High distribution costs limit insurance coverage, says RBI in FSR report

RBI's Financial Stability Report said high distribution-led costs are embedded in pricing, hurting affordability and penetration, while insurers' conservative investing may weaken product appeal

High distribution costs are restraining the expansion of insurance coverage, as they are embedded in pricing, which reduces affordability and leads to divergence between insurance density and penetration, the Reserve Bank of India said on Wednesday. It also noted that the conservative investment strategy of the insurance industry has potentially reduced the attractiveness of long-term insurance savings products among consumers.

 

What is driving premium growth in insurance, according to the RBI? 

In the Financial Stability Report, the RBI said premium growth has been increasingly driven by high-cost, distribution-led strategies rather than operating efficiency. It also noted that growth in the sector largely reflects higher spending by existing policyholders rather than a broadening of the insured base.

 

 

“In the non-life sector, commission growth has significantly outpaced other operating expenses. While in the life sector, front-loaded acquisition costs limited the extent to which scale efficiencies are passed on to policyholders.”

 

How are costs affecting underwriting and persistency in life and non-life? 

For the non-life insurance sector, high acquisition costs and claims inflation contribute to persistent underwriting losses, increasing reliance on investment income and diluting technical pricing discipline. For life insurance, the RBI said, front-loaded expenses compress early policy value, leading to higher surrenders and weaker persistency.

 

What is the difference between public and private insurers’ cost trends? 

The RBI said there is a stronger focus on expense management and a flat commission structure despite growing premiums by public sector life insurers, compared to a steep rise in commission payouts by private sector life and non-life insurers, with operating expenses remaining higher and sticky.

 

“In contrast, private life insurers show a steep increase in commission pay-outs, particularly surging from 2022-23 onwards, indicating business acquisition at higher marginal cost. Their operating expenses have also remained higher and sticky…..private non-life insurers exhibit a more aggressive cost-growth dynamic. Their commission expenses have escalated sharply. This points to a high-cost, distribution-led growth strategy, potentially impacting underwriting margins,” the RBI said.

 

What do the premium and AUM numbers show about the sector’s growth? 

Total premium income of the insurance sector increased to ₹11.9 trillion in FY25 from ₹8.3 trillion in FY21, reflecting market expansion and stable financial intermediation capacity. However, the RBI said total premium masks a significant growth moderation, as growth rates for both life and non-life sectors have slowed sharply. Total assets under management of the sector reached ₹74.4 trillion as on March 31, 2025.

 

Why did the RBI flag insurers’ conservative investment strategy? 

The RBI said insurers invest 59 per cent in government securities and 30 per cent in approved investments, with sovereign debt dominant, creating challenges in meeting policyholders’ return expectations compared to other financial instruments. It added that stagnation in non-government investment shares suggests a shortage of high-rated, long-duration corporate bonds that match insurers’ liability profiles.

 

“However, in a competitive financial landscape, this conservative allocation creates challenges in consistently meeting policyholders’ reasonable expectations, potentially reducing the attractiveness of long-term insurance savings products relative to other financial instruments offering superior risk-adjusted returns,” the report said.

 

What did the RBI say about rising reliance on cross-border reinsurance? 

Reinsurance volume ceded by general and health insurers expanded to ₹86,300 crore in FY25 from ₹58,900 crore in FY21. While the amount ceded within India grew 1.3 times from about ₹44,900 crore to ₹57,000 crore, reinsurance ceded outside India more than doubled, rising from around ₹14,000 crore to over ₹29,000 crore. The RBI said this suggests domestic market capacity may not be keeping pace with specialised or large-scale risk-transfer needs, necessitating greater recourse to global markets.

 

“This growing reliance on cross-border reinsurance suggests that the domestic market’s capacity may not be keeping pace with the specialised or large-scale risk transfer needs of Indian insurers, necessitating greater recourse to global markets,” the report said.

 

“Strengthening domestic reinsurance capabilities through regulatory incentives or new entrants may help retain more premium within the national financial ecosystem, reduce the sector’s vulnerability to external rate hardening, and mitigate the pressure on the balance of payments,” it added.