Thursday, 30 August 2012


Extract from Economic Survey, Chapter 5 "Financial Intermediation and Markets", pgs 127-130.

A healthy and developing insurance sector is of vital importance to every modern economy. Benefits of a healthy insurance sector are:
  1. it encourages the savings habit, 
  2. it provides a safety net to rural and urban enterprises and productive individuals, and 
  3. generates long-term funds for infrastructure development. 
  4. protect enterprises against risks such as fire and natural disasters. 
  5. Individuals require insurance services in such areas as health care, life, property and pension. 
  6. Social security system and pension reforms also benefit from a mature insurance industry.
Development of insurance is therefore necessary to support continued economic transformation.

Some terms: 
Insurance penetration: Insurance penetration is defined as the ratio of premium underwritten in a given year to the gross domestic product (GDP). The growth in the insurance sector is internationally measured based on the standard of insurance penetration.
Insurance density is defined as the ratio of premium underwritten in a given year to total population (measured in US dollars for convenience of comparison).
Also, with effect from 1 October 2011, portability in health insurance has been started in which an insured, if not happy with services or the product of the existing insurer, can change to another insurer whilst enjoying the benefits (especially that of pre-existing diseases) of her/his existing policy.

The Indian insurance business has in the past remained under-developed with low levels of insurance penetration. Post liberalization, the sector has succeeded in raising the levels of insurance penetration from 2.3 (life 1.8 and non-life 0.7) in 2000 to 5.1 (life 4.4 and non-life 0.7) in 2010.

New Pension System
From May 2009, the NPS was opened up for all citizens in India to join on a voluntary basis. The corpus being managed under the New Pension System (NPS) is ` 12,407.4 crore.

Although the NPS is perhaps one of the cheapest financial products available in the country, in order to make it affordable for economically disadvantaged people, the Pension Fund Regulatory and Development Authority (PFRDA) in September 2010 introduced a lower cost version of the NPS, known as ‘Swavalamban’. It is a cocontributory pension scheme whereby the central government would contribute a sum of ` 1,000 per annum in each NPS account opened having a saving of ` 1,000 to ` 12,000 per annum.

Challenges to universal inclusion of poorer sections of Indian society into the pension network:
  1. Lower levels of financial literacy, particularly among workers in unorganized sector, 
  2. Non-availability of even moderate surplus, and 
  3. Lukewarm response so far from most of the state/UT governments to the co-contributory Swavalamban Scheme
Concerns about the insurance sector. 
  • The Indian insurance sector is well capitalized but significantly exposed to the banking system. Inter-linkages between the insurance and banking sectors are a matter of concern, with many insurance companies being part of financial conglomerates. Any financial stability issue regarding banks in the conglomerate may have an amplifying effect on the insurer. Efforts therefore have to be made towards building firewalls to prevent contagion from one sector to another, especially in times of stress.
  • The ability to raise capital and adequate reinsurance capacity are expected to be important determinants
  • for the insurance sector’s continued stability.

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