Economic Survey 2025-26 flags high customer acquisition costs in insurance industry

Customer acquisition in the insurance industry continues to depend heavily on expensive intermediary networks inspite of the push for digital transformation, Economic Survey 2025-26 said, making a case for rationalising the cost structure.

Escalating acquisition and administrative costs have resulted in higher operating expenses for both life and non-life insurers, according to the document of Finance Ministry’s Department of Economic Affairs tabled in the Parliament on Thursday (January 29, 2026).

Economic Survey 2025-26 LIVE

Counting high operating costs among structural challenges, the authors of the Survey said instead of technology leading to cost rationalisation, the costs have steadily increased with a significant portion of premiums being consumed by distribution overheads. The rising cost of acquisition is not merely an operational friction as it acts as a structural constraint on the sector’s evolution, creating distortions that limit inclusion, erode consumer value and threaten long-term stability.

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’s recommendation comes amid the insurance regulator IRDAI, in its 2024-25 annual report, saying 23 life and non-life insurers had exceeded the limits of expenses.

Risk to core strength

According to the Economic Survey a high-cost model poses a risk to the core financial strength of insurers. Private life insurers, despite robust topline growth, have seen net profit stagnate, as escalating acquisition expenses compress margins. Similarly, the nonlife sector faces high combined ratios, forcing a heavy reliance on investment income to subsidise operations, a strategy that exposes the sector’s bottom line to capital market volatility. Rationalising acquisition costs would allow insurers to price risk more accurately and increase value to customers, making products and prices more affordable, the authors said.

Lowering overall costs and distribution outgoes is essential to improve affordability, enabling the industry to tap into the ‘missing middle’ and reverse the decline in penetration.

Value for money

Calling for decisive shifts, the Survey authors said insurers must prioritise digitisation of distribution to rationalise acquisition costs and restore ‘value for money’ to the policyholder. A high-cost distribution model inflates the cost of protection, structurally limiting the industry’s reach despite its robust solvency and balance sheet strength. The most visible implication of the high-cost regime is the widening divergence between insurance coverage depth and breadth. While insurance density has risen steadily to $97 in FY25, reflecting higher spending by households already integrated into the financial system, insurance penetration has stagnated and declined to 3.7%.

This 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 Survey authors said.