+ Life Insurance in 2021: Paving the Way for Protective Financial Inclusion - CII Blog

The pitch for financial inclusion in India got stronger this year especially against the backdrop of the pandemic. Today, more than 65 per cent of India’s population lives in rural towns or villages. Largely comprising of an “Earn and Pay” arrangement, the anomaly in a steady stream of cash flow delayed the presence of formal financial institutions in rural India. However, things are changing on the ground. Once considered agrarian, the rural economy is now increasingly more diverse. The non-agricultural sector in rural India is contributing to about two-thirds of household incomes. Again, a whole generation of mobile-first rural Indians who have leapfrogged generations of technologies to the mobile phone have bridged the awareness gap when compared to their urban counterparts. As India continues to remain a young nation, with a median age of 31 by 2030; a large part of this young population is expected to hail from rural areas.

Therefore, few would need to be convinced about the importance of driving financial inclusion in rural as well as urban India. The Reserve Bank of India (RBI) set forth the vision and objectives of financial inclusion policies in India by releasing the National Strategy for Financial Inclusion 2019-2024 on January 10, 2020. The strategy outlined by the RBI took into consideration, the suggestions and inputs from the central government as well as financial sector regulators like the Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India, and Pension Fund Regulatory and Development Authority of India.

Why financial protection is important, and the role it can play in supporting financial inclusion

The act of protecting oneself from financial uncertainties can be termed as financial protection. In life insurance, ‘financial protection’ is provided in the form of a life cover, also known as sum assured. It is a pre-agreed amount that is payable in case of an untoward incident with the life insured. While there are many types of life insurance products, term insurance is one of the best ways of driving protective financial inclusion in the country. Term insurance is the simplest type of life insurance that provides financial safety to the life insured’s family in case of the untimely demise. It enables them to tide over an irreplaceable emotional loss by providing a financial safety net to a family in its most challenging situation. Despite this fact, currently, the insurance penetration in India is 3.7 per cent of the gross domestic product (GDP) as against the world average of 6.31 per cent. The gap on sum assured/capita is even larger.

Among the various forms of savings options available to people, life insurance has a distinctive feature of enabling patrons to distinguish long-term savings from straightforward bequest intentions. Life insurance protects against the risk of longevity, especially when it comes as an annuity. As a complement to it, term insurance, which pays in case of death of the insured, isolates short-term propensity to spend. In spite of the great potential of life insurance, little attention has been paid to the empirical study of its demand.

While the RBI and the central government along with other regulators have played an important role in ensuring that people across the country have access to basic no-frills banking account for making and receiving payments; the Insurance Regulatory and Development Authority of India (IRDAI) has also set in place various measures to deepen India’s insurance penetration by offering them micro insurance (life) and non-micro insurance (life and non-life) products.

The Government of India, Department of Financial Services also recognizes the importance of life insurance in promoting protective financial inclusion. Through the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), people in India can avail off a basic life cover of Rs. 2 lakh for an affordable premium of Rs 330 per annum which works out to a premium of lower than a rupee per month.

The way forward

India presents immense opportunity for life insurance firms operating in the country, and there is an incremental opportunity for life insurance firms to invest in the country by leveraging their role as financial intermediaries, and they accentuate the development of the country as a whole. With rapid urbanization, mobility of population and formalization of economic relationships life insurance can take on the role of an instrument to manage income risk. As the private life insurance sector turns 20, it is now time for it to contribute more towards helping India achieve its vision of becoming a US$5 trillion economy by 2025 galvanizing financial inclusion with a layer of financial protection.

The abridged version of the article by Mr Prashant Tripathy, Member, CII National Committee on Insurance & Pensions and Managing Director & CEO, Maxlife Insurance, first appeared in the July 2021 issue of the CII Economy Matters. Click here to read.