Inclusive Bharat: How can all insurance reach every section and region of India

India’s insurance industry is among the fastest-growing sectors with a CAGR of 12 percent from FY14 to FY19. In terms of total premiums, India ranks 10th globally in the life Insurance segment and 15th in non-life. Gross premiums of $82.8 billion were written in FY19.

While these figures may be impacted by the COVID-19 slowdown, the general consensus remains that aggregate numbers will grow, driven by health and life underwritings. A growing number of insurance providers, aggregators, and distributors will contribute to this.

Currently, there are 24 life insurance and 33 non-life insurance firms operating in the country, ranging from the venerable Life Insurance Corporation of India to digitally-enabled startups.

However, despite the large size and impressive growth trajectory, the insurance gap in India persists. 75 percent of India’s population, or 988 million Indians, do not have any form of life insurance. The overall insurance density in India is just around 4 percent, compared to 21 percent in Taiwan which has the highest insurance penetration.

This low coverage results in high catastrophic expenditure – a 2017 World Bank study estimated 17 percent of Indians spent more than 10 percent of their income, and 3.9 percent more than 25 percent, on health costs. Such costs keep people poor and push others into poverty.

The numbers indicate that private insurance is beyond the reach of India’s poor. This is a major area of concern, more so during the current pandemic. The obvious question – why doesn’t Bharat buy insurance?

Why is the safety net of private insurance restricted?

Many factors create and reinforce the insurance gap. To begin with, the majority of insurers, aggregators, distributors, and agents in India only target metropolises and large cities. Hence, there are few insurance products catering to the Bharat purchasers.

Limited awareness, the belief that insurance is not a necessity, the lack of transparency in pricing (unlike credit, there are no guidelines for insurance companies), and the exorbitant cost associated with last-mile distribution further disrupt efforts to bridge the insurance gap in the country.

Insurance coverage in the fishing industry is a classic case. A 2017 study by the Central Marine Fisheries Research Institute found that insurance penetration among fishermen is virtually non-existent due to a lack of trust between insurers and fishermen, excessive premiums, and a lack of applicable insurance products.

Data and technology can address two large challenges of insurance inclusion – product design and distribution.

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How can technology bring Bharat into the safety net of insurance?

Continuing with the above example, let us assume that a fisherman is seeking to insure his boat for a fishing trip. Primarily unstructured data such as satellite imagery and geospatial intelligence, pictures of the boat, location history, on-site climatic conditions etc, collected frequently or even in real-time, can augment traditional data sources and be used in dynamic underwriting models.

Improved data coverage and frequency can reduce underwriting risk and enable the creation of small-ticket insurance products at lower premiums.

Sales of these small-ticket insurance products generate new data in previously data-poor areas, and over time, this data improves the performance of a self-learning underwriting model. The new products at lower premiums help bridge the trust gap and can change Bharat’s perception of insurance.

Similarly, with the widespread rollout of ODG and UPI, insurers and distributors can use scalable, disruptive approaches to serve the underinsured. With ODG, they can leverage transaction histories and large government datasets to underwrite policies in previously data-poor segments of Bharat. UPI streamlines and democratises payments, making insurance purchase cheaper and more accessible for Bharat users.

Social selling, micro products, and specialised product manufacturing based on big data, are all possible now, and tech-enabled and digital-first insurance providers, aggregators, and distributors (third-party agents) can contribute and propel the vision of insurance inclusion.

Role of government vs private sector in Insurance Inclusion

The government has taken several initiatives to improve financial inclusion. The Pradhan Mantri Jan Dhan Yojana (PMJDY) has brought more Indians into the formal banking network by offering a zero-balance bank account along with insurance coverage and a debit card.

The Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB-PMJAY) provides health insurance for 500 million socially and economically vulnerable Indians, and offers an annual cover of Rs 5 lakh per family. By December 2019, PMJAY had provided e-cards to 67 million and covered the treatment of 6.4 million patients. Despite such efforts, the government alone cannot bridge the insurance gap. The private sector has to work alongside to innovate on product design and delivery.

In 2016, the government also launched the Pradhan Mantri Fasal Bimal Yojana for crop insurance coverage for farmers. While 34 million farmers were insured as of 2017, much needs to be done to ensure full coverage of vulnerable farmers. The scheme has limitations as premiums are calculated at a district level for different crops per year, even though no two farms are alike.

Companies already provide satellite-derived data on agricultural yield at a 10m resolution globally. Using a farmer’s location and satellite imagery, existing algorithms can geo-fence a farm and determine yields. This approach, combined with climate models, local knowledge, and the insured’s mobile data, can bridge data gaps. Thus personalised products premiums and products can augment existing government schemes to improve coverage.

India’s microfinance sector provides a roadmap for private-sector innovation and engagement in addressing the insurance gap. A combined effort of banks, MFIs, equity investors and regulators, riding on existing government-led initiatives, was required to scale up microfinance in the country.

Microfinance empowered rural women to earn their livelihood — insurance can provide a safety net for that livelihood. A kirana store owner has little-to-no buffer in case of any emergency — even a small-ticket storeowner policy that covers theft or damage can allow her to take greater risk to expand inventory, increasing sales and income.

In fact, insurers can leverage microfinance distribution channels to optimise last-mile delivery to rural constituents. Unfortunately, in the absence of guidelines, insurers have little control over aggregators/distributors to guarantee last-mile delivery to rural areas.

A collaborative, purpose-driven approach from the government, insurers, distributors, and agents is imperative to facilitate seamless last-mile delivery of insurance to Bharat.

First, the customer has to be involved — create awareness among people that insurance is a necessity and not a luxury.

Second, there is an immediate need for bite-size insurance products that provide coverage at low premiums so that the awareness translates to trust.

Insurers need to develop Bharat-specific products with the use of technology and data science. The government could look at creating policies requiring industry players to meet rural market thresholds, similar to PSL thresholds for banks.

Third, distributors need to leverage automation to lower cost and enhance access. However, given low literacy levels and digital penetration, Bharat will need a ‘phygital’ distribution model, combining the education/awareness value of physical and the cost-benefit of digital channels to reach a larger audience.

While achieving the right mix of physical and digital may seem challenging, strategic partnerships between traditional insurance providers and InsurTech firms can pave the way for large-scale implementation of ‘phygital’ distribution models.

Way forward to a financially inclusive society

The Reserve Bank of India’s definition of financial inclusion is the “process of ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost in a fair and transparent manner by mainstream institutional players.”

India has made tremendous progress in banking inclusion, and the focus could now shift towards facilitating universal insurance coverage. As mentioned above, this will require all stakeholders to come together to expand their offerings and reduce distribution cost.

The vision of an inclusive India has to include insurance coverage for Bharat. The sooner we achieve this as a society, the faster would be our growth trajectory.

The authors would also like to provide credit to the researcher - Mr. Abhay Singhal – Research Support – Stanford 2023, Research Assistant with Stanford Institute for Economic Policy Research.