Problems and Prospects of Social Insurance in India

The fair transfer of the risk of loss from one entity to another in exchange for a payment, known as a premium, is what is meant by insurance (NCAER). A type of risk management called insurance is used to protect or hedge against the possibility of an unforeseen and contingent loss. In the economy, the insurance industry serves as a risk manager, investment activity booster, financial market stabilizer, mobilizer of funds, and financial middleman. According to the Financial Stability Forum, insurance services are categorized into three major categories: social insurance, non-social insurance and reinsurance. The social insurance sector helps in providing risk cover, investment and tax planning for individuals; the non-social insurance industry provides a risk cover for assets. Under reinsurance, developing countries often find themselves in the position of being buyers of reinsurance (UNCTAD 2007). The development of the social insurance market is playing an increasingly substantial role within the insurance industry due to the existence of insurance-growth relationship with the increased share of the insurance sector in the financial sector (Beck and Webb, 2003). Social insurance is civilization’s partial solution to the problems that caused by death; which eliminates 'risk', substituting certainty for uncertainty and comes to the timely aid of the family in the unfortunate event of death of breadwinner. In short, social insurance is concerned with two hazards that stand across the life-path of every person: firstly, that of dying prematurely is leaving a dependent family to fend for itself, and secondly, that of living till old age without visible means of supports (LIC, website). A well-developed social insurance sector is a boon for economic development as it provides long term funds for infrastructure development at the same time strengthening the risk taking ability of a country. Social insurers are custodians and managers of substantial investments of individuals; and policy holders need to be confident that their insurer will be able to meet its promised liabilities in the event that claims are made under a policy Regulatory authorities therefore seek to ensure that the financial soundness and performance of social insurance companies is in sound condition. Insurance is a big opportunity in a country like India with a large population and 2 untapped potential. In this current scenario of growing customer base, one of the principal concerns underlying the regulation of the insurance companies is the need to protect the interest of and secure fair treatment to policyholders (Charumathi, 2011) The risk absorption role of insurers promotes financial stability in the financial markets and provides a “sense of peace” to economic entities. The business world without insurance is unsustainable since risky business may not have the capacity to retain all kinds of risks in this ever changing and uncertain global economy (Ahmed et al., 2010). Insurance companies’ ability to continue to cover risk in the economy hinges on their capacity to create profit or value for their shareholders. The economic significance and recently increasing importance of the insurance industry for financial stability requires for adoption of risk-based supervisions of its undertakings. The Insurance Regulatory and Development Authority (IRDA), the regulatory body of the Indian insurance industry, has therefore intensified its supervision, on-site examinations and off-site surveillances. All of these regulatory measures are to ensure that the financial performance of insurance companies is in sound condition. Insurers’ financial performance is influenced by both internal and external factors. Whereas internal factors focus on an insurer’s-specific characteristics, the external factors concern both industry features and macroeconomic variables. The performance of insurance companies can also be appraised at the micro, meso and macro levels of the economy. The micro level refers to how firm-specific factors such as size, capital, efficiency, age, and ownership structure affect financial performance. The meso and macro levels refer to the influence of support-institutions and macroeconomic factors respectively. At the micro level, profit is the essential pre-requisite for the survival, growth and competitiveness of insurance firms and the cheapest source of funds (Buyinza et al., 2010). Without profits no insurer can attract outside capital to meet its set objectives in this ever changing and competitive globalized environment.