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reference to Max New York Life - NCAER India Financial Protection Survey.
INTRODUCTION
The India growth story has clearly brought the spotlight on India. All
multinationals, political leaders and investors across the world are eager to
increase their India-focus. India has been witnessing over 8% economic growth
for the last three years and the country has virtually broken through the shackles
of the ‘Hindu rate of growth’ – a term coined by economist Raj Krishna to denote
the low economic growth witnessed in India during the 1950s to 1980s, as
opposed to the other East Asian economies. This term was widely used by
economists to express their dismay in the sluggishness displayed by the Indian
economy. But today, all that can be safely buried in the echelons of India’s
economic history.
Today, India has emerged as a manufacturing and knowledge hub to the world
and virtually all sectors of the economy are witnessing impressive growth rates.
The robust growth in the services sector has been instrumental in fueling India’s
growth engine. The success of our IT and ITES sectors, the vaulting of new age
domains such as biotechnology, are all no mean achievements.
The Max New York Life – NCAER India Financial Protection Survey was
initiated to seek answers to this critical question. In order to be representative of
the broad reality, the survey was conducted across 63,016 households, out of a
preliminary listed sample of 440,000 Indian households. The sample truly
represents India in its varied demography.
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A detailed analysis suggests that there is little awareness about the need for
financial protection. Despite accelerating economic growth, only a minuscule
proportion of the population can be considered well protected. The majority of
people have inadequate financial protection.
The findings of the survey reflect four key areas of concern. The first emanates
from the fact that an overwhelming majority of Indians are at risk, if they lose the
breadwinner, or the major source of their household income (income from rent,
business, agriculture etc). As per the findings, – 96% of households feel that they
cannot survive for more than one year on their current savings in case of loss of
major source of household income. Second, there is widespread misplaced
financial optimism amongst Indians - 54 % Indians are confident about their
current and future financial stability. The “nothing will happen to me” syndrome
stops them from going in for an adequate life cover. Third, while Indians are
great savers, they do not save wisely. Around 81% of Indian households save.
But the money they save is either lying in their homes, or in the banks. Majority
of India does not save for the long-term. And lastly, while awareness on life
insurance is high (78% of Indian households are aware of life insurance),
ownership of policies is low. Only one-fourth of the Indian households own a life
insurance policy.
Max New York Life – NCAER India Financial Protection Survey gives an
unparalleled view of the financial behaviour of Indian households – how they
earn, how they spend and how they save. The survey discovered several
challenges in the Indian market which are enumerated below.
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KEY CHALLENGES:
b) More than 25% of Indian households are financially at risk in the current
state
Financially at risk has been defined in two ways for the purposes of this study:
(a) Level 1 risk, which determines crude savings by subtracting routine
expenditure1 from income; and (b) Level 2 risk, which is determined by
subtracting routine expenditure and unusual expenditure2 from income.
While the findings of extreme financial at risk broadly coincide with the official
estimates of poverty in India, Level 2 estimates of financial vulnerability suggest
that majority of Indians, even in relatively better-off households, are financially
at risk. At Level 2, ~ 28% of Indian households are financially at risk.
Financial risk is a gap between the income and expenditure and indicates the
household’s inability to meet their needs through the financial resources at their
disposal. This is in no way related to the prosperity of the nation which the data
indicates is growing. Thus, it is possible for Indian households to earn more as
economic growth accelerates, but their earnings might still not be sufficient to
cover their increased needs and they remain financially at risk.
1 Routine expenditure is defined monthly expenditure on food, housing, health, transport, education, clothing, & durables
2 Unusual expenditure is defined as medical, education, weddings, births and other ceremonies and travel
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II. Misplaced financial optimism
The study clearly brings out that India is a country of optimists when it comes to
financial security. More than half the Indian households i.e. 54% were confident
about their current and future stability. But unfortunately the survey brings out
that this financial optimism is not based on facts. 96% of households feel that
they cannot survive for more than one year on their current savings in case of
loss of major source of household income and yet 54% households feel that they
are financially secure.
Financially at risk urban Indians appear to be even more optimistic than their
rural counterparts. A higher proportion of households in the bottom two income
groups in urban India are confident of their future.
The findings of the survey clearly indicates that financial optimism of Indian
households is misplaced and there is a need for financial literacy for better
understanding of their financial risk.
III. Short-term perspective – India saves but does not invest wisely
The intent of savings is for the long-term – for emergencies, children’s education
and old age. However, savings are not invested in long-term instruments.
Around 51% deposit their savings in banks and 36% simply keep their savings at
home.
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Financially at risk urban households invest a larger proportion of their income
compared to rural India. Even amongst salaried households, 20% keep their
savings at home, while 68% put them in banks.
At the lowest income group, urban India invests almost 6% of income though
they have a deficit of roughly Rs 9,500 per annum, whereas rural India invests a
little over 3% having a deficit of approximately Rs 6,000.
IV. India borrows to spend, save and to meet planned and unplanned
expenditures
In the case of rural households, health and medical treatment are the major
reasons why they borrow. In urban India, education constitutes one of the major
reasons for borrowing.
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Financial institutions overall is the major source of borrowing but borrowing
from financial institutions is mainly for planned expenditure such as purchase of
machinery and consumer durables.
The reason behind this ‘misplaced optimism’ over financial security can probably
be attributed to safety nets like the joint family system. However, the findings of
the survey are alarming because 36% of the respondents had no idea about how
they will find an equivalent in case of loss of the major household income source.
This paradox of perception largely cuts across the various income groups.
Although (and expectedly so), a larger percentage of households in the lower
three income groups in rural India said they are less confident or least confident
of their future, an unexpectedly sizeable proportion expresses confidence about
their future (especially those in the second and third income groups).
Financially at risk urban Indians appear to be even more optimistic than their
rural counterparts. A higher proportion of households in the bottom two income
groups in urban India are confident of their future.
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96% of households feel that they cannot survive for more than one year on
their current savings in case of loss of major source of household income
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Opportunities at the bottom of the pyramid
Remarkably, 44% of households that earn their income from labour – which are
also among India’s most financially at risk – invest in insurance. This is almost at
a par with households that are well-off – that is, those that earn their income
from regular wages and salaries (43%).
The point to note, however, is that case sizes for this section of the population are
typically small. Labour households invest just Rs 748 annually in insurance,
compared with Rs 6,000 for those that earn regular salaries and wages. But
labour households constitute one of the larger sections of the total number of
households – a little over a third – suggesting that the potential for generating
volumes here is large.
Taken together with a key finding in the survey that more than a third of Indian
households simply prefer to keep their money at home, it is clear that there is ample scope
for life insurance as an instrument for financial protection.
A premium on optimism
The ‘opportunities at the bottom of the pyramid’ get reinforced by the fact that
insurance ownership appears to have a correlation with optimistic perceptions
about future income stability. In rural India, 36% of those who are most
confident own life insurance; in urban India the percentage is 56%.
Also worth noting is the fact that nearly 25% of urban households who own life
insurance say they are less confident – almost double the proportion of rural life-
insurance owing households with the same outlook. There is also potential
amongst well-off rural and urban households who are confident of the future but
do not own an insurance policy.
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WAY FORWARD
The financial risk, the spending and borrowing habits of Indian households, their
perceptions about financial security and low ownership of life insurance all point to
significant opportunities ahead for the industry:
1) Improve financial literacy and understanding of the true value of Life Insurance:
These opportunities emanate from the fact that while a vast majority of Indians are
aware of life insurance, only 24% of households own a life cover.
a. Help understand the financial risks of ‘living too long or dying early’: Most
Indians have a misplaced optimism and tend to believe that ‘nothing will
happen to them’ and that ‘savings will take care of things’ in case something
was to happen.
b. Spread awareness about financial planning: As personal incomes and
aspirations continue to grow coupled with rapid changes and uncertainties,
there is a strong need for financial planning.
c. Life Insurance is a protection tool: In India, insurance is largely used as a tax
and saving tool, rather than for protection. There is need to reorient the
consumer about the benefits of life insurance for both financial protection
and long-term wealth creation.
Max New York Life will continue to help customers plan for their financial needs and
security by providing them sound quality advice to select the right kind of life insurance
cover for them and their family.
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ABOUT THE SURVEY
In June 2005, Max New York Life, one of India’s leading life insurance
companies, approached reputed research organisation, the National Council of
Applied Economic Research (NCAER), with a unique proposal. The brief was to
develop an all-India household survey to determine the financial security and
well-being of Indian households and to generate a risk profile of Indians across
socio-economic groups.
Sample size and its distribution were determined on the basis of the accuracy
required and the resources available. A sample comprising of 63,016 households,
out of a preliminary listed sample of 440,000 households, spread over 1976
villages (250 districts) and 2,255 urban wards (342 towns) covering 64 NSS region
in 24 states/UTs was interviewed while executing the survey.
To increase accuracy and ensure adequate item response, the survey was
conducted by holding face-to-face interviews of heads of households as well as
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members of households, with the help of a questionnaire. Non-response was
reduced by conducting focussed group discussions, proper training of
interviewers and supervision.
The Max New York Life - NCAER India Financial Protection Survey was
designed in consultation with an advisory board. A special Thank you to Suman
K. Bery, Director General of NCAER; Economist Subhasis Gangopadhyay; S.L.
Rao, former NCAER chief and power sector regulator; D.V.S Sastry from IRDA
and Dr. Shukla, Senior Fellow, NCAER for their invaluable insights and advice
in designing this survey.
Media Contacts:
Genesis Burson-Marsteller
Suvir Paul / Archana Mohan
Mobile: +919811572137/ +919899736857
Email: Suvir.paul@bm.com / Archana.mohan@bm.com
Fax: + 91 124 404-4744
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