Can Budget 2016 help the Indian economy address the significant mortality and property protection gaps in India? How can it help to promote innovation in the insurance industry by encouraging more start-ups in the ecosystem to help in consumer engagement and risk assessment?1. A separate tax exemption limit for insurance to help close the USD 8.5 trillion mortality protection gap
Despite the rapid growth of insurance penetration in India, savings and insurance still meet less than 10% of the population’s protection needs.
This underlines the fragile nature of financial security for many families in our country.
Swiss Re’s 2015 Mortality Protection Gap study found that for every USD 100 needed for protection in India, only USD 7.8 of savings and insurance is in place, leaving a massive protection gap of USD 92.2.
Growth in savings and life insurance coverage has lagged behind economic and wage growth and this margin of 92.2% is the highest in the Asia Pacific region.
This illustrates the real financial hardship that Indian families could face in case of an unexpected adverse event such as early death of the family breadwinner.
Mortality protection is at the core of life insurance. The industry has requested for a separate tax exemption limit for life insurance.
A separate limit would promote greater awareness of the benefits of insurance protection to the general public, and reinforce the responsibility for having adequate coverage.
This could also increase the appeal of these products to consumers and serve as an important step in helping narrow the significant protection gap.
2. A separate tax deduction for home insurance to help close the property protection gap
India is vulnerable to a number of natural catastrophe risks including flooding, earthquakes, storms, droughts and landslides. However, due to low property insurance penetration, insured losses remain low and there is a large property protection gap.
In our sigma study ‘Underinsurance of property risks: closing the gap we found that India is one of the countries most underinsured relative to GDP in this area, with penetration for property insurance as low as 0.07% as compared to other markets like Brazil (0.36%), and Russia (0.23%).
While a rapidly growing middle class is accumulating substantial new wealth, insurance buying in this area still lags.
There is negligible consumer awareness about the need to protect their homes and property; current sales are driven largely through loan attachments.
In India, home insurance is neither mandatory nor has tax benefits. The first step could be a separate tax deduction for individuals with property insurance and this will help to create awareness on the property protection gap.
Just as tax benefits for health insurance limits have been a welcome initiative, a separate deduction can act as a signaling tool to encourage consumers to buy such products.
This has the added benefit of reducing the strain on government resources in the event of a catastrophe. Another step could be to consider whether home insurance could be made compulsory.
3. Encouraging long term innovation in the insurance industry
In India, the insurance industry is lagging behind consumer expectations in the digital age. The younger generation (Generation Y, born between the early 1980s and late 1990s, and subsequent generations) in particular have grown to expect easy and quick access to information in commercial interactions, transparency about cost and value, and high-quality service.
Insurers in advanced markets are now partnering with start-ups to expand their own data analytics and technology capabilities.
Some Indian insurers realise that such innovation will need to come from outside their four walls and run programs, like ‘hackathons’ to attract start-up talent to insurance-specific issues.
In the future, partnering with or buying more tech-savvy start-ups may be a necessary part of the new strategy.
There are good signs in the 16 January package and we see a groundswell of support from the government for the start-up ecosystem.
There are several key issues currently being considered for Union Budget 2016 to help the start-up ecosystem mature.
These include relaxing policy regulations like ease of compliance, and reliance on self-certification which will leave more time for innovation.
The Union Budget 2016 could also lay emphasis on the flagship Digital India programme.
There are a number of start-ups doing some very exciting work in the area of open data with the potential to radically change the way insurers interact with consumers and also help them better assess risks.
In conclusion, raising awareness on the importance of insurance and closing the protection gap should be a key element of change.
Let’s also illustrate the importance of innovation by taking a client and customer-centric approach to increase insurance penetration.