The Research Dialogue

Abstract

India’s life insurance market exhibits a persisting pattern: prevailing explanations based on income, access, and/or awareness often fall short trying to account for: regions facing greater uncertainty that, against common wisdom, do not consistently show higher insurance uptake. This paper attempts to understand this as a function of the interaction between risk and the institutional environment that affect household’s financial decision making.

Making use of a state level panel of 28 Indian states from 2015–16 to 2022–23, the analysis develops composite risk exposure and the trust environment. It also estimates their joint effect within a two-way fixed effects framework. The results indicate that the relationship between risk and insurance demand is conditional, that is, in lower trust settings, increased risk is associated with reduced or negligible increase of insurance penetration. On the other hand, in higher-trust settings, risk begins to in turn translate into increased participation.

The estimates imply the presence of a Trust level threshold that separates these two paradigms. Only minority of states lie above this threshold. Majority of Indian states remain in a regime where conventional expansion strategies yield limited effects. Results also suggest that insurance agents’ contribution is primarily through their role in shaping the trust environment.

These findings help understand the importance of institutional and relational factors in the development of insurance markets. It also suggests that policies aimed at expanding coverage may need to account for underlying differences in trust, rather than focusing solely on supply or awareness.

Keywords: insurance penetration, risk index, trust index, panel data, two-way fixed effects, India, inter-state heterogeneity, life insurance, relational trust, credence goods, institutional trust, financial inclusion, interaction effects

Cite this Article: 

Mridul, “Risk, Trust, and the Relational Agent:A Panel Analysis of Insurance Penetration Heterogeneity Across Indian States” The Research Dialogue, Open Access Peer-reviewed & Refereed Journal, Pp-351–379, Volume-05, Issue-01, April-2026, https://theresearchdialogue.com/