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Assessing the Need for Social Security for India’s BPL Population

Assessing the Need for Social Security for India’s BPL Population. Samik Adhikari, Shardul Oza , Anita Mukherjee, Shahid Vaziralli. Motivation and Context.

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Assessing the Need for Social Security for India’s BPL Population

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  1. Assessing the Need for Social Security for India’s BPL Population Samik Adhikari, ShardulOza, Anita Mukherjee, ShahidVaziralli

  2. Motivation and Context • Approx 33%, or 400 million of India’s 1.2 billion people live below the official poverty line. Almost all of them work in the unorganized sector. • These people are highly vulnerable to risky events such as disease, injury, death of household member, or drought • Due to a lack of formal risk mitigating financial products, the poor cope through either informal insurance, drawing down on savings, or the sale of productive assets • These coping mechanisms can lead to lower productivity, lower investment, and perpetuation of poverty • Recognizing this, Government and private players have begun to introduce numerous products aimed at helping counter risk

  3. Motivation and Context • However, despite the existence of various products, take up has been low. • Demand side factors • Financially illiterate / unable to grasp the concept of insurance • Due to existence of large short term problems, poor are unable to correctly weight long term risks • Cash constrained • Supply side factors • High transaction cost • Lack of technological innovation • Product design not adapted to the needs of the poor • Recognizing this, Government has invested in research, development, and scale up of a single, comprehensive social security scheme for the unorganized sector

  4. Comprehensive Social Security Scheme • Bundle of life insurance (JBY), health insurance (RSBY), pension (NPS-Lite), and scholarship • Health Insurance (RSBY) • Hospitalization coverage of up to Rs 30,000 p.a. • Premium of Rs. 30 p.a. • More than 30m households have been covered, with 4m hospitalizations paid for • Life Insurance (JBY) • Cover of Rs. 30,000 in case of death, Rs. 75,000 in case of accidental death • Premium of Rs. 100 p.a. • Pension (NPS Lite) • Swavalamban matching scheme: Rs. 1,000 p.a. earns you a 1:1 match from Govt. • Sold through licensed aggregators

  5. Objectives of the Study • Gauge the willingness of rural Below Poverty Line (BPL) Households in Uttar Pradesh to pay for the new social security bundle • Collect information on demographics, savings behavior, consumption, assets, access to finance, knowledge of insurance, perceptions of risk, financial literacy, health, education, shocks, trust and participation in government programs • Offer insights into how these various socio-economic characteristics correlate with the target group’s willingness to pay.

  6. Methodology • Sample selection • Siddharth Nagar and Fatehpur districts, chosen for low enrollment of RSBY and geographic disparity • 15 villages in each district, chosen at random with stratification on RSBY enrollment • Administration of household listing to verify BPL status • 25 households per village, chosen randomly from listing, with qualification that main income earner is younger than 60. • Household survey • Willingness to pay exercise • Marketers from Life Insurance Corporation of India • Sample divided in to 3 Price offers: Rs 230, Rs 500, Rs. 800 • Variation of the Take-it or leave-it game • Outcome Variables – 1) WTP for bundle, 2) WTC to pension

  7. Results – Sample Population Characteristics Household Demographics: Average age is 42, 65% are male, 60% are illiterate, and 63% have households between 5-8 people. Livelihoods: 9% cultivate on one’s own farm, 22% perform labor on other farms, 26% work in non-agricultural activities, 30% do domestic work, and 13% said ‘other’. Educational attainment: 62% have never been to school, 13% have completed just primary school, 13% have completed secondary school, 11% have completed high school, and 1% have completed college

  8. Results – Sample Population Characteristics Household Consumption: Households spend a considerable amount of money per month on health related expenses, almost Rs. 1,350

  9. Results – Sample Population Characteristics Debt: Over half (54%) have loans outstanding, mostly borrowed from informal sources, for various purposes such as health, weddings, inputs, and household items.

  10. Results – Sample Population Characteristics Savings: Over half (55%) have access to a savings account. Average savings for those with accounts is Rs. 3,287. 50% of households said they have savings under Rs.1,000. Households use savings for health and weddings.

  11. Results – Sample Population Characteristics Insurance: Only 20% have formal insurance, and most of those insured (66%) have life insurance. Only 6% have access to health insurance. Expectations for old age support: 90% said they would rely on children

  12. Results – Sample Population Characteristics Shocks: 48% reported having experienced an income shock in the last year. Disease and illness were the most common events. When asked on how they coped with the shock, 58% said they took out a loan, 36% said they drew down on savings. 30% hospitalized in last year, most paid full cost at average of Rs. 13,748

  13. Results – Sample Population Characteristics Trust and participation in Government programs: Banks and Government highly trusted, Panchayats not. NREGA and PDS participation high.

  14. Results – Willingness to Contribute to Pensions Households reported an average willingness to contribute annually of Rs. 1,282 for the pension product Households with access to a formal savings account stated that they would be willing to pay Rs. 228 more per year than households who lacked formal savings access An increase of one bigha in land is associated with a Rs. 51 decrease in the amount that households stated they would be willing to contribute The willingness to contribute for households with insurance was Rs. 273 less on average than households with insurance. More children means less willingness to contribute. Having one more child is associated with a Rs. 82 decrease in a households’ willingness to pay.

  15. Results – Willingness to Contribute to Pensions

  16. Results – Willingness to Pay for Bundle households are, on average, willing to pay approximately Rs. 582 per year for the comprehensive scheme. Price points that respondents were given by marketers significantly impacted the price households finally quoted as their maximum willingness to pay. Those offered the scheme at Rs. 550 had a WTP of Rs. 158 higher those offered at Rs. 230. Those offered at Rs. 800 were Rs. 309 higher. households that have higher numeracy and financial literacy skills are willing to pay more for the scheme. A one point increase in the index score of a household implied a Rs. 8 increase in their WTP. households with formal savings access reported a willingness to pay Rs. 97 more on average compared to households with no formal savings account

  17. Results – Willingness to Pay for Bundle

  18. Discussion – Demand Side • Financial literacy and numeracy • Other studies have also shown strong correlations to willingness to pay • Traditional financial literacy is expensive. Suppliers must harness technology. • Marketing needs to be simple yet informative • Pensions and insurance are tough to understand conceptually • Households are heavily cash constrained • May put low priority on long term commitment savings due to shorter term needs • Flexibility in savings and insurance products may be needed • Trust • Similar studies have shown that agents who are trusted sell more products. The agency that sells the product must have the trust and buy-in from the local community. • Anecdotal evidence on some untrustworthy NGOs and private companies operating in the study areas

  19. Discussion – Supply Side • Physical and institutional infrastructure required to sell in remote areas • No intermediary agencies capable of selling. • High travel time (average 3 hrs) and cost raises question of multiple premium collection over a year • Capacity building of marketing teams is critical • Product is complicated to understand • Monitoring of sales is critical. How do you incentivize marketers to sell to the right people? P • Targeting BPL households is a challenge due to graft with BPL cards • Complexity and long term nature of pensions is tough to communicate • Households see less value in pensions than in health and life insurance, despite the fact that it may actually be of equal or more economic value. • Retirement in old age is a less defined concept for the poor

  20. Policy Recommendations Innovation in micro-pensions is needed for the BPL sector. Likely that BPL households have different perceptions of old age risk, discount rates, and short term priorities compared to APL. Given the importance of financial literacy, several complementary interventions to the selling of the product should be introduced - information campaigns, smart marketing, use of technology, and introduction of financial literacy in school curriculums could be tried. Selling the scheme with a bank account, through BCs or MFIs, could be a good way to encourage savings, collect premiums, and deliver payments claimed at low cost.

  21. Areas of Further Research What is the best way to market and deliver the social security scheme? Is it through MFIs and BCs? Should marketing be done door to door or at the village level? What is the value of the bundle to the customer? How do BPL households differ from APL households in their risk profiles and financial priorities? Does some flexibility and relaxation of the commitment aspect of pensions alter the take up of the product among BPL and APL households? What is the willingness to pay for this bundle among APL households, at an unsubsidized price?

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