The Reserve Bank of India (RBI) has issued a cautionary note on the country's insurance industry, highlighting that while it appears stable in the short run, underlying structural issues could threaten its medium-term health and expansion. The central bank's observations are part of its latest Financial Stability Report.
Surface Stability Masks Deep-Rooted Pressures
The RBI stated that the sector poses no immediate systemic threats. However, this surface-level calm hides emerging pressures that could undermine sustainability and the goal of widening insurance coverage across the nation. A primary concern is the persistently high expense structure, especially the costs tied to acquiring new customers. The report notes that growth in premium income is increasingly fueled by expensive, distribution-heavy strategies rather than gains in operational efficiency.
For life insurance, the RBI pointed out that front-loaded acquisition costs prevent the benefits of scale from being passed on to policyholders. It also observed that the anticipated advantages from digital transformation have not yet been fully realized. "From a financial stability perspective, continuously elevated expenses could weaken profitability buffers and amplify cyclical vulnerabilities," the report warned.
Public vs Private Insurers: A Divergence in Strategy
The central bank's analysis revealed a clear split in cost management between public and private players. Public life insurers demonstrate a strong grip on expense management, with commission structures remaining flat even as premiums grow, suggesting potentially lower acquisition costs. In sharp contrast, private life insurers have seen a steep rise in commission payouts, especially from 2022-23 onwards, indicating they are acquiring business at a higher marginal cost.
This pattern repeats in the non-life segment. Public insurers maintain a stable but high expense base with low, flat commissions. Private non-life companies, however, show a sharper increase in commission expenses, pointing to a growth strategy reliant on high-cost distribution that could squeeze their underwriting margins.
The Path Forward: Cost Rationalisation and Broader Inclusion
The RBI prescribed a clear remedy for these structural challenges. It emphasized that a strategic reorientation towards cost rationalisation is essential. This includes better aligning intermediary incentives with policy persistency and long-term value, plus wider adoption of technology-driven, low-cost distribution models.
Supported by regulatory measures like the risk-based capital framework and enhanced disclosures, a sustained reduction in expense intensity would improve value for consumers. This shift could help the sector evolve from a 'high-cost, low-inclusion' model to a more desirable 'affordable-cost, broad inclusion and high quality' equilibrium, the RBI added.
The total premium income of the sector grew to Rs 11.9 lakh crore in 2024-25 from Rs 8.3 lakh crore in 2020-21, marking continued market expansion. However, the RBI cautioned that this aggregate figure masks a significant slowdown, as growth rates in both life and non-life segments have decelerated sharply.
Other key findings from the report include:
- Insurance density (per capita spend) rose from $78 in 2020-21 to $97 in 2024-25.
- Insurance penetration declined, suggesting GDP growth has outpaced premium growth.
- The life segment remains highly concentrated, while health insurance has become the leading segment in non-life.
- Total Assets Under Management (AUM) stood at Rs 74.4 lakh crore as of March 31, 2025, with life insurers holding 91% of investments, cementing the sector's role as a major institutional investor.
