India's Underinsurance Problem Demands Attention

I have been approached by several life insurance agents over the years and on almost all occasions have found it tough to buy a pure term cover, which is a stripped-down pure insurance cover that provides for the family on my death.

I am not alone, as I find several people wary of life insurance unless there is something tied to it, like a home loan cover, which is that you have taken a home loan but in the case of your untimely demise, the insurance will take care of the rest of the loan.

There are other products, like Unit Linked Insurance Plans or ULIPs, which are linked to stock markets and offer capital appreciation, which have done better, but insurance remains a problem. And this applies to life or general insurance, distinct as products but also displaying many similarities from a consumer behaviour and usage point of view.

Not surprisingly, a new McKinsey study says that the industry’s penetration rate has slipped from 4.2%in 2022 to 4% in 2023 indicating that progress has not been at par with India’s economic growth.

On the other hand, while insurance achieved a robust CAGR of over 17% in New Business Premium (NBP) the top five private life insurance companies in India have experienced tepid net profit growth of under 2% CAGR over the past five years.

One reason is costs are rising faster than incomes, which is also unlike other segments of the financial services industry, including banking and asset management.

Moreover, the McKinsey study says the growth in premiums for general insurers has been predominantly driven by increased hiring, with little to no improvement in productivity among top players.

On the other hand, the study also says the government could potentially save about $10 billion annually by expanding insurance penetration to encompass underserved populations and events.

McKinsey also added 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, or unforeseen events.

Targeted intervention programmes for crop insurance could contribute to minimizing crop losses, reducing loan defaults, and improving yield. The creation of natural disaster insurance pools with mandatory coverage for ecologically sensitive areas could minimize financial losses for small and medium-sized enterprises caused by catastrophic events

These are not new arguments in themselves but useful as a reminder.

Interestingly, it is also about what we think of as insurance and do not.

McKinsey says some 70% of customers spend over Rs 25,000 annually on purchasing or repairing appliances, yet only 40% have any form of insurance coverage.

On the other hand, Peeyush Dalmia, one of the authors of the report, tells me insurance is better communicated and thus sold while we are at retail stores, like a Croma while buying a refrigerator or even a smartphone.

Similarly, with homes, there is so much to insure—expensive gadgets, appliances, and even the structure itself—which we may not always think of.

So maybe one lesson in this is the fact that there is diminishing person-to-person contact in selling a product that takes some convincing and explanation

Insurance was never an easy sell but that only underscores its importance.

Selling it profitably without promising the earth and the moon is as important as the lives or homes it covers.