Deep dive into the protection gap in India

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Reading Time: 5 minutes

Key Takeaways

  • A protection gap is the amount of insurance protection that you need minus the insurance protection that you already have.
  • The insurance protection gap in India is around 92%.
  • Unaffordability, lack of awareness, trust, second income and government schemes as well as behavioural biases contribute to the high protection gap.
  • Most individuals either fail to understand the importance of financial planning or find insurance to be expensive.
  • Government can help improve the availability of retail and wholesale insurance by introducing compulsory schemes but the onus lies with individuals to bridge the protection gap

In the latest issue of People of Insurance, we are accompanied by Sumit Ramani on a journey to understand the protection gap in insurance and the reasons why it exists.

 

Sumit is the co-founder of ProtectMeWell.com, an API-first gap financial needs analysing engine, and has been in the insurance industry for about 15 years. He wears the hat of a Computer Science Engineer as well as an Actuary and has previously worked with both direct insurers and reinsurers.

 

His brain-child, ProtectMeWell.com, does an analysis of 10 products in 1 row, with a prime focus on the customers rather than the products. Offering a No Spam Guarantee, their website has received an audience of around 35 thousand customers. Equally, their API is being consumed by insurance brokers and wealth advisors to better engage with end customers.

 

People of insurance is a series by Assurekit where we invite experts and people from the insurance space to share insights, opinions and stories from the people of the insurance industry. Click here to check out our previous posts of the series.

 

1) What is a protection gap and how can it be calculated?

 

A protection gap is the amount of insurance protection that you need minus the insurance protection that you already have. During 1991-2021, only around 8% of the total losses were covered through any type of insurance, thus making the insurance gap in India about 92%.

 

For instance, say Gopal’s term insurance plan is ₹2 crores, but the cover he actually needs is   ₹3 crores, thus, the protection gap becomes ₹1 crores.

However, how can we determine the insurance cover and how do we arrive at 3 crores?

 

Asking why one needs protection:

 

The way to arrive at the required protection changes with the type of risk.

Continuing with our example, a primary reason to buy term insurance is to make sure that the lifestyle of your family remains unchanged in the event of early death. Mathematically, this means that the sum assured should be such that it takes care of all future expenses plus any outstanding liabilities. Further, if there is some dividend income or rental income that continues then that can be taken to reduce the size of the cover that is needed.

 

Another example is home insurance which is related to catastrophe insurance. Herein, we need to have enough coverage to be able to rebuild the home in case of a catastrophe.

Hence, the first step is to identify the purpose, translate it into mathematical models and then eventually arrive at a number.

 

2) Reports say that the protection gap is growing globally – what are the reasons for this?

 

Yes. The protection gap is indeed increasing across the globe but the trends are more nuanced.

For example, talking about catastrophe insurance or home insurance in our context, for the countries with upper and upper middle income the protection gap has reduced. Although, in lower income and middle-lower income countries it has increased. According to Munich Re, the natural catastrophe protection gap has narrowed steadily over the past 30 years, from 78 per cent to 70 per cent, and from 0.3 per cent to 0.2 per cent of the world’s GDP.

 

Similarly, speaking of the cyber protection gap, it has been the most ignored protection need across the world. Equally, iIt is estimated that the mortality protection gap in Asia stands at USD 83 trillion and that it climbs by 4% every year. 75% of households in Asia still faces a mortality protection gap of about eight times the average annual household income.

The reasons for this could be divided into two groups –

 

The demand side’s challenges:

 
  •       Awareness of the customers

People don’t realise the kind of risk that they are exposed to and the degree of damage that could occur if a risk shapes into reality.  

  •       Affordability

In the emerging markets, insurance looks quite expensive when you are trying to ensure that your daily needs are taken care of.

  •       Trust

To trust, one needs to experience the value of insurance which is possible only when one actually claims insurance and gets the money. However, by design, the event of a claim is less probable and so, less experienced.

  •       Socio-economic factors and lack of second income

For example, due to nuclear family structures, the need for insurance comes into vision only with the addition of marriage or kids.

  •       Behavioural biases

People are very averse to short-term losses, like premiums even when they could lead to long-term gains. Short or small losses in the context of insurance are premiums.

 

The supply side challenges:

 
  •       People are incomprehensive about the existence of exclusion or co-pay or a deductible. The insurance jargon is complex for the layman to appreciate.
  •       Expectations of the customers in insurance are more influenced by online shopping and insurance fails to offer the same smooth experience.
  •       In India, there isn’t a lot of social security through government schemes. If an individual is not buying and is also not covered through a government scheme, then the protection gap increases.

 

3) What does the customer think? Why would they not reduce their protection gap?

 

The first reason is that most people, as a result of poor financial literacy or general education, fail to appreciate the importance of financial planning.

Each one of us obtains education and hammers away to earn money but we refrain from appreciating the idea that our money could also work for us. All it takes is to understand a bit about how to manage our money.

 

The second reason is more specific to the younger generation. When young, one feels a sense of invincibility which keeps us from even thinking about insurance, let alone buying it.

 

The third interesting scenario is people find insurance expensive. One finds value in something only when one experiences it. However, from a macro vision, insurance is a product that we buy without any intention of utilizing it. It is a product of peace of mind and ascribing value to something essential for peace of mind is challenging and primarily personal.

 

4) What do you think needs to change for insurance to be accepted widely?

 

I perceive the following to be instated for accepting insurance widely,

  •       Increasing awareness and making people realise the quantum of the risk as the majority of people can’t think beyond life and health insurance and are unaware of policies like home insurance or disability insurance, which could be more financially draining.
  •       Simplifying insurance products would also work well. Differentiation of products makes the comparison more complex for customers. Having a better experience for the customer will definitely also encourage people to purchase appropriate products.
  •       Applying behavioural finance in marketing can go a long way. Asking people if they would be interested in protecting the future of their family and child might draw more interest in insurance. 

 

Similarly, if we pitch retirement planning but then bring in the element of insurance which is crucial to ensure the retirement planning is intact and robust, insurance appears more lucrative.

 

  •       Government schemes can bring in more awareness. E.g., Ayushman Bharat covers a section of our society for a cover of 5 lakhs. This has become a benchmark as the lowest amount of coverage that anyone should have. In general, the government can help improve the availability of retail and wholesale insurance by introducing compulsory schemes which create sufficiently large risk communities and risk pools.

 

Conclusion:

 

Thanks a lot, Sumit for joining us today and helping us obtain a wider and more deep-seated understanding of the protection gap that exists in the industry. We have much to look forward to in the future as we strive to compress the protection gap in India and in general.

 

To understand your personal protection gap, Sumit and his team at Protect MeWell have created a wonderful product that will understand your needs and recommend appropriate products for your protection. Go ahead and check it out here.

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