Cost cuts, distribution reforms key to tapping 'missing middle': Eco Survey

High acquisition and distribution costs are hurting insurance affordability, limiting reach to the 'missing middle' and keeping penetration stuck despite rising insurance density

The insurance industry needs to reduce overall costs and distribution outgo to improve affordability, which will enable it to tap into the ‘missing middle’ and reverse the decline in penetration, the Economic Survey said on Thursday.

 

The escalating cost of acquisition is a structural constraint on the sector’s evolution — limiting inclusion, eroding consumer value, and threatening the long-term stability of the sector, the survey highlighted.

 

According to the survey, the high-cost model of the industry is acting as a risk to the core financial strength of insurers. Despite an increase in top-line growth, private life insurers have seen a stagnation in their net profit, as margins are compressed by escalating acquisition expenses. Similarly, the non-life sector faces high combined ratios, which is forcing it to rely on investment income to subsidise operations, exposing the bottom line of companies to capital market volatility.

 

 

“Rationalising this cost structure is the critical lever required to transition the industry from a ‘high-cost, low-penetration’ equilibrium to a sustainable growth path,” the survey said.

 

Insurance penetration in FY25 stood at 3.7 per cent, flat compared to FY24, with life insurance penetration dropping to 2.7 per cent from 2.8 per cent in FY24 and non-life insurance penetration unchanged at 1 per cent in FY25. Despite progress in the life and non-life insurance segments, penetration continues to remain low, resulting in a significant protection gap.

 

But while insurance density has risen steadily to $97 in FY25, reflecting higher spending by households, 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 rigid cost structure means premium growth fails to keep pace with nominal GDP, eroding the sector’s relative economic size,” the Economic Survey said.

 

The report also highlighted the industry’s dependence on intermediary networks despite a push in digital transformation, and the need to rationalise digitisation in distribution to rationalise acquisition costs.

 

The distribution network — comprising agents, point of sales persons, and institutional partners — grew significantly from approximately 4.8 million in FY21 to nearly 8.3 million in FY25.