Insurers Must Address Internal Operational Risks

India’s insurance sector has grown at an impressive pace, emerging as one of the economy’s deepest institutional reservoirs of long-term capital. Yet, the Economic Survey 2025–26 cautions that internal operational dynamics now pose a significant “risk to the core financial strength of insurers.” While the sector has expanded in revenue and scale, structural inefficiencies threaten both profitability and sustainable growth.

Private life insurers, for instance, have recorded robust topline growth, but net profits have largely stagnated due to compressed margins. The non-life sector faces high combined ratios, forcing firms to rely heavily on investment income—often from equities—to subsidise operations. This strategy leaves insurers vulnerable to market volatility and highlights systemic fragility.

A key concern lies in escalating acquisition and administrative costs across both life and non-life segments. Despite technological adoption, acquiring new customers still depends on expensive intermediaries, increasing operating expenses. Paradoxically, while technology typically reduces costs, Indian insurers continue to allocate a significant portion of premiums to distribution overheads. Unlike banking, the insurance industry has yet to fully integrate digital solutions into core operations.

This structural rigidity skews business models, widening the gap between coverage depth and breadth. Insurance density has steadily increased to US$97 per household in FY2025, reflecting higher spending among already insured families who purchase larger sums, add-on policies, and coverage for multiple family members. However, overall penetration remains stagnant, at just 3.7%, indicating that new customer acquisition lags far behind.

Insurance Sector Performance Metrics FY2025

“This paradox suggests that while revenue per existing customer is rising, high distribution costs impede broadening the risk pool,” notes the Survey. Consequently, the sector’s growth struggles to match nominal GDP, constraining its economic footprint. Lowering operational and distribution costs is essential to improve affordability, tap the “missing middle,” and reverse declining penetration—particularly critical in a country with limited social security for large population segments.

Experts emphasise that high costs are not mere operational frictions but structural constraints that limit inclusion, erode consumer value, and threaten long-term viability. With India permitting 100% foreign ownership in insurance, rationalising costs is crucial to transitioning from a “high-cost, low-penetration” equilibrium to sustainable growth.

Modernising core systems—claims management software, policyholder portals, and administrative programmes—is complex but necessary. Effective integration enables the use of Artificial Intelligence, data analytics, and improved customer engagement, balancing the human touch with technological efficiency. Failure to do so risks lagging behind competitors who leverage these tools.

Moreover, data silos continue to impede insights and personalised service, especially critical in medical insurance, where immediate claim resolution is necessary. While many insurers claim to settle 90–95% of claims, actual payouts often range from 60–70%, particularly for marginalised groups or those with disabilities, reflecting both fine-print exclusions and structural reluctance.

In essence, addressing internal inefficiencies is indispensable. By lowering costs, embracing technology, and streamlining operations, Indian insurers can resolve the penetration-density paradox, broaden coverage, and evolve into truly inclusive and resilient pillars of the economy.