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Indian government could potentially save about $10 billion annually by expanding insurance penetration to encompass underserved population and events, a new McKinsey & Company report showed.
This new report, ‘Steering Indian Insurance from growth to value in the upcoming ‘techie,’’ analyses the Indian insurance industry’s performance and outlines key opportunities and challenges that could shape its near- and long-term performance.
McKinsey & Co’s analysis showed that comprehensive life insurance coverage could assist the government in alleviating the burden of providing ex-gratia benefits to families affected by the loss of life or livelihood due to accidents and unforeseen events.
Also affordable private health insurance coverage could reduce the strain on government healthcare, potentially freeing government funds to improve healthcare infrastructure, the report highlighted.
According to Mckinsey analysis, targeted intervention programmes for crop insurance could help minimise crop losses, reduce loan defaults, and improve yields.
Creation of natural disaster insurance pools with mandatory coverage for ecologically sensitive areas could minimize financial losses for small and medium-size enterprises caused by catastrophic events, the report highlighted
Growth Potential
A growing middle class, greater awareness, rising healthcare costs, and supportive regulations have combined to offer high growth for India’s insurance industry over the last few years.
However, there is immense growth potential as a significant portion of the Indian population and insurable assets remain uninsured, increasing the risks of high out-of-pocket expenses, adding to the overall economic strain, and undermining the industry’s ability to bring full benefit to society, the McKinsey report said.
The McKinsey & Co. report highlighted that Insurers’ ability to drive value has been impeded by challenges, including the inability to generate sufficient returns and manage operational efficiencies. Despite the regulator’s target of ‘Insurance for All by 2047,’ the industry’s penetration rate has slipped from 4.2 per cent in 2022 to 4 per cent in 2023, indicating that its progress has not been on par with India’s economic growth, the report added.
Peeyush Dalmia, Senior Partner, McKinsey & Company, said, “While current growth indicators are promising, the insurance industry has not seen improvement in productivity. Achieving long-term success requires a fundamental transformation in how insurance products are designed, distributed, and serviced.”
The industry stands at an inflection point, and Insurance companies that successfully implement these changes while ensuring focus on profitability will be well-positioned to capture the significant growth opportunities ahead, he added.
Meanwhile, the insurance sector’s gross written premium (GWP) exceeded $130 billion, with a CAGR of 11 percent, in the three-year period FY2020-23, outpacing its Asian peers.
Over a longer term, the life insurance market recorded an 11.4 percent CAGR in the seven-year period, FY16-23, while general insurance market grew 15 percent over the same period, the report highlighted.
However, despite achieving a robust CAGR of over 17 per cent in New Business Premiums (NBP), the top five private life insurance companies in India have experienced tepid net profit growth of under 2 per cent CAGR over the past five years.
The growth in premiums for general insurers has been predominantly driven by increased hiring, with little to no improvement in productivity among top players.
As a result, their per-employee productivity (measured as premium per employee) has stagnated at a meagre CAGR of just 0.5 per cent.
In contrast, leading players across life insurance, banking, and asset management have successfully expanded their businesses at a pace that outstrips their employee growth (CAGR of 2 to 6 per cent), reaping the benefits of enhanced productivity.
Despite declining claims ratios, a steady increase in expense ratios among traditional players (till 2023) has meant that the combined ratio has trended upwards. Improvement in leading productivity metrics, such as operating expenses per life or policy, has been negligible over the past two to three years for both life and general insurance companies, the report added.
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