New Delhi

The next phase of growth in India’s insurance sector is likely to depend increasingly on how effectively insurers expand distribution beyond traditional channels, with artificial intelligence (AI)-led customer discovery and ecosystem partnerships emerging as key drivers of insurance penetration, according to a McKinsey report.

McKinsey said insurers are reassessing the traditional direct-to-customer (D2C) model as customers increasingly discover and evaluate products through AI-powered search and conversational interfaces.

The traditional D2C model has relied significantly on aggregators and paid customer acquisition channels. According to the report, this has resulted in high customer acquisition costs and limited insurers’ direct ownership of customer relationships.

“The next phase of growth in Indian insurance may be determined less by product availability and more by distribution effectiveness,” McKinsey said.

The report said the industry could see the emergence of agentic-led discovery and acquisition models, in which AI systems manage significant parts of the customer journey -- from product discovery and engagement to conversion and cross-selling -- across insurers’ own platforms and partner ecosystems.

McKinsey also highlighted the growing importance of ecosystems in insurance distribution. Insurers are increasingly looking at such ecosystems not just as additional distribution channels but as long-term platforms for customer engagement, which could help improve retention and build deeper relationships with policyholders.

The report said expanding insurance coverage in Tier-3 and rural markets remains another key challenge. It noted that low penetration in these markets is not only a question of distribution reach but also reflects a mismatch between existing products and distribution models and the needs of underserved consumers.

Traditional insurance products, onboarding processes and engagement models can be complex and costly and have largely been designed around urban customers, limiting their suitability for rural and semi-urban segments, according to McKinsey.

To bridge this gap, some insurers are redesigning products and distribution models to make insurance more accessible and affordable while also improving customer trust in smaller towns and rural markets.

The report also identified underwriting as another area where AI could bring significant changes across the insurance value chain.

A potential future model could integrate customer information intake, data enrichment, risk assessment, pricing, approvals, quote generation and policy issuance into a unified AI-enabled workflow. This could allow underwriters to spend more time on areas requiring human judgment, including customer and broker engagement, exception handling and portfolio management.

“Insurers will likely experience this transformation via a structured progression toward AI-led decision-making,” McKinsey said.

The report comes as the Insurance Regulatory and Development Authority of India (IRDAI) has proposed changes to the country’s insurance distribution framework. The proposed overhaul includes lower expense limits, changes to commission structures and stronger safeguards aimed at preventing mis-selling.

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The developments indicate that technology, distribution efficiency and regulatory changes are likely to play an important role in shaping the next phase of India’s insurance sector.