Insuring the Indian Poor: Improving Lives, Reducing Risks
“Life is a dream for the wise, a game for the fool, a comedy for the rich, a tragedy for the poor.”- Sholom Aleichem, Author & Playwriter
26th December 2004 witnessed an undersea Earthquake measuring 9.0 on the Richter scale, struck along the West coast of Sumatra, Indonesia. This massive quake resulted in a Tsunami that decimated 14 countries. The east coast of Indian mainland along with Andaman & Nicobar Islands destroyed by the wild tsunami waves. More than 26,000 people lost their lives. Lakhs of Indians lost their homes, assets, livelihoods. The worst affected demography was the poor who lost everything. With little to no savings with them, no financial security, lost family members, lost livelihood, still some have not recovered since last 17 years.
What is the impact of such a disaster on the poor? OR What is the impact of any unknown or shock event on the poor? There are many unfortunate events that can change our world on its head. Some of us are fortunate enough to have financial stability to come out of such events. Poor people are not that fortunate. The money that they earn is limited and can barely cover their daily needs and means. Insurance would come at the end of the line for them based on priorities. So, it the responsibility of the Government to provide them with Insurance cover so that the impact of disasters, unfortunate events can be reduced to a level that they can cope with. To help the Government in achieving this vision, it is the goal of the businesses to provide with innovative insurance products that are best suited at solving these issues.
The main question now is that how technology can be a catalyst for change. This is the second article in the series “Disrupting Indian Insurance Industry using Ecosystems” discusses the case of Poor Population of India. How can we solve the problem of their Financial Inclusion and Risk Management? The new age of Ecosystems, data analytics, digital transformations can make a huge impact in our quest for Financial Inclusion of the poor.
The Menace of Poor Infrastructure
2022 will mark the 75th Anniversary of Indian Independence and we have progressed in a lot of sectors and areas. But the growth has been uneven. This inequitable distribution of growth and development has an impact on the development of the Rural Infrastructure. This is an example of the chicken-egg problem. The government needs resources to invest in the development of India’s villages and small towns. These primary source of government’s financial resources are the taxes that they collect from Individuals, Corporations as well as the Indirect Taxes collected from different financial transactions that take place in the country. The amount of taxes collected is correlated with the GDP growth and economic activity in the country in a year. State of the art infrastructure will result in better growth for the country which in turn results in better earnings for the government that they further invest to improve the infrastructure. This cycle continues and improves the living conditions for citizens. Thus, transforming lives of Rural India requires significant investments in the rural infrastructure.
The definition of infrastructure here covers different forms viz Social Infrastructure (Healthcare, Education, Public Facilities, Transportation etc.), Financial Infrastructure (Financial assets, markets, intermediaries etc.) and other types. To make sure that the target rural population can reap benefits of financial inclusion, it is extremely important for the government and businesses to focus on improving both social as well as financial infrastructure. New business models like Public Private Partnerships are emerging which can solve the problems of poor infrastructure by helping governments with the funding that is required for such mammoth projects. This ecosystem where governments, social sector enterprises are all coming together needs impetus in the form of capital and technology, which is provided by businesses and new start-ups by leveraging innovation.
Infrastructure development needs to be undertaken parallelly to the product development and innovation for insurance products. The major role for the government is to improve and build state of the art infrastructure for rural areas, so that last mile reach in terms of delivery of services is efficient along with internet connectivity in remote areas. The major role for Insurance companies, Fin-techs etc., is to create new products and business models that can help in increasing insurance penetration among poor demography and be profitable for the company at the same time.
The Sectors to Target
For the Mathematics & Statistics enthusiasts, insurance industry provides them a playing field of numbers and probabilities. Every action and reaction in this industry is based on numbers and chances. Actuarial models and theories are important in pricing of premiums for policies and basically, they depend on the size of the insured pool as well as risk characteristics. To provide products and policies which cover insurance needs of the poor population, it is important for insurers to solve the economics of their premiums calculations and profit margins.
The data shared by the Indian Regulator for Insurance Industry- IRDAI, provides good insights into the dynamics for the General Insurance Industry in India. If we compare Gross Premiums Underwritten for 2020–21, we observe that the top 3 segments are Motor Insurance (Third Party, Own Damage), Health Insurance and Crop Insurance. The below figure shows the share in the premiums underwritten for the top segments.
From the industry data we observe that around 90% of the total premiums underwritten are from 4 main categories. Also, to understand the impact that these categories have on the poor population of India, it is important to understand if these products align with their needs. A subjective judgement is made to label the impact of policies in such sub sectors. Health and Crop Insurance according to me has the highest impact on lives of the Indian poor due to their living conditions as well as working demographics.
Health Insurance
The old saying of “Health is Wealth” provides attention to the fact that health is one of the most important parameters for Human Development. The government has only spent 1.8% of GDP on the Health Sector (Budget 2020). The National Health Policy states to increase this to 2.5% of GDP which will add value to the poor population. They are exposed to different health risks and are extremely under-insured. They don’t have financial savings or literacy that can help them in tackling these challenges. With the Jan Arogya Yojana, the government has tried to cover all the poor population in the country. But there are significant bottlenecks that need to be resolved. New startups and insurers must come up with disruptive technologies and business models that can solve the last mile delivery issues as well as can tackle the social infrastructure drawbacks.
There is a change in trend of moving towards proactive connection with the customers and providing wellness insurance as a solution. Ayushman Bharat Initiative has brought in new energy to the Health Sector and increasing important of wellness for the masses. Primary Health Care centers of the government have been renamed as Health and Wellness Centers. This shows the focus on providing wellness for the poor population. Insurance Industry can provide innovative product and solutions for the same.
Crop Insurance
Majority of India’s poor population reside in the villages and are involved in the agrarian sector. Hence, crop insurance plays an important role. Economic Survey 2019–20 states that 21.5 crore persons are involved in Agriculture sector. Hence, innovations and new business models are crucial for crop insurance. The grim cycle of debt that the poor get stuck in due to crop failure can only be solved by making sure that majority of poor farmers are insured. To properly price the premiums for crop insurance, digital technologies need to be utilized. Weather tracking software packages which can predict rainfall patterns should be used along with big data analytics to find patterns across the country for premium pricing. Leveraging technology, we can predict the claims and accordingly reduce our risks and provide a price that is reasonable. The Government with its PM Fasal Bima Yojana has significantly reduced premium costs for the poor farmers. The premium expenses for the Government can be reduced by digital modernization of Insurance value chain by the insurers.
Conclusion
The 2nd article in the series “Disrupting Indian Insurance Industry using Ecosystems” discussed about the case for the Poor Population of India and their Insurance inclusion. The shortcomings in the Infrastructure in the country were discussed and how the government is currently focused on improving the conditions. Our focus to insure the poor population should be to target the health and crop insurance sectors first. In my next article in the series of, I will discuss the case of Health Insurance Industry. How is it being disrupted by ecosystems and how we can improve penetration in the country.
References:
Economic Survey 2020–21, Volume 1 and Volume 2
IRDA Website- www.irda.gov.in
Wikipedia- https://en.wikipedia.org/wiki/2004_Indian_Ocean_earthquake_and_tsunami
