Whalesbook
Health Insurance Market Shifts Dramatically to India's Smaller Cities
The outlook for health insurance policies in India for Financial Year 2026 appears exceptionally strong, with a notable acceleration in Tier II and Tier III cities. These regions are now the primary growth engine for the sector, significantly outpacing contributions from metropolitan areas. Data from Policybazaar indicates a major market transformation, driven largely by individuals purchasing health insurance for the very first time.
This seismic shift sees Tier II and Tier III cities accounting for a substantial 62 percent of all new policies sold as of November 2025. In stark contrast, Tier I cities, traditionally the dominant markets, contributed only 38 percent of the overall new policy sales. This data underscores the growing importance and potential of India's hinterland for insurers.
The Hinterland Becomes the New Growth Engine
Siddharth Singhal, Head of Health Insurance at Policybazaar, highlighted this trend. "Five years ago, metros dominated health-insurance purchases," he stated. "Today, 62% of all new policies sold come from Tier II and III India, making the hinterland the sector’s new growth engine." This pivot signifies a maturing market where awareness and demand are expanding beyond major urban centers.
The composition of policy sales reflects this expanding reach. While Tier I cities contribute 38 percent to new policy sales, the combined strength of Tier II and III cities now represents the majority. This realignment is reshaping distribution strategies and product development for insurance providers operating in India.
Rising Sum Insured and Payment Flexibility
Policyholders in Tier II and III cities are increasingly opting for higher coverage. Nearly half of the policies purchased in these regions now feature a sum insured amount between Rs 10 lakh and Rs 15 lakh. Furthermore, a significant portion, over 40 percent of insured individuals in Tier III cities, are utilizing easy monthly installments (EMIs) to manage their premium payments, indicating a growing comfort with financial products and a desire for comprehensive coverage despite payment considerations.
The data reveals a substantial increase in the sum insured amounts. For Tier II policyholders, the proportion opting for Rs 10–15 lakh coverage surged significantly from 27 percent to 47 percent, with those choosing over Rs 15 lakh cover increasing by 13 percent. Similarly, Tier III policyholders saw an even more pronounced shift, with the share for Rs 10–15 lakh coverage jumping from 29 percent to 49 percent, and the selection of over Rs 15 lakh cover rising by 14 percent. This trend indicates a growing awareness of medical inflation and a post-COVID-19 heightened focus on robust health protection.
Add-on Adoption Sees Remarkable Growth
Adoption of add-ons in health insurance policies has also seen a remarkable surge, particularly in FY26. Policies with up to Rs 10 lakh cover in Tier I cities exhibited an add-on adoption rate of 228 percent, followed by 207 percent in Tier II cities and 179 percent in Tier III cities. These add-ons, which include benefits like consumables cover, cumulative bonus, room-rent relaxation, and outpatient department (OPD) expenses, are becoming integral to health plans.
Siddharth Singhal attributed this rise to the Goods and Services Tax (GST) relaxation on health insurance premiums by the government. Previously, purchasing these supplementary covers incurred substantial costs. "On average, each health policy carries 2.2 add-ons in Tier I, two add-ons in Tier II, and 1.7 add-ons in Tier III (by premium)," Singhal noted. This suggests that even buyers in smaller towns are actively customizing their coverage, seeking richer, more comprehensive protection rather than settling for basic plans.
Family Floater Plans Lead Preference
Family floater plans are demonstrating strong adoption rates across all city tiers, with 69 percent of policies in Tier II cities choosing this option, compared to 57 percent in Tier I and 59 percent in Tier III. This preference for comprehensive floater covers over individual plans in Tier II and III cities is largely driven by the prevalence of joint families and the need for multi-member coverage. It reflects the multi-generational household structures common in these regions.
Hospitalization Remains the Primary Driver of Claims
Hospitalization continues to be the predominant reason for health insurance claims in Tier II and Tier III cities, accounting for 80.70 percent of all claims. While outpatient department (OPD) and day-care procedures together represent nearly one-fifth of claims, indicating a gradual expansion in the utilization of insurance beyond inpatient care, comprehensive hospitalization cover remains the central focus for protection planning. This claim pattern aligns with the rising preference for higher sum insured policies in these emerging markets.
Impact
This trend of growth in Tier II and III cities is highly positive for the Indian insurance sector, signaling substantial untapped potential. It presents significant opportunities for insurance companies to expand their customer base and revenue. For policyholders, it means greater access to health insurance products and increasingly comprehensive coverage options. The increased adoption of higher sum insured and add-ons suggests better financial planning for healthcare needs and improved financial inclusion. The overall impact is a more robust and diversified health insurance market in India, contributing to better public health outcomes and economic stability.
Impact Rating: 9/10
Difficult Terms Explained
- Financial Year (FY): A 12-month period used for accounting and reporting, typically from April 1 to March 31 in India.
- Tier I Cities: The largest and most economically significant metropolitan cities in India.
- Tier II Cities: Smaller cities that are regional economic hubs.
- Tier III Cities: Even smaller cities or towns with developing economies.
- Sum Insured: The maximum amount an insurance company will pay for a covered loss under a policy.
- Medical Inflation: The rate at which the cost of medical care and services increases over time.
- Add-ons: Optional benefits or riders that can be added to a basic insurance policy to enhance coverage.
- GST (Goods and Services Tax): A consumption tax levied on the supply of goods and services in India.
- Family Floater Plan: A health insurance policy that covers an entire family under a single sum insured.
- OPD (Outpatient Department): Medical treatment that does not require an overnight hospital stay.
- Day-care Procedures: Medical procedures that require hospitalization for less than 24 hours.