Focus on coverage provided, not premium collected

The Insurance Regulatory and Development Authority of India (Irdai) has committed to providing adequate life, health, and property insurance coverage to all citizens by 2047. This is a laudable goal since all of us know of at least one family whose life was turned upside down due to the main wage earner’s untimely death, or expenses incurred on a major sickness.

If all working citizens obtain sufficient life insurance so that the death claim amount is sufficient to restore the lost wages of the deceased wage earner, then the goal of “insurance for all” can be said to have been achieved.

However, the life insurance industry doesn’t measure metrics that would reflect whether citizens have adequate coverage: life insurance coverage per citizen or life insurance coverage as a percentage of average income.

Instead, it measures life insurance penetration, which is the total premium paid as apercentage of total income. It also measures life insurance density, which is the premium paid per citizen. This is like measuring progress in a journey by the amount paid for petrol instead of the distance covered.

Let’s illustrate the absurdity of these measures through an example. Suppose there are only two working-class citizens, each earning ₹ 10 lakh annually (total income of population would be ₹ 20 lakh). The acceptable norm for adequate insurance coverage is 10 times the salary. If both take life insurance cover of ₹ 1 crore each, the goal of “insurance for all” would be achieved.

Suppose initially only one of them has insured herself for ₹ 25 lakh at an annual premium of ₹ 40,000. The insurance penetration ratio, as defined by the industry, is 2 per cent (40,000/20,00,000), and the insurance density is ₹ 20,000 per person (40,000/2).

If both shift to term insurance of ₹ 1 crore each with a premium of ₹ 5,000 each, then “insurance for all” would be achieved. The total premium paid would be ₹ 10,000. However, the industry would measure this as a drop in penetration to 0.5 per cent and a significant reduction in insurance density to ₹ 5,000 per person.

In 2002, the insurance penetration rate was 2.71 per cent. It peaked at 5.2 per cent in 2010 and has since levelled off at around 4.2 per cent (Source: IRDA annual report, 2021-22). The low number at the turn of the century was when LIC was a monopoly. The entry of private companies resulted in a doubling of insurance penetration over 10 years.

The popularity of term insurance and competitive pressure has since driven down premiums, resulting in a much larger amount of life insurance being bought at a fraction of the earlier premium. Hence, premiums did not grow in proportion to the increase in coverage, resulting in a drop in “insurance penetration”.

Unfortunately, data on the total life insurance coverage provided by the industry is not available in the Irdai annual report. The industry’s reluctance to acknowledge the success of term insurance is understandable. The life insurance industry has always seen itself as a vehicle for collecting customers’ savings, not just their risk premium. This is aided by the high commissions paid to distributors, even on the savings portion of the premium. However, due to increased media coverage and investor awareness, the growth rate of savingscum-insurance plans has slowed, while term life insurance is becoming more popular.

Besides the life insurance industry, even the health and property insurance sectors measure their progress in terms of premiums received, rather than coverage provided.
Truth be told, ‘insurance for all’ will have a transformational impact on the lives of all citizens, particularly the poor. The policymakers need to ensure that the milestones for this remarkable journey are laid down correctly.

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor Twitter: @harshroongta