Insurance in India and the West: A comparative study

Insurance in India and the West: A comparative study

Insurance, like many things, may be demographical but is most certainly not a geographically regional requirement.

Naval Goel, CEO, Naval Goel, CEO,

Insurance, like many things, may be demographical but is most certainly not a geographically regional requirement. Accidents and death will occur, no matter what part of the city, country or world you live in. As a result, insurance needs to be prevalent in all countries of the world. Indian insurance may be almost two centuries old now, with its earliest origins in 1818, but it still has a long way to go to be as potent and as pervasive as insurance in the West.

A comparison between insurance in the Western countries such as USA and that in India is necessary to facilitate improvement in the insurance sector of India. For example, health insurance in the USA is much more customer oriented than health insurance in India, which leans more towards the insurer's benefit. The following tabular comparison of the health insurance industry in USA and India can help explain the point further:

Health Insurance in USA and India: A Comparison

  USA India
Mandatory/Optional It is compulsory for every individual in the USA to be covered under a health insurance plan and every employer must ensure that each of his employees is covered under health insurance during the period of employment. It is not only optional for individuals to get themselves and their families covered under health insurance, but it is also not compulsory for employers to ensure their employees health insurance coverage.
Health Cover The coverage here includes every visit to the doctor, be it for something as minute as a viral fever. This only covers hospitalisation and 30/60 days pre and post-hospitalisation visits to the doctor.
Employee Health Benefits Employers must provide health insurance cover to their employees, not only during the period of employment, but also in the case of the employees resignation until he finds another job. Employers have no liability to provide health insurance cover to their employees. It is a purely voluntary factor and no employer provides health insurance to an employee upon his/her resignation. A structurally unemployed person, therefore, will have health cover only if he has purchased a policy privately or when he finds another job where the employer chooses to provide health cover to his employees.
Premium Rates Premium rates of health insurance are higher as more people are covered under health insurance and the standard of living is much better. Premium rates of health insurance are comparatively lower since the health insurance sector has not permeated through much of the population and higher rates would further discourage people from getting themselves insured under the voluntary insurance model followed here.
State-Wise Differentiation USA follows state-wise differentiation in the case of health insurance policies, that is, each state has its unique tailor-made set of health insurance policies that are most suited to that state. India, not being a federation like the USA, has the same set of policies for the entire country as a whole, with no state-wise differentiation or customisation.




Term Plans in UK and India:

A Comparison An article by Deepti Bhaskaran in a September 2013 issue of the e-paper compares the per annum cost of a term insurance plan of a period of 25 years in the UK, Australia and India. UK's plan, in Rupee terms is Rs. 9,000; Australia's is a mere Rs. 8,500 while India's plan is a whopping Rs. 15,000. Why this alarming difference in rates between developed countries like the United Kingdom and Australia, as compared to a developing nation like ours? This is precisely because of a set of factors all related to the fact that UK is a much more developed country than India. Some of these factors are discussed as follows: "    

Quality of Life:

The quality of life in a country like the United Kingdom is much better than that in India. This means that the risk of certain diseases, infections and health problems, which could result in the death of the insured, is greatly reduced in developing countries and is much more prevalent in India. Therefore, it is not feasible for insurers to charge comparatively higher rates of premium in such countries with comparatively lower risks. This results in the difference of premium rates being charged in different countries. "  

 Life Expectancy:

Due to the reduced risks and higher quality of life in developed nations like the United Kingdom and Australia, the average life expectancy of people is much higher in these countries than in a developing nation like India or Pakistan. Term insurance is based wholly and solely on the risk of dying before one's average expected time or, in other words, dying too soon and suddenly. With the average life expectancy being much higher in the UK, this risk of dying early obviously reduces, thereby reducing the premium rates on term life insurance policies and plans abroad as compared to those in India. "    

Better Data Availability:

Insurance runs on the principles of risk and probability. Both risk and probability can be ascertained by information that is available to the insurer about the target masses. The more accurate and precise the available information is, the lower is the risk and more accurate is the probability estimation of expected deaths. The census and mortality charts available in the UK are multiple times more precise, accurate and up-to-date as compared to the mortality charts of India which are out-dated, inaccurate and often incomplete. India's census takes place once every ten years and it is unable to cover all the inhabitants of the country. On the other hand, UK's census takes place almost every year and they have a much clearer idea of the real demographic situation and the calculated mortality rates are much more accurate in the UK. This, of course, reduces risk and thereby reduces premium rates charged on life insurance plans. "  

 Larger Pool of Policyholders:

As mentioned earlier, the insurance sector in India is not as pervasive as the insurance sectors of developed countries abroad and the pool of policyholders is much larger in developed countries than in India. By the law of large numbers, a larger sample size obviously reduces the error in probability estimation and gives a more accurate and real picture of the mortality rates. The actual death rates become closer to the expected average death rates in such countries and the real and probable situations are practically the same. As explained previously, the better the probability calculation, the lower the risk and the lower the premium rates, as is the case in the comparative premium rates of the term plans of the United Kingdom and India. At an average, the premium rates of term policies are about 30% higher in foreign countries than in India.

Better data availability and finer underwriting practices in these developed countries lead to lower premium rates as compared to premium rates in India. While the Indian insurance sector has evolved to a great extent, it is an undeniable fact that it still has a long way to go. The private insurance companies in India, for example, are much newer as compared to insurance companies in the West and are therefore, not as experienced in the insurance sector as their counterparts in the USA and the UK. Insurance experts in the industry claim, however, that the Indian insurance sector is on the path to improvement and we will see a positive change in the underwriting practices in about four to five years.

Written by Naval Goel, CEO,