Insurance sector has the potential to provide impetus required for the making of a new India. However, looking at insurance density and penetration for both life and non-life insurance, it seems that we have miles to cover. For Life-Insurance business, with insurance penetration (total premium as a % to GDP) at 2.8%, India not only fares better than other developing economies such as Indonesia, China, Russia and Brazil, but is also better than developed economies like Germany and is on par with the United States. In contrast, the penetration of the non-life insurance segment stands at less than 1% in the country, which is among the lowest even for developing economies.
Various recent market surveys done on the insurance market indicate several reasons responsible for the low level of non-life penetration in India. The two reasons that stand out clearly are - “Accessibility” and “Awareness”. Almost every 2 out of 5 people feel insurance is too expensive and 1 out of 5 people feel insurance is not so important. A low insurance penetration coupled with low awareness about the various aspects of insurance leads to a high “Out-of-Pocket expenditure”. In India, for every Rs 100 spent on healthcare, nearly Rs 70 is from the patients’ pocket. As a result, nearly 55 mn people in India are pushed below the poverty line every year. This number is equivalent to the total population of South Africa.
We understand that some countries are geographically prone to more risks and hence require a higher level of insurance penetration than other safer countries. But even after controlling for such risk, we find that India is underpenetrated in the non-life segment. The insurance gap - the difference between where we are today and where we need to be - is quite remarkable in India. We need to double our current non-life penetration level to close this gap or continue to be exposed to potential economic losses of US$ 22 bn annually.
Theoretically, the relationship between per capita GDP and non-life insurance penetration follows an S-curve framework. As the per capita GDP reaches a certain level, there is an inflection in the insurance penetration curve as there is a rapid uptake of insurance. Finally, the growth of insurance penetration reaches its maturity before beginning to stagnate during the maturity stage.
Today, as a country we are at the beginning of this interesting journey. In the life segment, we are better positioned. However, in the non-life segment we need to progress rapidly. And during this journey, the benefits that will be accrued to the economy as whole would be substantial. Among other things, insurance improves financial stability, increases trade, and promotes better risk management and efficient capital allocation. Various studies indicate that, a 1% increase in non-life insurance premium is consistent with a 0.5% increase in GDP. Using this estimate, if India achieves its target GDP of US$ 5 trillion, this would be consistent with non-life penetration level of 1.8%.
For this sector to realise its potential in the Indian market the Government and insurance providers need to intervene with focused initiatives especially on four critical areas. First, we need to improve the accessibility of insurance products by expanding distribution channels, improving financial inclusion and expanding the coverage of health insurance. Second, we need to improve the awareness by sensitizing people about various risks and strengthening training. Third, we need to focus on regulatory measures such as improving the ease of doing business, strengthening governance and monitoring mechanism, and driving affordability. Fourth, we need to embrace new technologies that improves efficiency in the sector. This could be done be driving digitisation of land and health records, actively adopting emerging technologies such as Artificial Intelligence, Internet of Things, etc., and by expanding the digital portfolio of insurance products.