Author: Shahid Vaziralli
I spend a disturbingly high percentage of my time these days pretending to be a sardine in our office elevator, as it creeps down the ten floors towards the cafeteria. That, or standing in a succession of lines at airports. The line outside the airport to get in, the line after getting in but before the check in counter, the line at the check-in counter, the line at the bookshop, the line at security, the line to get in to the aircraft, the line for the loo on the plane, and the line to catch a cab (if you’ve managed to make it to city B in one piece). What I notice during my long bouts of ‘standing around and waiting’ is that there are young, energetic, working age people all over the place. If someone were to ask me what India’s population looked like, based on my visual experiences I would say that the country is just packed with people aged 20-40. A booming middle class of young, talented IT sector workers, right? The stacks of ‘India Shining’ themed manuscripts at airport bookstores, like ‘Emerging India’ by Nandan Nilekani, or ‘Hot, Flat, and Crowded (and ‘pissed off’, it should say)’ by Tom Freidman, would have you believe so as well.
Of course, nothing could be further from the truth. If you travel out of the metros, and into the smaller towns and villages, a clearer picture begins to emerge. A vast majority of the people who participate in India’s labour force, about 400 million of them, are employed in what some wonks like to call ‘The Unorganized Sector’. That is, they don’t receive a formal pay check, and often fall out of the taxation radar. The millions of house maids, small holder farmers, kirana shop keepers, street vendors, construction workers, truck drivers, weavers, and other casual labourers make up this ‘informal economy’. 90% of the workforce is in it, and 60% of GDP comes from it. Because most unorganized sector workers are self-employed or contract labourers, they do not receive the employee sponsored benefits that you or I (or your local government big shot) receives. No pension, no health insurance, and certainly no generous relocation allowance that we are all blessed with. If they encounter a traumatic event such as a draught, a serious injury, or a death in the family, they are pretty much on their own.
Add to this four more facts – 1) India has no universal social security coverage for the elderly, 2) the Indian population will grow to a staggering 1.7 billion people by 2050, 3) a third of all Indians live below the poverty line, and 4) India, believe it or not, is rapidly ageing. In 1961, 5.6% of the population was above the age of 60. In 1981, it was 6.5%. In 2001, 7.5%. Most estimates say that by 2050, 17% of the population will be 60 plus. Simple math tells you that by 2050, India will have 300m old people, most of whom won’t have a pension to live off of. More than a 100m of them will be below the poverty line, and probably won’t have the savings, the land, or the assets to support themselves at all. We are talking about a group of people the size of Germany that will suffer tremendous hardships in their old age.
These facts are not news to the Indian Government or to the ‘social sector’, i.e. the do-gooders like the MFIs and the NGOs. There has been a recent push to develop and extend social safety nets to the poor. Pensions, or ‘micro-pensions’ as they are fashionably called, are now part of the bouquet of financial services that many MFIs and NGOs offer to their clients. In 2004, the Indian government began to offer its employee pension scheme, NPS, to the rest of the country. If you are BPL, then the government matches your contribution one-to-one, if you contribute Rs. 1,000 in a year. Health insurance is also being extended to the poor. Rashtriya Swasthya Bima Yojana (RSBY), started in 2008, is a subsidized, in-patient hospitalization scheme for BPL households. More than 25 million Indians have been enrolled thus far. Many MFIs also provide health insurance that is usually underwritten by private providers such as SAS and Star.
While it may seem like enough is being done, a closer inspection reveals that the ‘micro-insurance’ industry is actually beset with problems. Take-up has been very low, unless insurance is offered for free like RSBY is. Studies have shown that a lack of trust in sellers, low financial literacy, and the existence of informal insurance from family and friends can explain some of the low demand. On the supply side, problems seem as big. RSBY is heavily subsidized and is running well over budget, threatening its expansion. Private providers are not enthusiastic about selling insurance because profit margins are very low. The cost of marketing insurance in remote rural areas is high, and the revenues barely cover them. The result is shoddy marketing that just magnifies the low take-up. In fact, if it weren’t for the insurance regulator playing a forceful hand, private providers would abandon the business altogether.
One may be tempted to say ‘why bother with this stuff? People don’t want it, and sellers don’t want to sell it’. Market forces should dictate all, right? The problem with that line of reasoning is that most people severely underestimate their need for formal financial coverage in old age. This is not something specific to India or poor people, but is quite a universal phenomenon. Because we overvalue the present and find it hard to plan for the distant future, we tend to undervalue a financial product that causes short term pain (in the form of premiums) but offers long term security (in the form of payouts in the future). This quirky feature of human behaviour, where we sometimes do not know what is best for ourselves, has led many Governments across the world to offer universal, or ‘forced’ coverage.
One encouraging move by the Ministry of Finance in India has been to offer life, health, and pension coverage together as a bundle. That is, as a consumer, you have to buy all three products together. There are two big reasons for this – 1) By bundling pensions with the more attractive health insurance product (in the form of free RSBY), the government hopes to play that forceful hand and get people to buy into pensions even though they may not want to, and 2) selling three products together saves on the cost of delivery. While the idea looks good on paper, the Government is unsure about that all important variable - price.
In December of last year, The Ministry of Finance and GIZ (their technical advisors from Germany) approached CMF about doing a study to determine how much a BPL household would be willing to pay for this product. In collaboration with marketers from The Life Insurance Corporation of India (LIC), we conducted a marketing exercise and survey of 771 BPL households across 30 villages in Uttar Pradesh. These households were very poor and vulnerable – 60% could not read or write, 80% had no access to any kind of insurance, and almost 50% stated that they experienced a severe income shock in the past year.
The marketing exercise was simple – we spent about 30 minutes at the household, explaining in detail the features and benefits of the product using flyers and verbal information, being especially careful to frame it as a bundle and not as individual products. We then gave the household an offer price (randomly selected as either Rs 230, 550, or 800), and asked them if they were willing to buy at that price. If they said yes, we would move up in increments (eg: “you say you are willing to buy at Rs 800, what about Rs 820?”), and if they said no, we would move down, finally settling on a maximum price they were comfortable with. The household survey captured information on demographics, assets, consumption, savings behaviour, history of income shocks, perceptions of risk, and numeracy skills.
We found that on average, households were willing to pay Rs 582 for the product. We also found that numeracy skills, access to a savings account, number of children (inverse relationship), and landholdings (also inverse) were strongly associated with the price people quoted, after controlling for variables such as the offer price, wealth, and age.
Given that 1) RSBY is free, 2) JBY life insurance costs only Rs 100 per year, and 3) the pension contribution is flexible, the fact that BPL households are willing to pay Rs 582 sounds pretty encouraging. Two caveats to this result though – 1) the marketing exercise was hypothetical, and we didn’t actually sell the product, which means people probably over-quoted their willingness to pay, and 2) our marketing was very high quality and intense, which is probably tough to replicate in the real world. Still, it seems that if you provide adequate information and spend time explaining the long term benefits to customers, they are quite willing to pay enough into it to make it a viable proposition for both themselves and the provider.
What do we take away from this study? Apart from the discovery that dhaba food in rural UP is sinfully good, our results have some practical and academic significance. First, as a supplier, they show that if you spend money on marketing (30 mins at the doorstep is expensive), you will likely see a satisfactory willingness to pay for pensions that are, on the surface, quite complicated to understand. It would be interesting to vary the amount of information given during marketing to see if that has an effect on people’s quoted prices. However, there is nothing to say that this is a cost effective strategy. More research on marketing that harnesses cheaper mobile technology would be useful. Second, our results on factors of demand verify the theory that informal insurance (through children or owned land) is a substitute for formal insurance. While there is nothing groundbreaking in our results, it is a small step in the right direction. Much more work needs to be done to answer questions on product design and variations for the very poor, marketing approaches, and bundled products before we can safely say that this scheme is a good idea. For more information on the study, you can visit CMF’s website here – www.centre-for-microfinance.org