to strategically use the institution of insurance for building the economy. However, despite the fact that insurance has never got the right public attention it deserved, total investments of insurers stand at more than sixty lacs of crores at this moment. Insurance Act, 1938 makes it mandatory for insurers to invest at least 75% of investable funds in government securities and other AAA rated approved securities. That makes Insurance industry as one of the biggest contributors to economic growth of the country. I believe, insurance sector is capable of contributing much more to the growth of the economy and our policymakers have to understand the role of insurance in the present-day context where industries find it difficult to attract sufficient investments which also means our capacity to generate more income and employment is left under-utilised. The nation must make best use of the institution for the welfare of common people and also for taking the country to a higher growth path. The policymakers will do well to remember that the insurance sector was opened up in the year 2000, to generate more resources for building the economy. In the absence of conscious efforts to make the best possible use of various classes of insurance, people have been left vulnerable to various unforeseen risks. At the same time, insurance has not been fully equipped to provide greater financial resources for the resource-starved industrial sectors of the economy.

The Ground Reality of the Insurance Penetration in India

At this moment, barely 20 crores of Indians have in-force life insurance policies as most of the 32 crores of in-force life insurance policies are held by customers who have multiple in-force policies. This underlines the fact that not more than 15% of Indians are covered by the protection of life insurance. On top of it, while Indians buy insurance policies every year, many surrender them prematurely or worse, keep them in lapsed condition after a few years, defeating the very purpose of buying life insurance policies. Although 55 crores of Indians are covered under some form of health insurance including the government-sponsored Ayushman Bharat for the poor, out-of-pocket healthcare expenses of Indians still happen to be more than 62% of total healthcare expenses as against the world average of 18%. Barely 1% of the population is covered by Home Insurance. Insurance cover for managing emerging idiosyncratic risks like cybercrime, terrorism, natural catastrophes etc have not yet taken proper root in the country. While an average educated person is convinced of the merit of Bank FD, Mutual Funds, Stocks and Real Estate as savings/investment products, insurance is something to be told to people again and again to evoke favourable responses. No wonder Insurance Penetration (defined as the proportion of the total premiums paid by people for insurance cover to the GDP of the country as a percentage) is a measly 4% while the penetration at other major emerging and developed markets is in the range of 8% to 10%. Insurance Density (defined as the total premium paid divided by the population size) is $92 in India while the corresponding figure in leading emerging and developed countries is at least $2000.

The rich countries remain rich because various life and non-life insurance products help them manage their risks better and protect their wealth better from various unforeseen circumstances like war, natural calamities and economic downturns. They do that both at individual and collective levels. Various insurance products improve their risk-taking abilities which are very important for a nation to sustain growth momentum. Through a high level of re-insurance activities, they are able to keep their insurance companies solvent under difficult situations, too. If we want to see a Viksit Bharat by 2047, we have to learn how to manage existing and emerging risks, protect lives and properties and help entrepreneurs to take reasonable risks.

Our Lawmakers have a Huge Role to Play

Who or what is responsible for the persistence of low interest of people towards insurance? I believe, our lawmakers have never given the needed importance towards promoting insurance. Nationalisation of the insurance industry was a good decision by the lawmakers in the sense that many private insurance companies had been playing with people’s money and ultimately becoming bankrupt, resulting in ordinary Indians losing their money. Setting up an industry regulator in 1999 and opening up the industry was also a wise decision. But these measures were not enough to make the industry vibrant. Since 1956, successive governments considered the industry just as a means to collect financial resources (like an ATM, as a noted lawmaker had once mentioned). Nothing beyond that. As a result, people hardly appreciated life, health and home insurance as necessities in their existence. In the absence of adequate social security benefits, scores of families continue to suffer as a result of untimely deaths and other adverse circumstances not in their control. Increasingly high healthcare expenses make many households slip below the poverty line in no time. Natural disasters make people lose all their possessions without anyone coming forward to indemnify them. In the present-day crisis of climate change, India suffers from natural catastrophes quite regularly across the country. Most of the properties destroyed by such catastrophes are uninsured. Unfortunately, people learn to appreciate the value of insurance only when they are devastated financially. But then, it is too late. Governments offer some financial help which has always been too little too late. Moreover, spending the government’s limited resources for fire-fighting rather than on nation-building is poor economics.

How to Make Insurance a Pull Product?

The insurance sector can not develop only by setting up more insurance companies and launching more insurance products (mostly of similar types). Announcement of allowing 100% FDI can hardly be the game changer. The sector can not even be jazzed up by AI or GenAI. These can be of important use when people consider insurance as vital for their existence. Are the people now ready to buy these products on their own, the way they buy Bank FDs, keep money on savings accounts, invest in SIPs and stock markets and even invest in real estate and Gold? If insurance is not made a pull product, people will always consider the industry as something that benefits the insurance companies and their intermediaries. Most people hate to buy something that provides nothing for immediate consumption. The government and now the regulator advise the insurers to launch insurance awareness campaigns across the country. But, why should people listen to the insurers? Why should people listen to the regulator for that matter? They believe the central and state governments more.

Lawmakers can not remain as Fence-Sitters

So, in all awareness campaigns and financial literacy programs, senior government officials of the districts have to be present and also urge people to buy individual insurance products and group insurance schemes. They can not expect the right things to happen automatically. IRDAI has made each of the life insurers “Lead Insurers” of each of the states of India, to develop insurance markets of the states. The objective is to encourage each insurer to penetrate deep into the insurance market of one Indian state, at least. This is a good intention but this alone will not bring results. Members of the Executive and Legislatures have to be in the same wavelength with the insurers in making the Indians of all states fully insured. The members of legislatures are people’s real representatives and they can not shy away from their job of promoting insurance actively. How many of our lawmakers encourage people to buy insurance or raise their concerns in Parliaments and state legislative assemblies about low insurance penetration?

The government wants insurance penetration to rise to global level. For that to happen, the lawmakers must tell people unequivocally that insurance in general and life insurance in particular has to be the cornerstone of the financial planning of Indian households, rich or middle-class or poor. For poorer Indians, government subsidies should continue to play a role. At this moment, the government wants people to invest money in the stock market and mutual funds so that corporate India gets financial resources to scale up their operations. People are more knowledgeable about how much appreciation or destruction of investor wealth is happening in stock market. Yes, we need more people to invest in equities and equity-heavy mutual funds. But this can not happen at the cost of investment in assets that can help ordinary Indians to achieve their sensitive goals. If more Indians protect their wealth through life and pension products, they can reach their sensitive goals in life. Their money will, in any case, come to the corporate sector ultimately. This is exactly how the developed world has become developed. In all developed countries, insurance penetration and density have been pretty high for the last century. Their insurance fund is a few times their GDP. If India has to become a Viksit Bharat, the insurance industry has to be given its due importance. More InsurTech and more AI do not necessarily improve insurance penetration and density. People must show greater sagacity in managing their risks including emerging risks that can overwhelm them within short notice. Our leaders must persuade people to consider insurance more as a pull product. The leaders should not be found playing the Fiddle when our houses are seen burning for reasons beyond our control.

Geneva Association, the pioneer in insurance research worldwide has identified five factors that contribute to the growth and development of an insurance market. These are political prioritisation of insurance, insurance literacy, the efficiency of insurance supervision, risk awareness, and complete trust of customers in insurers. Most of these are partially/completely missing in the Indian context.

As already mentioned, our politicians are hardly noticed discussing on how benefits of insurance can really reach all segments of Indians at affordable cost. The reason is, financial literacy is missing even among our political leaders. Regarding insurance supervision, I am sorry to say that the regulator is yet to address the issues at the ground level.

Another factor that comes in the way of underwriting emerging risks is the absence of reliable and updated loss data and estimates. In many cases, data are hidden in old government records. Unless the government helps the insurers with the historical loss data, insurers can never arrive at the right premium through actuarial calculations. So, the government has to be actively involved if we want the emerging risks to be managed. In the absence of direct involvement of the government in sharing such precious data and identifying local insurance needs, the insurers prefer to stay away from innovating further on products and prices.

Insurance has inverted production cycle in the sense that premiums are paid upfront and claim payouts may happen within one year in case of non-life insurance and one or two decades in case of life insurance. Government must play a crucial role in assuring the insuring public that claim payments will really be made to people as and when the contingencies insured against take place. In mature insurance markets like France, UK and even Taiwan, governments no longer need to remind people to believe in insurance and insurance companies because people already are convinced of the worth of insurance. But Indians have not reached that stage of maturity and they believe something only when they get some firm assurance from governments and lawmakers.

Many emerging risks like natural catastrophes, cyber-crimes and pandemics are cross-border in nature. Managing such risks requires the active participation of not just re-insurers but also governments of multiple countries. Reinsurers enable the diversification of risks on a global scale. Thus, heavier risks of one country are transferred to many other countries where the risks are not that heavy.

As there is insufficient understanding about insurance markets of India at political level, there is little understanding of the fact that lower insurance penetration and persistency is both a demand and supply side problem. The regulatory framework, created by the government, is not properly aligned with the level of maturity of the insurance market here. On top of it, wrong metrics are used to measure the progress of the industry. The best method is to see the proportion of households and businesses covered by the industry. Another useful measure is the Protection Gap, defined as the proportion of uninsured losses to total losses. Above all, insurance has to be made a part of the national disaster management plan which is possible only if the politicians agree to consider insurance as a tool for causing inclusive economic progress.

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