The new deal will keep Insigne at Napoli until the summer of 2018.
Napoli president Aurelio De Laurentiis confirmed the new deal on his Twitter account.
He tweeted: "This morning I met Lorenzo Insigne and we extended the contract for five years. Since this season Lorenzo will earn 700,000 Euros plus bonus.
"I wish 'Lorenzinho' a great career in Napoli."
Insigne turned down the chance to join Premier League side Sunderland earlier this summer.