India's insurance sector faces an ongoing challenge with low and declining penetration, despite the growth in premium collections. The Insurance Regulatory and Development Authority of India (IRDAI) has reported a drop in insurance penetration to 2.8% for the financial year 2023-24, compared to 3% in the previous year. This marks the second consecutive year of decline, following a high of 4.2% during the COVID-19 pandemic, when the insurance industry saw a temporary surge. However, despite the falling penetration rates, the industry has seen a notable increase in premiums, which presents a paradox between higher income from policies and lower uptake across the population.
Insurance penetration, a key indicator of the sector's reach, reflects the proportion of the total premium collected relative to the Gross Domestic Product (GDP) of the country. The IRDAI report highlights the gap between India's performance and that of developed countries, where insurance penetration is far higher. Globally, the average insurance penetration rate rose from 6.8% in 2022 to 7% in 2023, a trend that India is struggling to match, primarily due to affordability and awareness barriers.
The need for improvement in insurance penetration is further underscored by the ongoing low penetration in both life and non-life (general) insurance sectors. In the life insurance industry, penetration decreased from 3% in the previous year to 2.8% in 2023-24. Meanwhile, non-life insurance penetration remained at a stagnant 1%. These numbers highlight the significant challenges the industry faces in making insurance products more accessible and appealing to the broader population, particularly in rural and low-income urban areas.
Claims Settlements and Industry Performance: Despite the falling penetration, insurance companies in India have been relatively efficient in settling claims. According to the IRDAI report, 83% of all claims were settled, with 11% rejected and 6% pending as of March 31, 2024. These statistics suggest that while uptake is limited, the industry is fulfilling its obligations effectively. The life insurance industry alone paid out Rs 5.77 lakh crore in claims in FY24, which accounted for over 70% of the net premiums collected, indicating that policyholders are receiving substantial benefits from their investments.
In the non-life insurance sector, insurers settled 2.69 crore health insurance claims, disbursing a total of Rs 83,493 crore in health-related claims. The average claim payout amounted to Rs 31,086, which reflects the importance of health insurance in managing the rising healthcare costs in India. These figures show that while fewer people are insured, the claims process is working well, with many policyholders receiving timely payouts for their claims.
Growth in Premium Collection Amid Falling Penetration: One of the more surprising trends in the Indian insurance market is the growth in premium collections despite the decline in penetration rates. The life insurance market saw a 6.06% growth in premiums, reaching Rs 8.30 lakh crore in 2023-24. This consistent growth in premium income, even as fewer people purchase policies, suggests that existing policyholders are increasing their premium contributions or upgrading to higher-value policies. The non-life insurance industry has also seen an increase in premium density, rising from $22 to $25, though it still lags far behind the global average of $889.
Private sector insurers have performed better than public sector companies, with private insurers achieving a 15% growth in premiums, while public sector life insurers saw only a marginal growth of 0.23%. This disparity could be attributed to the more competitive offerings from private insurers, including innovative policy designs, improved customer service, and better marketing strategies.
GST and the Case for Tax Reforms: One of the most significant challenges to improving insurance penetration in India is the high Goods and Services Tax (GST) rate of 18% applied to insurance premiums. The high tax rate disproportionately impacts lower-income consumers, who may find insurance premiums unaffordable. In light of this, a Standing Committee on Finance, led by Jayant Sinha, has called for a reduction in the GST rate on insurance products, particularly for health and term life insurance policies, which are more relevant to the average person’s basic financial protection needs. The committee argued that the high GST rate on premiums is one of the key reasons for the low uptake of insurance policies, as it raises the cost burden on consumers.
However, in a December meeting, the GST Council deferred making any decisions regarding a potential reduction in tax rates for insurance premiums. This decision has raised concerns among industry stakeholders who believe that a reduction in GST would make insurance more affordable and, in turn, help increase penetration rates in the long term. Additionally, the GST Council's delay in addressing this issue has frustrated those who argue that a more significant effort to support the sector is necessary to ensure that insurance becomes more accessible to India's growing middle class.
Need for Awareness and Mass Campaigns: In addition to reducing taxes, experts argue that a concerted effort to increase public awareness of the benefits and availability of insurance is crucial to improving penetration rates. The Standing Committee on Finance has highlighted the importance of mass education campaigns to inform the public about the value of insurance products and how they can protect their financial well-being. The need for greater public awareness is evident in India's urban-rural divide, where insurance penetration is especially low in rural areas.
There is also a strong case for diversifying insurance offerings to cater to different sections of society, with affordable products that meet the needs of the lower-income population. Developing new products that are easy to understand and more accessible to people across various income levels could help to close the insurance coverage gap.
Conclusion: India’s insurance sector faces a pressing need for reform to boost its penetration rates, which remain significantly lower than global averages. While the industry has seen growth in premium collections, the declining penetration and the high cost of premiums due to GST remain major challenges. Reducing the GST rate on insurance products, particularly health and term life insurance, could make policies more affordable and accessible to a larger segment of the population. Additionally, raising awareness about the importance of insurance, creating affordable products for lower-income households, and expanding coverage in rural areas are crucial steps to improving penetration and providing financial protection to more Indians. Without these reforms and a greater focus on consumer education, the insurance sector may continue to struggle in reaching its full potential, leaving many citizens without the security that insurance can provide.
