McKinsey: Operational Inefficiencies Hindering India’s Insurance Sector

Mumbai: India could potentially save about USD 10 billion annually by expanding insurance penetration to the uninsured population, these saved funds could then be redirected to stimulate economic growth, said a report by global consultancy management firm McKinsey titled Steering Indian Insurance from growth to value in the upcoming techade.

The report said that India’s insurance sector has recorded a gross written premium (GWP) exceeding $130 billion and 11 per cent CAGR in premiums during FY 2020-23. Premiums growth outpaced Asian peers such as Thailand and China where growth rates stayed below 5 per cent CAGR over the same period. Despite the high growth, the industry's penetration rate slipped from 4.2 percent in 2022 to 4 percent in 2023, indicating that progress has not been at par with India’s economic growth. The Insurance Regulatory and Development Authority of India (IRDAI) has a target of “Insurance for All” by 2047.

This highlights a critical gap in product innovation, distribution efficiency, and renewal management, presenting a “glass half empty” perspective rather than a “glass half full.”

“Operational inefficiencies, profitability issues, gaps in coverage, limited regulatory support that stifles innovation, and rapidly evolving risks are all significant challenges that hinder the industry’s performance. Additionally, limited financial literacy and suboptimal advisory services have exacerbated concerns about mis-selling in the market,” said the report.

The report showcases findings from a survey conducted in August 2024, with responses from 5,000 insurance customers and 500 agents across life, health, and motor insurance, across Tier 1/2/3 cities in India. The report noted that listed life insurers have been unable to generate sufficient returns to cover their cost of equity in the past two to three years raising questions about the long-term viability of their business model. Despite achieving a robust CAGR of more than 17 percent in new business premiums (NBP), the top five private life insurance companies in India have experienced tepid net profit growth of under 2 percent CAGR over the past five years. The three largest listed private life insurers namely ICICI Prudential Life, SBI Life and HDFC Life had a return on equity (ROE) minus the cost of equity (COE) ranging between –3.9 percent and 1.6 percent. Although the value-of-new-business (VNB) margins for these leading players improved during this period from about 17 percent to more than 25 percent, they remain relatively low compared with MNC players in the Asian market, which boast VNB margins exceeding 50 percent, said the report.

This underscores potential challenges in cost management and operational efficiency and can be attributed primarily to escalating expenses, including increased commissions, operational costs, employee-related expenditures, and marketing expenses, which have risen in tandem with premium growth. Additionally, the modest growth in investment returns has not kept pace with the growth in premiums, further constraining net profit expansion. 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, according to McKinsey analysis of companies’ annual reports, per-employee productivity (measured as premium per employee) has stagnated at a meager CAGR of just 0.5 percent. In contrast, according to McKinsey analysis, 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 percent), thereby reaping the benefits of enhanced productivity.