Low insurance penetration, reforms to drive India's insurance growth; profitability challenges remain: S&P

India's insurance sector is poised for significant long-term growth, supported by structural reforms, low insurance penetration, and a favourable regulatory environment, although macroeconomic headwinds and profitability pressures remain key risks, S&P Global Ratings said on Thursday.

In its report, "India Insurance Sector Trends," S&P said accelerated industry reforms, liberalisation and regulatory changes are expected to drive the next phase of growth in both the life and non-life insurance segments. "Accelerated industry reforms and low penetration levels will drive massive sector growth in India. Liberalisation, competition and regulatory changes will shape the insurance sector's development," the report said.

The report comes after the government earlier this year approved 100% foreign direct investment (FDI) in the insurance sector under the automatic route, a move S&P said is attracting foreign capital and accelerating mergers and acquisitions (M&A) in the industry.

S&P expects robust growth across both life and non-life insurance businesses, aided by favourable demographics, rising awareness, and expanding distribution networks.

Private insurers are leveraging promoter networks and digital capabilities to expand their reach and drive premium growth, while public sector insurers continue to benefit from consumer trust, participation in government-backed social insurance schemes and their extensive domestic presence, the ratings agency said.

However, S&P cautioned that profitability in the non-life insurance segment is likely to remain under pressure as insurers continue to rely heavily on investment income to support pricing strategies.

The report also noted that while most insurers maintain adequate regulatory solvency levels, some pockets of vulnerability persist within the sector.

S&P warned that external risks, including energy-related disruptions, a weaker-than-expected monsoon and global economic uncertainties, could slow India's economic growth and weigh on insurance demand. "Macroeconomic headwinds and inflationary pressures could dampen domestic demand, threatening sector growth and shrinking insurer profitability," the report said.

The agency also cautioned that lower investment yields and higher-than-expected claims could compress insurers' margins and test their asset-liability management and risk management frameworks.

In addition, ongoing regulatory and accounting changes, including the transition to a risk-based capital framework, could result in higher compliance costs and increased volatility in insurers' capital positions and earnings over the medium term.