Economic Survey 2025 flags cost burden in insurance, backs tougher Rs 10-crore penalties

The Economic Survey 2025–26 has flagged high distribution and acquisition costs as a structural constraint holding back the growth of India’s insurance sector, limiting the expansion of coverage despite steady increases in premium collections and insurance density. The Survey warned that the prevailing cost structure has locked the industry into a “high-cost, low-penetration” equilibrium, preventing insurance from scaling in line with the broader economy.

Against this backdrop, the Centre has significantly tightened regulatory enforcement by enhancing the penalty framework under insurance laws. According to the Survey, the maximum monetary penalty for violations has been raised tenfold—from Rs 1 crore to Rs 10 crore, alongside granting the regulator powers to order disgorgement of wrongful gains. This marks a sharp escalation in supervisory oversight aimed at improving market discipline and strengthening policyholder protection.

Revised penalty

Under the revised framework, insurers found violating provisions of the Insurance Act or the IRDAI Act can now face penalties of up to Rs 10 crore, compared with the earlier cap of Rs 1 crore. Importantly, the scope of enforcement has been widened to explicitly include insurance intermediaries, such as brokers, agents and other distribution entities, bringing the entire value chain within the ambit of stricter accountability.

The enhanced authority has been vested in the Insurance Regulatory and Development Authority of India (IRDAI), empowering it to direct insurers and intermediaries to return unlawful profits arising from regulatory breaches, mis-selling or failure to comply with statutory norms. The Survey notes that disgorgement ensures violations do not remain a manageable cost of doing business by stripping offenders of any financial gains derived from wrongdoing.

Insurance penetration

Despite the sector’s continued expansion in absolute terms, the Survey highlights a worrying divergence between revenue growth and coverage. Insurance penetration declined to 3.7% in FY25, even as insurance density increased to $97, indicating that insurers are extracting more value from existing customers rather than expanding coverage to new segments. This widening gap underscores the difficulty of reaching underserved households and enterprises.

According to the Survey, escalating acquisition and administrative expenses across both life and non-life segments have driven up operating costs. While digital adoption has increased, insurers remain heavily dependent on intermediary-led distribution networks, which absorb a substantial share of premiums through commissions and overheads. As a result, a lower proportion of premium income is available for actual risk coverage.

The Survey observes that premium growth has failed to keep pace with nominal GDP due to these rigid cost frameworks, eroding the sector’s relative economic size. This has constrained the industry’s ability to serve the “missing middle”—households and small businesses that remain uninsured or underinsured despite rising incomes and economic activity.

The Survey concludes that the twin approach of steeper monetary penalties and disgorgement powers is intended to act as a strong deterrent against misconduct, particularly in cases of mis-selling, unfair trade practices, governance failures and systemic non-compliance. Together, these measures aim to restore trust, improve efficiency and create conditions for broader and more sustainable insurance coverage.