The principle mission of the Insurance Regulatory and Development Authority is to promote insurance penetration in India so that it reaches almost all individuals in the country and provide a suitable social safety net that could take care of families in the event of any untoward risk-taking place. This untoward risk could be either death of the bread winner or any structural disease which could affect the income earning capacity of the bread winner.

In the case of creditor protection products, this insurance will help the families to retain the asset without losing them towards the balance of the loan that was taken by the policyholder.

Hence, insurance will provide a suitable safety net against the risk of death or structural disease. Even the accumulation of money to buy annuity/pension is also classified as an insurance product (as per Section 2 (11) of the Insurance Act).

Insurance penetration was 2 per cent of GDP in 2000 and has reached 4.7 in 2008. The insurance density (premium per capita) was $10 in 2000 and had reached $48 in 2008. If the insurance penetration has to improve then the growth of the first year new premium should be higher than the growth of the nominal GDP, of course one must give due allowance for multiple insurance on the same lives, which could act as a negative force in reducing the penetration.

During the period 2003-07, the growth rate of the premium is much higher than that of the nominal GDP and this has paved the way for enhancing insurance penetration. Some of the neighbouring countries have a penetration of about 7 to 8 per cent of GDP. Hence, in a rough estimate, if 80 per cent of the population in the age group of 20 to 60 is covered with one or the other type of insurance, insurance penetration in India could easily reach about 8 per cent of GDP, assuming an average sum assured of Rs 25,000. Strictly speaking, one must give allowance for the rural-urban divide and take an appropriate sum assured.

What are the benefits of such a high degree of insurance penetration? Firstly, this provides a suitable social safety net, which is very crucial for people below the poverty line. This will also reduce the financial burden of the governments/corporate so that the income stream of the diseased is addressed through providing insurance cover.

Secondly, higher insurance penetration is to be achieved through higher health insurance cover. The percentage of the population covered by suitable health insurance is less than 5 per cent at present. Higher health cover will give a suitable protection against critical illness or major diseases, thereby protecting the continuity of income to the families. Furthermore, after super-annuation, this will help the insured population to meet all medical expenses, which are becoming costly to manage. Thirdly, this will contribute to augmenting the financial savings in the country. Life funds accounted for about 2 per cent of financial savings of the households in 2002-03 and this has increased to about 18 per cent in 2007-08. Hence, higher insurance penetration will also contribute to higher financial savings, and thereby the total savings of the country.

Fourthly, higher savings pave the way for higher GDP growth rate. Given a particular incremental capital output ratio, the only way to achieve higher GDP growth is by having higher long-term savings, so that there is a stable growth in savings and also in GDP. Insurance and pension are the only long-term saving vehicles. Fifthly, higher insurance penetration will enable to collect higher premium and these premiums are invested in debt and equity instruments. In the past two years, where the established providers of money to the capital market turned out to be net sellers, the insurance sector was a significant contributor to the capital market thereby lending support to the stability of capital markets. Sixthly, infrastructure development is very crucial for us. Infrastructure projects are long term in nature and to provide capital for such sectors, the money has to come from insurance and pension sectors. Hence high insurance penetration will provide a decent capital contribution in providing infrastructure facilities.

In enhancing insurance penetration, micro insurance and health insurance occupy a very crucial position. There is a wide scope for improving micro insurance products in India. Even though India is a pioneering country in micro insurance, the premium collected is less than 3 per cent of the total. Similarly there is a wide scope for improving health insurance. While Irda has allowed a life and a non-life company to jointly issue micro insurance products, recently we have also allowed a stand alone health insurance company to jointly issue a combo health product with a life insurance company. This should bring economies of scale in the products, so that a combined product is available at an affordable premium rate and will help to enhance health insurance penetration.