Premium growth in the Indian insurance industry has been increasingly driven by high-cost distribution-led strategies rather than operating efficiency. In non-life sector, commission growth has significantly outpaced other operating expenses, the RBI said mentioned in its Financial Stability Report, released on Wednesday.
Mumbai:Identifying emerging areas of stress in the Indian insurance sector, the banking regulator Reserve Bank of India(RBI) has said a primary pressure is the persistence of a high expense structure, particularly the sector’s acquisition costs.
Premium growth in the Indian insurance industry has been increasingly driven by high-cost distribution-led strategies rather than operating efficiency. In non-life sector, commission growth has significantly outpaced other operating expenses, the RBI has mentioned in its Financial Stability Report(FSR), released on Wednesday.
“While posing no near-term systemic risks the surface-level stability masks emerging structural pressures that could weigh on medium-term sustainability and coverage expansion,”said the RBI.
From a financial stability perspective, continuously elevated expenses could weaken profitability buffers and amplify cyclical vulnerabilities, cautioned RBI.
A reorientation towards cost rationalisation, aligning intermediary incentives with persistency and value to policyholders,and wider adoption of technology-enabled lowcost distribution models is essential, suggested the RBI.
“Supported by regulatory initiatives like risk-based capital framework, enhanced disclosures, and strengthened market conduct standards, a sustained moderation in expense intensity would improve consumer value, reinforce the sector’s long-term resilience,and facilitate transition from the current “high-cost,low-inclusion” to “affordable-cost, broad inclusion and high quality”equilibrium,” outlined the central bank.
A meaningful expansion of coverage is also constrained by the high expense structures With high distribution costs embedded in pricing, affordability is reduced, leading to a divergence between insurance density and penetration.Growth largely reflects higher spending by existing policyholders rather than a broadening of the insured base, cautioned the FSR report.
While in life sector, frontloaded acquisition costs limited the extent to which scale efficiencies are passed on to policyholders. Furthermore, expected benefits from digitisation remain unrealised, remarked the RBI.
Further, in the life sector, front-loaded expenses compress early policy value, leading to higher surrenders and weaker persistency. These trends add uncertainty to liability profiles and cash flows,even as solvency remains comfortable, obseved the RBI.
In the nonlife sector underwriting outcomes are impacted adversely. High acquisition costs and claims inflation contribute to persistent underwriting losses, increasing reliance on investment income and diluting technical pricing discipline in the sector,said the report.
The GST exemption introduced in September 2025 for all individual life and individual health insurance policies is likely to strengthen the sector’s premium generation trajectory, providing insurers with a larger pool of long-duration liabilities that can be
channelled into sovereign and infrastructure assets. Moreover, the enactment of Sabka Bima Sabki Raksha Act, 2025 and increase in FDI limit to 100 per cent are expected to transform the sector.
Overall, the insurance sector continues to display balance sheet resilience, supported by adequate capital buffers, steady capital accretion and solvency ratios that remain above prescribed regulatory thresholds at the aggregate level.
Market structure and concentration
The life insurance sector remains highly concentrated (top-5 life insurers – 82 per cent), with the largest insurer retaining a dominant share of business, while private life insurers have steadily expanded their presence. The concentrated structure of the life insurance market anchors investors for long-term government securities but creates concentration risk as distress in any of the major players could have broad market effects. The non-life sector is more diversified, though public sector entities continue to hold a meaningful share.
Settlement of Claims
Total benefits paid by life insurers have registered a significant upward trajectory, rising from around ₹4 lakh crore in 2020-21 to ₹6.3 lakh crore in 2024-25. The composition of benefits signals a concerning shift from scheduled maturities to unscheduled exits. The rising proportion of surrenders and withdrawals poses a potential risk to asset liability management.
The net incurred claims by non-life insurers have registered a consistent and significant upward trajectory, escalating from approximately Rs 1.1 lakh crore in 2020-21 to nearly Rs 1.9 lakh crore in 2024-The composition of claims underscores the dominance of two critical retail segments: health and motor. Together, they account for approximately 85 per cent of the total net incurred claims throughout the 2020-21 to 2024-25 periods Medical cost escalation and rising claim frequency of health segment, and higher vehicle repair costs and claim awards of motor segment are putting significant pressure for premium enhancements to maintain underwriting stability.
Need for broadening inclusion
Insurance density (premium per capita) shows a steady increase from US$ 78 in 2020-21 to US$ 97 in 2024-25 reflecting rising absolute spending on insurance by households and firms. In contrast, the simultaneous fall in penetration (premium as percentage of GDP) indicates that income and output are growing faster. The share of insurance in overall economic activity not increasing commensurately underscores the need for broadening inclusion through product innovation, distribution reforms and demand side measures