India's health insurance market in 2025 witnessed a tale of two trends: metropolitan cities leading in absolute bookings while smaller towns drove the majority of growth, according to new data from PB Fintech 's year-end report through its Policybazaar platform.

Metropolitan Cities Lead Booking Volumes

Delhi and Bengaluru emerged as the top performers in health insurance bookings for 2025, establishing themselves as key markets for insurance adoption. The metropolitan cluster was completed by Hyderabad, Pune, and Mumbai, which also ranked among the leading contributors to overall booking volumes.

Tier-3 Cities Drive Market Transformation

The most significant development was the surge in Tier-3 city adoption, which accounted for 70% of all health insurance purchases in 2025, representing a substantial increase from 63.5% in the previous year. This shift reflects changing attitudes in smaller towns, where families increasingly view health insurance as a mainstream financial product rather than an optional add-on.

Tier-2 cities showed modest growth, rising from 13.8% to 14.3% of total purchases. In contrast, Tier-1 cities experienced a notable decline, dropping from 22.7% to 15.7% of the market share, indicating a democratization of health insurance adoption across India's urban landscape.

Claims Pattern Reveals Health Priorities

The report identified key health concerns driving insurance claims across the country:

• Heart-related conditions
• Cancer treatments
• Cataract procedures
• Infectious and seasonal illnesses
• Day-care medical procedures
• Accidental injuries

Motor Insurance and International Segments Show Growth

In the motor insurance segment for FY26, Maharashtra topped demand charts, followed by Uttar Pradesh and Delhi. The overseas health insurance segment demonstrated remarkable growth, with NRI bookings from the US and Canada surging 157% year-on-year. European customers also contributed significantly to this growth, as expatriate families sought India-linked protection and continuity of care.

Travel Insurance Trends

Germany emerged as the top destination driving travel insurance purchases in 2025, followed closely by Thailand. This pattern reflects a combination of Schengen visa requirements and high-volume leisure travel to Southeast Asian destinations. Travelers showed preference for higher coverage amounts for US and Canada destinations, acknowledging the significantly higher healthcare costs in these countries.

The comprehensive data underscores the evolving nature of India's insurance market, with traditional metropolitan dominance giving way to broader geographic adoption while maintaining strong growth in specialized segments including international coverage.

The Reserve Bank of India has identified significant structural pressures in the insurance sector, highlighting how premium growth is increasingly driven by high-cost distribution strategies rather than operational efficiency. According to RBI's latest financial stability report, while the sector poses no near-term systemic risks, surface-level stability masks emerging challenges that could impact medium-term sustainability and coverage expansion.

Key Structural Pressures Identified

The central bank's analysis reveals persistent high expense structures, particularly in acquisition costs, as a primary concern. The report emphasizes that premium growth has been increasingly driven by high-cost distribution-led strategies rather than operating efficiency improvements.

Impact on Life and Non-Life Sectors

In the life insurance sector, frontloaded acquisition costs have limited the extent to which scale efficiencies are passed on to policyholders. The RBI noted that expected benefits from digitization remain unrealized, creating additional pressure on cost structures.

The report highlights a distinct divergence in cost efficiency between public and private life insurers. Public life insurers demonstrate strong expense management focus with potentially lower acquisition costs, supported by flat commission structures despite growing premiums. Conversely, private life insurers show steep increases in commission payouts, particularly surging from 2022-23 onwards, indicating business acquisition at higher marginal costs.

Insurance Penetration and Density Trends

The sector shows mixed performance indicators, with insurance density increasing while penetration rates decline.

Regulatory Recommendations

The RBI emphasizes the need for reorientation towards cost rationalization, aligning intermediary incentives with persistency and value to policyholders. The central bank advocates for wider adoption of technology-enabled low-cost distribution models to address current challenges.

Supported by regulatory initiatives including risk-based capital framework, enhanced disclosures, and strengthened market conduct standards, sustained moderation in expense intensity could improve consumer value and reinforce sector resilience. The RBI envisions facilitating transition from the current 'high-cost, low-inclusion' model to an 'affordable-cost, broad inclusion and high quality' equilibrium.

Financial Stability Implications

From a financial stability perspective, the RBI warns that continuously elevated expenses could weaken profitability buffers and amplify cyclical vulnerabilities. The report notes that while total premium income reflects consistent market expansion, growth rates for both life and non-life sectors have slowed sharply, indicating underlying structural challenges that require attention.