The Indian insurance sector has witnessed robust growth over the past decade, emerging as one of the economy’s deepest institutional reservoirs of long-term capital. Yet, the Economic Survey of 2025-26 warns that internal operational inefficiencies pose a significant “risk to the core financial strength of insurers.”
Private life insurers, despite healthy top-line growth, have struggled with stagnating net profits due to compressed margins. Meanwhile, non-life insurers grapple with high combined ratios, which forces them to rely heavily on investment income—often from volatile equity markets—to subsidise operations. This dependence exposes the sector’s profitability to capital market fluctuations.
A major structural concern is rising acquisition and administrative costs across both life and non-life segments. While digitalisation and technology adoption are expected to reduce costs, insurers continue to rely on expensive intermediaries to attract new clients. As a result, distribution overheads consume a substantial portion of premiums, limiting the effectiveness of tech initiatives. Unlike the banking sector, insurance has not fully capitalised on technology to streamline operations.
These high internal costs distort business models, creating a gap between coverage depth and breadth. The Survey notes that insurance density—the per capita premium spend by already-insured households—rose steadily to $97 in FY-2025. This indicates that existing policyholders, integrated into the financial system, are purchasing higher sums insured, including add-ons and additional family coverage. However, insurance penetration—the proportion of the population covered—has stagnated or even declined to 3.7%.
| Indicator | FY-2025 | FY-2024 | Observation |
|---|---|---|---|
| Insurance Density (USD) | 97 | 92 | Rising, reflecting deeper coverage for existing customers |
| Insurance Penetration (%) | 3.7 | 3.8 | Slight decline, indicating limited expansion to new customers |
| Private Life Insurers’ Net Profit Growth | 0% | 2% | Margins under pressure due to high operating costs |
The Survey highlights a paradox: while revenue deepening among existing customers succeeds, high distribution costs hinder the widening of the risk pool. This prevents the sector from growing in line with nominal GDP, constraining its relative economic size. New customers remain hesitant, while existing ones continue to pay higher premiums—both trends must align for sustainable sectoral growth.
Lowering operating and distribution costs is therefore crucial. It would improve affordability, allow insurers to reach the “missing middle,” and reverse declining penetration—especially important in a country where social security coverage remains inadequate. High costs are not just operational friction; they constitute a structural constraint, limiting inclusion, reducing consumer value, and threatening long-term viability.
Looking ahead, decisive reforms are essential. Insurers must embrace digital tools, modernise legacy systems, integrate AI-driven analytics, and streamline administrative processes to restore value for policyholders. Yet, unlike banking, human interaction remains vital: educating clients and addressing claims promptly cannot be entirely automated.
Experts also note the challenge of data silos, which impede insights and personalised service. While most large insurers claim 90-95% claims payouts, anecdotal evidence suggests actual payments often fall to 60-70% of the sum insured. Similarly, policies for marginalised or differently-abled individuals often come with caveats that limit payouts, effectively excluding potential insureds. Addressing these internal inefficiencies is therefore imperative for India’s insurance sector to become truly inclusive, resilient, and growth-oriented.