How to Tackle Under-Penetration and Protection Gap of Insurance in India

Context: According to the Insurance Regulatory Development Authority of India’s (IRDAI) latest annual report, the penetration and protection by Insurance in India is very low and needs a redressal.

The Twin Challenges of the Insurance Sector.

• Low Insurance Penetration:

• Penetration of life insurance is a mere 2.74% which was declined from a high of 4% in 2009
• Even among the insured, the average sum assured is a only 8% of the amount that might be required to protect a family in the case of the breadwinner’s death. – IRDAI Report

• High mortality protection gap: It is the difference between the resources needed and those available

• In India, consumers have savings and insurance of just ?7.8 for every ?100 needed for protection, a gap of ?92.2. - Mortality Protection Gap Report, Asia -Pacific, by Swiss Re.

• The social and economic cost of being uninsured and under-insured: The economic progress Indian families have made over decades can get wiped out in the unfortunate event of the chief wage earner’s death.

Constraints

• Absence of a formal security system for the promotion of term insurance plans
• Wrong positioning of insurance: Insurance has been positioned as a financial product that combined very little insurance with a lot of investments.

• Pure protection products were considered to be an “expenditure" that were either avoided or parked away for another day.

• Lack of Awareness about the necessity of life insurance :

• For E.g. while health insurance coverage has been increased due to the COVID, life insurance continues to remain unappreciated because most people view it only as a tax saving option.
• People rarely develop a proper financial plan; they tend to buy products in an ad-hoc manner relying on the advice of family and friends. 

Way Forward: Solutions - 

• Systemic policy redressal: 

• Eliminate goods and services tax (GST) for term and health insurance.
• Introduce a separate section under the Income-tax Act (over and above Section 80C) that gives a tax benefit on the premium paid towards pure life and health insurance policies.

• Well-qualified financial planners : To support consumers thus they can better assess their current and future financial requirements.
• Promote online Insurance: to close the protection gap.

• Research shows that those buying online insurance as part of a proper financial plan tend to opt for term insurance with higher covers.

• At a personal level, buying a cover equivalent to at least 10 times the annual income, plus protection for a big-ticket loan like home loan is a good way to go about insurance planning.
• An education and policy push to tackle the twin challenges of insurance:

• The industry stakeholders need to keep explaining the need for protection and the government could step in with a few targeted steps to nudge demand for protection products.

Conclusion

Enhancing the penetration and protection by Insurance is the only way that the middle class of the country can protect itself from the 3 D’s—death, disease and disability.