Why Insurance Penetration in India is Falling: What You Need to Know

Insurance is an important part of personal finance. Whether you are looking to protect your health, your home, or your car, insurance helps shield you from financial losses. However, a recent report from the Insurance Regulatory and Development Authority of India (IRDAI) has revealed a worrying trend. Insurance penetration in India has been declining. In FY24, it dropped to 3.7%, down from 4% in FY23. In FY22 the insurance penetration was even higher at 4.2%. So, what does this mean for us as individuals? Why should we care about it?

Allow me to interpret this news for you. I’ll try to declutter the information provided in the IRDAI’s report in a way that it becomes more meaningful and useful for us.

1. What Is Insurance Penetration?

Before we go into why it’s declining, it’s important to understand what insurance penetration is.

Simply put, insurance penetration refers to the percentage of a country’s GDP (Gross Domestic Product) that is spent on insurance premiums.

A higher percentage means that more people are buying insurance policies. If this happens it usually indicates a more secure and financially aware population.

Here is a few global numbers related to insurance penetration (source: statista)

• Global Average: 6.7%
• USA: 11.6%
• South Korea: 11.1%
• UK: 10.5%
• France: 8.7%
• Italy: 8%
• Canada: 8%
• Australia: 4.2%

In India, the insurance penetration has always been relatively low compared to global standards.

But, even within India, it has been decreasing over the past few years. For instance, the life insurance penetration fell from 3% in FY23 to 2.8% in FY24.

This is concerning because life insurance is one of the most basic forms of insurance people should have.

2. Why is Insurance Penetration Falling?

Several factors contribute to this decline.

They’re important to understand, especially if you’re trying to make smart financial decisions. Knowing these reasons can help us recognize gaps in our financial planning.

There are a few common misconceptions about insurance, we must not fell for it. Being aware about these below reasons will help us clear these misconceptions if its there in our minds. Insurance is a way to ensure that we and our loved ones are adequately protected in the future.

2.1. Lack of Awareness and Financial Literacy

The biggest factor for the low insurance penetration in India is the lack of awareness.

Many people, especially in rural areas, are not fully aware of the benefits of insurance. They view it as an unnecessary expense rather than as a tool for protecting their future.

Many don’t understand how insurance can provide financial security, or they might just believe that they won’t need it.

For example, consider a young person starting out in life.

They may be more focused on saving for a car or a house rather than thinking about protecting themselves or their loved ones with insurance. This mindset leads to them skipping health or life insurance, even when it could protect them from big financial setbacks.

2.2. Low Trust in the Industry

Another reason is low trust in the insurance companies.

While there has been growth in the sector, people often feel that insurance companies are more focused on making a profit than helping customers.

Some have had bad experiences with delayed claims or unclear terms in policies. Such experiences has lead them to believe insurance is a scam.

This erodes confidence and reduces penetration.

2.3. Price Sensitivity

Many Indians also find insurance to be too expensive.

For example, a good health insurance plan or life insurance policy can cost a significant amount of money. For someone just starting their career or someone in their 20s and 30s, it might seem like an unnecessary expense.

They may prefer spending that money on immediate needs like rent or food.

However, this short-term thinking can have long-term consequences. As such people significantly delay the purchase of insurance covers, when they buy, it gets even more expensive.

2.4. Decline in Life Insurance Penetration

The major decline in the 3.7% penetration rate was caused by a fall in life insurance penetration. It decreased from 3% to 2.8%.

Life insurance is essential because it provides financial protection for your family in case something happens to you. However, many people in India still view it as an expense rather than an investment.

They might think that they don’t need life insurance at a young age. But life is unpredictable, and without insurance, your loved ones may struggle financially if the worst happens.

3. The Growth of Non-Life Insurance

On a positive note, non-life insurance (which includes health, car, and home insurance) saw some growth.

The non-life insurance industry saw an increase in direct premiums written. It grew by 12.76% from the previous year.

This is an encouraging sign because it shows that people are starting to realize the importance of health and property protection.

Interestingly, private insurers have been doing better than public-sector insurers. For instance, in FY24, private insurers underwrote Rs 1.88 lakh crore in premiums compared to Rs 82,891 crore by public insurers.

Despite this, public insurers still had a higher claims ratio, which means they paid out a larger portion of premiums as claims.

4. India’s Insurance Density is Rising

While insurance penetration is falling, insurance density is improving.

Insurance density refers to the amount of premium paid per person in the population. This means that while fewer people are buying insurance overall, those who do buy it are purchasing more.

For FY24, India’s insurance density increased to $95, up from $92 in FY23. Just for our informations, the global average insurance density is about $850. The insurance density in USA is $8,000, USA, Singapore $6000, and Switzerland $6500.

Increasing insurance density mean that the Indian insurance market is is maturing, and people who do buy insurance are starting to understand its value more deeply.

But when we compare our number with the world average, India is among the poor countries.

5. What Does This Mean for US?

If you’re an Indian in your 20s or 50s, what should you do with this information? Here are my personal thoughts on it:

• Start Early – Life insurance and health insurance are two of the most important types of insurance. When you’re young, you’re at the lowest risk of health problems or untimely death. It means, means your premiums will be cheaper. By starting early, you ensure you’re protected and lock in lower rates for the future.
• Understand the Value – Insurance isn’t just an expense; it’s an investment in your future. Think of it as a safety net. You might not need to use it now, but it’s there for when you do. Don’t fall into the trap of thinking insurance is just another bill. It’s your way of making sure you and your family have a back-up when emergency strikes. At that time, this same insurance cover will look like the wisest step.
• Don’t Wait for a Crisis – Many people wait until they’re in a financial or health crisis to buy insurance. Don’t make that mistake. It’s always better to be proactive than reactive when it comes to personal finance. Of course, they can buy it then, but it will come at an extra cost.
• Explore Non-Life Insurance – If you’re not yet convinced about life insurance, start with non-life insurance like health or car insurance. These will protect your day-to-day life from unexpected expenses and give you peace of mind.

Conclusion

The drop in insurance penetration in India is concerning, especially with the decline in life insurance coverage. But it is also a fact that post-covid, insurance penetration has slightly been falling all over the world.

But why it is a bigger concern for India? Because in India our insurance penetration and density are already too low. A fast growing economy should not show these characteristics.

However, there are signs of growth in non-life insurance, and people are beginning to see the importance of financial protection.

For us, it is crucial to recognize the value of insurance. It might seem like an added expense now, but in the long run, it could be the one thing that saves us from financial disaster.

If you haven’t already, start by looking into health insurance or life insurance today. It’s never too early to protect your future.

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Have a happy investing.