Impact on saving via insurance reforms

An important component of financial sector reform in India is the reform of the insurance sector. In the absence of adequate insurance mechanisms, people mostly self-insure through private savings. Greater availability of insurance products at competitive prices should be expected to alter this behaviour. This study by Ajit Ranade and Rajeev Ahuja attempts to examine the impact of insurance sector liberalisation in India on savings behaviour. The authors find that as the economy moves from self-insuring to market based insurance, private savings go down with reforms. Even though their theoretical argument suggests that the impact of insurance reform on aggregate intermediation of funds (banks plus insurance) is ambiguous, the simulation results in the study indicate that intermediation also goes down. A comparison of pre and post reform insurance regime shows that consumer welfare and funds intermediation could be lower in an environment of probable insurance failures.