Indian Insurance Sector Outpaces Regional Peers, But Penetration Rates Lag Economic Growth

The Indian insurance industry ranks well in growth terms, but the gross written premium of over $130 billion during the fiscal years 2020–2023 has a CAGR of 11%. This is much higher than the growth rates recorded by the regional peers: Thailand and China, respectively, less than 5% over the same period. This is according to a McKinsey & Company report titled “Steering Indian Insurance from Growth to Value in the Upcoming ‘Techade'”.

The report, released on Thursday, highlights the growth trajectory of both life and general insurance sectors, alongside challenges that need addressing for sustained progress.

Robust Growth in Life and General Insurance Segments

The life insurance business continued to sustain a growth rate of around 11% a year, and the business clocked in premiums worth $107 billion as of 2023. General insurance business grew faster with a CAGR of 15%, which took the business to $35.2 billion during the same period. This performance positions Indian life insurers at the top of valuation multiples; P/B ratios are in the range of seven to ten times—stronger than the one-to-two times seen at regional peers in Asia.

Decline in Insurance Penetration Rate Despite Premium Growth

Despite impressive growth in premium collections, the insurance penetration rate in India dropped from 4.2% in 2022 to 4% in 2023. This decline highlights a disparity between the sector’s expansion and the pace of the country’s overall economic growth.

The McKinsey report also highlights that while the top five private life insurers had grown over 17% CAGR in new business premiums, they managed to book almost less-than-2% CAGR in net profits for the last five years. The sector’s profit growth has been termed dismal since it was coupled with operations cost raises, which include higher commission, employee cost, marketing expenditures, and other overheads.

Challenges in Operational Efficiency and Cost Management

According to McKinsey, escalating expenses are eroding profitability despite a decline in claims ratios. Expense ratios for traditional players have steadily increased, pushing up the combined ratio—a key measure of insurer profitability. The report noted that there has been negligible improvement in productivity metrics such as operating expenses per life or policy over the past two to three years for both life and general insurers.

Potential for Expanding Insurance Penetration

The report pointed out that more coverage among the underserved populations may be worth a lot for the Indian economy. For instance, coverages for the comprehensive life insurance would ease the burden on government finances by nearly $10 billion a year. Such coverage would reduce ex-gratia payments made to families who lost their breadwinners or means of income due to unforeseen losses of life or livelihood.

Targeted crop insurance programs would also help control the level of crop damage, loan default, and improve agricultural productivity. Such policies would not only protect farmers but also ensure greater economic stability.

The Path Forward for India’s Insurance Industry

The report emphasizes innovation solutions and technological advantages to address inefficiencies. So, on both the cost and penetration rate enhancement strategies, the insurance industry needs to focus to sustain the growth momentum of its economy to align with broader ambitions.

The sector is said to change through targeted intervention and innovative business models, allowing the insurance landscape of India to evolve into one of the leaders in the global market for insurance.