Economic Survey Calls for Lower Distribution Costs To Make Insurance Affordable
Costly commissions inflate premiums, limit reach despite rising insurance density
Mumbai: The Economic Survey 2025-26 on Thursday flagged a high distribution model of the insurance sector that has inflated the cost of protection and limited its reach despite a growth in premium collection and insurance density. Similar concerns have also been voiced in the past by the insurance regulator IRDAI and the Department of Financial Services.
"Despite the push for digital transformation, customer acquisition continues to depend heavily on expensive intermediary networks. Consequently, instead of technology leading to cost rationalisation, costs have steadily increased, with a significant portion of premiums being consumed by distribution overheads," noted the Survey.
High commissions paid by insurers to their distributors is ultimately borne by policyholders making health, motor and life insurance costlier for them. According to the Insurance Regulatory and Development Authority of India (IRDAI) Annual Report FY25, insurance companies (life, non-life and health) have paid more than Rs one lakh crore as commissions during the year even as the number of policies issued and lives covered fell during the year.
The most visible implication of the high-cost regime is the widening divergence between insurance coverage depth and breadth. While insurance density has risen steadily to $ 97 in FY25, reflecting higher spending by households already integrated into the financial system, insurance penetration has stagnated and declined to 3.7 per cent. This paradox indicates that while the sector is successful in ‘deepening’ revenue from existing customers, high distribution costs are preventing a ‘widening’ of the risk pool.
The report called for prioritising digitisation of distribution to rationalise acquisition costs and restoring ‘value for money’ to the policyholder.
The Survey noted that a large proportion of Indian households and MSMEs remain uninsured, with insurance adoption uneven across regions and income groups. It said that the rigid cost structure means premium growth fails to keep pace with nominal GDP, eroding the sector’s relative economic size. "Lowering overall costs and distribution outgoes is essential to improve affordability, enabling the industry to tap into the ‘missing middle’ and reverse the decline in penetration," said the Economic Survey.
