INSURANCE IN INDIA
INSURANCE IN INDIA
- Insurance refers to a contract or policy by which an individual or any firm or entity receives protection from financial loss or from any other kind of damage.
- Insurance is a form of hedging and risk management system against uncertain loss and damages.
- Insurance policy is a Debt instrument/Legal contract against eventualities of death or damage.
- Two parties involved in this contract:
- INSURER(Assurer)– the party which is bearing the risk.
- INSURED(Assured) – the person, group, or property for which an insurance policy is issued.
HISTORY AND EVOLUTION
- In India, insurance has a deep-rooted history. It finds mention in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics, and famine.
|1818||Advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta, started by Europeans|
|1870||Bombay Mutual Life Insurance was the first Swadeshi life insurance company started in the Bombay Residency.|
|1912||The Indian Life Assurance Companies Act 1912, was the first statutory measure to regulate life business. However, the norms were lax, that led insurance industry to face problems in the aftermath of Great Depression in USA.|
|1938||With a view to protecting the interest of the public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with tougher regulatory provisions.|
|1956||Nationalising the Life Insurance sector and Life Insurance Corporation (LIC) came into existence. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.|
|early 1990s||The process of re-opening of the sector had begun.|
|1993||The Govt. set up RN Malhotra committee to propose recommendations for reforms in the insurance sector.|
|1999||On recommendations of Malhotra committee, Insurance Regulatory and Development Authority (IRDA) (made statutory body in 2000) was constituted as an autonomous body to regulate and develop the insurance industry.|
|2000||The subsidiaries of the General Insurance Corporation of India (GIC) were restructured as independent companies and GIC was converted into a national re-insurer.|
- The insurance sector is a colossal one and is growing at a rate of 15-20%. Together with banking services, insurance services add about 7% to the country’s GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk-taking ability of the country.
- Like the banking industry, the insurance industry had to be nationalized after independence due to scams, irregularities, financial inclusion goal and Five-Year Plans.
- There are currently 57 insurance companies in India, of which 46 are from the private sector. There are 24 life insurance and 33 non-life insurance companies in India.
- Uberrima fides– Good faith, hide nothing. (Diabetic in case of Health Insurance)
- Indemnity– Only “real and actual” loss, not imaginary (could not give UPSC CSE exam due to fire).
- Subrogation– Insurer can recover from negligent third party.
- Causa Proxima – Direct loss link.
- Insurable interest– If “risk-x” not happen, client remains in same position, “risk-x” happens client in bad position.
HOW INSURANCE IS DIFFERENT FROM BANKING SECTOR?
- Insurance policy is a type of debt instrument.
- Insurance companies are liability driven financial intermediaries.
- Risk capital or solvency capital norms are relatively higher. (Banks – CRR, SLR etc.)
- Policy premium is based upon statistics, probability theory, demographic trends, return in financial market and prevalent market situations.
- Insurance is “Sold” but never “Bought” (barring some compulsory insurances such as motor vehicle)
IMPORTANCE OF INSURANCE SECTOR
- Sector helps in mobilizing savings of public to financial assets
- Reduces fiscal burden on govt. to run schemes for social security – reduction in fiscal deficit.
- Insurance sector also act as a stabilizer and it helps people in the situation of crisis (health, accident, etc.)
- Spread of financial services in rural areas – IRDA Regulations provide certain minimum business to be done in rural areas, in the socially weaker sections.
- Insurance is a financial instrument which turns saving into an investment–Circular flow of capital
- A well-developed insurance sector boosts risk-taking in the economy.
- Sector also provides much-needed support to family members in the case of loss of life or health.
- Insurance companies need to invest part of premium in social and economic infrastructure – promotes socio-economic development.
- Insurance enables entrepreneurs to take bold and big-ticket decisions.
- Assets under management of insurance companies represent long-term capital, they also act as a pool in which to invest in long-term projects such as infrastructure development.
- Budget-2019à Finance minister Nirmala Sitaraman in the Union Budget last year said that 100% FDI will be permitted for insurance intermediaries. This will facilitate more investment by foreign companies in insurance sector, increased competition, better services to consumer, better and robust economic growth. FDI in the insurance sector was capped at 49% under the automatic route. According to the policy, FDI for insurance company is still capped at 49%
- NOTE – The proposed change is only applicable to insurance intermediaries while the cap on foreign ownership in insurance companies will remain at 49%
Market Size of Insurance Sector in India
- The overall market for insurance is expected to be USD 280 Bn by 2020.
- Gross premiums in India reached USD 94.48 Bn FY 2018. Of which –
INSURANCE SECTOR IN INDIA
- India currently accounts for less than 1.5 per
cent of the world’s total insurance premiums and about 2 per cent of the world’s life insurance premiums despite being the second most populous nation.
- India’s life insurance sector is the biggest in the world with about 360 million policies which are expected to increase at a Compound Annual Growth Rate (CAGR) of 12-15 per cent over the next five years.
- The insurance industry plans to hike penetration levels to five per cent by 2020.
- India had also increased FDI limit to 49 per cent from 26 per cent in insurance sector to increase the investments in insurance.
|Non-life insurance||Life insurance|
|In sector, private companies had a market share of 54.68 % in FY 19.||In this, private companies had a market share of 33.74 % in FY 19.|
- The insurance sector is a 72 Billion USD industry and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the country’s GDP.
BANKING SECTOR vs INSURANCE SECTOR
|Nationalization of RBI|
|1955 – 56
|Nationalization of SBI
|Nationalization of the Life Insurance sector and LIC came into existence.|
|Nationalization of 14 Private Banks|
|GIC Act – GIC and its 4 subsidiaries tookover – 107 (private owned) General Insurance Companies.|
|Nationalization of 6 Private Banks|
|Narasimham committee I (1991) and II (1998) + privatization and liberalization of banking sector||Malhotra Committee (1993) + Private insurance companies were allowed + FDI was liberalized|
|CRR, SLR, BASEL
|Investment Pattern, Solvency Margin. For instance, Insurance companies must invest minimum “specified %” of premium in G-Sec, they cannot invest more than “specified %” of premium in private companies shares or debentures etc. They must not invest in companies having less than “AA” credit rating etc. Exact norms not imp.|
|Financial Inclusion and goal of Welfare
|Priority Sector Lending (PSL) norms, 25% branches in unbanked rural areas||Rural & Social Obligation Norms- every year “specified” number of policies must be sold in rural areas, PH/backward etc. Further Insurance companies required to invest minimum “specified” in affordable housing projects, State Govt’s fire equipment etc.|
|Bank branch, Business Correspondence Agent (Bank-Mitra)
|Agents & brokers, Banks selling insurance (Bancassurance), Surveyor/Loss Assessors, Third Party Administrators (e.g. Hospital
where treatment is given)
TYPES OF INSURANCE
- ENDOWMENT INSURANCE
- WHOLE LIFE INSURANCE
- TERM INSURANCE
- UNIT LINKED INSURANCE POLICY
- HEALTH INSURANCE
- MOTOR VEHICLE INSURANCE
- CROP INSURANCE
- HOUSE/FIRE/MARINE INSURANCE
- Life Insurance
Life insurance is insurance that pays out a sum of money either on the death of the insured person or after a set period.
a. Endowment Insurance– An endowment policy is a life insurance contract designed to pay a lump sum after a specific term (on its ‘maturity’) or on death. It is shorter policy: (e.g. 10-20 years)
b. Whole Life Insurance– Whole life insurance provides coverage for the life of the insured. In addition to paying a death benefit, whole life insurance also contains a savings component in which cash value may accumulate. It is long term policy (e.g. 35-40 years)
c. Term Insurance– Term insurance is a type of life insurance policy that provides coverage for a certain period of time or a specified “term” of years. It is short policy with low premium e.g. PM Jeevan Jyoti Bima Yojana
d. Unit Linked Insurance– It is a multi-faceted product issued by insurance companies that combine insurance coverage and investment exposure in a single offering.
In this, part of money goes in insurance, part in Mutual funds.
|Type of insurance||Money returned|
|On maturity||On death|
|Yes, savings returned||Yes|
|Yes, savings returned||Yes|
|Unit Linked Insurance Policy||Yes, savings returned||Yes|
7.1.1. Post Office Life Insurance
- Initially started as postal life insurance for the postal employees (1884), but later scheme was extended to rural people as well. Presently, 6 schemes for government employees and 6 schemes for rural areas. These schemes usually start with prefix of “GRAM”g. gram Suvidha / Suraksha / Santosh etc.)
7.1.2. Sampoorna Bima Gram Yojana (2017)
- Scheme was started by Ministry of Communication. In every district, atleast one village identified, and, in that village, it covers all households with a minimum of one Rural Postal Life Insurance policy. Moreover, all villages under the Saansad Adarsh Gram Yojana (SAGY) will also be covered.
7.1.3. Life Insurance Corporation of India (LIC)
- The life insurance business/industry in the country was nationalised by the GoI in 1956 and fully government-owned company was setup by an act of Parliament, to take over the private life insurance companies.
- In 2018, LIC became majority shareholder in IDBI bank.
- Further in 2019, RBI classifies IDBI as a ‘private sector’ bank.
- LIC HQ (Mumbai) and Corporate magazineà “Yogakshema” (means well-being – Rigveda)
- LIC mottoà “Yogakshemam Vahamyaham” (means I ensure safety and well-beingof my devotees- Gita)
- Twin objectives of nationalisation of LIC
- To spread the message of life insurance for greater social security
- To mobilise people’s savings (collected as premiums) for nation building.
7.1.4. Disinvestment of LIC (2020)
- Union Budget-2020 stated that LIC Act will be amended. This move will convert LIC from a statutory corporation into a listed company. This will enable govt. to sell part of its shareholding through Initial Public Offering (IPO)
- Insurance products of LIC come with a sovereign guarantee by the Government. Hence, people prefer to buy it over private sector insurance policies. This led to distortion of perfect competition.
- Reduction of shareholding by government will result into independent functioning of LIC.
- Prior to these developments, IMF (2018) and Financial Sector Legislative Reforms Commission (Justice B. N. Sri Krishna) (FSLRC-2011) had also advised the disinvestment to Government of India.
- RN Malhotra Committee (1993) was appointed by the GoI to lay down a road map for privatisation of the life insurance sector.
7.1.5. LIC – Aam Aadmi Bima Yojana (AABY)
|Criteria||-Age – 18-59 years
-Below Poverty Line
-Marginally above poverty line people.
|Policy Premium||INR 200 per year. (Rs. 100 by Union Govt. + remaining Rs.100 by either State Govt. or NGO).|
|Payment||Children scholarship and INR30-75k depending on natural death accidental death / disability.|
|Administrative control||Ministry of Labour and Employment (since 2017)|
|Previously Janshree Bima Yojana for Unorganized workers “group insurance” but merged with AABY (2012).|
7.1.6. IDBI Bank Purchased by LIC in 2018
- IDBI was setup as a Development Financial Institution (DFI)in 1964 through the Industrial Development Bank of India Act, (1964).
- RBI’s P.J. Nayak Committee (2014) suggested that the Government should exit shareholding in smaller PSBs, to enhance their efficiency.
- Henceforth, LIC now owns 51% shareholding in IDBI.
- Though LIC itself is public sector entity but RBI has declared IDBI as ‘private sector’ bank.
|Govt. need not waste tax-payers’ money in running such loss-making banks.||LIC policy holders’ money is going into a loss-making Bank.|
|Govt. no longer worry about BASEL III norms -recapitalization of IDBI.||Consumers will be deprived of better insurance-investment products and services.|
|LIC can market its insurance policies to IDBI consumers through bancassurance.||“Financial Repression of Households”|
|Budget-2020: Government of India will sell its remaining shares from IDBI Bank to private investors through the stock exchange|
7.1.7. Life Insurance and Accidental (General) Insurance
|FEATURES||PRADHAN MANTRI JEEVAN JYOTI BIMA (PMJJB)||PRADHAN MANTRI SURAKSHA BIMA
|18 to 50 years with bank account in India. NRIs eligible but payment in rupee currency only.||18 to 70 years with bank account in India. NRIs eligible but payment in rupee currency only.|
|LIC or any empanelled private life insurance company.||Four Public Sector, or any empaneled pvt. General Insurance company.|
|INR 330 per person/ annum
|INR 12 per person/ annum
|Nature of Plan
|1 year “term” life insurance.
|1 year “term” accident cum death insurance.
|Any type of death: INR 2 lakhs will be returned
|Accidental Death, murder, natural disaster etc. INR 2 lakhs. However, suicide, alcohol-drugs related death will not be eligible|
|Neither PMJJB nor PMSBY covers hospitalization cost.|
- An insurance policy other than ‘life insurance’, is called General Insurance. e.g. accident insurance, health insurance, crop insurance, fire-theft-marine & vehicle insurance.
8.1 Public Sector General Insurance Entities in India
|1948||Employees’ State Insurance Corporation (ESIC) under Labour Ministry – through an act of Parliament to protect selected category of workers.|
|1957||Export Credit Guarantee Corporation of India (ECGC) under Commerce Ministry. Gives insurance cover to exporters, and credit guarantee to Bank/NBFC who loan to exporters.|
|DICGCI Act – banks must buy deposit insurance from it- covers upto INR 5 lakh
Although not considered a General Insurance Company in textbook sense because does not directly sell insurance policy to any individual household/business firm.
|General Insurance Nationalization Act – 107 (private) general insurance companies were taken over by GIC and its 4 subsidiaries –
New India Assurance,
Later, Govt. took direct control over these 4 subsidiaries, and left GIC to take care of re-insurance business.
|Agriculture Insurance Company Limited (AIC), (formed with funding of GIC, above 4 public sector General Insurance Companies and NABARD.)|
|Budget announced to merge National Insurance Company, United India Insurance Company and Oriental India Insurance Company, however the plan is yet to materialize.|
|Dept of Financial service (Min. of Finance) organized ‘Insurance Manthan’ for Public Sector General Insurance at Delhi.
Six-point agenda endorsedàfully insured society, customer orientation, digital-analytics for future, sustainable-prudent business, reach for everyone and talent management.
8.2 Employees’ State Insurance Corporation (ESIC)
- Functioning under the aegis of Ministry of Labour and Employment and Incorporated under the ESI Act of 1948,
- ESIC is a self-financing health insurance and social security initiative for all Indian workers earning less than ₹ 21000 per month as wages.
- ESI is applicable to any establishment with ten or more employees.
- It is co-contributory initiative – “specified” percent of employee’s wages + “specified” from employer’s side.
|Benefits to an ESI subscriber|
|1.||Medical insurance for the worker and his family from day one of joining|
|2.||Maternity Benefit to women employees|
|3.||Monthly payment to family if worker dies by employment related injuries|
|4.||Sickness benefit – partial wages during medical leave|
|5.||Monthly payment on disability|
|6.||Unemployment allowance if involuntary loss of employment- through the scheme “Atal Bimit Vyakti Kalyan Yojana”|
|Project “PACHDEEP” is associated with digitization and automation of ESIC processes by WIPRO (2017)
Project “ARROW” – Modernization of India Post (2008)
|Q. Consider the following statements: (CSE-2012)
The employees of which of the above can have coverage under ESIC?
GENERAL INSURANCE – HEALTH INSURANCE
A health insurance policy is a contract between insurance and individual or group in which insurer
agrees to provide specified health insurance cover in exchange of a regular “premium”.
TYPES OF BENEFITS
|FIXED BENEFIT||INDEMNITY BASED|
|Fixed payment will be given depending on illness.
For instance, in fixed benefit case, if the Policy agreement said “if you get TB, we will give you INR10 lakhs.” So, even if a patient spends ₹8 lakh on hospitalization, still the company will pay INR 10 Lakhs.
|In this type, benefits will be upto to the “actual hospitalization cost” from the total insured sum.
For instance, Policy covers upto INR 5 lakh annual health insurance. So, if hospital bill came INR 1.5 lakh then insurance company will pay ₹1.5. Lakhs only (unlike in case of fixed benefit case)
|Cashless policy: In this case, patient (nominee) simply admitted to an empanelled hospital for free and cashless treatment.|
|Non – Cashless policy: patient (nominee) will first pay hospital bill from own capacities. After submitting bills to insurance company, nominee will get refund.|
9.1 Arogya Sanjeevani Policy (2020)
|Need||Too many types of health insurance policies with varied features and premiums confuses common man in choosing best health policy for him. So, IRDAI ordered health insurance entities to launch a Standard Health Insurance Product (SHIP) to cover the basic health insurance requirements of every person. Insurance Companies need to launch it from or before 1 April 2020.|
|Features||Name of the policy must be “Arogya Sanjeevani Policy” followed by “name of the company”. Another name will not be allowed.|
|Type||Indemnity health policy insuring minimum ₹1 lakh to maximum ₹5 lakhs.|
|Validity||Minimum 1 year to lifetime|
|Entry age||Minimum 18 to Maximum 65. Policy can be availed for–
Family Floater policies covering close family members such as spouse, children, parents.
|Costs coverage||Hospitalization cost + pre and post hospitalization cost + Ayush treatment (such as Ayurveda, homeopathy etc).|
9.2 Niramya Health Insurance
|Operated by||By Dept. of Empowerment of Person with disabilities|
|Oriental Insurance Company|
|Benefit||Upto Rs. 1 lakh health insurance for handicapped and mentally challenged|
|Premium||Orphan Minor Person with Disability (PWD) à Zero;
Other PWDsà₹250-500 (Subject to poverty and income status)
9.3 Rashtriya Swasthya Bima Yojana (RSBY-2008)
|Fee||One-time registration for Rs. 30. Premium is paid by government and beneficiary need not pay any premium.|
|Benefits||INR 30,000 for medical treatment (smartcard + cashless) àeven for existing ailment and even in private hospital
INR 25,000 for accidental death.
|Senior Citizen Health Insurance Scheme (SCHIS)||If nominee is 60 years or above, they get additional INR 30,000 for treatment|
|Both RSBY and SCHIS are subsumed in PM- Jan Arogya Yojana (2018)|
9.4 Ayushman Bharat
- According to NITI Aayog, more than 80% of the medical and hospital expenditure are met by out of pocket (OOP), which is major cause of poverty on post hospitalisation.
- In-patient hospitalization in India has increased nearly 300% in the ten years.
- Medical emergencies and hospitalisation forced rural households to use hard earned household savings and borrowings which ultimately results into vicious cycle of poverty.
- These all factors led government to announce Ayushman Bharat scheme in Union Budget 2018, with two components:
- lakh Primary Health Care Centers (PHC) to be transformed into Health & Wellness Centres.
- National Health Protection Scheme (AB-NHPS) which was later renamed ‘PM Jan Arogya Yojana (PMJAY)’. It has subsumed
- Rashtriya Swasthya Bima Yojana (RSBY) & Senior Citizen Health Insurance Scheme (SCHIS).
9.4.1 PM Jan Arogya Yojana (PMJAY) – 2018
- In this scheme, a free insurance cover upto 5 lakh per family per year for secondary and tertiary hospitalization.
- On positive note, all pre-existing disease covered from day one. Scheme will also cover Pre and post hospitalization & medicine expenses.
- PMJAY ensures cashless and paperless access in empanelled hospitals.
- Beneficiaries for PMJAY will be identified through Socio-Economic Caste Census (SECC 2011) data.
- Estimated coverage – Over 74 crore vulnerable entitled families (approximately 50 crore beneficiaries) will be eligible for these benefits.
- Scheme imposes no limit on family size or age of family members.
- Treatment will be offered in all public hospitals and empaneled private hospitals. Hospitals to have Pradhan Mantri Aarogya Mitras (PMAMs) to help patients with the paperwork.
- These PMAMs are trained using National Skill Development Corporation (NSDC) and Ministry of Skill Development.
9.4.2 National Health Authority (NHA)
- Initially, it was conceived as an “Agency”, then restructured & renamed into “Authority” (2019).
- NHA oversees and monitors the implementation of PM-JAY, operational guidelines, collaborate with insurance companies & IRDAI, running web-platform etc.
- NHA is an attached office with the ministry of health and family welfare. (i.e. Health Ministry only looks after parliamentary matters like replying in question hour, tabling annual reports etc. thus giving NHA more freedom in day to day functioning)
- NHA has a CEO with status of Secretary to Govt of India.
NHA–Governing Board” Chaired by the Minister of Health & Family Welfare, and Members: NITI Aayog CEO, NHA-CEO & other govt officials and domain experts. States will be represented in the Governing Board on rotational basis.
9.4.3 State Health Agency (SHA)
- Each State to form a trust/society/Not-for-Profit Company/Nodal Agency which will act as State Health Agency (SHA)
- SHA have two options:
- SHA can directly implement the scheme by themselves or.
- SHA can tie up with an insurance company to implement the scheme.
Cost Sharing mechanism of PMJAY
|A||“Special Category States”àNorth-Eastern States, and Two Himalayan States (Himachal Pradeshand Uttarakhand)||Union contributes 90% and State govt. contributes 10% of the cost for scheme implementation in the given State.
|B||Other States – who are not in above category (UP, Bihar, etc.)
UTs with legislatureàDelhi, Puducherry, Jammu & Kashmir.
|C||UT without legislature – Ladakh, Andaman Nicobar etc.||100%
|Prior the removal of Art. 370, State of J&K was previously in special status category, so it got 90:10 funding. But given a UT with legislature, J&K will get 60:40. So, Central Government considering creating a new category ‘Hill Union Territory’ so J&K may continue to received 90:10 funding.|
9.4.4 Budget-2020 on Ayushman Bharat PM-JAY
- Government will setup hospitals in aspirational (115 districts identified by NITI) districts for treatment of PM-JAY beneficiaries.
- Public private partnership (PPP) mode for hospital construction Funding. Public side’s funding will be provided using revenue from taxation on medical devices.
- Government will use AI, Data analytics, Machine Learning to take preventive actions against the spread of diseases.
- Total allocation of INR 6400 cr for PM-JAY.
9.4.5 Challenges To PMJAY
- Lack of spirit of Cooperative Federalism. To commence scheme, states have to sign MoU with Union to begin operations.
- However, West Bengal already has state-govt sponsored “Swasthyasathi” scheme in State with similar features so CM of West Bengal has left PM-JAY (2019).
- Similar issues encountered in other Non-BJP states, Kerala and Orissa for instance.
- Fiscal Challenges – Insufficient budgetary allocations led to borrowing of money by govt. which could result into inflating fiscal deficit.
- Nexus between insurance company and hospitals – Private hospitals may perform unnecessary surgeries & prescribe excessive amount of medicines to extract more money from govt.
- Administrative Challenges – Beneficiary identification, poor doctor to patient ratio, inadequate bed capacity, Physical and IT infrastructure, transport & connectivity upto village level.
- Issue of medical privacy of patient– data may be leaked to pharma companies for their clinical trials and commercial motives.
- Lack of coordination and integration with other schemes–In 2019, NHA announced PM-JAY will not cover cataract surgeries, dialysis and normal deliveries because already there are other schemes for poor people.
9.4.6 Conclusion (PM-JAY)
- SDG 3 –to ensure healthy lives and well-beings at all ages. PM-JAY is a right step in that direction.
- Disease burden has devastating impact on a poor person’s wages and savings. PM-JAY can greatly help in poverty alleviation and human capital development in India.
- PM-JAY can improve health outcomes, productivity, and efficiency of Indian population, thus leading to improvement in GDP and in quality of life and ensuring fruits of demographic dividends.
- Taking states into confidence and taking them on board to ensure spirit of cooperative federalism is need of the hour.
|Q. Which one of the following is not a feature of the Ayushman Bharat Scheme? (UPSC-CDS2020)
|Q. Centrally sponsored scheme Ayushman Bharat is a national health insurance system for: (UPSC-Geologist-2020)
GENERAL INSURANCE – OTHER THAN HEALTH INSURANCE
10.1 Pradhan Mantri Fasal Bima Yojana (2016)
- Nodal Ministry – Ministry of agriculture and farmers welfare
- Public sector general insurance companies, and empanelled private sector insurance companies
- Intended beneficiary – All farmers including sharecroppers and tenant farmers growing notified crops in a notified area during the season who have insurable interest in the crop are eligible.
- Scheme covers damage against natural calamities, pests, diseases. Policy also protects before, during and after harvest.
- Premium paid by farmers against the total insured amount:
- Rabi winter crops – 1.5%
- Kharif summer monsoon crops – 2%
- Horticulture & Commercial crops other than oilseed & pulses – 5%.
Premium is paid by Union and State Govt in ratio of 50:50. It is optional for States to join. Insurance policy is compulsory for farmer to buy if he is seeking crop-loan from banks.
- ChallengesàStates are reluctant in paying their contribution, exorbitant delays by private insurance companies in settling claims, poor assessment of damages.
10.2 PM-Fasal Bima Yojana (2.0) – 2020
|Premium for kharif is 2%
For instance, a kharif crop insurance premium is ₹1000.
Farmer paid ₹200 of the premium
Union paid ₹400 + State paid ₹400.
Union and States will share their premium burden half-half (50:50).
|Premium for kharif is 2%
For instance, a kharif crop insurance premium is ₹100.
Farmer pays ₹2 of the premium
Union pays only ₹25 to 30 based on whether it is irrigated or un-irrigated.
State may have to pay ₹68-73. So, states’ burden increased.
However, the Union will bear 90:10 of the burden in case of North Eastern States.
|Compulsory for farmer in case of loan from banks
|Voluntary for farmers.
However, this may result in higher premiums (e.g. ₹200) if less farmers are subscribing.
|Multiple events coverage such as flood, drought, hailstorm. But farmers in Rajasthan had no fear of floods.
|Single event coverage insurance can be taken
e.g. “protection only against drought.” This will help reduce premium amount.
|Government allotted a district/area to an Insurance company for usually 1 year.
|Minimum 3 years. In case of extraordinary performance by company, then more years may be granted. This will encourage companies to invest more in the marketing & insurance agent network.|
|Updated methodology and use of technology for assessment of crop
- Issue – West Bengal implemented scheme from 2016 to 2018 but then stopped it & launched its own Bangla Fasal Bima Yojana (2019) which hampers spirit of cooperative federalism.
10.3 Other Agriculture Insurance Schemes
- Apart from PM Fasal Bima, there is Restructured Weather Based Crop Insurance Scheme (RWBCIS, 2016)- protects against weather only and not in case of pests or diseases.
10.4 NIRVIC Scheme (2019)
- NIRVIK is an Export Credit Insurance Scheme (ECIS)operated by Ministry of commerce through Export Credit Guarantee Corporation (ECGC).
- Exporter takes loan from a bank. But if he defaults then ECGC will cover upto 90 percent of both of his principal and interest losses to the bank. (earlier version of NIRVIC scheme, it was only 60%)
- Exporters pay ‘premium’ to the bank in turn bank pays it to ECGC.
- Premium rates vary across sectors. For instance, premium is on higher side for gems, jewellery sector attributed to risk/losses associated with it.
10.5 Third Party Motor Insurance
- Motor Vehicles Act (1988) requires all motor vehicle owners to purchase it.
- Third party (TP) insurance implies when your vehicle hits another vehicle, person or property, that victim (third party) registers a case, gets compensation.
- IRDAI is regulator as far as premium rates & other norms are concerned.
- SC judgement (2019): Third Party insurance validity should be 3-5 years, so even if owner forgets to renew annually, the third party is protected.
10.6 Own Damage Insurance
- It protects owner of vehicle against theft, vandalism, accident, fire.
10.7 Title Insurance
- “Title” implies a legal document showing ownership of a property.
- Claiming ownership of the same property by multiple persons results into “Title dispute”.
- “Title Insurance” protects the new buyer in case of such legal disputes (by refunding the money he had spent in buying land, construction, legal expenses etc).
- Real Estate Regulation and Development Act 2016 (RERA) requires the builders to buy this type of insurance to secure property from title disputes.
10.8 Catastrophe Insurance (Proposed)
- This type of insurance policy protects the client from natural and manmade disasters.
- Presently, farmers’ crops are protected from natural disasters through PM-Fasal Bima Yojana. But, if his own home was destroyed in floods, it will not be covered. In such situations, Union & State Governments forced to use taxpayers’ money for paying compensation to victims of floods, cyclones etc.
- 2019 – IRDAI planning to allow catastrophe insurance (or CAT cover) for poor people.
- When an insurance company buys insurance cover for its insurance business, a new segment comes into being i.e., re-insurance (Re-insurance is like an umbrella above umbrellas
- Reinsurance, or insurance for insurers, transfers risk to another company to reduce the likelihood of large payouts for a claim.
- DICGCI Act (1961) requires banks to take deposit insurance from DICGCI. Similarly, Insurance Act (1938) requires insurance companies take ‘re-insurance’ on their business.
- Previously, only GIC was the sole-reinsurer, but then norms liberalized (2015). New re-insurance companies allowed. (e.g. India’s ITI Reinsurance Ltd). Even foreign re-insurers such as Swiss Re, Munich Re, General Reinsurance are permitted.
- Benefits of multiple re-insurance companies à
- GIC’s monopoly in dictating re-insurance premium rates is gone.
- Reduction in cost of operations
- Business expansion
- Launch innovative products
Budget 2019: Norms relaxed to attract foreign reinsurers to open branches in India.
FUNCTIONS OF RE-INSURANCE
- Risk transfer – With reinsurance, the insurer can issue policies with higher limits than would otherwise be allowed, thus being able to take on more risk because some of that risk is now transferred to the re-insurer.
- Income smoothing – Reinsurance can make an insurance company’s results more predictable by absorbing large losses. This is likely to reduce the amount of capital needed to provide coverage. The risks are spread, with the reinsurer or reinsurers bearing some of the loss incurred by the insurance company.
- Reinsurer’s expertise –The insurance company may want to avail itself of the expertise of a reinsurer, or the reinsurer’s ability to set an appropriate premium, in regard to a specific (specialised) risk. The reinsurer will also wish to apply this expertise to the underwriting in order to protect their own interests. This is especially the case in Facultative Reinsurance.
- Micro-insurance refers to products offering coverage to low-income households or to individuals who have little savings and is tailored specifically for lower valued assets and compensation for illness, injury, or death.
- A general or life insurance policy with a sum assured of 50,000 or less is covered under micro-insurance policy.
- Though it promises to support sustainable livelihoods of the poor, its market penetration remains low.
IRDAI – INSURANCE SECTOR REGULATOR IN INDIA
|Organisation||Following the recommendations of the Malhotra Committee report, IRDA was setup in 1996, the statutory status given in 1999.
In 2014, its name changed to Insurance Regulatory and Development Authority of India (IRDAI). It is headquartered at Hyderabad (Telangana). (SEBI and RBI are at Mumbai)
|Structure||Total 10à One Chairman (5yrs or 65 yrs) and 9 members (5yrs or 62 yrs)
They are eligible for re-appointment.
|Functions||IRDAI gives separate licenses for life, general & re-insurance companies.
Prescribes norms for insurance companies for accounting, solvency, audit, commission to agents etc. It can penalize companies, suspend or cancel registration. (Appeal against order lies in Securities Appellate Tribunal (SAT).
Norms for agents & brokers, banks selling products (Bancassurance), Surveyor/ Loss Assessor, and Third-Party Administrators (e.g. Hospital)
Consumer grievance redressal via Insurance Ombudsman.
IRDAI is member of Financial Stability and Development Council (FSDC).
|Key objectives of the IRDA – include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.|
CHALLENGES TO INSURANCE SECTOR
- Low Awareness – A large majority of people in India believe that health insurance is not a worthy investment.
- Poor Distribution – Distribution outside large cities is poor. The reason insurers and distributors do not build a presence in small towns is that it is unviable.
- Insurance is highly regulated, but healthcare is equally unregulated, so it creates supply demand mismatch between (doctors-hospitals) vs. patients. Moreover, standardized medical treatment costs difficult to ascertain (unlike car damage). This problem further aggravated by delays in claim settlement so discourages to renew health policy.
- Capital intensive industry– Private players not generating enough profits due to poor returns in share market. Soaring commission rates and marketing reduces profitability further.
- Costly products – Lack of innovative custom and tailor-made policies for MSME. This results into under insurance (client not taking sufficient insurance to cover losses)
- Lack of required skill set – with the insurance agents. Need of more skill and network more than banker.
- Rural folks – they are either disinterested or un-served despite no. of schemes and & IRDAI norms which are in place.
- Sales centric focus – Insurers have been focusing on growing sales even if that creates a distortion in pricing for individuals.
- Perception by influencers – Often, the life insurance industry is portrayed (by media and influencers) in a negative manner and hence the consumers become skeptical.
- Fewer product innovations – While many essential products to mitigate risk are available, there are gaps in the insurance product portfolio that leaves large risks uninsured.
- Hesitation by peoples in buying House, Factory, Fire, Theft insurance due to fear of discovery of ‘asset value’ which could result into IT/GST raids & ransom demands. As a result, India’s “insurance gap” is high i.e. total assets (in value) divided by insured assets (in value).
- Promote Awareness – It is necessary to promote more awareness among public about benefits of insurance through videos, social media, ads, organizing campaigns
- Evolving Multiple Channels of Distribution – Linking insurance with allied finance products like housing loan, mutual fund investment, banks credit cards etc are the new channels for life insurance.
- Huge Untapped Market – The demographics and macro-economic factors in India are diverse and insurance systems have to be aligned to other programmes in the country in order to target every section.
- Better regulation-Regulatory policies can be made to ensure that insurance companies focus more on insurance targets than profitability.
- Use of Technology – Stakeholders will have to leverage Internet, AI, ML and other technology options to provide single window service so as to cross-sell and retain customers.
INSURANCE PROGRESS IN INDIA – ES2020
|Type of insurance||Insurance penetration (%)||Insurance Density (per capita)|
|Insurance penetration is declining in zig-zag fashion. (2.74% in 2018||Insurance Density is improving in zigzag fashion. ($55 in 2018)|
|Non-Life (2011-18)||Improving zigzag fashion. (0.94% in 2018)||Improving steadily
($19 in 2018)
|For India, these indicators are low compared to many developing countries due to aforesaid challenges.|
|Insurance Density (per capita) àPremium divided by total population|
|Insurance penetration (%) àPremium divided by GDP.|
REASONS FOR POOR INSURANCE PENETRATION
- Complex and delayed claim settlement procedures
- Vague and incomprehensible rules and regulations of the insurance companies
- Lack of education and awareness among the masses
- Lower income levels of the population
- Socio-cultural factors – poor literacy and poverty
- Lack of level playing field in the industry
- Less vibrancy in the regulatory framework
SHOULD WE INCREASE FDI BEYOND 49% IN INSURANCE COMPANIES?
- Presently, Government has allowed upto 49% Foreign Direct Investment.
|In favour of increase||Against increase|
|Indian insurancecompanies will get additional capital from Foreign investors. This will help in mitigating various challenges.
Indian companies can expandoverseas, mobilize money from other nations insurance clients etc. &invest it in Indian economy.
IRDAI prescribes “Investment pattern”, there is ombudsman institution for customercomplaints. Further, Companies Act has various norms for independent directors, auditing, whistle-blower protection.
CSR will also ensure socio-economic development of India
China, Thailand, Indonesia etc all have raised FDI limits in insurance sector. We should also follow their roadmap.
|In case of increased FDI, foreign investors will put pressure on Indian insurance companies to generate more profit. This would results into:
speculative trading& investment in junk bonds that can offer higher return. This will increase vulnerability to collapse.
Insurance companymay reject insurance claims for frivolous and unjustified reasons to increase its profitability to keep foreign investors happy.
- Pension – a person eligible to receive “specified” monthly quantum when he retires. And when he dies, his wife eligible to receive “specified” monthly quantum. When she also dies, scheme stops.
- Economic Survey (2018-19) observed that in future, we will have an ageing population and less young people, so we should gradually raise the age of retirement.
17.1 Employee Provident Fund Organisation (EPFO)
- EPFO was setup initially by an ordinance and later accorded statutory status in1952.
- Ministry of Labour and Employment is nodal for organisation.
- EPFO governed by Tri-partite “Central Board of Trustees”
- Government (Union + state) à15 nominees
- Employers (industrialists) à10 nominees
- Employees (workers)à10 nominees
- They make policy decision about avenues for investing money (G-sec>C- Bonds>Shares; with minimum and maximum slabs) and also decide how much interest should be paid to subscribers. 3 schemes –
- Provident Fund (1955),
- Deposit Linked Insurance (1976)
- Pension (1995).
- EPFO subscriber worker haspermanent Universal Account Number (UAN)– remains unchanged even after switching jobs.
- Unlike earlier, since 2019 EPFO allowed employees to generate UAN online by simply giving Aadhar & Mobile Number.
- Factory owner has Labour Identification Number (LIN)- which he uses while uploading the compliance documents on Shram Suvidha web portal (Under Labour Ministry)
- EPFO & ESIC transactions can be done through both public and private sector banks and through Ministry of Electronics and Information Technology (MeitY)’s UMANG App (Unified Mobile Application for New-age Governance).
17.1.1 EPF Commutation (2020)
- Employees’ Pension Scheme (of EPFO) in which worker gets pension after retirement at 58 years.
- EPF Pension commutation- Worker can partially withdraw his pension in advance (before reaching retirement age). But, then EPFO will pay him less pension afterwards when he reaches retirement age.
17.1.2 Pradhan Mantri Rojgar Protsahan Yojana (2016)
- Scheme is under the ambit of Ministry of Labour and Employment
- Private sector employers hire workers informally, without registering them on official formal records otherwise they need to contribute to EPFO-funds under statutory norms, with fear of harassment from EPFO officials.
- Moreover, informally hired workers denied job-security & social security.
- To address this problem and to encourage private companies to hire new workers ‘formally’, Govt. pays employer portion (12%) for the first 3 years. This scheme is called Pradhan Mantri Rojgar Protsahan Yojana (Labour Ministry)
- On similar lines, Textiles ministry announced “Pradhan Mantri Paridhan Rojgar Protsahan Yojana” to encourage formal job creation in the textile sector.
Economic Survey (2015-16) – recognise it as “EPFO Regulatory Cholesterol” preventing formal-job creation.
17.2National Pension Scheme (NPS)
|Govt Employees (from 2004)||Middle Class (from 2009)|
|In 2004, govt. renamed New Pension Scheme (NPS) into National PensionSystem.
Subscriber to this scheme will be those who joined govt. service on or after 01 Jan 2004.
Mechanismof scheme- Employees (10 % of basic pay) + Govt. contribution (14% of basic paysince Interim-Budget-2019)àgoes to PFRDAàNPS Trustàempanelled NPS – Fundmanager àInvested G-sec, Corporate Bonds and Shares depending on your preferences.
|In 2009, the National Pension System (of govt. employee) was made open for all citizens (and NRIs) aged 18-55 on voluntary basis. You contribute money till age of 60 years, as per your capacityinvestedàpension.
Govt launched NPS-Lite (Swavlamban) in 2010à If poor person from unorganized sector joined NPS, then govt to co-contribute money for five years
|NPS subscribers have Permanent Retirement Account Number (PRAN), similar to UAN number of an EPFO subscriber.|
|Govt. was entirely responsible for arranging the pension money for its employees|
Post 2004’s NPS
|Govt Employee’s salary is partially deducted and invested in financial securities; his pension is thus not fixed nor fully paid by Govt. but it’s dynamically linked with dividend & interest generated by those financial securities.|
Jeevan Pramaan (2014)
- Previously, a pensioner (in any Govt / public sector org.) had to submit a physical life certificate in November each year to prove that he/she is alive.
- “Jeevan Pramaan” is an “Aadhar-based Digital Life Certificate” by Ministry of Electronics & Information Technology (MeiTY)
- Pensioner’s Aadhar number authenticated with biometric reading device on PC or Mobile will generate “Digital Life Certificate” eligible for submission to the authority – pension released.
17.3 PENSION SCHEMES FOR SENIOR CITIZENS
17.3.1 Pradhan Mantri Vaya-Vandana Yojana
- Launched after demonetisation to protect the senior citizens’ income, when banks were flush with deposits which could result into fall of deposit interest rates.
- Scheme is operated by (DFS -2017) – LIC
- A60 years or above senior citizen can join, latest by 31 March 2020.
- He can invest minimum INR1.5 lakhs to maximum INR15 lakhs.
- LIC guarantees 8% interest on investment, which results into a monthly pension of INR 1000-10000, for a period of 10 years. Then original amount returned.
- In between, if senior citizen dies then nominee (spouse, children) gets original amount back.
- If LIC unable generate guaranteed return, then Govt (Dept of Financial Services) will pay subsidy for shortfall.
- Other schemes on similar lines are – Senior Citizen Savings Scheme, LIC Varistha Pension Bima Yojana etc.
17.4 Pension Schemes for Poor People
|Atal Pension Yojana (APY)||Pradhan Mantri Shram-Yogi Maandhan Yojana|
|Operated by Dept of Financial Services, 2015
|Interim Budget (2019) by Ministry of Labour and Employment|
|Only for age group of 18-40 years Indian citizen residing in India (Not for NRI)||NPS, Income-Tax payer, EPFO, ESIC will be not eligible.
|No minimum or maximum income limits to join APY scheme. Specially directed towards unorganized workers outside EPFO security and poor peoples||Unorganized sector workers with monthly income upto INR 15kin the age group of 18-40 years.
|Monthly pay ranges from Rs. 42-210 till the age of 60 years
|Monthly invest Rs. 55-200 (depending on age). Govt to co-contribute equal amount. Till the age of 60 years.|
|Rs. 1000 -5000 monthly pension– depends on at which age scheme has joined and level of contribution.||Fixed Rs.3000 pension per month.
|One person one subscription only.||Same condition applies|
|If husband dies after 60 years, then wife continues to receive same quantum of pension.
If husband dies before age of 60, wife gets premium or if she continues to pay then she gets pension when she reaches 60 years.
Both die, then beneficiary (child) receives the entire principal (premium).
|If husband dies after 60years, wife gets Rs. 1500 per month as family pension. Once Wife dies, scheme stops. If husband dies/disabled before 60 years, wife can continue paying or withdraw with interest. In case ofpremature exit before 60years, contribution will be returned along with interest.|
|Note: 1) Atal Pension Yojana 2) PM Jivan Jyoti Yojana and 3) PM Suraksha Bima yojana are collectively known as Pradhan Mantri Jansuraksha Schemes|
|Q. Find correct statement(s) regarding ‘Atal Pension Yojana’: (CSE-2016)
17.4.1 Maan-Dhan Yojana of 2019
|Pradhan Mantri Shram- Yogi Maandhan (2019)||Pradhan Mantri Laghu Vyapari Maandhan Yojana (NPS-traders) (2019)||Pradhan Mantri KISAN Maandhan Yojana (2019)|
|LIC (Fund Manager) + Ministry of Labour and Employment||LIC (Fund Manager) + Ministry of Labour and Employment||LIC (Fund Manager) + Ministry Agriculture|
|For unorganized sector workers with monthlyincome upto INR 15000
|Small trader / shopkeepers whose annual turnover does not exceed Rs INR 1.5 crore, based onself- declaration.||small / marginal farmers with upto 2 hectare land.
|NOTE– one person can join only one type of above scheme. Income-Tax payers & those who joined EPFO/ESIC are not eligible for any of these schemes.|
17.4.2 National Social Assistance. Programme (NSoAP)
- For Below Poverty Line (BPL) people Ministry of Rural development’s scheme launched in 1995
- In this programme, direct money is given without asking for any premium from the beneficiary.
- NSoAP is a core of the core scheme with 100% cost is paid by Centre.
- Scheme is optional for state govt. to contribute money.
SOCIAL SECURITY FOR OVERSEAS INDIANS (PENSION / INSURANCE)
- These schemes are managed and looked by Ministry of External Affairs (MEA)
18.1 Mahatma Gandhi Pravasi Suraksha Yojana (2012)
- Scheme was operational from 2012 to 2017. It was a voluntary and “insurance + pension” policy for Indian workers in foreign countries.
- However, but very few people subscribed to it which led to ultimate closure in 2017.
18.2 Pravasi Bharatiya Bima Yojana (2017)
- Most nation’s which do not have strict laws regulating the entry, employment or safety of foreign workers are classified by GoI as Emigration Check Required (ECR) countries. For instance: Saudi, Qatar, UAE, Libya, Malaysia, etc.
- It is compulsory for Indian workers going ECR nations to join Pravasi Bharatiya Bima Yojana from the empanelled insurance companies.
- It will have insurance cover of Rs. 10 lakhs if accidental death/permanent disability while abroad.
- It also covers Maternity expenses for women worker, Family Hospitalization etc.
- Premium for policy ranges between INR 275-375 depending on tenure of policy.
PFRDA – PENSION FUNDS’ REGULATOR
|Organisation||PFRDA (Pension Fund Regulatory and Development Authority) was setup by an executive order in 2003. The statutory status was given in 2013. PFRDA headquartered at Delhi (like IBBI, CBI).|
|Structure||Total 6à One Chairman (5yrs or 65 yrs) and5 members (5yrs or 62 yrs)
They are eligible for re-appointment.
|Functions||Implement National pensionsystem (NPS), select its fund-managers.
Regulate all public and private pension funds except EPFO, Seaman, Coal miners, Assam tea plantations related pension schemes as they’ve their separate acts / mechanisms.
Protect Clients, Pensioners
Prescribe liquidity, auditing, investment norms for Pension funds.
Powers of civil court.
Documentation, financial awareness generation throughpensionsanchay.org.in
Pension FDI is linked with insurance FDI (49%) so not decided by PFRDA.
19.1 Separation of PFRDA And NPS Trust
- In 2008àPFRDA setup a body NPS Trust. NPS Trust manages the National Pension System (NPS) and Atal Pension Yojana funds.
- Budget-2019àPFRDA is the pension sector regulator, soit should separate itself from NPS-Trust which is doing pension business activity.
- Pattern of Government take over NHB from RBI is visible here- the financial regulators themselves should not be involved in running financial products, so that they can work in a transparent, impartial manner without conflict of interest.