India’s Insurance Penetration Actually Dropped Between 2010 and 2014. Here’s Why This Was a Good Thing

Sep 14, 2018 | 1 month ago | Read Time: 4 minutes | By Manan Vyas

Insurance Penetration

India is one of the biggest global markets for the insurance sector with a premium of $72 billion in 2018, which is expected to reach around $260 by 2020. The Indian economy continues to be one of the prime destinations for insurance providers due to the sheer size of the market and the potential of growth for any insurance company. When we discuss the growth of the insurance sector in any country, it is imperative to talk about the insurance penetration rate as it helps us understand how common it is to buy insurance in the country.  Insurance penetration rates in India in both the life and non-life insurance have been declining since 2010 as exhibited by both the graphs below.

Non Life Insurance Penetration and Density:Non Life Insurance Penetration and Density

Life Insurance Penetration and Density:

Life Insurance Penetration and Density

The insurance penetration in India in the non-life sector have hovered around 0.7% for many years, and is in fact, one of the lowest in the world. For 2018, as per the Economic Survey, the general insurance penetration was 0.77% and life insurance penetration was 2.72% as compared to the global average of 3.47% for life and 2.81% for non-life. However, these figures in no way indicate a bad picture, in fact, the drop in the penetration rate is actually good for the insurance industry and in order to understand why that is, it is crucial to understand that this penetration gap was critical to ensure a cleaning up of the insurance market in India, which was being flooded by ULIPs which provided higher premiums but lesser protection as insurance was merely looked at as an instrument of tax saving and investment. However, finally there has been a resurgence in popularity of term plans which offer greater protection at lower rates of premium.

India’s Life Penetration rate is lower than peers:

India’s Life Penetration rate is lower than peers

What exactly is the insurance penetration rate?

Insurance penetration rates along with the rates of insurance density are usually used to understand and analyse the level of development of the insurance sector in a country. This is measured as a ratio of the premium underwritten in a year as compared to GDP. This would mean that policies such as Unit Linked Investment Plans (ULIPs) which have higher rates of premium, would lead to higher insurance penetration rate, whereas, term policies which have lower rates of premium would lead to a lower penetration.

What does this say about the Indian market?

As we saw in the graphs overhead, Indian insurance penetration has in fact dropped between 2010 and 2014. This is primarily due to the market crash in the insurance industry in 2010, whereby, according to figures supplied by the Insurance Regulatory and Development Authority (Irda), around 9.1 million policies lapsed in 2009, with some insurers reporting lapse ratios as high as 50%. This crash was fueled by the overflow of ULIP policies in the Indian market that had incredibly high rates of premium but offered little to no protection to the policyholders.

However, since the market crash of 2010, while yes, insurance penetration of the country has dropped, primarily due to the reduction in the most high premium yielding plans (ULIPs), there has been a resurgence in term plans, which offer premiums as low as Rs 5000, but help in protecting the policyholder rather than merely being an instrument of tax saving. A term insurance plan is essentially a purely protection based insurance plan, where in the case of the death of the policyholder the nominee receives the entire sum assured of the policy, in either a lump sum or in the form of monthly payouts as decided upon by the policyholder. As there is no maturity benefit of the policy, customers are only required to pay nominal premiums for full coverage and protection.

While it is true that insurance penetration is considered one of the most important ratios to measure the performance of an industry, it is important to carefully investigate what the changes in this ratio signify, rather than just jumping to conclusions with figures. While insurance penetration across the country has dropped it now signifies a new attitude in India about buying insurance, more and more people are opting for term plans rather than other forms of “investment” insurance plans, which reflects that insurance has finally become more than a mere tax saving instrument for Indians.


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