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Insurance Costs Block 'Missing Middle'
30 Jan
Summary
- High distribution costs hinder insurance growth and affordability.
- Insurance density rose to $97 in FY25, but penetration declined to 3.7%.
- Insurers paid over ₹1-lakh crore in commissions and distribution in FY25.
The Economic Survey 2025-26 highlights that high distribution costs and reliance on intermediaries are significantly impeding insurance sector growth and policy affordability. While insurance density increased to $97 in FY25, reflecting greater spending by financially integrated households, insurance penetration stagnated, declining to 3.7%.
This situation presents a paradox where the sector deepens revenue from existing customers but fails to widen its customer base. The survey emphasizes that lowering distribution outgo is essential to make policies affordable for the 'missing middle' and reverse the penetration decline. The Reserve Bank of India echoed these concerns, noting premium growth is driven by high-cost strategies rather than operational efficiency.
Combined commission and distribution payouts by life and non-life insurers exceeded ₹1-lakh crore in FY25. The survey argues that rationalizing this cost structure is key to moving the industry towards a sustainable growth path and away from a 'high-cost, low-penetration' equilibrium. Failure to do so risks the financial strength of insurers, as seen in stagnating net profits for private life insurers and reliance on investment income in the non-life segment.
Reducing acquisition costs would allow insurers to more accurately price risks, enhance customer value, and make products more affordable. This strategic shift is presented as critical for achieving broader market penetration and ensuring the long-term health of the insurance industry.
