Understanding Insurance Penetration

Two of the most important and mostly used terminologies in insurance industry throughout the globe are insurance penetration and insurance density. In fact, these two are also used to compare the insurance industry of various countries and plays an important parameter for judging the insurance growth in any economy. In this post, I will discuss about Insurance penetration and will try to a make readers understand about the same and will be discussing Insurance density in a separate post.

Insurance Penetration: Technically, Insurance Penetration is the ration of premium underwritten in a particular year to the Gross Domestic Product (GDP) of the country and is expressed as a percentage. In other words, insurance penetration is the percentage contribution of the insurance sector to the GDP of the country. Let us understand with an example. Suppose the total premium underwritten in a Financial Year in a country is INR 1,00,00,000 and the GDP of the country of that Financial Year is INR 50,00,00,000. To calculate the insurance penetration, divide the premium underwritten to the GDP which means, (1,00,00,000/50,00,00,000 = 0.02) and expressing this as a percentage will come up to 2% (0.02*100 = 2). This means, the insurance penetration is 2%. Insurance Penetration is widely used and you will encounter this jargon in almost every insurance journals, reports, research papers etc.

As per the latest Insurance Regulatory and Development Authority of India (IRDAI) Annual Report 2017-18, the insurance penetration of India in 2017 was 3.69% which is a slight increase from 3.49% in 2016. Further, the insurance penetration can be segregated in to life insurance and non-life insurance. As per IRDAI Annual Report, the life insurance penetration and non-life insurance penetration of India in 2017-18 were 2.76% and 0.93% respectively.  For 2016-17, life insurance penetration and non-life insurance penetration were 2.72% and 0.72% respectively. This indicates a marginal increase in life insurance and non-life insurance penetration from 2016-17 to 2017-18. Let’s look at the insurance penetration of some of the countries which is given in the following table:

Insurance Penetration of selected countries (in %)
Country	Year 2016			Year 2017
	Life	Non-Life	Total	Life	Non-Life	Total
Taiwan	16.65	3.34	19.99	17.89	3.42	21.32
Hong Kong	16.2	1.41	17.6	14.58	3.36	17.94
South Africa	11.52	2.74	14.27	11.02	2.74	13.75
South Korea	7.37	4.72	12.08	6.56	5	11.57
United Kingdom (UK)	7.58	2.58	10.16	7.22	2.36	9.58
France	6.06	3.17	9.23	5.77	3.18	8.95
Japan	7.15	2.37	9.51	6.26	2.34	8.59
Switzerland	4.72	4.12	8.85	4.41	4.12	8.53
Singapore	5.48	1.67	7.15	6.64	1.58	8.23
India	2.72	0.77	3.49	2.76	0.93	3.69
World	3.47	2.81	6.28	3.33	2.8	6.13
Source: Swiss Re, Sigma volumes, 3/2017and 3/2018

A closure look at the insurance penetration reveals that India is way behind the world average insurance penetration.  Taiwan is the country with highest insurance penetration of 21.32 % followed by Hong Kong and South Africa having insurance penetration of 17.94% and 13.75% respectively. Also, the above table reveals that Switzerland is the country where the gap between life and non-life insurance penetration is minimum. In fact, Switzerland has a proper distribution of life and non-life insurance business and both life and non-life insurance has almost equal contribution to the country’s GDP.

Insurance penetration is an indicator of growth of insurance sector for any economy in a particular year. It is widely used as a comparative tool to measure and compare insurance industry among various countries and hence knowing and understanding of insurance penetration is beneficial for all of us. Hope I was able to make you understand this jargon in simple terms. 🙂

– Ashish Kumar