The Economic Survey 2025 has delivered a critical assessment of India's insurance sector, framing it as a growth problem that is often mistaken for a mere coverage issue. To bridge the nation's significant protection gap and realize the ambitious goal of "Insurance for All by 2047," the Survey emphasizes that the industry must not just keep pace with nominal GDP but substantially outpace it. This call to action underscores the urgent need for transformative measures in a sector that has been grappling with deep-seated challenges.
The Core Constraint: Distribution, Not Demand
Contrary to common perceptions, the Survey identifies the binding constraint in the insurance sector as distribution, rather than a lack of demand. It points out that the escalating cost of acquisition is far more than just an operational friction; it acts as a structural constraint on the sector's evolution. This high-cost environment creates distortions that limit financial inclusion, erode consumer value, and pose a threat to long-term stability.
Understanding Acquisition Costs and Their Impact
Acquisition costs for insurance companies primarily include commissions and fees paid to distributors for selling policies. According to industry insiders, the incentives offered to bankers to sell insurance products, as opposed to promoting bank deposits, have been a key trigger for mis-selling practices. This misalignment of incentives has contributed to a scenario where the sector's growth is hampered by inefficient distribution channels.
The Penetration–Density Paradox
This cost drag has resulted in what the Survey terms a "penetration–density paradox." Insurers are extracting more revenue from their existing customer base, yet they are failing to widen this base effectively. As a result, insurance penetration has slipped to 3.7%, even as density rose to $97 in FY25. This trend indicates that the overhead-heavy distribution system is shrinking the risk pool rather than broadening it, highlighting a critical inefficiency in the sector's approach.
The Survey makes it clear that acquisition costs are no longer just an operational irritant; they have become a structural brake on both stability and consumer value. This realization calls for a fundamental rethink of how insurance products are distributed and sold in India.
Proposed Policy-Led Reset
To address these challenges, the Survey proposes a policy-led reset aimed at revitalizing the insurance sector. Key legislative changes under the Sabka Bima, Sabki Suraksha Act, 2025, are designed to pull in long-term capital and streamline distribution mechanisms. These reforms are expected to reduce acquisition costs, enhance transparency, and foster a more inclusive insurance ecosystem.
By focusing on structural reforms, the government aims to create an environment where insurance can truly serve as a tool for financial security for all Indians, moving beyond the current constraints to achieve sustainable growth and broader coverage.
