Synopsis: This article explores a landmark shift in India’s insurance landscape, where Tier II and Tier III cities have overtaken metros to become the primary growth engines, accounting for 62% of all new health insurance policies sold by insurers so far in 2025-26 (FY26) according to a report by Policybazar.
The health insurance environment in India is experiencing a sea change and Tier II and Tier III cities become the growth engine in FY26. Due to the growing awareness, medical inflation, and availability of easily available financing options, these areas have already sold 62 percent of new policies in November 2025, indicating the democratization of coverage outside of the metros.
Sales Share Trends
Tier II and Tier III cities currently have the highest percentage of new health policy of 62% compared to the previous years where Tier I metros had bigger shares. As per Policybazaar data, Tier I decreased to 38% in FY26 compared to 46% in FY22 and Tier III increased to 38% compared to 31%.
| Financial Year | Tier I | Tier II | Tier III |
| FY22 | 46% | 23% | 31% |
| FY23 | 45% | 22% | 34% |
| FY24 | 44% | 22% | 33% |
| FY25 | 41% | 23% | 36% |
| FY26 | 38% | 24% | 38% |
Rising Coverage Levels
In Tier II and Tier III cities almost half of the policyholder selects sum insured of 10-15 lakh with Tier II city recording a 47 percent increase in the sum insured of 10-14 lakh cover against 27 percent in the past. Tier III reflects the same growth of 49 percent in the same range as well as 13-14 percent growth in covers above Rs 15 lakh as a result of medical inflation and post-Covid awareness. Tier III buyers make premiums on monthly EMIs more than 40 percent.
Add-Ons Surge
Tier II (60% of policies up to Rs 10 lakh) and Tier III (63% of policies) recorded 207 and 179 add-ons adoptions respectively, versus 228 in Tier I. GST relaxations boiled down to 2 add-ons in Tier II, 1.7 in Tier III, with consumables, OPD and waivers on room rent.
Family Floater Preference
In Tier II and Tier III, family floater plans are prevalent at 69% and 59% as compared with 57% in Tier I as a result of the joint family system. At tiers, individual plans come in at 39-43%.
Claims Breakdown
In Tier II and Tier III cities, the proportion of claims attributed to hospitalization is 80.7 percent and while outpatient department (OPD) and day-care procedures together represent nearly one-fifth of claims, This combination demonstrates the growth outside the field of inpatient care, which correlates with the request of increased covers.
Conclusion
With Tier II and Tier III cities building a base as the foundation of the health insurance growth in India, insurers need to focus on products differentiated to suit the needs of different urban markets, flexible payments, and education in order to keep the gain going in the coming years. Not only does this change add more financial security to millions of people but it also highlights the stability of the sector in response to changing healthcare demands.
Written By Jayanth R Pai
