RBI expresses concern over high-cost distribution strategies of insurers

Mumbai: The Reserve Bank has flagged structural pressures in the insurance sector, saying premium growth is being increasingly driven by high-cost distribution-led strategies of insurance companies rather than operating efficiency.

While posing no near-term systemic risks, the surface-level stability masks emerging structural pressures that could weigh on medium-term sustainability and coverage expansion, RBI said in its latest financial stability report.

"A primary pressure is the persistence of a high expense structure, particularly the acquisition costs. Premium growth has been increasingly driven by high-cost distribution-led strategies rather than operating efficiency," the report said.

It further said that while in the life insurance sector, frontloaded acquisition costs limited the extent to which scale efficiencies are passed on to policyholders.

Furthermore, expected benefits from digitisation remain unrealised.

"From a financial stability perspective, continuously elevated expenses could weaken profitability buffers and amplify cyclical vulnerabilities," it said.

A reorientation towards cost rationalisation, aligning intermediary incentives with persistency and value to policyholders, and wider adoption of technology-enabled low-cost distribution models is essential, it said.

Supported by regulatory initiatives like risk-based capital framework, enhanced disclosures, and strengthened market conduct standards, a sustained moderation in expense intensity would improve consumer value, reinforce the sector's long-term resilience, and facilitate transition from the current 'high-cost, low-inclusion' to 'affordable-cost, broad inclusion and high quality' equilibrium, it added.

Total premium income grew to Rs 11.9 lakh crore in 2024-25 from Rs 8.3 lakh crore in 2020-21, reflecting consistent market expansion and stable financial intermediation capacity.

"However, total insurance premium masks a significant growth moderation, as the growth rates for both life and non-life sectors have slowed sharply," the RBI said.

At a sectoral level, the report said the life (protection and savings) sector exhibits a high concentration risk, while the non-life sector has undergone a structural shift, with health emerging as the leading segment.

Furthermore, product concentration in both life and non-life sectors indicates limited progress in diversification.

Total assets under management of the insurance sector reached Rs 74.4 lakh crore as on March 31, 2025, with life insurers accounting for 91 per cent of total investments, underscoring the sector's deepening financial footprint and its growing significance as a primary institutional investor in the economy.

The report further said that a distinct divergence in cost efficiency is evident between public and private life insurers.

"Public life insurers show a strong focus on expense management and potentially lower acquisition costs underlined by a flat commission structure despite growing premiums. 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," it said.

In the non-life sector, public insurers demonstrate a stable but high expense base.

While their premiums have grown steadily, operating expenses spiked in 2022-23 before moderating, and commission costs have remained low and flat, reflecting their reliance on established, lower-cost distribution channels.

Conversely, 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 report also noted that insurance density (premium per capita) shows a steady increase from USD 78 in 2020-21 to USD 97 in 2024-25, reflecting rising absolute spending on insurance by households and firms.

In contrast, it added the simultaneous fall in penetration (premium as a percentage of GDP) indicates that income and output are growing faster.