Insurance sector remains constrained by ‘low-penetration, high-cost’ equilibrium driven by high-cost distribution model, says Economic Survey

While the insurance sector is successful in ‘deepening’ revenue from existing customers, high distribution costs are preventing a ‘widening’ of the risk pool.
| Photo Credit:
Chee Siong Teh

India’s insurance sector continues to grow robustly, yet rising customer acquisition and administrative expenses have heightened operational costs, according to the Economic Survey for FY26 tabled in Parliament. This perpetuates a “low-penetration, high-cost” equilibrium, constrained by expensive distribution models.

Despite digital initiatives, insurers remain reliant on costly intermediary networks across life and non-life segments. Rather than reducing expenses, digital adoption has coincided with steadily increasing costs, diverting significant premium revenue toward distribution overheads.

“Insurance density climbed to $97 in FY25, reflecting greater spending by financially integrated households, yet penetration stagnated at 3.7%,” the Survey observed. This paradox highlights the sector’s success in deepening revenue from existing customers while failing to broaden coverage due to cost barriers.

Low Penetration Concerns

India’s insurance penetration fell from 4% in FY23 to 3.7% in FY24, emphasizing structural issues. The country exhibits the region’s highest protection gap, underscoring affordability challenges.

“Reducing distribution costs is critical to reach underserved segments and reverse penetration declines,” stated the Survey. High acquisition costs have evolved from operational friction to systemic constraint, limiting inclusion and eroding consumer value.

Margins for private life insurers stagnated despite premium growth, while non-life insurers depend on volatile investment income due to underwriting losses. Streamlining costs could improve pricing accuracy and product accessibility, noted the report.

Need for Strategic Reform

The Survey urged digitizing distribution channels to rationalize costs and enhance policyholder value. “Overcoming cost inefficiencies could resolve the penetration-density paradox and position insurance as an economic pillar,” it concluded.

Total insurance premiums reached ₹11.9 lakh crore in FY25, up from ₹8.3 lakh crore in FY21. Life insurance dominates with 91% of assets and 75% of premiums. In non-life segments, health insurance outpaced motor insurance as market leader, constituting 41% of gross domestic premiums.

Published on January 29, 2026