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Social Security Could Revolutionize India’s Insurance Sector
The Indian government’s aggressive push to expand financial inclusion with savings bank accounts for all and affordable social security schemes for millions of its people could create a revolution in the country’s insurance sector.
The recently launched schemes, namely, two insurance schemes PradhanMantriSurakshaBimaYojana (PMSBY) and PradhanMantriJeevanJyotiBimaYojana (PMJJBY) would provide cover in the unfortunate event of death by any cause, death or disability due to an accident whereas the pension scheme, Atal Pension Yojana (APY), would address old age income security needs.
Along with Jan DhanYojana (JDY), the three schemes will provide affordable access to essential insurance coverage and pension. Contrary to popular perception, many of these schemes will be available to all citizens and not just to those living close to the poverty line. Most importantly, the launch of the schemes coincides with the need to give much-needed fillip to the insurance sector.
After registering a healthy growth for almost a decade, India’s insurance sector is currently experiencing stagnation due to rising costs, slowed growth, systemic challenges, and stalled reforms. India opened insurance for private sector participation in 2000 with a 26% FDI limit, which was only raised to 49% in 2014.
The sector was pegged at 72 billion US dollars in 2012. But, the major challenge for the insurance industry in India is to improve penetration and density. Despite a decade of growth, the country remains under-penetrated market at 3.9% against a global average of 6.3% in 2013. What is worse, only 0.2% of the people are covered under mediclaim. Compared to this, about 75% of the U.S. population is covered under some insurance program.
The level of insurance penetration depends on a large number of reasons like level of economic development of the country, the extent of savings in financial instruments, and the size and reach of the insurance sector. It is in this backdrop the BJP government’s effort to push financial inclusion and social security for all should be appraised.
Social security ‘Jan Suraksha‘ schemes, in turn, availed through a bank account ‘Jan Dhan’ could massively increase insurance penetration besides becoming a harbinger for socio-economic change, particularly for a country like India where still 30% of the population continues to live in poverty and millions of people live beyond any organized access to finance and insurance systems.
In fact, both social security net and insurance sector are interlinked and growth and expansion of one sector will give fillip to the other and to the overall economic prospects of the country. Conversely, a decline in one sector will retard other’s growth.
The revised 49% FDI limit in the insurance sector is expected to bring in 250 billion Indian rupees to the sector. This amount could be used to push core infrastructure projects, which, in turn, could lead to job creation. The latter is a high priority and stated goal of the Modi government.
Higher insurance penetration achieved through a widening of social security net will help increase domestic savings, which again can be used for infrastructure funding and other big-ticket development plans. Within the sector, higher foreign flows will help new entrants to expand their operations that will lead to higher competition. Insurance companies competing for expanding their base of subscribers will have to offer better policies at lower premiums, which will ultimately benefit the consumer. More importantly, an expanded social security net will drive a change in mindset at the social level just like it did in America in the 1930s.
U.S. President Franklin Roosevelt created social security system in 1935, which became a catalyst for social change, enabled skill upgradation in workforce, fostered innovation and entrepreneurship and increased domestic consumption. An expanded social security net could help drive a similar spirit of entrepreneurship in India’s core growth sectors and others and result in job creation.
In recent years, India’s IT sector is facing heat from enhanced international competition and a spirit that drove the growth of the sector between 1980s and 1990s is missing. The sector is reportedly experiencing a decline in job creation, some of which also is a result of policy backlash in the United States.
The enlarged access to organized banking and financial sector could drive millions of unproductive workers in the agricultural sector to shift towards manufacturing and other gainful employment. Insurance coverage will enhance their risk taking abilities and confidence to invest in new ventures. Social security will further add to the Indian economy through increased consumption, which is important to a nation with low per capita income (currently around 1500 US dollars).
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