High distribution costs and continued reliance on expensive intermediary networks, despite deeper digital penetration, are constraining the growth and penetration of the insurance sector and making policies unaffordable for the ‘missing middle’, the Economic Survey 2025–26 said.
The survey noted that insurance density rose steadily to $97 in FY25 reflecting higher spending by households already integrated into the financial system. However, insurance penetration stagnated and declined to 3.7%.
This paradox, the survey said, suggests that while the sector has been able to ‘deepen’ revenues from existing customers, elevated distribution costs have prevented a meaningful ‘widening’ of the risk pool.
Enhancing Policy Affordability
“Lowering overall costs and distribution outgoes is essential to improve affordability, enabling the industry to tap into the ‘missing middle’ and reverse the decline in penetration,” the survey said.
The findings come a month after the Reserve Bank of India flagged similar concerns around the industry’s cost structure. In its Financial Stability Report, the RBI said premium growth has increasingly been driven by high-cost, distribution-led strategies rather than gains in operating efficiency.
“In the non-life sector, commission growth has significantly outpaced other operating expenses. While in the life sector, front-loaded acquisition costs limited the extent to which scale efficiencies are passed on to policyholders,” the RBI said.
Life and non-life insurers together paid over ₹1-lakh crore in commission and distribution payouts in 2024–25 as per Irdai.
Compressing Profit Margins
The survey argued that rationalising this cost structure is the critical lever needed to shift the industry from a ‘high-cost, low-penetration’ equilibrium to a more sustainable growth path. It warned that the prevailing model poses risks to the financial strength of insurers.
“Private life insurers, despite robust topline growth, have seen their net profit stagnate, as margins are compressed by escalating acquisition expenses,” it said.
The survey also flagged stress in the non-life segment, where high combined ratios have forced insurers to rely heavily on investment income to subsidise operations, exposing earnings to capital market volatility.
“Rationalising acquisition costs would allow insurers to price risk more accurately and increase value to customers, making products and prices more affordable,” the survey added.