While India is riding a wave of extraordinary economic growth, its life insurance sector is still at a nascent stage and its contribution to value creation has been minimum.
With its stable government, managerial and technical talent and expanding middle class,
India is poised for many years of strong economic growth. The prospects for the insurance
industry should be extraordinarily good, since Indian consumers’ risk coverage is low even
by emerging market standards.
Unlike other markets, however, growth in India’s life insurance industry is correlated more
closely to equity market performance (Exhibit 1) than rising GDP.
And profits remain elusive:
for more than a decade, the private industry has delivered overall returns far below the cost
of capital (Exhibit 2) and even below the returns in other Asian markets (Exhibit 3).
Even the bright spots are mostly illusory. Between 2011 and 2014, for example, private life
insurers in aggregate generated positive returns, but our analysis shows that this rebound
was driven primarily by surrenders and lapses on unit-linked investment products (ULIPs)
as equity markets weakened. New businesses also declined, ironically buoying industry
earnings as life insurers reduced financial strain incurred from the significant acquisition
costs incurred in the first year of selling a new policy.
The industry’s negative returns are no surprise, since most Indian private life insurers have
chased volume by building large sales forces with significant fixed cost infrastructure and
who focus on selling low-margin ULIPs. And rather than trying to build the skills of agents to
sell higher margin protection products as affluency rises, many carriers continue to chase
top-line investment-focused growth in the hopes of building scale and growing their way out
of the profitability challenge.
This model may not work. Volume growth can create some value in bancassurance in situations
where the channel is proprietary and unit acquisition costs are lower—as it is in the case
of Indian life insurers with exclusive bank partners, often with cross-held equity. Indeed,
investors continue to reward Indian life insurers for building top-line growth, mostly in
their bancassurance business. But our global research shows that a significantly larger
opportunity for value creation belongs to those who make the strategic shift to create value
in agency by selling a greater share of protection products.
A wide gap between leaders and laggards
Although the industry as a whole has destroyed value for more than a decade, our
calculations show that three carriers grew their surplus by an average of more than 25 percent per
year during that period (Exhibit 4).
McKinsey research into value-creation amongst the 15 largest insurers in the market reveals
a 81 percentage point spread in book value growth between the top and bottom performers
from 2002 to 2013. During this period, the book value of insurers in the top quartile grew
by 19 percent to 34 percent compounded annually as opposed to –11 percent to –47 percent for those in the bottom
quartile. (To arrive at this conclusion, we made significant adjustments to reported returns,
as explained in the sidebar.)
The wide spread in value creation is not unique to India—carriers in Japan showed a 28
percentage point spread in annual growth rates in book value, for example, the spread
amongst the top 30 US carriers is 13 percentage points, and China’s are separated by as
many as 55 percentage points—but the variation in performance raises important questions.
What do the winners do differently in India? Do they offer a more attractive product mix?
Execute better within product lines? Achieve higher investment returns?
We launched a research effort—The Life Journey—to develop fact-based answers to these
questions in India. We analyzed publicly available data for India’s life insurance industry since
2000 and for the top 15 life insurers since 2003, and we interviewed more than two dozen
industry analysts and executives.
Our research revealed that none of the private insurers in the country are creating value as per the market potential. This is because they are all serving a miniscule segment of
consumers, mainly to meet narrow investment needs. But even within this confined space,
they demonstrate a significant spread in performance which is driven largely by distribution
While most carriers offer affluent consumers a similar product mix, including a high share
of investment-focused ULIPs, a few have outperformed the industry by investing in their
distribution channels. The leaders tend to focus on bancassurance, for example, and
leverage strategic and exclusive partnerships with banks to leverage their scale, footprint,
and brand to grow market share and profit margins.
The implication is that while life insurers carriers can grow value by learning from industry
leaders who are doing well in bancassurance, the overwhelming value creation potential lies
in rethinking the industry’s value proposition to serve the protection needs of a much larger
segment of the population. To grow value, life insurers in India must create, market, and sell
more protection products.
McKinsey’s analysis of life insurers around the world reveals that whilst all markets show a
significant performance gap between the top and the bottom players, the major driver of
this performance gap depends on the economic maturity. For example, in more mature
economies such as the US and Japan, higher-performing life insurers generate value through
superior liability risk management; those in emerging economies such as India, meanwhile, rely almost entirely on asset management. In other words, as markets mature, the basis of
value-creation shifts from assets to liabilities (Exhibit 5). Investment management remains
a significant source of earnings in every market, of course, but carriers find it increasingly
difficult over time to differentiate their performance purely on this basis.
We expect that as the institutional asset management market matures in India, it will erode
life insurers’ ability to deliver high returns on the asset side of the balance sheet and force
them into building capabilities that create value on the liability side.
Korea, China, and Indonesia and other emerging markets have already begun to undergo
this shift. We believe that in the next decade life insurers carriers in India will create value
consistently only by mastering liability management: pricing and selecting risk more wisely,
designing more protection products, and building the distribution skills to sell them.
Relative to other markets, the Indian insurance market is also unique in how channels
stack up in value contribution. In other markets except Indonesia, tied agency creates
more value than third parties including bancassurance. In India, third-party channels—bancassurance accounting for the overwhelming majority of it—create more value than
agency (Exhibit 6).
In fact, bancassurance is now the largest channel for India’s private-sector insurers, constituting about 55 percent of the market (Exhibit 7) and contributing to surplus
growth at a rate that is 50 percent higher than that in agency.
The search for profitable growth
In what may be the world’s most promising insurance market, we see the largest untapped
potential in two areas: growing penetration in a few specific geographies and unleashing
latent demand for protection products.
‘Go granular’ to identify high growth geographies
The Indian economy will grow rapidly in the years ahead, but the gains will vary widely by
geography. We expect 44 clusters and five stand-alone regions to account for over three-fourths of India’s incremental GDP growth by 2025 (Exhibit 8). Opportunities in mid-sized
cities, such as Kochi and Surat, will be larger than those in major cities like Mumbai and
Even within cities, insurers must use a micromarket lens to allocate resources and build
distribution capacity (Exhibit 9). Mumbai, for example, has 33 distinct micromarkets across
more than 150 wards, of which eight will account for three-quarters of the city’s growth in
the next decade.
Shift from investment to protection
As affluence rises, demand for protection, pensions, annuities, and long-term care products will
provide significant opportunities for growth.
Around the world, managing “poolable risk”—mortality and morbidity—is the single biggest
driver of value-creation in life insurance, but India remains highly underpenetrated in terms of risk
and protection products. In level of sum assured to GDP ratio, India is at 50, while Thailand is at
96, Malaysia 149, Korea 166, and the US at 270.
Demand for these products in India has already begun to grow sharply (Exhibit 10), with the
accident and health segment leading the way. This market has historically been dominated
by non-life players, but life carriers can capture a sizeable share of this market with innovative
products and services and, most important, a distinctive value proposition of advice and service
through the agency channel.
The penetration of retirement products is also extremely low, but Indian consumers across
segments are increasingly concerned with the risks they face in retirement (Exhibit 11). As their
awareness grows, consumers will expect better yields, more security, and a steady source of
post-retirement income that life insurers are uniquely positioned to provide.
Four imperatives for life insurers seeking value growth
To ride the wave of growth in India and deliver sustainable value in the years ahead, we believe life
insurers will need to strengthen their capabilities in four key areas:
Expand capabilities in agency and lower costs. Sales forces in India range from the
rare professional teams serving the affluent to the ubiquitous part-time sales people
who concentrate on the mass market. We believe that to grow value, insurers must first
prioritize customer segments—based on profit pool size and growth, and their own
competitive advantage. Then, based on the size of the opportunity, starting position, and
appetite for risk and time to maturity, each carrier should align on an agency strategy.
The levers it chooses to drive agency performance will depend on this strategy.
Regardless of the strategic footprint life insurers choose, they must also invest in a few areas, including tailoring service offerings to agents based on their needs, increasing financial-planning
uptake, building product-expert, wholesaler, and sales teams to drive agent
performance. In addition, life insurers in India must rethink the frontline manager model
to improve effectiveness and significantly lower fixed costs.
Reinvent relationships with customers and distributors by using digital tools
and analytics. Indian consumers are becoming more digital, crossing boundaries
seamlessly between the physical and virtual worlds in their decision journeys. Marketing
innovations using social and digital media, including online product customization and
purchasing and multichannel experiences, are becoming requirements for life insurers
to remain competitive in India. In addition, with increasing competition, efficiency will
become even more important. To improve efficiency ratios, insurers should invest in
digitization, lean distribution, analytics, and better management of in-force customers.
These skills will help make advances across the industry value chain: sales, product
design and pricing, risk selection, claims, and service.
Build risk and capital management skills. As described earlier, to grow value and
outperform the industry, India’s life insurers will need to excel in managing liability risks. The winners will rely on clear parameters regarding risk appetite and establish robust
metrics to manage capital and govern risk. Winners will also build more flexibility
into product design and pricing to make fewer long-term guarantees and find more
innovative ways to share risk with policyholders.
Leverage the in-force book and existing customer relationships. The in-force book
accounts for a large share of profits, revenues, and operating costs for insurers, and
this share will only increase as the industry matures. To unlock the hidden value of the
in-force book, carriers need to capitalize on pricing, fee, and asset-allocation flexibility,
pursue cross-selling and customer behavior management, and improve operational
For India’s life insurers, the challenge is straightforward: stable, attractive returns will come
only to those who fundamentally rethink the industry’s value proposition and shift focus
on serving the protection needs of a broader share of the population by building capabilities
to effectively manage liability risk and by building a more efficient and effective distribution