GST exemption expected to drive affordability, penetration in life insurance sector: Report

The Indian life insurance sector is set to experience significant growth, following the GST Council's decision in September 2025 to exempt life insurance premiums from GST. While this move presents short-term profitability challenges, it is expected to enhance affordability, improve policy persistency, and deepen market penetration in the long term. Experts project a compound annual growth rate (CAGR) of approximately 14.5% for the sector over FY23–35E, driven by macroeconomic fundamentals and rising financial inclusion.

Despite two decades of steady growth, the Indian life insurance market remains significantly underpenetrated. The sector grew at a CAGR of 11% between FY05 and FY25, reaching ₹1,203 billion. However, its penetration was only 2.8% of GDP in FY24, much lower than the developed-market average of 5.6%. This gap offers a substantial opportunity for insurers as more households begin to allocate savings towards financial products.

Structural elements like the absence of comprehensive social security, a growing middle class, and increasing life expectancy are expected to drive demand further. Particularly, protection and annuity products, which remain underpenetrated, have the potential for high long-term growth. The shift towards these products is anticipated as customers move away from Unit Linked Insurance Plans (ULIPs) towards offerings like Non-Participating (NPAR) products.

Non-Participating (NPAR) products, which offer guaranteed returns with lower reinvestment risk, are gaining popularity in the current low-interest-rate environment. At the same time, protection products like term plans and credit life covers are in demand, addressing India's significant protection gap. Annuities are also set to grow rapidly, providing stable income sources for ageing households.

Distribution channels in the sector are evolving, with a continued focus on bancassurance, which accounts for 30–60% of sales. However, private insurers are increasingly investing in agency networks and direct digital channels to capture Tier-2 and Tier-3 markets, reducing dependence on single-bank partnerships. This strategic shift aims to bolster market presence and improve competitiveness.

Recent regulatory changes, including new surrender value guidelines and expense-of-management norms, have posed challenges. Insurers are expected to counter these through commission rationalisation, pricing adjustments, and operational efficiencies. The GST exemption, while creating short-term challenges, is likely to improve long-term sector resilience, particularly in Value of New Business (VNB) margins.

Valuations in the sector have corrected, with the one-year forward price to embedded value (P/EV) ratio now at around 2.0x, down from 2.6x in 2020. This presents attractive opportunities for investors. PL Capital identifies HDFC Life Insurance, Max Financial Services, and ICICI Prudential Life Insurance as top picks due to their focus on protection and NPAR products and expanded market reach.

Overall, the combination of under-penetration, favourable structural demand, and regulatory reform positions India's life insurance sector to become a central component of the country's financial services landscape over the coming decades .