New Delhi: At a time when India's insurance regulator is reviewing the economics of insurance distribution, a McKinsey report has found that insurance penetration remains low even as operating expenses at life insurers have grown faster than new business premiums.

India's overall insurance penetration stood at 3.7 per cent of GDP in FY25, nearly half the global average of 7.3 per cent, according to the report. The shortfall is largely in non-life insurance, where penetration stands at just 1 per cent of GDP, while life insurance penetration is 2.7 per cent.

The findings come amid an ongoing debate over insurance distribution costs and commissions, with the Insurance Regulatory and Development Authority of India (IRDAI) examining changes aimed at improving affordability, transparency and sales practices.

McKinsey's findings highlight the cost and productivity pressures facing insurers as they seek to expand coverage.

Among private life insurers, new business premium grew at about 14 per cent compound annual growth rate between FY22 and FY25, while total operating expenses increased by around 20 per cent over the same period. The report said productivity among leading life insurers has remained broadly flat, while sales and distribution face rising cost pressures.

Higher premiums have also not necessarily translated into wider insurance coverage. Across the life insurance industry, individual new business premium grew at about 10 per cent annually between FY22 and FY25, while the number of individual policies declined by around 2 per cent annually.

McKinsey said this suggests that premium growth is increasingly being driven by larger policy sizes rather than an expansion in the number of policies sold.

This comes despite India's rapid expansion in formal finance. Bank account ownership among adults rose from 53 per cent in 2014 to 89 per cent in 2024, while participation in demat accounts and other investment products expanded sharply. Insurance adoption, however, has not kept pace.

"The constraints on insurance in India are no longer access to a formal financial system, an identity document, or a digital channel; those have been built. The constraints are product relevance, distribution alignment, and trust at the moment of risk," the report said.

The issue assumes significance as IRDAI weighs how to reduce distribution costs and strengthen safeguards against mis-selling while ensuring insurers retain sufficient reach to expand coverage, particularly in underserved markets.

McKinsey said the next phase of growth will depend less on basic access and more on product relevance, affordability, distribution effectiveness and trust, alongside better use of technology and artificial intelligence to improve productivity, underwriting, claims and customer servicing.