Industries in start-up mode can be innovative, scrappy and undisciplined as they scramble to grow and capture market share. Those traits have characterized the rambunctious life of the country's insurance market.

Eager to serve middle-class consumers new to insurance products, insurers piled into the market and pumped capital into assembling a distribution infrastructure. To drum up sales, they aggressively boosted marketing outlays, hired novice agents and front-loaded their commissions to sign up policyholders. Business took off, lifting Indian life insurers' revenues to $59 billion in the year ended March 2010, according to industry data.

Yet, despite torrid growth and the potential for their business to expand, Indian insurers are discovering that the route to profitability is arduous, typically taking nearly a decade to break even. As the economy slows, things will only get tougher. Only a few large players, such as ICICI Prudential Life and Bajaj Allianz Life, have recently turned a profit. Sub-scale insurers are hemorrhaging cash due to high operating costs and rampant customer churn.

Life insurers' uphill climb to profitability is becoming even steeper. Despite shallow profit pools and adverse economics, new competitors still crowd into the market, and more plan to join them. Meanwhile, the Insurance Regulatory and Development Authority (Irda) issued new rules last year to curb consumer abuse that is slowing industry cash flows.

For instance, Irda has toughened rules that prevent insurers from front-loading fees on new policies while capping surrender charges insurers can levy. We expect this cap will cause the net present value of insurers' revenues from surrender charges to fall by over half.

Suddenly, distant profitability goals look even more distant. Overall, industry analysts estimate the new Irda rulings will reduce discounted profits on new policies sold by 8-10%, and increase the amount of capital insurers need to hold by some 40%.

Insurers hoping to survive the coming shakeout and ultimately turn profitable will need to find efficiencies and boost productivity in three areas:

Target the right customers

Outlays for payroll and commissions to a direct-agent sales force typically eat up over half the first-year premium—far higher than other emerging and developed markets. But high customer churn rates mean that too many policies are surrendered long before they generate sufficient premium income to become profitable.

Companies that focus on attracting customers that their organization can serve best get far more for their marketing outlays than less discriminating competitors. Our work with insurers shows that those who zero in on the right customers and use a closed-loop feedback process to track how well their organization meets—or exceeds—customer expectations on critical touch-points reap higher revenue growth rates and market share.

Not only do promoters cost less to serve than customers who are detractors, they are also less apt to defect, they buy more products and are far more likely to recommend their insurer to friends and colleagues.

Donie Lochan is a partner and a member of the Financial Services practice.