A protection gap is the amount of insurance protection that you need minus the insurance protection that you already have.

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The insurance protection gap in India is around 92%. Unaffordability, lack of awareness, trust, second income and government schemes, as well as behavioral biases, contribute to the high protection gap. Most individuals either fail to understand the importance of financial planning or find insurance to be expensive.

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The government can help improve the availability of retail and wholesale insurance by introducing compulsory schemes, but the onus lies with individuals to bridge the protection gap.

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In the latest issue of People of Insurance, we are accompanied by Sumit Ramani on a journey to understand the protection gap in insurance and the reasons why it exists.

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Sumit is the co-founder of ProtectMeWell.com, an API-first financial needs analysis engine, and has been in the insurance industry for about 15 years. He is both a Computer Science Engineer and an Actuary, having previously worked with both direct insurers and reinsurers.

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His platform, ProtectMeWell.com, analyzes 10 products in one row, with a primary focus on the customers rather than the products. Offering a No Spam Guarantee, their website has received around 35,000 customers. Their API is also being used by insurance brokers and wealth advisors to better engage with end customers.

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People of Insurance is a series by Assurekit where we invite experts and professionals from the insurance space to share insights, opinions, and stories. Click here to check out our previous posts in the series.

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1) What is a Protection Gap and How Can It Be Calculated?

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A protection gap is the difference between the amount of insurance protection you need and the coverage you already have.

During 1991-2021, only around 8% of total losses were covered through insurance, making India’s insurance gap nearly 92%.

For example:

• If Gopal has ₹2 crore term insurance but actually needs ₹3 crores, his protection gap is ₹1 crore.

How do we determine the required insurance cover?

The first step is identifying the purpose:

• The primary reason for term insurance is to ensure that a family’s lifestyle remains unchanged in case of an untimely death.
• The sum assured should cover all future expenses + outstanding liabilities.
• If a person has rental income or dividends, they can reduce the cover needed accordingly.

For home insurance, the coverage should match the cost of rebuilding the home in case of a disaster.

Each type of insurance requires a mathematical model to estimate risk exposure, which helps determine the right coverage amount.

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2) Why Is the Protection Gap Growing Globally?

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Yes, the protection gap is increasing worldwide, but the trends vary.

• In high-income countries, the catastrophe insurance gap has reduced.
• In lower-income nations, the protection gap has widened.
• According to Munich Re, the global natural catastrophe protection gap has decreased from 78% to 70% over 30 years but still represents 0.2% of the world’s GDP.
• Cyber protection gaps are among the most neglected risks worldwide.
• The mortality protection gap in Asia stands at USD 83 trillion and grows by 4% annually.
• 75% of households in Asia still have a protection gap 8x their annual income.

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Factors Contributing to the Growing Protection Gap

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Demand-Side Challenges (Customer Perspective):

• Lack of Awareness: Many individuals don’t realize their financial risks.
• Affordability Issues: Insurance seems expensive, especially in emerging markets.
• Trust Issues: Many customers only trust insurance after experiencing a claim payout.
• Socioeconomic Factors: In nuclear families, the need for insurance arises later (e.g., after marriage or having children).
• Behavioral Biases: People are averse to short-term losses (premiums) even if they bring long-term benefits.

Supply-Side Challenges (Industry Perspective):

• Complex Policy Terms: Consumers often struggle to understand exclusions, co-pays, and deductibles.
• Poor Customer Experience: Insurance fails to offer the seamless experience of e-commerce platforms.
• Lack of Social Security: In India, individuals without private insurance have no financial protection.

Bridging the gap requires financial literacy, simplified insurance products, and better customer experiences.

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3) What Stops Consumers from Reducing Their Protection Gap?

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1. Lack of Financial Literacy

Many people don’t see insurance as part of financial planning.

• Most individuals focus on earning money but not protecting it.
• They fail to understand how to secure their income and future expenses.

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2. A Sense of Invincibility

• Young individuals don’t believe they need insurance.
• They assume “bad things won’t happen to them.”

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3. Perceived High Cost of Insurance

• Insurance is seen as expensive compared to other financial commitments.
• Customers only realize the value of insurance when they experience a claim payout.
• Insurance provides peace of mind, but putting a price on peace is difficult.

Customers see insurance as an unnecessary expense rather than a financial safety net.

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4) What Needs to Change for Insurance to Gain Widespread Acceptance?

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1. Increase Awareness & Education

• People must understand their financial risks beyond just life & health insurance.
• Home, disability, and cyber insurance should also be emphasized.

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2. Simplify Insurance Products

• Complex policy terms confuse buyers and discourage them from purchasing insurance.
• Standardized policies with fewer exclusions & more transparency are needed.

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3. Apply Behavioral Finance in Marketing

• Insurance should be framed as a tool for protecting family & retirement plans.
• Positioning insurance alongside financial planning increases its appeal.

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4. Leverage Government Schemes for Awareness

• Government-backed insurance programs like Ayushman Bharat (₹5 lakh coverage) create a benchmark for minimum coverage.
• Mandated insurance schemes help create risk pools and lower premium costs.

Insurance should be seen as a necessity, not an optional luxury.

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Conclusion

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Thanks to Sumit Ramani for sharing his valuable insights!

Key takeaways:

• India's insurance protection gap is 92%, meaning most people are underinsured.
• Affordability, lack of awareness, and trust issues prevent widespread adoption.
• Customers don't actively reduce their protection gap due to behavioral biases.
• A mix of education, better product design, and marketing strategies can help close the gap.

To check your personal protection gap, visit ProtectMeWell.com.

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