'Insurance coverage expansion to underserved segments can save govt $10 bn'

The gross written premium of Indian insurance has exceeded $130 billion and grown at a CAGR of 11 percent, in the three-year period FY20-23, outpacing its Asian counterparts

The government could potentially save nearly $10 billion annually by expanding insurance penetration to include underserved populations and events, which could be redirected towards stimulating economic growth, according to a McKinsey report.

 

This includes providing comprehensive life insurance cover, which could help reduce the burden of ex gratia benefits to families affected by the loss of life or livelihood due to accidents and other unforeseen events. Robust and affordable private health insurance coverage could lessen the strain on public healthcare, freeing government funds to improve India’s healthcare infrastructure, the report stated.

 

Additionally, targeted interventions in crop insurance could help minimise crop losses, compensate for crop damages, reduce loan defaults, and enhance production yields, according to the report.

 

Further, creating natural disaster insurance pools with mandatory coverage for ecologically sensitive areas could minimise financial losses for small and medium-sized enterprises (SMEs) and other businesses affected by catastrophic events.

 

The gross written premium of Indian insurance has exceeded $130 billion, growing at a compound annual growth rate (CAGR) of 11 per cent in the three-year period FY20-23, outpacing its Asian counterparts. From FY16-23, the life insurance segment recorded an 11.4 per cent CAGR, while the general insurance market grew by 15 per cent over the same period.

 

This growth aligns with the Insurance Regulatory and Development Authority of India’s (Irdai) goal of “Insurance for All by 2047,” aimed at enhancing availability, accessibility, and affordability. The regulator has introduced customer-centric regulations that simplify the purchase process, allowing insurance players to innovate and cater to a larger consumer base.

 

Furthermore, the growth of private and digital insurers is outpacing that of public sector insurers. Capital influx into the insurance sector is also driving this expansion.

 

“Substantial investments in innovation and growth have transformed the insurance industry. Fueled by domestic and foreign private capital, insurers have prioritised enhancing customer experiences through digital channels, optimising sales strategies, and improving business performance metrics like policy persistence,” the report noted.

 

Current regulations cap foreign direct investment (FDI) in insurance at 74 per cent, and private equity firms can invest directly in insurers.

 

However, despite these efforts, challenges remain. The industry’s penetration rate slipped to 4 per cent in FY23 from 4.2 per cent in FY22, highlighting gaps in product innovation, distribution efficiency, and renewal management.

 

“Operational inefficiencies, profitability issues, gaps in coverage, limited regulatory support that stifles innovation, and rapidly evolving risks are significant challenges hindering the industry’s performance. Additionally, limited financial literacy and suboptimal advisory services have exacerbated concerns about misselling,” the report said.

 

Over the past five years, the top five private life insurers in India have recorded a 17 per cent CAGR in new business premium, while their profit rose by only 2 per cent, indicating issues with cost management and operational efficiency. Rising expenses—including commissions, operational costs, employee salaries, and marketing—contribute to these challenges.

 

On the regulatory front, certain measures have impacted insurers' profitability, including new surrender value norms for life insurers and stagnation in third-party pricing for motor insurance.

 

“The change in surrender value methodology may lead to higher payouts, while reducing the minimum premium term from two years to one could drive up costs. The stagnation of third-party pricing for motor insurance, which has grown by less than 2 per cent annually since 2019 (compared with an inflation rate of 5 to 6 per cent), hampers market competitiveness and discourages innovation in the motor insurance sector,” the report observed.

 

To build a resilient ecosystem, insurers must focus on driving value growth. While factors like rising premiums, strong competition, and capital inflows may support short-term gains, long-term success will depend on prioritising innovation.  Insurers need to adapt to evolving customer needs, invest in talent and technology, and commit to sustainability. Data, analytics, and technology will be key enablers in this process.