Monday, May 25, 2015

Banking the unbanked, insuring the uninsured

Prime Minister Narendra Modi has been giving a major push to the following schemes:
  1. Pradhan Mantri Jan Dhan Yojana: A no-frills zero balance bank account
  2. Pradhan Mantri Suraksha Bima Yojana: An accident insurance cover of Rs 2 lakh for an annual premium of Rs 12 (or a monthly premium of Rs 1)
  3. Pradhan Mantri Jeevan Jyoti Yojana: A life cover of Rs 2 lakh for an annual premium of Rs 330 (or roughly a daily premium of Rs 1)
  4. Atal Pension Yojana: A sort of annuity with a promised return of 9.6% per annum.
Any adult having a bank account is eligible for 2 & 3. For the pension scheme (4), one has to be between 18 and 40 to be eligible. The monthly premium paid is determined based on the pension one opts for (capped at Rs 5,000 a month) and one's age. The monthly pension will be paid once you hit the age of 60. There is also a one-time annuity purchase if one has already hit the age of 60. This gives a guaranteed return of 9.6%.

It is very clear that 2, 3 and 4 are the best possible deals in their respective categories. Though I believe I have sufficient insurance cover, I will be insuring myself and my spouse in 2 & 3.

Modi and BJP PR talk about Jan Dhan as a unique scheme which they introduced. This is incorrect. P Chidambaram had introduced this no-frills account during the UPA rule. It was not promoted that heavily then. It was seen as a drain on their P&L by the Nationalised banks. Now it is promoted heavily, but it is not clear how the common folks see value in this. The Nationalised banks probably still see this as a drain but cannot complain given that the PM has made it his pet scheme. It is quite likely that many banks have registered the same person in their books (after all, it is a zero balance, no-fee account!) and Modi's PR bandwagon is trotting out numbers to show that this scheme is a big success. This is unfortunately part of any politically driven scheme in India.

Despite these PR stunts, I think this package above is a fantastic one. Forcing people to have at least a no-frills account to be eligible for the very attractive accident insurance and life insurance will encourage them to understand and use the banking and the insurance systems in the country. Then, they can slowly be moved to start using these systems better. It appears that some degree of traction has happened with the insurance schemes.

Indian life insurance sector dominated by LIC mostly used to sell endowment and money back policies. Private players pushed unit linked policies (market driven). Risk coverage has not been the priority. Life insurance policies are mainly seen as investment instruments. A senior insurance expert who runs an insurance industry magazine made me see the light a few years back. I was randomly taking whole life policies, unit linked policies and the usual LIC endowment policies. She explained that the best value for money was to go for a pure risk term insurance plan combined with an investment in a mutual fund (or a fixed deposit) instead of investing in any unit linked insurance policy. You get better liquidity, better returns and the best risk coverage. LIC's term insurance plans are the most awful in the country. Today, the best deal you get from a private insurer is around 200 times the premium (for my age ~ 45 yrs). The Pradhan Mantri Jeevan Jyoti Yojana offers 600 times the premium. Quite unbeatable, but limited to a cover of only 2 lakh Rs.

What is to be appreciated is, for the first time, instead of the usual dole-outs that Indians are so used to, our government is coming up with a scheme which rewards action and initiative on the part of the individual. You enroll, open a no-frills bank account and pay up the premium and only then you will get the benefit. You can't just sit there doing nothing and be compensated for your losses.

One worry however is, whether the insurer will find it breaking even. Finance ministry is providing sovereign guarantees but that is generally not a good idea. One has to also see whether private players will be happy to participate in a scheme like this.

Another problem is bridging the gap between these government schemes and the available market schemes that can help the middle class. The current government schemes are all targeted at the poor mostly.

However, the success of schemes like these may encourage private players to start offering interesting products to the public, to graduate them upwards.


  1. Though I like the schemes, some thing was bothering me. It need not generate profits for the insurance companies, but will it at least break even?

    A friend from the insurance industry alerted me to this yesterday. The stats he gave was alarming. He asked me to look at the population of Tamil Nadu and the number of accidental deaths that happen per year in Tamil Nadu to calculate the premium required per head to just about manage this project.

    This Times of India story [] gives the accidental deaths in the country in 2013 as 4 lakh. Taking the population of India as 125 cr, and accidental cover premium as Rs 12, the total premium collected if all Indians enroll in this program is = Rs 1,500 Cr.

    If 4 lakh people die of accidents and their relatives claim the insurance, then the amount to be paid out = 4,00,000 * 2,00,000 = Rs 8,000 cr.

    This would mean that the government, banks and insurance companies will have to bring in at least another 6,500 cr to just about make this scheme work. Note that I have not even accounted for the marketing costs, commissions to be paid out, administration costs and so on.

    This would mean that the premium for Rs 2 lakh accident cover should have to be around Rs 100 or more and not Rs 12 as promoted by Modi.

    Even at Rs 100 for two lakh Rs coverage, it is a good deal. A good scheme should not be finished off by bad design. Hope someone immediately takes note of this and make the required course correction.

  2. Life insurance cover premium is at Rs 330. And accidental insurance is at Rs 12. I think in case of accidents, the payout will be dependent on type of disability.

  3. I only took 'death due to accidents'. I have completely skipped disability/injury etc. This number of 4 lakh is death due to accidents in a whole year, across our country. That means, if each one is insured, then each one has to be paid Rs 2,00,000/-

  4. Badri - You have considered only Road accidents. What about industrial accidents, construction accidents, floods, snake bite, rail accidents, animal attack, electric shock, gas leak, building collapse etc. It requires Rs 100 /lakh assuming that the entire country will be insured

  5. It is important to carefully check the terms of accidental death insurance policies. For example, if you are injured in an accident that later turns out to be fatal, the death must occur within a certain amount of time. To qualify for 100% of the dismemberment insurance, the injury may have to involve the loss of two limbs or both eyes.