Insurers need internal insurance

One cannot doubt that the Indian insurance sector grew at a robust pace, stands at a pivotal juncture, and has matured into one of the economy's deepest institutional pools of long-term capital. However, the Economic Survey (2025-26) warns that internal operational dynamics pose a “risk to the core financial strength of insurers.” For example, it states that private life insurers, despite robust topline growths, have seen their net profit stagnate, as margins are compressed. The non-life sector faces high combined ratios, which forces a “heavy reliance on investment income (generally from stocks) to subsidise operations, a strategy that exposes the sector’s bottom line to capital market volatility.” In both cases, there is trouble.

A crucial problem with insurers is that “escalating acquisition (of new customers), and administrative costs have resulted in increased operating expenses… across both life and non-life… segments.” Despite the digital and tech-led push, getting new customers depends on expensive intermediaries, which has pushed up costs. While the use of tech is linked with lower expenses, the opposite is true for the insurers, as a significant portion of the premiums are sucked by the distribution overheads. Like it or not, unlike banking, insurance has failed to assimilate tech and digital initiatives.

Such internal cost structures skew the business models towards higher costs, which sadly widen the divergence between coverage depth and breadth. The Survey points out that the insurance density rose steadily to $97 in FY-2025, which indicates that the households that are already covered, and “integrated into the financial system,” spend higher amounts on premiums. This is because they understand the need for wider insurance in terms of sum insured, include add-ons, and add more family members to enhance protection. But penetration has stagnated, even declined to 3.7 per cent.

“This paradox indicates that while the sector is successful in ‘deepening’ revenue from existing customers, high distribution costs are preventing a ‘widening’ of the risk pool,” states the Survey. In other words, the rigid and high-cost structure does not allow the sector growth to “keep pace with (the growth in) nominal GDP.” This obviously erodes the insurance sector’s relative economic size, and keeps its breadth in check. While existing customers go deeper, and pay higher premiums, new ones are reluctant and hesitant. Both trends need to happen in tandem for a safe economy.

Hence, lower overall costs, and distribution outgoes are essential to improve affordability, and help the industry to tap into the “missing middle,” and reverse the decline in penetration. This is crucial, especially in a country like India, which provides inadequate safety and social security to a large section of the population. Welfare schemes have limited impact, and somehow do not reach the poor beneficiaries that most require to tap into insurance. High costs, explains the Survey, do not merely denote “operational friction,” which can be managed through business models, and strategies.

High costs act as a “structural constraint” on the evolution and maturity of the sector, and creates “distortions that limit inclusion, erode consumer value, and threaten long-term viability.” This is especially true now, as India opts for 100 per cent foreign ownership in insurance, and wishes to woo foreign capital. “Rationalising this cost structure is a critical lever required to transition the industry from a ’high-cost, low-penetration’ equilibrium to a sustainable growth path.” This is reflected in the firms’ balance sheets. The margins of the private insurers are compressed; non-life insurers depend highly on non-insurance means to hike profits, and cash flows.

Hence, going forward, the sector needs to adopt “decisive shifts.” These may include further embrace of digital tools, and tech to reduce acquisition costs, and “restore ‘value for money’ to the policyholder. If the industry can successfully dismantle these cost inefficiencies, it will not only resolve the penetration-density paradox but also transform from a constrained aggregator of savings into a truly inclusive and resilient pillar of the economy.” It will not be an easy task. Unlike banking, and several segments of financial services, insurance needs human interface. Customers need to be educated and convinced, which needs a personal touch.

According to other studies, the act of modernising outdated core systems, and integrating them with new tech is complex and costly. Indian firms, especially state-owned mega ones, face capability issues. Private ones think before spending too much. The scenario may change with 100 per cent foreign ownership. But this will take time. Remember, apart from a few nimble and aggressive players, the banking sector took years, even decades to reach the current tech levels. Indeed, the innovations forced others to follow. Maybe, the insurance sector needs a pack of leaders who can show the way.

One of the consulting firms presents the challenge in a different way, and offers solutions. “You will need to make sure all your core systems like claims management software, policyholder portals, or administrative and underwriting programmes are up-to-date, and cloud-based,” states the website. Without this internal management, an insurer will not be able to leverage the latest tech, especially the use of Artificial Intelligence. “You will fall behind competitors who have invested in their systems, and are operating with increased efficiency,” warns the website. A push, rather than pull, is required.

Yet another problem, as highlighted by experts, is due to data silos. It is difficult to leverage data effectively across different systems, which hinders insights, and ‘personal touch.’ In insurance, more than the other financial services segments, customers demand 100 per cent trust, and the insurer’s ability to address any problems instantly. This is a necessity, and not instant gratification. In medical insurance, the insured needs immediate solutions, and payments from the insurers. Any delays can be costly, and ghastly. This is where a combination between tech and human is required.

Most insurers, especially the bigger and renowned ones, claim to pay out 90-95 per cent of the claims. Yet, anecdotal evidence, and personal experiences indicate that the payouts are much less, sometimes 60-70 per cent of the sum insured. This is not only because of the fine print, which bars and bans certain types of payments. This is also due to the insurer’s reluctance to part with the full amount, and pay the entire claim. Even the educated are unable to fight this rigid system, forget about the poor families. Similarly, there are complaints that the insurers are reluctant to offer policies to challenged people. Some do it, but state upfront that a claim will not be entertained, or the payout will not be more than 60-70 per cent. In essence, the insurers shut out potential insured.