India’s life insurance industry is showing resilient growth, but rising distribution and operating costs are putting increasing pressure on profitability, according to McKinsey & Company.
In its latest report, ‘India’s new insurance track: The marathon becomes an AI-led decathlon’, McKinsey said that the country’s top four private life insurers delivered approximately 12–16% CAGR in new business premium (NBP) and around 14–20% growth in embedded value (EV) during fiscal years 2022–26. However, total operating expenses also grew at around 20% CAGR during the same period. As a result, value-of-new-business (VNB) margins declined by 3–4 percentage points for most players.
“This suggests that, while insurers continue to write more business, the profitability of incremental business has moderated,” McKinsey said.
The report comes a day after the insurance regulator came out with a sweeping reform on distribution, including caps on insurance commissions and expenses of management (EoM) limits for insurers, aimed at lowering the overall cost of insurance and enhancing returns for policyholders.
The McKinsey report also flagged rising cost pressures and stagnant productivity in sales and distribution operations. It suggested that insurers could build greater operating leverage by embedding AI and technology across the value chain, including AI-enabled intake, risk assessment and decision support in underwriting.
“These levers can improve productivity, persistency, and product economics while creating a more efficient and scalable operating model,” it added.
Similarly, McKinsey found that gross written premium (GWP) in India’s general insurance industry grew at approximately 12% CAGR, driven primarily by an expansion in policy volumes, which increased at around 14% CAGR. Average ticket sizes, however, declined by approximately 2% CAGR.
“Frontline productivity continues to be one of the largest structural constraints across the general insurance industry,” the report said, highlighting that productivity across the top five private multiline general insurers declined by 2.5% per annum over financial years 2022–26.
The report highlights a sector at an inflection point, with overall insurance penetration at just 3.7% of GDP, around half the global average of 7.3%. The gap is particularly pronounced in non-life insurance. At the same time, growth is being accompanied by pressure on productivity and profitability, while rising healthcare costs, longer life expectancy, greater asset ownership and income volatility are increasing the need for protection.
According to McKinsey, AI could help address persistent constraints around distribution, customer experience, risk assessment, claims management and scalable service delivery. It could, for instance, enable more personalised and productive sales interactions, accelerate underwriting and claims decisions, and automate servicing workflows at scale.
“By looking beyond metro cities and focusing on delivering personalized offers, hyper-local engagement and vernacular experiences through AI and voice interfaces, insurers can build trust and accelerate adoption across the next billion users.” said Peeyush Dalmia, Senior Partner, McKinsey & Company.