Life Insurance Coverage gap in India

The role of life insurance is much more than just providing life cover - it is a popular mode of systematic saving for Indians, and enabler of lifetime pension. However, to objectively evaluate the efficacy of the most basic function of life insurance, the amount of life insurance cover provided to individuals, must be analyzed in isolation.

Traditional measures of life insurance adoption such as Insurance Penetration and Insurance Density prove inadequate for this purpose as they consider all life insurance premium. An alternative approach that considers the life cover (Sum Assured) may help focus on the extent of risk cover taken.

HOW DOES INDIA FARE ON TRADITIONAL MEASURES

Life insurance penetration expresses the total life insurance premium collected for a period in proportion to the nominal GDP. For the year 2022, life insurance penetration in India was 3.0% as compared to the worldwide measure of 2.8%.

On life insurance density, which is a measure of total life insurance premium per capita, India fares poorly though at USD 70 compared to world average of USD 354 for the year 2022.

THE INADEQUACY OF TRADITIONAL MEASURES – INDIAN LIFE INSURANCE CONTEXT

Both traditional measures use premium in the numerator and are not directly indicative of insurance cover, as:

1. Premium is a flow measure while amount of insurance cover is a stock measure: We are interested in the amount of life insurance cover (Sum Assured) in place for individuals, which can be observed at the end of any review period (stock measure). This cover may be in place due to the premium paid in the same review period or that paid in advance.

   
   

2. Level premium and limited/single pay: Life insurance policies in India have level premiums. Expected death claims go up as the insured person’s age advances. Hence, when one pays level premiums, they are effectively paying some premium in advance for life insurance cover in later years. 23% of Sum Assured from new policies sold in FY 2023 is from group single premium policies, which mostly comes from group credit life insurance. These policies are often sold as a single premium where the cover could reduce over the policy term while premium is collected upfront. This breaks the link between premium collected in a year and the active cover for all such borrowers over a period.

   
   

3. Savings element of life insurance policies: Of the retail life insurance premiums collected in India, an estimated 95% are towards policies which have a savings element. The cover provided in such policies is typically just 10 times the annualized premium.

The case for an alternate metric – coverage to GDP

To isolate and observe mortality risk protection, an alternative metric is suggested below.

Total Sum Assured in force as at end of a financial year divided by nominal GDP for the year. Let’s call this the Life insurance coverage factor (LICF).

This approach addresses the limitations explained earlier in this section and is a direct measure of cover available for individuals vs. that required.

WHERE DOES INDIA FARE ON THE COVERAGE METRIC

The total individual life insurance Sum Assured in India as on 31st March 2023 was INR 277 Trillion. This includes Sum Assured of all life insurance companies, Postal Life Insurance Schemes & estimated cover under the Employers’ Deposit Linked Scheme provided by EPFO. Total group Sum Assured from new policies issued in FY’23 was INR 49 Trillion. However, the available figure does not cover all group business Sum Assured that is in-force or that of self-managed insurance schemes such as Army Group Insurance Fund.

LICF for India thus stands at 1.03 as on 31st March 2023. The same was 1.07 as at 31st March 2022. It is estimated that if missing data points are plugged in, the factor is likely to be in 1.1-1.3 range.

What does it need to be?

As a principle, the life insurance cover required should be able to cover for a) future potential income of an individual and b) outstanding loans, in case of death.

A thumb rule of 10 times of annual income plus outstanding loans, is often suggested by financial advisors as sufficient life insurance cover amount for earning individuals. This of course reduces with age and someone at age 55 may need much less than 10 times their annual income.

Considering India as a whole, with a predominantly young population we can use 10 times GDP as a simple measure for sufficiency of life insurance cover.

LICF has to grow from 1.1-1.3 range that we estimated earlier to 10, which clearly indicates India’s insufficient life insurance coverage.

IS THE NEEDLE MOVING FAST ENOUGH?

Considering in-force retail Sum alone, from 31st March 2018 till 31st March 2023, the metric has grown at 9.8% CAGR as compared to nominal GDP growth at 12.2% CAGR over the same period. Given that LICF at a country level has to increase by almost 10-fold, Sum Assured has to grow much faster.

To put it in perspective, if we keep 2047 as the target year for the meeting the 10x goal, starting from the March 2023 number, Sum Assured has to grow at a CAGR of 23% assuming a nominal GDP growth at 12% over the same period.

MISSING PIECES AND POSSIBLE SOLUTIONS

Three tiers of life insurance protection provision.

1. Government/Statutory:
   

   1. Pradhan Mantri Jeevan Jyoti Bima Yojana (Rs. 2 lakh cover set in 2015) and Pradhan Mantri Vyay Vandana Yojana cover amounts may need upward revision.
      

   2. Employees Deposit Linked Scheme provides life insurance cover for those registered with EPFO and is upto INR 7 lakh. The premium charged is independent of age and the structure can be modified to offer much higher covers for younger working population for the same premium amount.

2. Employer provided/promoted:

1. Employers who provide meaningful life insurance covers may be encouraged to promote the benefit which could nudge employers in the same industry to follow suit.
   

2. Employers can promote voluntary purchase of higher cover through “top-up” schemes.

3. Individually purchased:

   
   

   a. Endowment plans: Insurers can increase minimum life insurance cover multiples, especially for younger ages (less than 45) from current levels of 10 to 20.

b. Term Insurance:

1. Improving awareness through industry-level campaigns on the need for sufficient insurance.

2. Term insurance is currently not available for all customers with stringent screening criteria on occupation, education etc. What is missing is granular pricing and smart underwriting that can help a larger subset of the population become eligible for term insurance cover, at their risk appropriate price.

Authors:

• Satprem Mohanty, Founder (ValuEnable)

• Mithil Sejpal, Founder (ValuEnable)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of IIA and IIA does not assume any responsibility or liability for the same.