India’s insurance sector has been largely successful in deepening revenue from existing customers, but high distribution costs are preventing a ‘widening’ of the risk pool of customers, the Economic Survey for 2025-26 said.
The escalating cost of acquisition is not just “operational friction” for insurance but acts as a structural constraint on the sector’s evolution, creating distortions that limit inclusion, erode consumer value, and threaten long-term stability, the survey added.
The high-cost model poses a risk to the core financial strength of insurers, with escalating acquisition and administrative costs resulting in increased operating expenses across both life and non-life insurance.
This is reflected in the fact that private life insurers, despite robust top line growth, have seen their net profit stagnate as margins are compressed by escalating acquisition expenses. Similarly, non-life insurance companies face high combined ratios, forcing a heavy reliance on investment income to subsidise operations, a strategy that exposes the sector’s bottom line to capital market volatility.
“The rigid cost structure means premium growth fails to keep pace with nominal GDP, eroding the sector’s relative economic size,” the survey said, adding that lowering overall costs and distribution outgoes is essential to improve affordability, help the industry tap the ‘missing middle’, and reverse the decline in penetration.
In this scenario, rationalising acquisition and overall costs is the “critical lever” required to transition the industry from a ‘high-cost, low-penetration’ equilibrium to a sustainable growth path by allowing insurers to price risk more accurately, increase value to customers, and make products and prices more affordable.
The Economic Survey’s comments come months after the government exempted life insurance and individual health insurance policies from GST, effective September 2025.
While the exemption is expected to drive insurance growth by making policies cheaper, the subsequent loss of input tax credit benefit has increased operational expenses for insurance companies. Left with the choice of either absorbing these higher expenses or passing them to other ecosystem players, several insurance companies, especially private insurers, have suggested a review of their distribution structures which is expected to hit commissions of insurance intermediaries and distributors.
Dependence on intermediaries
Customer acquisition in insurance continues to depend heavily on expensive intermediary networks. As a result, instead of seeing technology-led cost rationalisation, costs have steadily increased for the sector, with a significant portion of premiums consumed by distribution overheads.
This is reflected in the growing divergence between insurance coverage depth and breadth. While insurance density, reflected as the average annual insurance premium per capita expressed in US dollars rose steadily to USD 97 in FY25, insurance penetration has stagnated and declined to 3.7%.
India has 26 life insurers, 26 non-life insurers, seven health insurers, and two specialised insurers, supported by a network of more than 8.3 million distributors. The total number of insurers’ offices stood at 22,076 as of March 2025, whereas the distribution network – comprising agents, point-of-sales persons, and institutional partners – grew significantly from 4.8 million in FY21 to nearly 8.3 million in FY25.
Assets under management of the insurance industry touched ₹74.4 trillion in FY25. Total premium income rose to ₹11.9 trillion from ₹8.3 trillion in FY21. Life insurance accounted for 91% of the total AUM and around 75% of the premium income. In the non-life segment, health insurance currently comprises 41% of gross domestic premium, overtaking motor insurance as the leading business line. Further, standalone health insurers are one of the fastest-growing segments, highlighting the growing need for healthcare financing solutions, the survey said.
Closing the protection gap
However, a large proportion of Indian households and MSMEs remain uninsured, with insurance adoption uneven across regions and income groups, the survey said, adding that closing this protection gap is critical to strengthening household financial security and reducing vulnerability to financial shocks.
“Achieving this will require the insurance sector to grow at a substantially faster pace than nominal GDP,” it said, adding that growth is expected to pick up after the recent GST and a series of reforms in the Insurance Amendment Bill ‘Sabka Bima, Sabki Suraksha Act, 2025’ in December 2025.
For their part, insurance companies must prioritise the digitisation of distribution to rationalise acquisition costs and restore ‘value for money’ to the policyholder, the survey said. “If the industry can successfully dismantle these cost inefficiencies, it will not only resolve the penetration-density paradox but also transform from a constrained aggregator of savings into a truly inclusive and resilient pillar of the economy,” it added.