Despite India’s rapid financial formalisation, the insurance industry struggles with low penetration, rising costs, and limited consumer trust, according to a McKinsey report highlighting the need for more relevant and accessible products.
India’s insurance market is still falling short of its economic potential, even as the industry’s cost base continues to climb faster than premium income, according to a McKinsey report cited by ETBFSI. The consultancy said total insurance penetration in FY25 was 3.7% of gross domestic product, barely half the global average of 7.3%, with the gap driven mainly by weak non-life cover. Life insurance penetration stood at 2.7% of GDP, while non-life insurance was just 1%, underscoring how far the market remains from broader household and business protection.
The report lands at a moment when the Insurance Regulatory and Development Authority of India is re-examining distribution economics, commissions and sales practices. That review reflects wider concerns about affordability, transparency and mis-selling, as regulators look for ways to expand coverage without pushing up the cost of buying insurance. McKinsey argued that the central constraints are no longer basic access to banking, digital channels or identity documents. Instead, it said the industry’s bottlenecks now lie in how well products fit customer needs, how efficiently insurers reach buyers and whether households trust insurers at the point when a claim is most needed.
The numbers point to a market in which growth is still being driven more by larger policies than by more policies. McKinsey said that among private life insurers, new business premium rose at about 14% a year between FY22 and FY25, but operating expenses increased by roughly 20% over the same period. Across the life insurance sector, individual new business premium grew by about 10% annually, while the number of individual policies fell by around 2% a year. Reuters-style reporting on the report’s findings suggests this means insurers are collecting more money per policy rather than selling meaningfully more policies, a sign that productivity gains have not kept pace with rising selling and servicing costs.
The broader backdrop is one of rapid formalisation in Indian finance, but uneven insurance uptake. According to the report, bank account ownership among adults has risen sharply over the past decade, and participation in demat accounts and other investment products has also expanded. Yet insurance has not matched that pace. McKinsey said the next phase of growth will depend less on access and more on product relevance, affordability, distribution effectiveness and trust, with technology and artificial intelligence likely to play a larger role in underwriting, claims handling and customer service. The consultancy’s view also echoes earlier industry analysis from IRDAI and McKinsey itself, which has highlighted both the scale of India’s insurance opportunity and the persistent gap between premium growth and genuine market deepening.
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