THE GIST of Editorial for UPSC Exams : 23 November 2018 (Get the model right: on state-sponsored insurance)

Get the model right: on state-sponsored insurance

Mains Paper 3: Economy
Prelims level: Insurance Sector
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth,
development and employment. Inclusive growth and issues arising from it


  •  World Bank data, in 2015, showed that nearly 65% of health-care expenditure in India is “Out of Pocket” (OoP).
  •  A report by the World Health Organisation has shown that around 3.2% of Indians would fall below the poverty line because of high OoP health expenditure.
  •  Thus, a national health insurance scheme like the Ayushman Bharat is welcome.
  •  The principle of insuring a vulnerable population is widely accepted, what is contentious is the model that the government has adopted that of using insurance companies.
  •  High premiums are paid for these schemes.
  •  Ayushman Bharat, for instance, has enhanced the Rashtriya Swasthya Bima Yojana (RSBY) of the United Progressive Alliance government, to cover around 11 crore families with a yearly coverage of ₹5 lakh.
  •  Experts estimate this will require ₹25,000 crore per year, when fully implemented. Similarly, the Central and State governments jointly paid ₹17,796 crore for crop insurance (2017-18) under the Pradhan Mantri Fasal Bima Yojana (PMFBY).

The flawed model

  •  Insurance works on the principle of pooling the risk of policy holders. But another common sense idea must guide insurance decisions.
  •  If an individual, corporation or a government can bear a certain quantum of risk by themselves.
  •  It is not financially sensible to insure with an insurance company.
  •  This is because administrative overheads and profit margins of insurance companies are included in insurance premium costs.
  •  Another pertinent issue is finding reinsurers for government insurance schemes, a problem that is being encountered by companies on the Pradhan Mantri Jeevan Jyoti Bima Yojana because of high claims.

Costs of insurance companies

  •  Typical insurance company costs include designing insurance products to suit customer needs; actuarial input to assess and manage risk; advertising and marketing; empanelment (of approved service providers such as hospitals); administrative expenses to provide prior approval of claims; and processing, which includes functions such as fraud detection.
  •  Though the first three are not applicable to programmes such as Ayushman Bharat which will be fully funded by the government as a blanket scheme.
  •  The government is also funding more than 80% of crop insurance.
  •  The last three functions, i.e. empanelling service providers, pre-approving hospitalisation of patients and subsequently settling the claim, are commonly outsourced to third-party administrators (TPAs) even by insurance companies.

Trust mode and cost cutting

  •  No insurance company has the kind of financial resources the Centre and the States have. Hence, governments must consider bearing the risk by themselves.
  •  It known as the “trust mode” instead of using insurance companies as risk-bearers and intermediaries.
  •  However, in India, governments continue to pay hefty sums in premium to insurance companies.

Way forward

  •  Those who recommend the use of insurance companies allude that the government lacks the expertise to manage insurance.
  •  The “government has no business being in business” is the neoliberal mantra, insurance companies are a redundant layer in the government’s social security structure.
  •  The government has already proclaimed that it wishes to cut the intermediary through the JAM trinity (Jan Dhan-Aadhaar-Mobile) and direct benefit transfers.
  •  It has also indicated that it wants to optimise fund utilisation through the recently introduced Public Finance Management System.
  •  Shifting to the trust mode will be the next natural step in this path, not only saving taxpayer money but also benefiting farmers and the underprivileged instead of insurance companies.

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General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) Consider the following about the Coalition for Epidemic Preparedness Innovations (CEPI) that was recently seen in news.
1. It was launched by the World Health Organization (WHO).
2. It is a public-private alliance to finance and coordinate the development of new vaccines to tackle epidemics.
3. It will fund programmes in LDCs that build a geographical information system (GIS) for mapping epidemic prone regions.

Select the correct answer using the codes below.
a) 1 only
b) 2 and 3 only
c) 2 only
d) 1, 2 and 3

Answer: C

Mains Questions:
Q1. For state-sponsored insurance, governments should avoid insurance companies. Explain it