Economic Survey flags ‘missing middle’, says insurance sector should use more tech to lower costs

• Insurance premiums increased to Rs 11.9 lakh crore in FY25 from Rs 8.3 lakh crore in FY21.
• High distribution costs hinder insurance penetration, now at 3.7 percent
• Insurers' use of intermediaries hikes customer costs despite digital investments.

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The insurance sector has grown at a robust pace but costs, too, have increased steadily, with a significant portion of premiums being consumed by distribution overheads, the Economic Survey 2025–26, released on January 29, has said.

While the total premium income scaled up sharply in FY25, growing to Rs 11.9 lakh crore from Rs 8.3 lakh crore in FY21, the survey said despite the push for digital transformation, customer acquisition continues to depend heavily on expensive intermediary networks instead of technology leading to cost rationalisation.

The central argument in the survey is that both life and non-life insurance segments are not taking advantage of digitisation to support both acquisition costs and restore ‘value for money’ to the policyholder.

Structural challenges: high operating cost

Beyond the industry’s success in deepening revenue from existing customers, the survey flagged a decline in insurance penetration to 3.7 percent. High distribution costs are preventing a widening of the risk pool. It is essential to lower overall costs and distribution outgoes to improve affordability to tap into the "missing middle" and reverse the decline in penetration.

According to the survey, this structural constraint helps to understand why the escalating cost blocks the insurance sector’s evolution, creating distortions that limit inclusion, erode consumer value, and threaten long-term stability. The survey acknowledges that the cost of acquisition is not merely an operational friction.

The survey also draws a sharp distinction between private life insurers and the non-life sector's high-cost model strategies, posing a risk to the core financial strength of insurers.

The insurance sector has matured into one of the economy's deepest institutional pools of long-term capital but remains constrained by a "low-penetration, high-cost" equilibrium driven by a high-cost distribution model, it said.

“Even after years of digital investment, most policies are still sold through high-commission agents and intermediaries, which makes insurance more expensive for customers. That’s why we see a strange trend— people who already buy insurance are spending more, but overall coverage is not expanding much,” said Alay Razvi, Managing Partner, Accord Juris.

The survey said insurers are not taking advantage of the digitisation of distribution to support both acquisition costs and restore ‘value for money’ to the policyholder.

“As a result, a significant portion of insurance premiums is consumed by distribution overheads rather than being channelled towards risk coverage, product innovation, or improved claims servicing,” said Atul Menon, Partner, King Stubb & Kasiva, Advocates and Attorneys.