Web Aggregation in Insurance sector in India - concept, status and issues

Introduction to Web Aggregation:

In India, Insurance has usually been “sold” (depending upon the commission, the agent/broker gets) and not “bought”(depending upon the felt need of the customer). Insurance companies historically have relied on standard channels of distribution mainly agents who normally push the highest commission products. This often leads to post purchase dissonance and hence lapsed policies. The insurance policy contracts somehow are verbose, often have fine prints, and no proactive communication on negatives. No entity besides the regulator has an incentive in making the customer understand the contract he is actually entering into, as the focus is clearly on making the transaction happen. As a result, not only,there often is a mismatch between what a person needs and gets but also she/he doesn't get to exercise an informed choice option of price and insurance product by comparing neutrally various insurance policies of different companies. In a sense, she/he gets exploited for this lack of comparative information data.

 

Insurance aggregation is a process of finding multiple quotes of various Insurance Companies at one time so that the buyer can make an accurate comparison of insurance products based on his needs and budget. Insurance web aggregation in turn is finding this information on the web. It is an easy and consumer friendly display of prices, costs, features, service levels, consumer reviews, and sometimes the opinions of expertson different insurance options to a consumer, who voluntarily comes (he is actually buying)looking for such information. The information required by an aggregator from a customer is usually a superset of the information required by
all the insurers who provide a quote. Aggregators get traffic because customers
find value in the research they can do on their own on Insurance products, saving time, and in simple to understand language. This traffic is the key differentiator for a successful aggregator, and its advertising revenue potential. This implies there is a direct relationship between the accuracy and helpfulness of an aggregators comparison charts, and their success.

Aggregators are different from other channels, as they are designed to be a self-help tool for the customer. The focus is on education and information quality and richness. These results in deepening penetration of protection focused products which specifically cater to his needs some of which might be low cost products, products not typically sold through traditional intermediaries. For example pure term insurance products have been largely displayed and promoted by aggregators.

International Experience:

Web aggregators are standard tools for buying Insurance in most developed markets. The UK and US have 4 web aggregators who are publically listed. Other countries including Netherlands, Germany, France, Spain, Italy, Australia, Hong Kong, Ireland, South Korea, and Canada, among others have Web aggregators.

The UK has the most developed insurance aggregation business, supported by the FSA. For example, in UK, 63% of all motor insurance buyers compare before they buy.

Insurance Aggregation in India

Insurance Aggregation started in India in 2005 with two companies (i) Apnainsurance.com and (ii) Bimadeals.com. From 2005 to 2011 twenty other players joined this industry. Their importance can be gauged from the number of Unique Visitors to various leading insurance sites for instance the number of hits which was 344,000 in April 2010 became 1,900,000 in April 2011 for Policybazaar.com. Within a short span of time, these websites already account for over 50% of the 1st year premium collected via the Internet in India. For some companies, Aggregators can account for as much as 15% of their new business.

Regulations in India regarding Web Aggregation

IRDA vide circular No.IRDA/Admin/GDL/Misc./253/11/2011 have issued guidelines under section 14(1) of IRDA Act, 1999 which defines web aggregator, process of approval and eligibility criteria to be web aggregator, agreement between an insurer/ broker with web aggregator and conditions, contents to be displayed on website and remuneration caps on transmission leads and actual issuance of policies. The guideline prescribes a flat fee not exceeding Rs. 1 lac per year towards each product displayed by the web aggregator and an amount not exceeding Rs.10/- towards each lead transmitted by the web aggregator. An insurer shall pay a fee or remuneration to web aggregator not exceeding 25% of the commission payable or actually paid, if such leads get converted into actual sales, within the overall limits on commissions and expenses as provided u/s 40 (B) and 40(C) of the Insurance Act. The guidelines came in operations w.e.f.1st February, 2012.

The average charges till the lead stage which the WA has to pay to search engine sites such as Google is about Rs 100 or more (as voiced by some of the WAs and needs to be verified) and putting a cap of Rs 10 per lead has made it totally un-remunerative. As a result, out of 15 WAs, only 5 companies decided to apply for aggregator license, that too under protest on commercials and only 2 of these have received licenses.

It may be pointed out that in no other country, is there a remuneration cap between the WA and an Insurer.

Likely implication

The implication of Rs 10 per lead as stipulated by IRDA, given the fact that since its initial phase and not more than 25% of leads are actually getting converted into sales, implies that WA end up paying more to the service providers than what they receive from prospective customers and that is making the entire process a non-starter. A question arises therefore whether should it not be left for them (WA & Insurers) to decide mutually depending upon their volumes and economies, within the overall expense limit as defined under the Act?

The likely reach of internet in Indian scenario in the coming years is going to be phenomenal. Almost 50% of the total population will have access to internet in the next five years and we will thus be missing out in a major way if we ignore the power of internet and continue to stifle it with some short sighted guidelines. We need to look into the future and create an enabling environment which provides prospective customers a neutral unbiased web based platform to compare insurance policies and make a judicious choice.

IRDA has rightly put conditions to monitor the content of what’s displayed by a WA to ensure against misinformation and to maintain neutrality. Regarding the remuneration between an Insurer and the WA, IRDA‘s stipulation of it being within the overall limit u/s 40(B) & (C) of the Insurance Act for those leads actually getting converted into sales (ie lead charges +sales commission) is also within the justifiable as there is no separate definition of a WA under the Act and the expenses are to be covered within the meaning of Section 40 (B) & (C) of the Insurance Act.

There’s another related issue which is hampering the growth of insurance e-policies. IRDA has mandated that Insurance co. has to reapply for product approval if it proposes to put a product, already approved, as a e-policy based product too. There are large no. of products already approved and in order to increase the efficacy of web-based comparison of insurance products, it is desirable that all such products should be available as e-products. Otherwise, the basket of Insurance products available online gets severely restricted, depriving customers to make a meaningful comparison and choice. The logic of IRDA is that the regulator wants to examine the cost implication of a product being introduced as e-product and that no additional cost should be passed on to the customer. This, however, can be achieved by adding a certification from the insurance co that such an introduction doesn’t increase the premium nor changes any aspect of the policy in any manner. E-policies, by cutting down the other expenses, may actually lead to some cost savings for the insurance cos and that will act as an incentive for them to concentrate on issuance of e-policies in a major way duly harnessing the web based potential and reach.

In view of the growing importance of internet, the web based insurance business, whether issuance of e-policies or comparison sites on the web, need to be encouraged. Putting a cap of Rs 10 per lead, without any basis, is proving to be stifling and is restraining the propagation of Insurance policies through comparative sites in a major way and needs to be done away with. Similarly, asking the co to reapply for approval for a product already approved leads to delays and puts extra burden on the regulator which can be obviated by having a certification by the insurance co. regarding the price impact and status quo of product features.

Suggestions for making Web Aggregation more effective in India

(i)  the actual charges levied by the WA and payable by the insurers on a per click or per lead basis should be left to be decided by them which will vary depending upon the volume of business, the web-design of the WA and other such factors, subject to it being within the overall limits under Section 40(B) & (C) of the Insurance Act;
(ii) An insurance product, once approved by IRDA need not require re-approval if it is proposed to be introduced as an e-policy provided it doesn’t lead to increase in premium and there remains status-quo so far as product design is concerned. A certificate needs to be filed by the co. in this respect with the Authority who can take appropriate action in case of any violations.
(iii) There shouldn't be an entry fee prescribed (at present Rs 1 lakh) payable by an Insurance company to the WA for display of an insurance product on the web aggregator portal. It puts a cost for the insurance co. and may deter them from displaying low premium insurance products and thereby depriving customers from availing such products. In fact, I would suggest that enlisting of any insurance product should be free so that one can have as many products on such portals as possible which will give the intended customers a real time choice option.

 

Conclusion

Indian insurance market which used to be predominantly agent (including brokers and corporate agents) driven is changing with newer mode of distribution channels such as Bancassurance and web based individual insurance cos portals coming to play increasing role. The importance of web aggregation for insurance cannot be ignored. World over, especially in mature markets, majority of insurance policies in Motor, health and property insurance as well as life insurance are bought online through web aggregation. This is yet another effective and neutral platform providing comparative information on various insurance products of different companies to the intended customers and enabling them making an informed choice based on their specific need and budget. Web aggregation thus needs to be encouraged and shouldn't be curbed down with some short sighted ill-informed regulations. People have suffered tremendously since 2006-07 on account of large scale mis-selling and a time has come when they should "buy" insurance products rather than being "sold".

Budget 2013-14 -- Insurance sector benefits

Finance Minister presented the Budget for 2013-14 on March 1. Paragraph 90-93 of the speech refer to certain announcements pertaining to Insurance sector. I am reproducing these paragraphs here:

Insurance

90.       A multi-pronged approach will be followed to increase the penetration of insurance, both life and general, in the country.  I have a number of proposals that have been finalised in consultation with the regulator, IRDA. 

·       Insurance companies will be empowered to open branches in Tier II cities and below without prior approval of IRDA.

·       All towns of India with a population of 10,000 or more will have an office of LIC and an office of at least one public sector general insurance company.  I propose to achieve this goal by 31.3.2014.

·       KYC of banks will be sufficient to acquire insurance policies.

·       Banks will be permitted to act as insurance brokers so that the entire network of bank branches will be utilised to increase penetration.

·       Banking correspondents will be allowed to sell micro-insurance products.

·       Group insurance products will now be offered to homogenous groups such as SHGs, domestic workers associations, anganwadi workers, teachers in schools, nurses in hospitals etc.

·       There are about 10,00,000 motor third party claims that are pending before Tribunals/Courts. Public sector general insurance companies will organise adalats to settle the claims and give relief to the affected persons/families. 

91.       The Insurance Laws (Amendment) Bill and the PFRDA Bill are before this House. I sincerely hope that Government and the Opposition can arrive at a consensus and pass the two Bills in this session.
92.       The Rashtriya Swasthiya Bima Yojana covers 34 million families below the poverty line.  It will now be extended to other categories such as rickshaw, auto-rickshaw and taxi drivers, sanitation workers, rag pickers and mine workers.
93.       A comprehensive and integrated social security package for the unorganised sector is a measure that will benefit the poorest and most vulnerable sections of society.  The package should include life-cum-disability cover, health cover, maternity assistance and pension benefits.  The present schemes such as AABY, JSBY, RSBY, JSY and IGMSY are run by different ministries and departments.  I propose to facilitate convergence among the various stakeholder ministries/departments so that we can evolve a comprehensive social security package.

I did write a brief article which appeared in Economic Times dated March 21, 2013, on what each of these announcements entails for the sector.

A slightly detailed analysis is presented here.

India is among the top ten economies in terms of nominal GDP and fourth in terms of purchasing power parity. However, for its size and potential, India has an abysmal level of insurance penetration (insurance premium as percent of GDP) and density (per capita insurance premium). The penetration in the life sector actually came down to 3.4 % during 2011-12 while it continues to be at a low of 0.7% in the general insurance sector (including health). Much of the life insurance premium comes from the salaried and the organized sector including the self-employed and is largely driven by tax incentives. A worrying feature also has been the thin spread of per capita insurance cover (insurance density) even among those availing insurance, which @US$64.4 is much lower than the world’s average of US$627.3 and is lower than any of the other BRIC nations. While life sector density is US$55.7, the general insurance density is only US$ 8.7 which is among the lowest coverage in the world. Not surprisingly thus, the levels of protection (insurance sum assured as a percent of GDP) for India is only about 55% where it ranges from 150-250% in some of the other emerging and mature economies.

India is clearly under insured and the sector represents a clear case of a “missing market”.

As early as in 1911, Joseph Schumpeter had argued that services provided by financial intermediaries, aimed at mobilizing savings (including insurance), are essential for technological innovation and economic development. Using data on 80 countries over the 1960-89 period, Economists Robert G King and Ross Levine have presented a cross country evidence consistent with Schumpeter’s view that the role of financial systems in promoting economic growth is not “over-stressed”. A well developed insurance sector with increase access in far-flung areas, a wider bouquet of simple and easy to understand standard products and easier availability is thus a pre-condition for mobilization of savings and it is in this regard that insurance related measures (paragraph 90-93) announced by Finance Minister Shri P. Chidambaram in his budget speech for the year 2013-14 assumes great significance.

Let me try and elaborate what each of these announcements entails.

“Insurance companies will be empowered to open branches in Tier II cities and below without the prior approval of IRDA” and further “All towns with a population of 10,000 and more, will have an office of LIC and at least one of the four public sector general insurance companies by 31.03.14”.

One of the major reasons for the low penetration, especially in the general insurance has been the non –availability of insurance offices in smaller towns ie towns having a population of 10000 and above. The existing office infrastructure of LIC and the four public sector general insurance co. is:

 

Even though LIC has a system of premium collection centers through its agents network in most of the towns upto Tier V, the fact remains that presently, only 16% of its own offices are in tier IV level towns and below. Private life insurance companies especially SBI Life have started opening offices in tier II and III and a total of 1756 offices of private companies are in tier II level and below. The low penetration in general insurance is understandable as only 6% of offices of the four Public sector general insurance companies are located in Tier IV towns and below. The situation is almost alarming when it comes to the presence of private companies in the general insurance sector.  There isn’t a single office of any private general insurance companies in any town of tier II level and below (classified as “other” category by IRDA). The number of towns (tier wise as per census classification) thus not having any insurance offices are:

It is thus clear that insurance facility is yet to reach the critical mass and this would require both expansion in capacity and the geographical spread of the insurance facility. The number of towns in each of these tiers is going up continuously with the increase in population. There also has been a burgeoning middle class in each of these towns who save and are in need of insurance. So far, the insurance needs of these towns is met by the agents most of whom however cater to life insurance which also gets reflected in low penetration in general insurance sector.

The presence of offices of LIC and at least one general insurance company is each of these towns will enable availability of insurance services at the doorsteps of people in these towns and will specifically be useful in health and motor insurance segment. The opening of offices to such uncovered and under-covered areas will be based on the commercial considerations of these insurance companies and empowering these companies to open their offices without having to come to the regulator for case wise approval will also provide these companies a business opportunity who will also get an advantage of early foot-fall in these cities. Private insurance companies are likely to follow suit immediately. It is often missed out that insurance creates and sustains employment. As it penetrates in tier II level towns and lower, it will boost and nurture both direct and indirect employment. All these towns will have these offices functional by 31^st March 2014.

“the KYC for banks will be applicable for insurance policies”

Presently, a separate KYC (know your customer) is done every time an individual wants to buy an insurance policy. In order to bring down “on Boarding Cost” of insurance products, it has been decided that the KYC check done by banks will be made applicable for insurance policies. This will also facilitate customers for availing insurance policies without going through a multiplicity of KYC requirements by different agencies. For this purpose, a copy of the bank passbook containing KYC details and attested by the concerned bank official shall be an accepted document for the purpose of KYC for buying an insurance policy. Only additional information which is insurance policy requirement (such as health status of the individual etc) will be asked for separately. This will enable buying of an insurance policy easy and customer friendly and will bring down the cost for the insurance company. This announcement has been welcomed by the industry.

“in order to utilize all bank branches, Banks will be permitted to act as insurance brokers”

Insurance is a permissible form of business that could be undertaken by banks under section 6(1)(o) of the Banking Regulation Act, 1949. As per RBI circular dated July 12, 2012, Banks need not obtain prior approval of the RBI for engaging in insurance agency or referral arrangement without any risk participation subject to certain conditions. Bancassurance mechanism means selling insurance products through bank branches and presently all such Bank-insurance tie ups are where Banks act as corporate agent of an insurance company (one life and one non-life or health insurance company). IRDA during 2009-12 has issued a total of 362 corporate agency licenses including 203 licenses in the life sector and 159 licenses in the general insurance sector. However, the insurance business through Bancassurance is only about 7.5% of the total insurance premiums and only about 15000 of the existing 100,000 bank branches are engaged in selling insurance policies.  

In order to utilize the entire network of available bank branches, which will also help increase the insurance penetration, banks will be permitted to act as insurance brokers. This will not only enable availability of insurance products of several different insurance cos through banks branches but will also mean that banks will represent the customers as insurance brokers.  IRDA will notify banks as “broker” under regulation 2(j)(v) of the IRDA(Insurance Brokers) Regulations 2002.  There will not be any need to open a separate subsidiary by banks for this purpose and the existing branch network can be utilized.  Banks wishing to become an insurance broker will however require prior approval of RBI. The conduct of insurance business as a broker does not involve any risk participation by banks. It is expected that this move will help not only the utilization of all bank branches but also will provide customers a wider range of insurance products.

“All categories of banking correspondents shall be allowed to sell micro insurance products”

The high cost of distribution in rural areas coupled with availability of simple, standard and a product with low/flexible premium is one of the major reasons for a very low insurance presence and penetration in rural areas.  This announcement will go a long way in addressing this difficulty of higher distribution cost.  Micro insurance policies have an insurance cover ranging from Rs 5000 to Rs 50000 and cover health, dwelling, personal accidents in general insurance and term, endowment, health and accident under life insurance.  Micro-insurance policies, because of flexibility of premium payment terms, amount and coverage, cater to families in the informal sector who are in need of insurance and can’t afford higher premium in one go. 

These banking correspondents will be permitted to take up selling of ‘micro-insurance’ policies. The tie-up of banking correspondent as seller of micro-insurance policies will enable people in such unbanked and under-banked areas to avail insurance products at their doorstep and will help improve insurance penetration in a major way. IRDA presently permits only four categories ie. Non Governmental Organizations, Self Help Groups, Micro Finance Institutions and a company formed under Sec 25 of the Company Act to be a micro insurance agent. IRDA is in the process of expanding this definition to include banking correspondents as permitted by RBI. The banking correspondents will have to undergo an insurance training of 25 hours. However, they will be exempt from undertaking and clearing the Agent’s exam as mandated by IRDA for a regular agent.

“Group insurance products will be made available to homogeneous groups such as self help groups, domestic workers associations, aanganwadi workers, teachers and nurses etc”

Group Insurance products are offered to a group as a whole with a single master policy holder and individuals as members. A typical group saving product is an endowment policy and will have a component of both insurance and savings. The Group Products are expected to offer a more cost-effective product to the members of the Group by cutting down processing costs and risk sharing. Another advantage of group product is that it can be customized for each group depending upon the requirement, premium paying capacity and coverage required of its members. Such group products are presently permitted only for employer-employee groups where the employer is a master policy holder. 

There are a large number of groups which are non-employer- employee, are homogeneous in nature and have a commonality of interest. These groups include represent a particular profession/trade such as domestic workers, auto drivers and taxi drivers association, Anganwadi workers, Aasha workers, teachers of schools, Self help groups (SHGs) and cooperative societies. Such groups are in fact more deserving for a group based insurance product and are presently not able to have a product for them. It was felt necessary that group insurance products should also be available for these non-employer Non-employer-employee groups.

The inclusion of these groups under the group insurance products will help hitherto uncovered members of these groups to have an insurance as well as saving cover, will help mobilize their savings and will help increase insurance penetration immensely. These members could not afford an individual insurance product due to the higher premium and will now be able to avail a better customized product at a much lower premium.

 “There are about 10,00,000 motor third party claims that are pending before Tribunals/Courts. Public sector general insurance companies will organise adalats to settle the claims and give relief to the affected persons/families”

Motor insurance is the largest portfolio of General Insurance Industry both in premium accounting for about half of the total premium as also the claims outgo for the industry. The Motor Vehicle Insurance Policy is a contract between the Insurer and the vehicle owner (Insured) by which the insurer undertakes to pay the liability awarded against the owner of the Motor vehicle by the Tribunal or the Court in respect of any injury/ fatal accident or property damage claim filed by a Third Party or their Legal heirs. On receipt of a claim filed by a Third Party/ legal heir/s who has been injured in a road accident, the Motor Accident Claims Tribunals (“MACT”) and Courts, based on various factors like cause of accident, Insurer’s liability as per Policy Conditions, contributory negligence, if any, on the part of claimant, age and income of the claimant or deceased, dependents etc. pass an award of compensation.

However, due to various reasons, there are delays in claim settlements. The number of outstanding motor third party claims as on date is approximately 10 lakhs, involving an amount of Rs.22,000 crore. What’s worrying is that almost one-third of these claims are pending for more than 5 year and another 21% and 27% are pending for a period ranging from 3-5 years and 1-3 years and only about 20% are less than an year old. The long pendency has been causing misery and hardship to the affected persons and their families. Recourse to “lok-adalats” to expedite settlement of pending claims in a campaign mode throughout the country will enable quick disposal of all pending cases. All the four public sector general insurance companies as well as private companies will, under the guidance of National Legal Service Authority (NALSA) will participate in these “Lok-adalats” at various levels. .  It will provide a major relief to all the affected families and reduce pressure on the legal system.

“There is a need to have a comprehensive social security insurance for the informal sector which would include life and disability cover, health cover, maternity benefits, incentive for girl child education and pension benefits. The existing schemes such as AABY, JBY, RSBY, IGMSY and pension schemes are implemented by different agencies.

It is estimated that by 2020, India will have over 900 million people in the working age group of 15060 years and over 130 million dependents in the age group of 60 years and above.  Further, on the demography scale, India will begin to grey between 2020-35 and coupled with rising life expectancy which will be around 80 years, it is imperative that a sound pension system is in place and that the basic levels of health and life insurance cover is available during the working age.

The existing schemes aimed at providing social security such as life and disability cover (Aam Aadmi Bima Yojana and Janashree Bima Yojana administered by LIC), health cover (Rashtriya Swastha Bima Yojana by Ministry of Labour and Employment), maternity benefits (Indira Gandhi Matritva Suraksha Yoajana by Ministry of Women and Child Development and Janani Suraksha Yojana by Ministry of Health & Family Welfare) and pension schemes (a co-contributory ‘Swavlamban’ scheme administered by PFRDA) are administered by different departments and implemented by their respective agencies. As a result, there is little inter-linkage/integration of these schemes and as such intended beneficiaries or those getting presently covered are not able to get the overall comprehensive coverage. There is thus a strong need for providing a comprehensive social security insurance cover to all in the informal sector.

In order to provide certain basic level of a comprehensive minimum social security, which would include old-age income security, life & disability and health insurance, maternity benefits and incentive for girl students at the higher secondary level  of the families covered,  all such existing schemes will be dovetailed and converged into a single comprehensive scheme. The components of the scheme, coverage of beneficiaries, premium required and its sharing pattern and the overall funding requirements will be decided through a process of consultations with the state governments and various stakeholders. 

To sum up, The critical importance of insurance in an economy is well recognized and the series of measures as announced by Finance Minister in the budget speech will provide the necessary impetus in the insurance sector and will help arrest the deceleration in insurance sector at the earliest.

 

 

Increasing Insurance coverage - catch them young!

Why should one insure? Well, as the name suggests, its an insurance against a particular peril covered under the insurance policy and provides, to the insured or his family a benefit coverage in case of any eventuality. We all do insurance in some form or the other. While the informal
insurance is our savings, social networks and kinship where we lean on others for assistance, the formal insurance means taking an insurance policy. The various segments where insurance cover is provided include life, health, personal accidents, fire and motor among others.
In the life sector, the extent of insurance cover is measured by sum insured which in turn depends on the nature and extent of cover and the sum assured determines the premium chargeable. Higher the sum assured, higher would be the premium. There are 3 broad and totally inter-related measures:
1.Insurance penetration – this means insurance premium as a percent of GDP. It is 4.1% in India last year and come has a long way from being around 2% in the year 2000 when the insurance sector got opened up in India. The world average in this regard is 3.1%. Given the saving habits of Indians and the younger age group bulge, it is however felt that India can reach a penetration level of 5.5-6% in next 5 years.
2. Sum assured as multiples of premium – this shows the intensity of insurance and shows, how much a person is willing to get a sum assured which is primarily determined by his capacity to pay the premium. The higher the sum assured, the higher will be the premium.
3. Level of protection in the country is also determined by the sum assured as a percent of GDP. Higher the sum insured, higher is the level of protections in the country. This is discussed in detail below.
The sum assured as a percent of premium collected shows, in a way, how people treat insurance products. On the one side of the spectrum is base policies providing life coverage at its minimum. The premium is low and the sum assured is low. An example is that of social security policies such as Aam Aadmi Bima Yojana and Janashree Bima Yojana. The premium is only Rs 200 pa and the maximum coverage is Rs 75000 in case of accidental death. On the other hand, we have life coverage which are in the multiples of millions and the premium also increases.

Lets look at sum assured as number of times of premium collected over the years..

LIC is obviously lower because it has social security policies. The sum assured as percent of premium collected is increasing, albeit slowly and it’s a sign of a maturing life market.
However, the sum assured as a percent of GDP in India is only 55% ( sum assured can cover only 55% of the GDP) whereas the world’s average is about 150% and some of the mature countries have more than 200%.In that sense, we have a long way to go to improve per policy sum assured. While penetration (insurance premium as percent of GDP) at 4.1% looks healthy, it can be increased. The saving habits in India, despite being decelerated a bit in recent past is still at a healthy 32% of GDP. What is worrisome however, is the fact that most of it is being invested in gold and real estate and the extent of household savings in insurance is only 17%. This needs to be improved and a conscious effort needs to be made to channelize people's savings into Insurace.
One way to improve sum assured (and insurance penetration) is to concentrate on younger generation. They will have a longer contributory span (a life policy of 25 years old versus 45 years old). Let’s look at what’s happening in LIC.
The average age of LIC’s policyholders is: This average age of 37 years is not very high considering that life insurance is a long term contract and the average in respect of in-force policies for a grown up and matured company like LIC, is bound to increase.However, the average age of LIC’s policyholders (risk weighted Sum Assured) in respect of New Business for the last five years is also worked out as and shown in the right side table. It is clear from the data that the average age of new business policyholder is not high and showing stagnation from last 3 years. Increase in New business average risk weighted age during last 5 years from 30 to 32 may be attributed to the higher saving capacity among older people. Following data which shows the NB policies sold for the last 3 years (not risk weighted) gives us some more insights: The table conveys that selling of new policies to the people below aged 35 years is constantly increasing from 47.28% of the total policies sold by LIC in 2009-10 to 53.66% in FY 2011-12. At present LIC is selling more than half of the policies to the people aged 35 years and below, which is a good indicator of the efforts taken by the corporation to be relevant for the young generation in changing business environment.

India has a demographic advantage with >50% of people in less than 30 age group. With increasing awareness about the insurance, the need to have an insurance cover is increasing. The average age of starting a job in India is between 23-25 years and it is here that we need to concentrate and have them insurance cover at the earliest. Its a win win situation as they get an insurance cover with a lower premium (because of their age, health profile being better) and the levels of protection improves in the country.

Bancassurance - concept and issues

“Bancassurance” is not a term defined in Insurance laws in India. It broadly refers to sale of Insurance products by Banks (Bank + Insurance= Bancassurance). This was initially introduced in nineties in Europe and later spread to other countries. As Insurance business deals with monies received from policyholders against future promise of claims maturity or settlement, it is highly regulated and Bancassurance is no exception.

There are 3 models of Bancassurance in Europe:
(i) Straight contractual relation between a Bank & an Insurance co.for the distribution of their products.
(ii) Banks & Insurance cos form a specified Joint Venture (JV) which markets insurance products;
(iii) An Insurance co. is promoted by a Bank which has an exclusive distribution right to distribute its products.

Banks were prohibited to have any relation with Insurance cos. In USA & Canada. Laws were changed in USA in 1999 and Banks are slowly getting into Insurance space though not significantly.

The Indian life insurance market has been witnessing a slowdown post certain regulatory changes by IRDA since September 2010. However,the fundamentals for growth remain strong. Over the next decade, India will be one of the fastest growing life insurance markets in the world, with a compound annual growth rate of around 15 to 18 per cent and will account for around 10 per cent of global growth in gross written premiums. It is expected to grow from the fifth to the third largest life insurance market in Asia by 2020.

Bancassurance, is defined earlier is the insurance distribution model where insurance products are sold through bank branch network. The presence of several banking groups as promoters of insurance companies is of great significance to this model. With a network of over 80,000 branches spread across the length and breadth of the country, banks have the necessary potential to make bancassurance the most efficient way to achieve financial inclusion in insurance sector also. The bank customers with higher average premium per capita provide quicker means to grow for insurers. The complementary nature of insurance products towards the bank advances (e.g. credit life)provide synergies in operations to the entire financial sector. The ease of access to bank customers reduces servicing costs, contributes to lower lapsation of insurance policies and hence lower costs to the economy.

IRDA vide its notification dated 16.10.2002 on licensing of Corporate Agent authorized the following entities to become corporate agent which includes:
a) a Banking Company as defined in Clause (4A) of Section 2 of the Companies Act, 1956.
b) a corresponding new bank as defined under clause(d)(a) of sub-section(1) of section 5 of the Banking Companies Act, 1949 (10 of 1949)
c) a regional rural bank established under section 3 of the Regional Rural Banks Act, 1976 (21 of 1976)
d) a co-operative society including a co-operative bank,registered under the Co-operative Societies Act, 1912 or under any law for the registration of co-operative societies.

So far, the Regulator (IRDA) has granted 3261 corporate agency license out of which 266 have been granted to Banks to act as Corporate agents. While Banks have nearly 100,000 branches in the country, only about 15-20% of these branches have been utilized for distribution of Insurance Products.

The distribution channels in various countries is as under:-
As against an overall 8% in India, Bancassurance accounts for 26% in Japan, 27% in Singapore & 68% in here. Bancassurance accounts for 13% of gross premium in life and 2% in non-life as on 31.03.12 in India (IRDA).

While the overall market has stagnated over the last two years (and declined in several product in several pockets), bancassurance has continued to grow (from 19 per cent of new business premium [NBP] in FY 2008 to around 40 per cent in 2012 for private sector players). The share of bancassurance in India for private sector players is now almost as large as some of the other Asian and Western countries (many of which have share of bancassurance close to 50 per cent) and also almost as large as agency channel for private sector players in India (around 45 per cent share of new business premium in FY 12 for private sector players). The role of banks as primary investment counselors is rising. McKinsey proprietary personal financial survey indicates that now 16 per cent of customers choose a bank investment counselor as their primary advisor compared to only 7 per cent in 2007. The importance of Bancassurance thus becomes crucial.

Moreover,unlike other Asian markets, bancassurance economics in India is better compared to the overall industry (operating cost and commission is 15-25 per cent lower for bancassurance channel than overall industry). Further, bancassurance is significant contributor to third party fee income for banks (greater than 75 per cent of third party fee income for banks is through life insurance sales). The bancassurance channel therefore has the potential to be a win-win proposition for both banks and insurers. However, there are several gaps in the bancassurance business model in India driven by leakages in end to end value chain that constrain value capture.

Internationally, it has been observed that insurers with stronger Bancassurance have a faster growth trajectory:In view of the fact that the percentage of insurance business through Bancassurance hasn’t picked up in a manner expected and the fact that only about 15-20% of the Bank branches are being used for Bancassurance purpose, IRDA has come out, recently, with draft guidelines on Bancassurance and the key features are as follows:
i. Zonal Division: The States/UTs and major cities in the country have been divided into three zones based on which the guidelines for tie-ups between banks and insurers have been specified.
a.Zone A (13 States) - Kerala, Gujarat, Andhra Pradesh excluding Hyderabad, Tamil Nadu excluding Chennai, West Bengal excluding Kolkata, Karnataka excluding Bangalore, Maharashtra excluding Mumbai, Chandigarh, Hyderabad, Bangalore, Chennai, Delhi, Mumbai.
b. Zone B (9 States) – Rajasthan, Assam, Jharkhand, Haryana excluding Chandigarh, Orissa, Bihar, Punjab excluding Chandigarh, Madhya Padesh, Uttar Pradesh
c. Zone C(Rest of the country) – Lakshadweep, Dadra & Nagra-haveli, Daman & Diu, Andaman &Nicobar, Mizoram, Arunachal Pradesh, Sikkim, Nagaland, Meghalaya, Manipur, Pondicherry, Tripura, Goa, Jammu & Kashmir, Himachal Pradesh, Uttrakhand, Chattisgargh.

ii. Ceiling on number of tie-ups with banks:
No insurers other than the specialized insurer shall tie up with any bancassurance agent in more than nine states/ Union Territories in Zone A (out of 13) and six states/ Union Territories in Zone B (out of 9). There is no such ceiling in Zone C.

iii. Ceiling on number of tie-ups with Insurers:
No bancassurance agent shall tie up with more than one life, one non-life and standalone health insurance company in any of the states in addition to one each specialized Insurance companies.

These are draft guidelines and not yet formal. However, given the fact that the tie-up between an Insurance Company and a Bank, invariably has been on pan-India basis in almost all cases, the proposal of IRDA in restricting operations of such a tie-up on geographical basis (9 out of 13 in Zone A and 6 out of 9 in Zone B ) is causing apprehensions in their mind. The problems in slow take off in bancassurance, apart from being a teething one, are structural in nature and solution lies in sorting out those issues. Some of these issues are in (i) product offering where many partnerships lack basic /priority end to end practices in product development and marketing including availability of simple products, adequate bundles (>3) of core banking and insurance products and joint product development; (ii) Lead generation and sales conversion which has multiple hurdles. For most banks esp Public Sector Banks, the lead generation mechanism depends either on customer walk-ins or the frontline’s relation with the customer who often face capacity constraint. Private sector & foreign Banks generate leads effectively through their outbound sales force, analytics and alternate channels. The sales coversion process also suffers from several pitfalls as only 50-60% of the leads generated are actually converted. (iii) then there are several leakages in the Bancassurance channel post the log-in as much as 30% between log-in and policy issuance, the main cause being frontline’s inability to collect all relevant documents. (iv) there also are leakages, post sales service and persistency management.

To conclude,creating a focused program with close involvement of both Banks and Insurers can help make the model a win-win for both and capture full value from the partnership.



ps.I have taken inputs from the later report of Mckinsey & co, Financial Institutions Group on "Capturing the full value of bancassurance through end to end integration"

These are my personal views and no part of this blog can be quoted without my specific approval

A brief history of Pension system in India -Part I

According to a working paper published by Asian Development Bank (Ageing Asia’s Looming Pension Crisis): “A young continent reaping the demographic dividend of a large youthful workforce is giving way to a greying continent where the ratio of retirees to workers is on the rise. In contrast to industrialized countries, most Asian countries do not yet have mature, well-functioning pension systems”. This makes the task of pension reforms in India rather compelling in nature and a dire social necessity that cannot be forestalled for far too long. The Indian economy is currently basking in the glow of the so-called “demographic dividend”, a fortuitous consequence of what was earlier considered a millstone for the economy – the country’s burgeoning population. But, this dividend can also turn into what has been termed as a “demographic echo”. Over time, this huge bulge in the working force – which is being considered as an economic windfall -- is expected to retire. At the same time, the lower dependency ratio will see fewer younger people joining the workforce, resulting in a graying of the economy. A larger number of older and retired people, in the absence of a dependable pension system, will pose a danger to the old age income security in the country and put enormous pressure on the government of the day to re-route expenditure earmarked for public goods and services towards providing for health and pension spending. This causes a drain on the state of the fiscal and, subsequently, on the economy.
The proportion of those aged 60 and above is expected to climb from 4.6% in 2000 to 9% in 2030. In absolute numbers, the number of people above the age of 60 will increase from 87.5 million in 2005 to 100.8 million in 2010 and this is expected to jump to 200 million by 2030. By 2050, it is expected to be over 320 million (Source -- World Population Ageing: 1950-2050, United Nations). What makes this data-point chilling is the fact that improved economic development is bound to lead to a higher life span. The inability to implement a properly functioning pension system now is likely to affect a larger number of people in the future
What further complicates matters is that only about 12% of the working population participates – and is eligible to participate -- in the mandatory, formal programmes designed for providing income security during the non-earning years. These employees are largely part of the formal sector (private sector and the government). The rest is either part of the informal sector (which goes unreported in the broader economic scheme) or does not enjoy adequate income streams that can be accommodated in the existing pension schemes.
Any pension system in the world can be said to broadly conform to any one, or a combination, of three basic pillars.
Pillar-I: This pillar essentially comprises all the state-funded pension plans, which in theory should ideally cater to every citizen in the country. This is also the pillar under which the government launches some of its poverty alleviation programmes aimed specifically at the aged. Under this pillar, the system is publicly managed, the liabilities are not actuarially funded and the scheme works on what is termed as Pay-As-You-Go. This means that current revenues are used to meet current expenditures. But, in fiscal terms, the consequences need a slightly more detailed look – the current generation’s tax payments are used to pay the pension liabilities of an earlier generation. The World Bank’s now famous report on pensions, called Averting The Old Age Crisis (1994), defines Pillar-I thus: “…a publicly managed system with mandatory participation and the limited goal of reducing poverty among the old…”. In India, the defined benefit pension system in vogue for the civil services at both the Centre and the state level – including in the railways, defence and telecommunication services – fall under Pillar-I, where the system is essentially non-contributory in nature and any particular year’s pension liabilities are met from the government’s annual revenue expenditure account for that year.
Pillar-II: This typically comprises a mandatory savings programme at the employment level which is either privately or publicly managed. In simple terms, it is a forced savings pillar that provides benefits only to contributors, and, in general, incorporates a direct linkage between the volume of contribution and the extent of benefits received. In India, the Employees Provident Fund, which is India’s largest defined contribution and publicly managed plan, is an example of this. In addition, there is the Employees Pension Scheme, a publicly managed scheme carved out of the EPF scheme with the objective of paying a monthly pension to workers after their retirement.
Pillar-III: This pillar includes all kinds of voluntary savings, available to everyone including those looking to supplement their Pillars I & II pension provisions. In India, the Public Provident Fund scheme fits the definition.
The Journey from Defined Benefit to Defined Contribution
The government began to take note of the looming pension crises necessitated by an existing anachronism in the civil service pension scheme – a defined benefit scheme inherited from the British administration, which was showing all signs of being fiscally unsustainable and, secondly, by an important event in the mid-nineties in which a part of the age-old defined contribution scheme, the Employees Provident Fund Scheme, was converted into a defined benefit scheme in the form of the Employees’ Pension Scheme, 1995. This marked a curious move by the Indian government, particularly at a time when the rest of the world was moving away from DB to DC. However, the introduction of NPS a few years later might be seen as an attempt to make course corrections.
The Ministry of Social Justice and Empowerment (earlier called the Ministry of Welfare), in 1998, commissioned the first comprehensive study of India’s pension sector under the chairmanship of former UTI Chairman Dr S A Dave, under the name of Oasis Project – Old Age Social and Income Security Project. While the original remit of the Oasis Committee was to provide a pension solution for the 90% of the informal sector workers, the committee ended up providing a prescription for overall pension reforms. As part of its overall recommendations, the Oasis committee (which submitted its final report in January 2000) suggested a completely new and radically different architecture through portable individual retirement accounts, across-the-counter service delivery platforms, centralized record keeping, competing pension fund managers, extensive use of information technology, freedom to choose investment menus, among other things. While observing that there was a separate working group looking into the aspect of government pensions, the Oasis committee expressed its view on the issue rather succinctly: “…measures should be taken so that Government Pension liabilities become fully funded out of contributions made by government employees. This goal can be achieved over a period of the next ten years.”
The turning point came on February 28, 2001, when former Finance Minister, Mr. Yashwant Sinha, announced this in his Budget speech for 2001-2002: “The Central Government pension liability has reached unsustainable proportions: as a percentage of GDP, it has risen from about 0.5 per cent in 1993-94 to 1 per cent in 2000-2001. As such it is envisaged that those who enter central government services after October 1, 2001 would receive pension through a new pension programme based on defined contributions. In order to review the existing pension system and to provide a roadmap for the next steps to be taken by the Government, I propose to constitute a High Level Expert Group, which would give its recommendations within 3 months.”The Finance Minister Jaswant Singh announced in his Budget speech of February 2003: “My predecessor in office had, in 2001, announced a road map for a restructured pension scheme for new Central Government employees, and a scheme for the general public. This scheme is now ready. It will apply only to new entrants to Government service, except to the armed forces, and upon finalisation, offer a basket of pension choices. It will also be available, on a voluntary basis, to all employers for their employees, as well as to the self-employed. This new pension system, when introduced, will be based on defined contribution, shared equally in the case of Government employees between the Government and the employees. There will, of course, be no contribution from the Government in respect of individuals who are not Government employees. The new pension scheme will be portable, allowing transfer of the benefits in case of change of employment, and will go into ‘individual pension accounts’ with Pension Funds. The Ministry of Finance will oversee and supervise the Pension Funds through a new and independent Pension Fund Regulatory and Development Authority.”Thus began the transition from the age-old defined benefit scheme to the fiscally prudent defined contribution scheme as part of the National Pension System. In December 2003, the Interim Pension Fund Regulatory and Development Authority was created as the watchdog and promoter for the pension sector. Simultaneously, all government employees joining service on or after January 1, 2004, were compulsorily brought under the coverage of the New Pension System (NPS)—a defined contribution scheme replacing the defined benefit scheme available to the Government employees until then. Most of the states have also migrated to the DC system under NPS, except three states. Only one category of government employees has been exempted from mandatorily moving to NPS: personnel from Armed Services. NPS was introduced for all citizens from May 2009.

Each government employee contributes 10% of his salary (basic+DA+DP) to the pension account, which is then matched by a government contribution of an equal amount. However, non-government employees do not get the benefit of a matching government contribution. In both the cases, investors are free to contribute higher than what has been mandated. All these contributions are accrued in a pension account called Tier-I from which funds cannot be withdrawn. Once the account-holder reaches the proper exit age (60 years, relaxed to 50 years for Swavalamban beneficiaries in Budget 2011-12, see below), he/she can withdraw only up to 60% from the accrued savings corpus. The balance 40% in the savings corpus has to be used to compulsorily purchase annuities sold by any life insurance company. This annuity then provides for regular pension streams over the non-working life of the investor. In addition, there is a tax issue at work here as well. The contributions to this account and the savings accrued are exempt from income tax, as per Section 80CCD. However, when the investor withdraws the amount on maturity, it is taxable. The Direct Tax Code is proposing to convert retirement savings from the current Exempt-Exempt-Taxable regime (which exempts contributions and the accumulated sums from income tax but levies tax on the final corpus) to a completely Exempt-Exempt-Exempt regime.

Over 12 lakh government employees are currently registered with NPS. However, when weighed against the fact that it has been more than six years since NPS was first made mandatory for government employees, the enrolments at 12 lakh do seem to be on the lower side. In May 2009, NPS was thrown open to the general public. The subscription levels so far have remained rather tepid and do not seem to reflect any investor interest in the product. The scheme has managed to draw less than 55,000 subscribers so far (October 2011). This is a rather low number, given that the scheme architecture was designed to make it attractive to the general public. In terms of money managed by the PFMs, as of March 31, 2011, the total assets under management by all PFMs amounted to Rs 8,585 crore. Of this, the contribution from the nongovernment sector does not exceed Rs 100 crore. This reflects the sluggish growth of NPS.

While the transition from DB to DC is a financially prudent and viable in terms of long term sustainability, the progress under NPS scheme has been sluggish, staggered and far below the potential. We need to look into what ails NPS and what can be done to popularise the scheme.

Comprehensive Social Security Insurance Scheme - A concept note

Most of the insurance policies in India presently are exclusively in the domain of life, non-life (health) & pension. While life & non-life insurance schemes are regulated by Insurance Regulatory Development Authority (IRDA), pension schemes are regulated by Pension Fund Regulatory & Development authority (PFRDA). With the opening up of the Insurance sector in 1999, the number of companies, both in life and non-life, have gone up to 49 and the new era has seen the entry of international insurers, the proliferation of innovative products & distribution channels and raising of supervision standards. Insurance penetration (ratio of insurance premium underwritten as a percentage of GDP) in life insurance is 4.4 % and non-life insurance penetration is 0.7% in 2010 India . While less than 15% of total population is covered under some sort of health insurance (including government supported schemes), Pension coverage is even lower with only about 12 % of the working population covered under the formal pension schemes. At present rate, only 50% of the population is likely to get covered under health insurance by 2033 . However, most of these Insurers have confined their operations in cities and gradual penetration in tier II & tier III cities. The insurance coverage in rural areas is extremely low and is confined mainly to the top 3 % of the rural population. Insurance companies in rural areas are reluctant to enter aggressively mainly on account of low levels of insurance literacy, perceived lower levels of the ability to pay premiums, fear of sparse coverage geographically and thus low levels of premiums. Clearly, there is a need for quicker and wider coverage.
Rural market is supposedly tough for insurance companies and it’s only the subsidy based co-contributory insurance schemes for certain categories promoted by PSU Insurance companies that have made some inroads in rural areas. While LIC promotes Aam Aadmi Bima Yojana (AABY) & Janashree Bima Yojana (JBY) schemes in Life segment, it’s Universal Health Insurance Scheme (UHIS) by non-life PSU Insurers and Rastriya Swastha Bima Yojana (RSBY) by Ministry of labour & Employment in non-life- Health sector and “Swavalamban” ( NPS-lite) for pensions managed by PFRDA.
Insurance sector, since opening up of the insurance sector has undergone two phases –the first one being from 2000-2005 which was focussed on increasing coverage followed by the second phase of 2005-2010 where the focus of insurance companies was on profitable growth. The sector now is entering in the third phase which aims at ‘stable profitable growth’.
In an effort to ensure a balanced and speedy expansion of insurance coverage in the country, IRDA came out with regulations (Obligations of Insurers to Rural or Social Sectors), 2002. These regulations imposed obligations on insurers to sell a specified percentage of policies to rural public and cover a specified number of lives/assets belonging to people below poverty line or those pursuing certain traditional occupations. The Government of India set up a consulting group in 2003 to examine the existing insurance schemes for the rural poor; and on the basis of the group’s recommendations, the Authority issued IRDA (Micro insurance) Regulations, 2005. Consequent upon this notification, even though there has been a growth in the design of products catering to the needs of the poor, the rural penetration and density of Insurance products remains abysmally low. Not only the rural insurance and pension literacy is low but it gets further accentuated by the fact that insurance companies have not made any major efforts aimed at creating and capturing rural markets. It’s the beneficiary who is supposed to approach the insurance agent (unlike the urban market) as of now. Given the fact that there are plethora of schemes and each of them segmented on mutually exclusive domains and managed by different insurance company, it becomes almost impossible for the rural poor/ worker in an informal sector to make up his/her mind on the insurance policies to go in for. Moreover, because of the poor insurance literacy, the felt need is extremely low. And due to the fact that most of these poor / workers in informal sector have little savings on a long term basis, very little remains when one retires and the family is exposed to worst of economic hardships in case of any eventuality of the bread earner of the family. Moreover, there’s nothing left when one retires or has no job and the entire family suffers in old age. There also is an issue of what’s should be premium chargeable from them as too little makes the scheme unsustainable and ‘too high’ makes it impossible for this segment to contribute for.
All this makes a strong case for a “Comprehensive Social Security Insurance scheme” covering life, non-life and pension under one scheme. IRDA has already allowed insurance companies to offer “health plus life combi product”, a policy that provides life cover along with health insurance. Presently, a tie-up is permitted between a life and a non-life co. Under the ‘combi products’ the underwriting of the respective portion of the risks is underwritten by respective insurance company. While this was intended to facilitate policy holders to select an integrated product of their choice under a single roof, the ‘combi product’ somehow hasn’t really been a success and we need to look into the reasons.
Proposal
The Standing Committee of Finance (2010-11) in its fortieth report submitted on August 30, 2011 in fifteenth Lok Sabha has made the following observation...
“55. As the unorganized sector is a very important part of our society and economy, the Committee desire that their social security should be adequately safeguarded in the present era of craving for social inclusion. The Committee would, therefore, like the Government to work out a tripartite kind of a scheme where the State Government, the Central Government and the unorganized sector workers could make contributions. With such a comprehensive coverage, the present pension scheme which is rather narrow in scope now could move forward so as to truly justify its nomenclature as the National Pension System.”
Further, the recently concluded G20 Cannes Summit Final Declaration “Building our common future: renewed collective action for the benefit of all” dated November 4, 2011, inter-alia, declares:
“We recognize the importance of investing in nationally determined social protection floors in each of our countries, such as access to health care, income security for the elderly and persons with disabilities, child benefits and income security for the unemployed and assistance for the working poor.”
Target Group
The scheme is meant to provide a comprehensive Insurance coverage to workers (& their family) working in the informal/unorganised sector. The basic objective of having a social Security Insurance scheme is to bring in all those, who are otherwise left out of formal insurance cover especially Pensions, under Insurance coverage. As such, without restricting the coverage eligibility to an artificially defined line, it is proposed that anybody who is not presently covered under a formal pension scheme, such as Employee Provident Fund (EPF), Employees Pension Fund, Employees Deposit Link Insurance Scheme, Central Government Health Scheme (CGHS) & Employee State Insurance Scheme (ESIS), New (National) Pension Scheme (NPS) (tier I) and any other such scheme which is compulsory in nature for the employees and where the employer makes a co-contribution, will be eligible.
Components of the Comprehensive Insurance Scheme
1. Life – based on the existing schemes which are based on 50% co-contribution from Government of India (Aam Aadmi Bima Yojana & Janashree Bima Yojana), the life coverage will be as under:
a. Premium – Rs 300 pa.
b. Coverage-
i. Rs 50,000 – natural death
ii. Rs 100,000 – accidental death
iii. Rs 100,000 – total permanent disability
iv. Rs 60,000 – partial permanent disability
It will be a group insurance scheme and the family will be the unit. In the existing AABY & JBY scheme, the annual premium is Rs 200 and the coverage is Rs 30000, 75000, 75000 and 37500 for each of these categories respectively.
2. Health – Health insurance has to be an integral part of any comprehensive insurance scheme. It was initially felt that a health insurance scheme on lines of RSBY should be a part of this scheme. Since, it is envisaged to have a separate comprehensive Universal Health Insurance Scheme including preventive health, Maternity benefits and child care also, the health insurance is not being considered under this scheme.
3. Scholarship for Girl children – all the girl students, studying in class IX-XII will be eligible for scholarship whose parents opt for the comprehensive Insurance Scheme. The amount of scholarship will be @ Rs 800, 1200, 1800 & 2400 pa once the girl completes class IX, X, XI and XII respectively and will be given once a year at the end of the academic year and after she has passed the examinations. This will act as a conditional incentive linked aimed at encouraging the girl child to complete the secondary education. There will not be any limit on the number of Girl children to be covered under this scheme for a family.
4. Pension- the most crucial missing link presently leading to insecurity at the old age and associated issues is the presence of a pension system for workers and their families in the unorganised sector. Keeping in tune with what’s practised globally and pension principles, most of the pension schemes in the country have moved away from Defined Benefit to Defined contribution based system. The NPS scheme launched in 2004 is the latest such scheme. Funds are invested under a pattern defined by the regulator by the Pension Fund Managers with a twin objective of minimising the risk and maximising returns.
In order to encourage workers in the informal sector to save for pensions voluntarily, a scheme called “Swavalamban” was launched by the Central Government in September 2010, wherein for a saving of Rs 1000-12000 pa, the Central Government makes a co-contribution of Rs 1000 pa for the first five years starting 2010-11. The funds are invested by the Pension Fund managers and annuities will be provided to the policy holders once they attain the retirement age. Due to various factors such as low awareness, lack of proper marketing of the product and structural issues, the coverage under Swavalamban has remained very low. However, a fact that the scheme as envisaged aims to target workers who can save in the range of Rs 1000-12000 pa and there are large number of workers who can’t save Rs 1000 pa. Moreover, it needs to be studied as to what’s been the average saving per account for every Rs 1000 contribution of the Central Government and as such the issue whether targeting wasn’t done properly needs to be examined.
Taking Swavalamban as a guiding scheme in terms of Central Government contribution being Rs 1000 for a worker saving between Rs 1000-12000pa and its experience in terms of its failure to take off, it is proposed that Central Government contribution towards pension funds should be atleast Rs 2000 pa. Depending upon the age at which a worker enters the scheme, his annuity payable at the time of retirement will be determined. Moreover, it is a Pension scheme and not a saving scheme and as such, withdrawals before the retirement age will not be possible.
Premium structure – whether beneficiary should pay and how much?
We need to answer whether beneficiary should pay for such a scheme. The scheme basically by definition is based for the worker in the unorganised sector. The issues to be addressed are regarding his capacity to save voluntarily in the normal course and which he is willing to contribute as his share in the scheme. I am presuming that a worker is willing to save @Rs 5 per day ie Rs 150 per month or upto Rs 1800 per annum as the upper limit. Any premium above this will not be affordable by him. There’s also an issue of the collection cost and whether it will outstrip the premium itself. Regarding the willingness to pay, in a study conducted in 2005, it is established that there is a willingness to pay for health insurance . It is thus felt that there are tremendous advantages in mandating beneficiary contribution under such a scheme. The beneficiary will be a stakeholder and will be more aware about his entitlements. It will also imply the actual coverage of real beneficiaries and will guard against any misuse or inflated coverage. In the long run, it will ensure sustainability of the scheme.
Accordingly, it is felt that there should be tri-partite agreement between Central Government, State Government and the beneficiary. While there are apprehensions whether the State Governments would agree to contribute in such a scheme, the experience under NPS-lite ( Karnataka and Haryana) and some of the other schemes (MSP based procurement of foodgrains – in MP, Bihar etc) have shown that States may like to get involved if they see a ‘political value addition’ in such a scheme. Moreover, it is felt that State Government’s involvement will ensure against wastage under the scheme and against any exaggerated coverage.
The funding pattern of the annual premium on a per beneficiary basis is suggested as under:
In a typical first year scenario it is presumed that the beneficiary contributes Rs 500, State Government Rs 700 and Government of India Rs 1500 and thus the annual premium will be Rs 2700 per beneficiary.
With Rs 300 as annual premium for life coverage, and Rs 150 for the annual administrative charges, Rs 2250 will remain for towards annuity contribution under the pension accounts. Depending upon the age at which the beneficiary enters the scheme, the derivable pension structure per beneficiary per month will be:

Figures in column 1 is age in years, the figures in column 2,3,4,5 represent annual figures in Rs while figures in last column are monthly pension due to the beneficiary. The above calculations are based on an average return of 7% pa (the actual return is higher in the range of 9-12 % and thus the yield would be better) and the returns based on the actuarial valuation are thus likely to be higher.
However, these figures are not adjusted for inflation and considering a nominal inflation of 5% pa for this entire duration, the additional contribution required per annum, to keep the inflation adjusted value at the same level will be Rs 1845 pa for the age group 20 years to Rs 570 pa for the 55 age group.
The requirement of funds from Central Government will be Rs 1800 crores (Rs 1500 crores towards life & pension coverage @ Rs 1500 pa and Rs 300 crores for Girl child scholarships) for every 10 million family coverage. The State Government’s contribution will be Rs 700 crores pa. Depending upon the increasing coverage overtime, the requirement of funds will increase @Rs180 crore for a million coverage for GOI and Rs 70 crore per million for the state Government.
Implementation architectureSince two separate products – life (which is annual) and pension (which is annuity based accumulation) will have to be managed, an un-bundled architecture is proposed to manage the comprehensive social Security Insurance scheme, based on the NPS architecture being followed to manage the pension funds by the PFRDA and some of the best global practices in pension fund management. The unbundled architecture focuses on keeping the entry level agencies (Aggregators/point of presence), CRA (Central record keeping agencies) and Fund Managers separately.
The key constituents are:
Point of Presence (POPs): POPs are the interface between the policy holder and Insurance authorities. Effectively, the POP is only a conduit between the investor and the Central Record Keeping Authority (CRA) for information and between the investor and the Fund Managers for managing the reverse flow of keeping the investor apprised with regular NAV updates. There are three broad categories of PoPs:
1) POPs -So far, the POPs have included branches of banks (from both the public and private sectors), post office branches, depository participant offices and NGOs.
2) Aggregators - Aggregators shall be intermediaries identified and approved by the Central Nodal agency to perform subscriber interface functions in respect of their constituent groups. The Aggregators shall be entities already in existence having continuous functional relationship with a known customer base for delivery of some socio-economic goods / services. LIC, State Govt departments, State govt Societies such as SERP, WCD, NGOs etc are some of the institutions who could be an Aggregator. The Aggregator must be a registered body. The aggregators shall be responsible for a) Promotion of the scheme and awareness about the need for old age income security among its constituent group members; b) Meeting the ‘Know Your Customer’ requirements in respect of potential subscribers as mandated; c) Discharge of responsibilities relating to fund and data upload within prescribed time limits. d) Collection of contributions from subscribers and ensuring its passage to Trustee Bank;e) Ensuring availability of services to its underlying subscribers as mandated under the pension scheme; f) Handling grievances received from subscribers and their resolution.
Each of the Aggregators will operate through a system of Facilitators.
3) Facilitators – the facilitators are the individuals who are based in the locality where the beneficiaries are and they are the last mile connectivity in the link of enrolment of beneficiaries and will provide the necessary hand-holding to each of the beneficiary. The existing network of LIC agents (about 14 lakhs), Business Correspondents (BCs), aanganwadi workers, ASHA workers, ANMs, Teachers are some of the categories who will be facilitators. They will all work on a commission on a per enrolment basis, to be decided by their Aggregators.
CRA - the Central Recordkeeping Agency (CRA) will be a centralised agency at the national level to maintain the records of contribution and its deployment in various pension fund schemes for the Subscribers. CRA will carry out the functions of Record Keeping, Administration and Customer Service for all Subscribers under the proposed comprehensive pension scheme. The records of the contributions of each Subscriber will be kept in an account known as the Permanent Retirement Account which shall be identified by a Permanent Retirement Account Number (PRAN) (similar to what’s already available under the NPS system). CRA shall issue a PRAN to each Subscriber on his/her successful registration and maintain database of each Permanent Retirement Account along with recording of transactions relating to each PRAN.

Trustee Bank – A nationalised Bank will be appointed as a Trustee Bank who will manage the banking of the Pension Funds in accordance with applicable provisions of the pension funds, the schemes and the guidelines/notifications issued by the Government of India from time to time as per applicable law.

Exit clause: the purpose of having such a comprehensive insurance scheme is to provide old age income security and it is thus clear that the pension funds getting accumulated are not to be taken as a savings accounts and are not withdrawable before retirement.