From ex gratia to insurance

Insurance payouts maintain human dignity and create incentives for safety

The derailment of Indore-Patna Express, near Kanpur in Uttar Pradesh, is the first major accident after the introduction of an extremely low cost travel insurance scheme. Under the “optional travel insurance” scheme passengers (or their kin) can receive up to Rs 10 lakh in payouts if they pay a premium of less than a rupee.

Despite the extremely low cost of insurance, only 128 of the 695 passengers on the train opted for the insurance. The accident victims, or their kin, will still receive Rs 5.5 lakhs from the Union government, Rs 5 lakh from the Uttar Pradesh government and Rs 2 lakh from the Madhya Pradesh government. These are the ex gratia payments that governments have traditionally paid to victims of accidents and disasters.

What is an ex gratia payment? It is a payment made voluntarily, out of grace, sympathy or kindness. It precludes any legal liability or obligation on the part of the payer. It treats the passenger as a subject or a supplicant, rather than a citizen with rights and dignity.

An insurance payout on the other hand is an obligation on the part of the insurance company to pay the insurer, if the accident were to unfortunately occur. Insurance companies have an incentive to try to lower the risks, for example, by pressing the transport company to invest in safety.

Clearly, it makes sense for a democratic country to move away from the monarchical, patronising ex gratia system to an insurance system that upholds the dignity of the passenger, allows individuals to decide how much they value their own lives and create incentives for railways to improve safety.

Therefore, the introduction of an insurance scheme by Suresh Prabhu’s railway ministry was an important step in the right direction. If the insurance scheme catches on, greater competition in railway insurance could emerge, with passengers being able to choose how much insurance they would like. A basic low-cost insurance scheme, like the one currently operated by the government, could ensure that even the poorest passenger is insured.

Given that only around 20% of the passengers availed the low cost insurance scheme suggests that people have to be educated on the importance of insurance. One proposal—that relies on insights from behavioural economics—involves changing the insurance from an opt-in to an opt-out. This makes sense, given that the insurance premium is a tiny fraction of the ticket price.

The other proposal is politically more difficult: the phasing out of the custom of awarding ex gratia payments. At the margin, people will be more inclined to pay a tiny insurance premium if they know that they cannot expect governmental charity. The phasing out can be gradual and accompanied by a campaign to educate passengers on the importance of insurance.