The Reserve Bank of India’s (RBI) Financial Stability report, released ahead of the Union Budget 2026, has flagged concerns over the structural weaknesses of India’s insurance sector despite its overall stability. It highlights concerns, including high operating costs, increasing claims and poor pricing as medium-term risks while the companies remain financially sound with ample capital.
Insurance companies are considered systemically important because of their size and their role as long-term investors. They also have growing connections with the wider financial system, which means their health matters not just to policyholders but to the economy as a whole.
Assets and Investments
As of March 31, 2025, the insurance industry managed assets worth around Rs. 74.4 lakh crore. Life insurance companies hold the bulk of this money, accounting for nearly 91 per cent of total investments. Most of these funds are placed in government securities and other approved safe instruments.
While this conservative approach ensures safety, it also limits returns. The RBI pointed out that the lack of long-term, high-quality corporate bonds in India forces insurers to depend heavily on government debt. This makes it difficult for them to deliver significant returns to policyholders over time.
Insurance Density and Penetration
Insurance density, which measures how much each person spends on insurance on average, has improved. It rose from 78 US dollars in 2020-21 to 97 US dollars in 2024-25. This shows that households and businesses are spending more on insurance in absolute terms.
However, insurance penetration has slipped to about 3.7 per cent of GDP, denoting the moderate growth of the sector and calling for wider coverage and better access to insurance products.
High Costs and Limited Efficiency
One of the RBI’s main concerns is the high-cost structure across the industry. While life insurance companies spend heavily upfront to acquire new customers, non-life insurance companies paid high commissions to agents and distributors that were reflected on the absence of affordable products and limited coverage.
The report also noted that digital technology, which was expected to reduce costs, has not yet delivered significant savings.
Claims Pressure in Non-Life Insurance
Claims have risen sharply in recent years, especially in health and motor insurance. Together, these two segments account for nearly 85 per cent of total claims in non-life insurance.
Medical inflation was also attributed to the increasing health claims. Higher vehicle repair costs and larger compensation awards in motor accident cases were the other reasons for this scenario. These factors have led to persistent underwriting losses.
Dependence on Investment Income
The report cited that many insurers are relying more on investment income to remain profitable as underwriting profits come under strain. This has led to poor pricing capacity.
Concerns in Life Insurance
In the life insurance segment, the RBI highlighted rising policy surrenders and withdrawals. These occur when customers exit policies before maturity, often because the early value of policies is low due to high upfront costs.
Such unscheduled exits affect asset-liability management, which is the process of matching long-term obligations (like paying policy benefits) with available assets. Frequent withdrawals create uncertainty in cash flows and weaken persistency.
No Immediate Systemic Risk, But Deeper Issues
However, the RBI made it clear that the insurance sector does not face any immediate threat to financial stability. Solvency ratios, which measure the ability of insurers to meet long-term obligations, remain above regulatory minimums, and capital buffers are adequate.
However, high expenses, rising claims, and weak underwriting discipline could limit growth and reduce consumer value, if not addressed.
The RBI stressed lowering costs, improving efficiency, and strengthening underwriting practices as the ways to bolster the performance of the sector. The goal should be to make insurance more affordable and sustainable in the long run, ensuring wider coverage and better value for policyholders.
