Creating the Correct Proposition

In the last one and a half decade Indian insurance industry has witnessed a substantial change with  the establishment of Insurance regulatory and development authority (IRDA) in 1999 and subsequent liberalisation of the insurance market with many private companies mushrooming  the Indian market. The life insurance industry recorded a new premium income of Rs 1.38 trillion (US$ 20.54 billion), during April 2015 to March 2016 period indicating a growth rate of 22.5 per cent[i]. Inspite of this growth, the journey of the Indian Insurance Industry has been sluggish and has failed to meet the aspirations of both the policymakers and the public. Insurance penetration and density has not witnessed much change in these 15 years. Insurance penetration of India i.e. premium collected by Indian insurers stands at just at 3.440% of GDP in FY 2015-16[ii]. Per capita premium underwritten i.e. insurance density in India during FY 2015-16 stands at  US$ 54.70.[iii] The industry has not been able to create the desired awareness. Life Insurance still continues to be a push product. The Indian customers yet do not understand the insurance concept , its benefits and what aspects of risk are covered by life insurance products. The general perception about life insurance being that it is a saving mechanism. This misconception has infact hindered the growth and penetration of Insurance in India. The policy makers viz.  the Government, regulator and Insurers need to create a clear and correct proposition about the insurance concept to spread the spirit of insurance to every nook and corner of the country. How life insurance should be looked upon ? Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent and uncertain loss. In case of life insurance, it is basically the recognition of the financial value that could be placed on one’s life for which the dependents of that assured will suffer in case of his untimely death and insurance is meant to indemnify for the loss of that value in case of assureds’ death. Thus, in life insurance the aim is to provide protection against the untimely death of the bread earner In a life insurance contract thus the insurer promises to pay a sum of money (the benefit) in exchange for a premium to the beneficiary, upon the death of an insured person (often the policy holder) either in one lump sum or in installments. Other events such as terminal illness or critical illness and funeral expenses  are also included in the benefits depending upon the type of contract. Besides this living too long is also a risk as one needs financial support when one stops working in old age, hence the need of pension products to give a regular source of income. General perception about life Insurance India’s economy being saving driven , investment in guaranteed returns instrument is preferred by the public at large . Life insurance has also been looked upon as a means of savings and investment in our country. The Insurers lure the customers by illustrating the maturity benefits, bonus additions and tax benefits under the policies and pay less focus on the death benefits and that it is a means of death risk management. Accordingly the products which provide both death as well as maturity benefits i.e endowment plans and anticipated endowment plans dominate the Indian life insurance market. The need for pure term plans providing only death benefit has been never created by the Insurers. Moreover, endowment plans with saving element have high premiums which fetch insurers with large amount of money. Though whole life plans which provide death coverage throughout life are also being sold but they are long term contracts and more costlier than the term products. The policymakers have further incentivised the public by means of tax exemptions on the insurance premium contributions and the policy proceeds including the bonus additions. Higher is the premium, higher the tax rebate. Thus, life insurance is looked as a means to save tax but not as a financial risk managing tool. With the introduction of unit linked insurance products in the last decade, a general perception that insurance is an investment mechanism has further strengthened. MEASURES TO INCREASE RISK COVERAGE Some steps have been taken by the Government to provide term insurance cover to people in formal sector and below poverty line people. Besides the Insurance regulator has also taken measures to increase the death risk coverage. Some of these measures are : a) Employees deposit linked insurance scheme Employee deposit linked insurance scheme (ELDI) was launched in the year 1976 as a statutory benefit for all the employees covered under the Employees Provident Fund and Miscellaneous Provisions Act,1952. ELDI gives life insurance cover to the employees and the benefit is payable to the nominee in case of death of the employee . This is an additional benefit to the employees besides provident fund deposits and pension benefits under the act. The contribution under the scheme is given by the employer. Employers who provide death risk coverage better than the insurance coverage under EDLI scheme can opt out of the scheme. The scheme has been revamped from time to time. The benefit under scheme has been recently increased to 6 lacs from the existing 3.6 lacs b) Life Insurance cover under the Pradhan Mantri Jan dhan Yojna Pradhan Mantri Jan-Dhan Yojana (PMJDY) is a National comprehensive programme launched by the Government in August,2014 for financial inclusion of an individual who doesn’t have a bank account. The scheme ensure access to financial services, namely, banking/ savings & deposit accounts, remittance, credit, insurance, pension to all including poor in an affordable manner. The scheme also provides with an accidental insurance cover of Rs.1.00 lac and life insurance cover of Rs.30,000/- to the account holders subject to certain specifications. c) Pradhan Mantri Jeevan Jyoti Bima Insurance Scheme Jeevan Jyoti Bima Scheme insurance scheme was started by the Indian government in May,2015 and it provides a life insurance cover of Rs. 2 lakhs in case of death of the member due to any reason. The benefit is offered at a nominal premium of Rs. 330 per year for applicants between 18 to 50 years of age and the applicant should have savings bank account in any of the participating bank accounts. This is a pure term insurance cover and is renewable till the age of  55 years. d) Minimum death benefit under all products In order to promote death risk coverage ,IRDA has provided regulation related to minimum death benefit payable under all non-linked and linked individual life insurance products in 2013. Minimum Sum Assured (SA) on death under non linked products[iv]: Except for variable insurance products, the minimum death benefit during the entire term of the policy shall not be less than the sum of sum assured on death and additional benefits if any. For this purpose the minimum sum assured on death should be as follows:

Type of Product	Age Below 45	Age 45 and Above
Single Premium Product	Highest of: 125% of single premium or Minimum guaranteed SA on maturity or Any absolute amount assured to be paid on death.	Highest of: 110% of single premium or Minimum guaranteed SA on maturity or Any absolute amount assured to be paid on death
	Age<45 years Non participating product	Age 45 years and above Non participating product
Other then single premium product, where the policy term is  5 years or more but less than 10 years	Highest of: 5* Annualized premium or 105% of all premium paid as on date of death or Minimum guaranteed SA on maturity or Any absolute amount assured to be paid on death	Highest of: 5* Annualized premium or 105% of all premium paid as on date of death or Minimum guaranteed SA on maturity or Any absolute amount assured to be paid on death
	Age<45 years Participating product	Age 45 years and above Participating product
	Highest of: 5* Annualized premium or Minimum guaranteed SA on maturity or Any absolute amount assured to be paid on death	Highest of: 5* Annualized premium or Minimum guaranteed SA on maturity or Any absolute amount assured to be paid on death
	Age<45 years Non participating product	Age 45 years and above Non participating product
Other then single premium product, where policy term is 10 years or more	Highest of: 10* Annualized premium or 105 % of all premium paid as on date of death or Minimum guaranteed SA on maturity or Any absolute amount assured to be paid on death	Highest of: 7* Annualized premium or 105 % of all premium paid as on date of death or Minimum guaranteed SA on maturity or Any absolute amount assured to be paid on death
	Age<45 years Participating product	Age 45 years and above Participating product
	Highest of: 10* Annualized premium or Minimum guaranteed SA on maturity or Any absolute amount assured to be paid on death	Highest of: 7* Annualized premium or Minimum guaranteed SA on maturity or Any absolute amount assured to be paid on death

For the purpose of this provision, the annualized premium shall be the premium payable in a year chosen by the policy holder, excluding the underwriting extra premiums and loadings for modal premiums, if any. Minimum Sum Assured (SA) on death under linked products: Except for variable insurance products, for all the non-linked individual life insurance products ,the minimum death benefit during the entire term of the policy shall not be less than the sum of Sum Assured on death and Additional Benefits,[v] if any. The minimum sum assured in linked products except pension products and immediate annuity products should at least be equal to:

Type of Product	Age Below 45	Age 45 and Above
Single Premium Product	125% of single premium	110% of single premium
Regular premium including limited premium payment products.	10* Annualized premium or (.5*T*annualised premium ) whichever is higher	Highest of: 7* Annualized premium or (.25 * T * annualised premium ) whichever is higher

Here

• T is Policy Term chosen by the policyholder for any product except for whole life products.
• For whole life products, T shall be taken as 70 minus age at entry.
• AP is Annualized Premium selected by the policyholder at the inception of the policy excluding the service tax.
• SP is the Single Premium which is chosen by the policyholder at the inception ofthe policy, excluding the service tax.

 e) Changes in the tax laws Rebate on Insurance premium u/s 80C The rebate for insurance premium u/s 80C has changed from time to time and insurers have changed the products accordingly in line with these exemptions so that the premium and benefits  under the policies do not exceed beyond the exemption limit. The tax exemptions given on insurance premium is as follows: i ) For policies issued from 1-04-2003 to 31-03-2012 Life insurance premium paid in order to keep enforce an insurance on the life of the assessee or on the life of the spouse or any child of assessee & in case of HUF(Hindu undivided family ) premium paid on the life of any member thereof under an insurance policy ,(other than a contract for a deferred annuity ,) are eligible for deduction to an extent of 20% of the actual capital sum assured or actual premium paid, whichever is less. ii) For policies issued on or after 1-4-2012 Life insurance premium paid in order to keep enforce an insurance on the life of the assessee or on the life of the spouse or any child of assessee & in case of HUF(Hindu undivided family ) premium paid on the life of any member thereof under an insurance policy ,(other than a contract for a deferred annuity ,) are eligible for deduction only to an extent of 10% of the capital sum assured or actual premium paid whichever is less. Tax deduction on proceeds of insurance policies under section 10(10D) Under section 10(10D) of the Income tax act, 1961 , maturity / death claims proceeds of life insurance policy , including the sum allocated by way of bonus on such policy (other than amount to refunded under  Jeevan Aadhar insurance plan in case of handicapped dependent predeceases the individual or amount received under a Keyman Insurance Plan) , is exempted from income tax. Sum ( not including the premium paid by assessee) received other than death claim under an insurance policy issued on or after  April 1, 2003 but on or before March 31,2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 20%of the actual sum assured is not exempted under this section. Sum ( not including the premium paid by assessee) received other than death claim under an insurance policy issued on or after  April 1, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 10%of the actual Sum assured is not exempted under this section. Way Forward In light of the Regulator’s norms of minimum death risk,  insurers have modified their existing products and thereby to match the tax exemption limits , so that the premium under the products does not exceed the 10% of the sum assured limit. But all these attempts have still failed to develop the life insurance awareness in the minds of the underinsured public that life insurance basic purpose is to provide for the financial loss the family suffers in case of untimely death of a bread earner. Looking at the grave situation, correct knowledge about insurance needs to be created so that life insurance is not disguised as a saving or investment product. Some of the measures could be: a) Introducing Insurance as a subject at secondary level Indians have negligible  knowledge about insurance concept except those people who are in the insurance industry. Despite having such low insurance penetration and density, policymakers have paid little attention to insurance education for creating awareness. In India people learn about insurance only at the time of seeking tax exemption under section 80C. If one learns about insurance while at school, one can take an informed decision while selecting the cover.  If insurance is introduced as a subject at secondary/higher secondary level correct knowledge about insurance could be imparted which will automatically create awareness. It will further help to control mis-selling by the intermediaries and increase sale through direct marketing channel. b) Mandatory business from term insurance products Pure term products have never been a choice of the insurance intermediary due to less premium and thereby less amount of remuneration to them. In such a scenario, either the regulator should specify the minimum business requirement from term products or else the regulatory ceiling on commission could be enhanced. Increasing the regulatory ceiling may not result in increasing the sale unless the insurer takes interest in that product. As term products generate less amount of premium, they are not the main business thrust areas for the insurance companies. It is thus imperative that the business of term products could not be increased unless there is a regulatory requirement. The regulator thus needs to bring in insurance awareness in the real sense by mandating minimum business from pure risk plans. c) Insurance awareness camps/ advertisements by the regulator and insurers The main thrust of the Insurers in insurance camps is on promoting and selling their own products instead of educating the customers about the concept of insurance. They need to change their focus from selling to educating so as to make insurance a pull product rather than a push product. They thus need to educate the customer to create awareness. Initiatives from the regulator could help in drastically changing the perception about insurance . The regulator itself should take the initiative of creating that awareness through camps and advertisements in the media. Though some amount of awareness has been created by the regulator through advertisements but more extensive efforts from the regulator are imperative to create a clear perception. d) Special treatment of term insurance products for income tax rebates If only risk coverage products have to be encouraged then the products need a separate treatment from taxation perspective. Special rebate as is available for pension and health insurance products is likely to bring in correct perception about life insurance risk coverage products. As this will clearly differentiate the importance of term products in comparison to insurance investment products and other investments which also qualify for tax rebate u/s 80 C. CONCLUSION Some of the measures taken to increase life insurance penetration till date have not been very effective and life insurance business has shown a sluggish growth over the past few years and besides this level of risk coverage is very low. Insurance coverage through Pradhan mantri jan dhan yojna targeting the unorganised sector and for those in the employment  insurance cover under EDLI scheme are minimal. Besides this a majority of the population is without any insurance cover and is not even aware of it. There is no alternative to education for creating awareness and illuminating the customers about the correct proposition of insurance concept. The duty rest on all the policy makers viz.  the Government, regulator and insurers to develop the awareness and knowledge by taking active and corrective measures. There has to be a clear distinction between saving, investment and risk coverage products. Instead of setting the standards of minimum death benefit in all insurance products , if only death benefit products are encouraged the life insurance penetration will increase in the real sense and will bring about the desired financial security. [i] http://www.ibef.org/industry/insurance-sector-india.aspx [ii] IRDA report 2015-2016 [iii] IRDA report 2015-16 [iv] IRDA( Non-Linked Insurance Products) Regulations, 2013 and IRDA/ACT/CIR/PRD/119/16/2013-14 [v] IRDA( Linked Insurance Products ) Regulations,2013.

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Autobiographical of the Author  Name:  Dr. Seema Arora Phone No: 94145-96933 Mail id: [email protected] Paper title:  Creating the correct proposition Academic Qualification:  B.Sc, M.A, Fellowship from Insurance Institute of India, Doctor of Philosophy in Insurance. Experience:  Worked with LIC of India for 17 years, Teaching life insurance, Group insurance and pensions, health insurance and insurance regulations to post graduate students since last 9 years in School of Insurance Studies, National Law University, Jodhpur. Present Post: Working as Deputy Director, School of Insurance Studies, National Law University, Jodhpur.