Rising Claims and Evolving Risk Profiles: Challenges Facing India's General Insurance Sector

By Shilpa Arora

The Indian insurance sector is undergoing a transformative journey thanks to its expanding customer base and regulatory innovations. The positive developments can be credited to the efforts by the Insurance Regulatory and Development Authority of India (IRDAI) to achieve "Insurance for all" by 2047.

However, the vision is marred by several challenges, especially in the general insurance domain, where rising claims and changing risk profiles are causing concerns for both insurers and the insured. India’s non-life insurance sector, which encompasses health, property, motor, and liability insurance, has grown in the last few years. However, it comes at a cost. For instance, the health insurance sector is finding it increasingly challenging to manage the burden of rising claim frequency amid escalating medical inflation, which currently stands at 14%. Due to the mounting claims and payouts, they are struggling to offer competitive premiums and retain profitability.

Similarly, the frequency of claims across motor and property insurance categories is increasing due to frequent natural calamities and other risk factors. Despite penetration rising from 3.69% to 4.57% between 2018 and 2022 across all insurance businesses, there’s a protection gap of 90%. This problem arises due to several underlying challenges, such as a limited understanding of products, complex insurance processes, and delays in claim settlements.

Key Drivers Fueling Claim Frequency and Changing Risk Profiles

Both health and motor insurance have witnessed a sharp jump in claim numbers in the last 4-5 years. Similarly, the pandemic has made the general public realize the benefits of comprehensive health coverage, driving them to purchase insurance. On the other hand, the increasing number of road accidents and flood occurrences due to global warming is driving individuals to avail of motor insurance. Frequent natural calamities such as floods, cyclones, and landslides have increased claims under property and crop insurance products. This is stretching insurers’ capacity to cover future risks.

On the other hand, medical inflation is outpacing general inflation rates. In India, hospitalization costs jumped 12.8% in 2023-2024 from the previous financial year. One of the primary contributors to this rising cost is the surge in critical illness among the current population. Today, lifestyle disorders such as diabetes, cardiac issues, and hypertension have become common among the population due to sedentary lifestyles, poor dietary choices, and changes in environmental factors.

Additionally, as the number of cancer diagnoses increases, it’s driving demand for comprehensive health plans that cover the cost of surgeries, radiation therapy, chemotherapy, and hospitalization. As a result, insurers are receiving a growing number of high-value claims related to cancer treatments, stretching their resources.

Besides, more consumers are filing insurance claims digitally for a faster and simpler experience. This digital shift is increasing the pressure on insurance companies to expedite claim processing and ensure transparency at all stages.

How is Fraud and Compliance Affecting the Insurance Landscape?

Lack of trust in insurance products and companies due to the rampant misselling and aggressive sales tactics is another critical gap in the industry. The mistrust in the industry deters many potential policyholders, especially in the under-penetrated segments, from purchasing insurance products. In this regard, lack of financial literacy and accessibility to tailored products are worsening the situation. Complex insurance products, unfamiliar jargon, tricky clauses, and lengthy claim processes make it difficult for laymen to navigate insurance products.

On the other hand, the rise of fraudulent cases has prompted insurance companies to implement strict Know Your Customer (KYC) and Anti-Money Laundering (AML) measures. While these initiatives are adept at tackling the issues, they often increase operational costs and delay onboarding. Similarly, meeting regulatory norms takes time, which clashes with customers’ demand for faster service and insurers’ need for compliance.

The Role of Technology and Innovation in Addressing Insurers’ Challenges

To overcome these challenges, insurance companies are seeking insurtech solutions. They use AI, automation, and data analysis to minimize fraud risks, improve claim management, and ensure compliance with regulatory norms without hampering operational efficiency. It is helping insurers lower friction in the claim settlement process.

Additionally, more companies are using AI-powered solutions to develop hyper-focused personalized insurance products to cater to changing consumer preferences and increase insurance penetration. The IRDAI has introduced multiple initiatives like the BIMA VAHAK, BIMA SUGAM, BIMA VISTAAR, etc., to ease doing business and make general insurance products more accessible to consumers.

In short, it can be said that India’s general insurance is facing new challenges, especially when the frequency of claims is increasing rapidly and the consumer risk profile is undergoing a notable shift. While regulatory efforts and technological innovations can help overcome these challenges, insurance companies need to develop a customer-first approach. This approach can help build tailored insurance products, lower the trust deficit in the industry, and make the vision of ‘insurance for all’ by 2047 achievable.

(Disclaimer: Views expressed are personal and do not necessarily reflect the position of Outlook Media Group or its employees. The author is Co-Founder and Chief Operating Officer (COO) of Insurance Samadhan.)