Assessing the Need for Social Security for India’s

BPL PopulationSamik Adhikari, Shardul Oza, Anita Mukherjee, Shahid

Vaziralli

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

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

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

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.

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

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

Results – Sample Population Characteristics

Household Consumption: Households spend a considerable amount of money per month on health related expenses, almost Rs. 1,350

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.

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.

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

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

Results – Sample Population Characteristics

Trust and participation in Government programs: Banks and Government highly trusted, Panchayats not. NREGA and PDS participation high.

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.

Results – Willingness to Contribute to Pensions

(1) WTC-Yearly

Gender 148 .095 175 .746

Is The Respondent Head Of Household? 112 .143 124 .856

Age of respondent -5 .503 6.336

Total number of children in the house -82 .421 36.258**

Asset Index (Without Land) -44 .598 44.246

Financial Literacy Index 25.947 26.865

Land in Bighas -50 .492 16.359***

Household Has A Formal Savings Account? 227 .088 117.849*

Have Currently Active Insurance? -237.506 109.439**

Marketed Before(1)/After(0) the survey -329.166 119.019***

Constant 1540.149 311.398***

Observations 555 R-Squared 0.06 Mean of dependent variable 1175.23 Sd of dependent variable 1315.11 This regression shows the effect of explanatory variables on the yearly willingness to contribute in the general pension scheme * p< 0:1, ** p< 0:05, *** p< 0:01 Robust Standard errors are shown below the coefficient Standard error are clustered at individual level

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

Results – Willingness to Pay for Bundle (1) Accepted Price

Gender 17.178 31.944

Is The Respondent Head Of Household? 49.315 31.599

Age of respondent -4 .971 1.439***

Total number of children in the house 2.910 6.970

Asset Index (Without Land) -5 .046 10.216

Pricepoint - 550 157 .451 27.331***

Pricepoint - 800 309 .458 31.226***

Financial Literacy Index 8.498 4.915*

Land in Bighas 4.695 3.761

Household Has A Formal Savings Account? 97.696 26.310***

Have Currently Active Insurance? 21.721 30.140

Marketed Before(1)/After(0) the survey -28 .419 23.969

Constant 480 .777 75.619***

Observations 680 R-Squared 0.19 Mean of dependent variable 563 .94 Sd of dependent variable 343 .42 This regression shows the effect of explanatory variables on the accepted price for the combined scheme * p< 0:1, ** p< 0:05, *** p< 0:01 Robust Standard errors are shown below the coefficient Standard error are clustered at individual level

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

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

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.

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?