Which of the following are the typical differences between the private insurance programmes and the social insurance programmes ? 1. Adequacy versus Equity 2. Voluntary versus Mandatory Participation 3. Contractual versus Statutory Rights 4. Funding Select the correct answer using the codes given below :

Correct — D, (d) 1, 2, 3 and 4.

All four headings name real and standard differences between private insurance and social insurance, so the option that takes 1, 2, 3 and 4 is the answer. Taken one at a time:

Statement 1, adequacy against equity. A private insurer prices each contract to the risk it carries, so what a policyholder receives bears a close relation to what he has paid; that is individual equity. A social-insurance scheme is designed instead to secure a floor — a benefit adequate to keep the beneficiary and his family above want — with the result that lower earners get back proportionately more than they put in and higher earners proportionately less. There is a deliberate element of redistribution in social insurance that a private contract does not have.

Statement 2, voluntary against mandatory participation. Buying a life or medical policy is a decision; participation in social insurance is compulsory for the class the law covers, and neither employer nor employee can contract out of it. Compulsion is what makes the pooling work, because a voluntary scheme built on a floor of adequacy would attract the bad risks and lose the good ones.

Statement 3, contractual against statutory rights. A policyholder’s rights lie in his contract and are enforced as contractual rights. A member’s rights under a social-insurance scheme are created by statute and by the schemes framed under it, and the legislature that made them can alter them.

Statement 4, funding. A private insurer must hold reserves sufficient to meet every liability it has undertaken; solvency regulation exists to enforce that. Social-insurance schemes need not be fully funded in the same sense, and many are financed substantially out of current contributions, because the state stands behind them, does not go out of business, and can compel future contributions.

With no false line in the list, the only possible answer is the option that names all four.

Why the others are wrong

• (a)1, 2 and 3 only — ‘1, 2 and 3 only’ drops funding, which is a genuine difference and in some ways the deepest of the four. A private insurer is required to be fully funded: it must hold assets against the liabilities it has assumed, because if it fails there is nobody else to pay. A social-insurance scheme rests on a different footing — the state’s power to levy contributions and its indefinite existence — so it can be run substantially on current income, and its long-term balance is a matter of policy rather than of solvency law. The option is attractive because the first three headings are conceptual and the fourth is technical, and a candidate scanning a list will often take the odd one out to be the intruder. In a list of differences, the technical entry is usually the one the specialists would name first.
• (b)1, 2 and 4 only — ‘1, 2 and 4 only’ drops the contrast between contractual and statutory rights, which is a real difference and the one with the most practical consequences. Under a private policy the insurer’s obligation is defined by the words of the contract, and a dispute about it is a dispute about that document. Under a social-insurance scheme the obligation is defined by the Act and by the schemes framed under it, so the benefit can be enlarged or restricted by amendment, the machinery of adjudication is the one the statute provides, and the terms are the same for every member because they are laid down by law rather than negotiated. A candidate who has thought of social insurance mainly as ‘insurance run by the government’ may not see that the source of the right differs at all.
• (c)3 and 4 only — ‘3 and 4 only’ keeps the two structural differences and drops the two that concern the design of the benefit and of the membership, both of which are correct. Adequacy against equity is the classical statement of what social insurance is for: it aims at a socially adequate benefit rather than at a benefit strictly proportioned to the contribution. Voluntary against mandatory participation is the other half of the same design, since a scheme that pays some members more than their contributions justify can only be sustained if membership is compulsory. The two go together, and an option that removes them leaves the differences that a lawyer would notice while discarding those that an economist would.

Social insurance and private insurance both work by pooling risk, and the differences between them follow from the fact that one is an instrument of social policy and the other a commercial contract.

On benefit design, private insurance aims at individual equity — premiums proportioned to risk, benefits proportioned to premiums. Social insurance aims at social adequacy — a benefit sufficient to maintain the beneficiary, which necessarily means that the return on contribution varies between members.

On membership, private insurance is voluntary and underwritten: the insurer may refuse a bad risk or price it higher. Social insurance is compulsory for the covered class and admits everybody in it without underwriting.

On the source of the right, a policyholder relies on his contract and a member relies on a statute.

On funding, an insurer must be fully funded and is regulated for solvency; a social-insurance scheme can rely on current contributions and on the state.

India’s own schemes illustrate the second, third and fourth of these directly. The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 applies by force of section 1(3) to every establishment of the notified kinds employing twenty or more persons, so membership is not a choice; the benefits flow from the three schemes framed under the Act — the Employees’ Provident Fund Scheme, 1952, the Employees’ Pension Scheme, 1995 and the Employees’ Deposit Linked Insurance Scheme, 1976 — and are therefore statutory; and the pension scheme carries a contribution from the Central Government of a kind no private annuity has.

Key facts

• Social insurance emphasises social adequacy — a benefit sufficient to maintain the beneficiary — while private insurance emphasises individual equity, with benefits proportioned to contributions.
• Participation in social insurance is compulsory for the class the law covers; private insurance is voluntary and underwritten.
• Rights under a private policy are contractual; rights under a social-insurance scheme are statutory, created by the Act and the schemes framed under it and alterable by the legislature.
• A private insurer must be fully funded and is regulated for solvency; social-insurance schemes can be financed substantially from current contributions because the state stands behind them.
• In India, section 1(3) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 makes coverage compulsory for notified establishments employing twenty or more persons.
• The benefits under that Act flow from three statutory schemes — the Employees’ Provident Fund Scheme, 1952, the Employees’ Pension Scheme, 1995 and the Employees’ Deposit Linked Insurance Scheme, 1976.

Common traps

• Rejecting the one-word heading ‘Funding’ because it looks too thin to be a difference; it names the sharpest structural contrast of the four.
• Reading the item as asking which differences are the most important rather than which are genuine differences.
• Assuming social insurance differs from private insurance only in who runs it.
• Expecting at least one false line in a four-item list and manufacturing a doubt about the least familiar heading.

• practice — not a real PYQ

  Which of the following is a characteristic of social insurance but not of private insurance ?

  • (a)Pooling of risks among a large group
  • (b)Compulsory participation by the covered class
  • (c)Payment of benefits on the occurrence of a defined contingency
  • (d)Collection of contributions in advance of the benefit

  Answer(b) Compulsory participation by the covered class — the other three features belong to insurance of both kinds. Pooling, a defined contingency and contributions collected in advance describe the mechanics of any insurance; it is compulsion, together with the emphasis on adequacy over equity, that marks social insurance out.

• practice — not a real PYQ

  The rights of a member under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 are best described as

  • (a)contractual rights arising from an agreement with the employer
  • (b)statutory rights created by the Act and the schemes framed under it
  • (c)equitable rights enforceable only in a civil court
  • (d)voluntary benefits granted at the employer’s discretion

  Answer(b) statutory rights created by the Act and the schemes framed under it — that is precisely what distinguishes them from the contractual rights of a policyholder under a private insurance contract. The Act imposes the obligation by law rather than by agreement, and the benefits are neither discretionary nor a matter of private bargain.