As India embraces digital transformation, inclusion, and a new role as a tech leader exemplified by a decade of technology transformation, or “techade,” new opportunities open up for the insurance sector and the wider financial services industry. With strong valuations and a significant growth trajectory, India’s insurance industry is poised for continued success. Accompanying this positive outlook, however, are concerns about profitability and notably slow innovation within the industry in India.
What would it take for the insurance industry in India to make strides toward a robust future and achieve its full potential? This report builds on in-depth McKinsey surveys of insurance consumers and agents to answer this question.1 It identifies the industry’s strengths to offer a glass-half-full perspective, outlines the challenges for the glass-half-empty view, and proposes important interventions to help unlock the industry’s potential and contribution to economic growth.
Glass half full: The growth story of India’s insurance industry
Rising costs of healthcare in India, a growing middle class, greater awareness of the need for insurance coverage following the pandemic, and supportive regulations have combined to position the insurance industry at the start of an insurance penetration S-curve, with the potential for rapid growth and profitability.
With a gross written premium (GWP) exceeding $130 billion and an 11 percent CAGR from fiscal year 2020 to fiscal year 2023,2 India’s insurance sector has outpaced some Asian peers in terms of premium growth. It has also attained a promising market valuation with robust performance, driving valuation multiples of Indian life insurers to a premium of seven to ten times price-to-book.
Tailwinds in insurance and beyond position the industry well for further growth. The Insurance Regulatory and Development Authority of India (IRDAI) has created regulatory interventions designed to simplify customer journeys and introduce digital innovations. The emergence of private players has transformed operational efficiency, technology, and investment.
More generally, economic development typically is seen to foster a higher demand for insurance (Exhibit 1). In India, while general insurance penetration closely tracks the trajectory of the S-curve, life insurance penetration sits above the S-curve.
Meanwhile, intense competition is reshaping the insurance landscape. Private players are challenging public sector incumbents to rethink strategies and embrace digital transformations. They are digitizing rapidly and improving employee productivity to create a more dynamic, competitive market. At the same time, substantial investments in innovation and growth have helped to transform the insurance industry.
Glass half empty: Challenges constraining the industry
While insurers are positioned to grow market share, their ability to attract capital and sustain growth is impeded by various challenges (Exhibit 2). Despite the regulator’s target of “Insurance for All” by 2047, the industry’s penetration rate slipped from 4.2 percent in 2022 to 4.0 percent in 2023,3 indicating that its progress has not been on par with the country’s economic growth.
This highlights a critical gap in product innovation, distribution efficiency, and renewal management. Operational inefficiencies, profitability challenges, gaps in coverage, limited regulatory support that deters innovation, and rapidly evolving risks are all headwinds that affect the industry’s performance (Exhibit 3). Limited financial literacy and suboptimal advisory services have contributed to concerns around mis-selling in the market.
Prioritizing and encouraging innovation is critical for longer-term growth. While current strengths such as rising premiums, robust competition, and capital influx may fuel growth in the near future, for the long haul it will be important to overcome the dearth of innovation in both products and distribution. At the same time, insurers will need to develop robust capabilities to address emerging risks through rapid innovation, while ensuring efficiency and productivity through simplification, standardization, and digitization.
Built to last: The way forward for a future-proof industry
In a risk-fraught world of cyberattacks, climate change, pandemics, and a growing number of intangible assets, insurance coverage is often lacking. The cultural nuances of the Indian population call for tailored solutions to safeguard against emerging risks. The pace of change and evolving regulations have compelled Indian insurance companies to continuously update their product portfolio offerings.
To effectively address emerging risks and truly serve the customer, India’s insurers can abandon traditional approaches by embracing agile product development and tailoring products for their diverse customer base.
Today, the Indian insurance industry stands at a crossroads, facing both challenges and opportunities. To build a strong, future-proof ecosystem that endures in a dynamic landscape, companies could focus on four themes: boosting their growth trajectory, enhancing profitability, sustaining valuation, and driving innovation (Exhibit 4). Doing so could help them to build greater resilience, create additional value, and contribute to the nation’s economic growth.
Insurance companies can explore five interventions as they plan ahead:
- Expanding the product suite with customer-centric innovations. To truly serve the customer, India’s insurance companies could invest in agile innovation, grasping the opportunity to launch innovative products faster while anticipating customer needs and incorporating agent feedback, mastering pricing finalization, and embedding an agile go-to-market strategy. In addition, with rising life expectancy in India, composite and tailored products could be the key to affordable healthcare for the people. Moreover, given that Indian households frequently include three generations living together, potential product innovations such as multigenerational coverage would enable customers to transfer the benefits of a single coverage across generations.
- Strengthening and expanding distribution channels. Staying competitive in this dynamic environment calls for insurance companies to deliver a unified, frictionless experience. Toward this end, they can make the most of all distribution channels available to them by extracting maximum value from existing channels and embracing novel channels to target a wider audience.
- Enhancing customer experience across the insurance life cycle. In a dynamic, digital landscape, insurance companies need to raise their game across the customer life cycle, from product discovery and onboarding to servicing and claims. They should also explore raising awareness among the Indian population and look to develop ecosystem-based partnerships for enhanced service quality and customer engagement.
- Boosting profitability. Profitability remains a challenge for Indian insurers. They could shift the needle on this by modernizing outdated technology infrastructures to mitigate technical debt,4 implementing robust systems for accurately tracking and optimizing marketing return on investment, and elevating the risk function to serve as a pivotal value creator. This could improve financial performance, reduce operational costs, and raise profitability.
- Adopting new ways of working. To adapt to changing market dynamics and ensure long-term success and profitability, insurers could adopt innovative operating models. The shift from traditional siloed structures to agile, platform-based models (comprising cross-functional squads working toward a common objective based on customer needs) has the potential to be a game changer, addressing the interplay of changing customer needs, expectations for rapid product innovation, a dynamic channel landscape, and evolving claims and customer service trends.
Data, analytics, and technology are underlying, cross-cutting enablers across all these interventions. In this respect, insurance companies will need to ensure a single source of truth for the data on which they base their analytics. To effectively use, protect, and manage data, they can make efforts to prioritize data democratization and clearly define data ownership, in addition to adhering to data protection standards, so as to comply with the Digital Personal Data Protection Act 2023.
Tech innovation offers significant potential for an industry facing both opportunities and challenges in a decade of accelerating digital transformation and inclusion. The Indian insurance industry is on an S-curve, with the potential to enhance growth and profitability, sustain valuations, and drive greater innovation. The interventions described in this report offer the opportunity to turn potential into reality.
