The Economic Survey for 2025-26 has delivered a critical assessment of India's insurance sector, highlighting a significant paradox. While the industry has successfully deepened revenue from its existing customer base, it continues to struggle with widening its risk pool to include new policyholders. The primary culprit, according to the survey, is the persistently high cost of distribution.
The Structural Constraint of Escalating Costs
The report frames the escalating cost of customer acquisition not merely as an operational hurdle but as a profound structural constraint. This high-cost model is creating distortions that limit financial inclusion, erode the value delivered to consumers, and pose a long-term threat to the sector's stability. The core financial strength of insurers is at risk, with rising acquisition and administrative expenses inflating operating costs across both life and non-life insurance segments.
Impact on Profitability and Stability
This cost pressure is starkly visible in the financials of insurance companies. Private life insurers, despite reporting robust top-line growth, have seen their net profits stagnate. Their margins are being severely compressed by the relentless rise in acquisition expenses. Similarly, non-life insurance companies are grappling with high combined ratios. This forces them to rely heavily on investment income to subsidise their core underwriting operations, a strategy that exposes the entire sector's profitability to the volatility of capital markets.
The rigid cost structure means premium growth fails to keep pace with nominal GDP, eroding the sector's relative economic size, the survey noted. It emphasised that lowering overall costs, particularly distribution outgoes, is essential to improve affordability. This is the key to tapping the vast 'missing middle' of potential customers and reversing the concerning decline in insurance penetration.
The Critical Need for Cost Rationalisation
The survey identifies rationalising acquisition and overall costs as the critical lever for the industry's transformation. Moving from a 'high-cost, low-penetration' equilibrium to a sustainable growth path requires this shift. Lower costs would allow insurers to price risk more accurately, increase the value proposition for customers, and make insurance products genuinely more affordable for a broader population.
Recent Policy Changes and Unintended Consequences
These observations come months after a significant policy intervention. The government exempted life insurance and individual health insurance policies from the Goods and Services Tax (GST), effective September 2025. While this exemption is intended to spur growth by making policies cheaper for end consumers, it has had a complex side effect. The subsequent loss of input tax credit benefits has actually increased the operational expenses for insurance companies.
Faced with the choice of absorbing these higher costs or passing them on to other players in the ecosystem, several insurers—especially in the private sector—are now contemplating a review of their distribution structures. This review is expected to impact the commissions of insurance intermediaries and distributors, highlighting the sector's deep-seated dependencies.
The Persistent Dependence on Intermediaries
Customer acquisition in insurance remains heavily reliant on expensive intermediary networks. Contrary to expectations of technology-led cost rationalisation, expenses have steadily climbed, with a significant portion of premiums being consumed by distribution overheads. This inefficiency is reflected in a growing divergence between two key metrics: insurance density and insurance penetration.
While insurance density—measured as the average annual premium per capita in US dollars—rose steadily to USD 97 in FY25, insurance penetration has stagnated and even declined to 3.7%. This paradox underscores the sector's challenge: it is earning more from existing customers but failing to bring new ones into the fold.
Scale of the Indian Insurance Industry
The Indian insurance landscape is vast and growing. As of the latest data, India hosts:
- 26 life insurers
- 26 non-life insurers
- 7 standalone health insurers
- 2 specialised insurers
This ecosystem is supported by a massive distribution network of more than 8.3 million agents, point-of-sales persons, and institutional partners—a figure that has grown significantly from 4.8 million in FY21. The total number of insurers' offices stood at 22,076 as of March 2025.
The industry's assets under management (AUM) touched an impressive ₹74.4 trillion in FY25, with total premium income rising to ₹11.9 trillion from ₹8.3 trillion in FY21. Life insurance dominates, accounting for 91% of total AUM and around 75% of premium income. In the non-life segment, a notable shift has occurred: health insurance now comprises 41% of gross domestic premium, overtaking motor insurance as the leading business line. Standalone health insurers are among the fastest-growing segments, highlighting the escalating need for healthcare financing solutions.
The Imperative to Close the Protection Gap
Despite this scale, a critical challenge remains. A large proportion of Indian households and Micro, Small, and Medium Enterprises (MSMEs) are still uninsured, with adoption uneven across regions and income groups. Closing this protection gap is vital for strengthening household financial security and reducing vulnerability to economic shocks.
Achieving this will require the insurance sector to grow at a substantially faster pace than nominal GDP, the survey stated. It expressed optimism that growth could accelerate following the recent GST exemption and a series of reforms introduced in the Insurance Amendment Bill, known as the 'Sabka Bima, Sabki Suraksha Act, 2025', passed in December 2025.
The Path Forward: Digitisation and Efficiency
For this growth to be inclusive and sustainable, the survey calls on insurance companies to prioritise the digitisation of distribution channels. This move is crucial to rationalise acquisition costs and restore 'value for money' for the policyholder. 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 Indian economy, the Economic Survey 2025-26 concluded.
