Big opportunity for insurers

Author: Rajesh Shukla

The Indian economy is growing from

strength to strength. The fast-paced economic growth is bringing
about a change in the country’s socio-economic fabric. It is not
uncommon to see Indian households spend beyond their earning
capacities. Easy availability of loans, increasing popularity of
credit cards and rising consumerism are putting an increasing
number of Indian households under the risk of being financially
vulnerable. Social security is virtually nonexistent in India and
since financial security is largely the responsibility of each
household, there is an urgent need to create awareness about
financial protection.

Among social security measures, life insurance is one of the most

important. The demand for life insurance products has seen rapid
growth in the last few decades. The domestic life insurance
market has witnessed significant growth: $22.4 billion within a
period of seven years (2000-07) with a growth rate of 118.2%.
The performance of the market is forecast to accelerate to $76.5
billion by 2011 with a compounded annual growth rate (CAGR) of
12.4% and a growth of 59.8%. It is a business growing at 15-20%
annually.

This extraordinary growth of the domestic insurance market is the

result of several macroeconomic factors, including increase in
literacy and per-capita incomes, a decrease in death rates and
unemployment, better tax rebates, growing GDP, an expanding
consumer class, and an increase in spending and saving
capacities. In such a scenario, the Indian insurance sector is
poised for even more spectacular growth.

Data collected by NCAER for its India Financial Protection Survey

reveals that awareness about life insurance is fairly high (78%)
among Indian households. Despite this, ownership of life
insurance is low (24%) and is largely confined to urban areas. But
Indians consider life insurance as one of the major security
products. This indicates a huge market potential for players in this
sector.

Further analysis of data confirms that awareness and ownership

of life insurance are a function of education and affluence. Around
31% of life insurance owners are graduates or have higher
qualification, while barely 6% of non-owners are graduates. The
proportion of insured households tends to rise with educational
attainment. Both awareness (95%) and ownership (53%) is
highest among salaried households, followed by those who are
self-employed in non-agricultural activities.

The survey results also show that the income

and expenditure levels of insured households are more than
double that of non-insured. While an insured household has an
average income of Rs 1,13,190 and an expenditure of Rs 78,475,
the average income and expenditure of non-insured household is
much lower.

On average, an insured household is left with nearly three times

the amount to save and invest (at Rs 34,714 per annum)
compared to an average non-insured household (Rs 10,137). The
ownership of consumer durables is also high among households
with life insurance.
A number of socio-economic determinants, or factors, come into
play for life insurance ownership, including affluence, household
characteristics, demographic profiles, financial activity, financial
perceptions, etc. But the key determinants are education and
occupation of chief earner of household, affluence and product
ownership. It is observed that households that have a more
optimistic view about their future, income adequacy and saving
levels show higher levels of participation.

To illustrate, while nearly 53% of insured households are salary-

earning households, just 6.8% of insured households are ones
that derive their income from labor. Moreover, labor households
that are insured pay the lowest premium (Rs 2,469) compared to
salaried households (Rs 6,050).

There is a strong tendency for the average premium payment to

rise with income. Households contributing to insurance on an
average make payments of the same size relative to income (3-
4%) across all income levels. On an average, the topmost income
quintile group (Q5) owns a policy of Rs 1,47,479 in contrast to Rs
75,526 for the bottom-most income quintile group (Q1).

Insured households are much more confident about their future

financial stability than the noninsured. Nearly 74% of insured
households are confident about the stability of their household
income. In contrast, only 47% of non-insured households are
confident about the stability, 36% are not confident, while 17%
belonged to the ‘can’t say’ category. Similarly, 9% of insured
households said that they could live on their current savings for
more than a year if they lost their income source, while this
proportion is barely 2% for non-insured households. Households
focused on short-term savings needs (such as social ceremonies,
purchase of consumer durables, etc) show a lower propensity to
participate in life insurance against households focused on more
long-term savings needs (such as children’s education, saving for
emergencies, building a house, etc).

Clearly, service providers should focus to create need-based

social security instruments for Indian families. This requires a
systematic planning by stepping up financial literacy levels; evolve
innovative distribution channels and products to reap benefits in
future and to build a more financially secure India.

(The author is Senior Fellow at NCAER)