Financial barrier is still a dominant problem for access to necessary healthcare for majority of the Indians. To ensure universal and comprehensive healthcare to its citizens, alternative healthcare financing strategies like health insurance are being widely accepted. However, despite health insurance being an equitable and efficient solution, the health insurance coverage still remains at an infant stage in our country. This study specifically addresses the issue of low level of health insurance coverage with special reference to private health insurance. The study analyses the rational behaviour of insurance agents in the scale-up process of health insurance in an imperfect market. Moreover, the study discusses the impact of such rational behaviour of insurance agents on inequity in health insurance coverage and adverse selection. This study will surely add to the existing body of literature on health insurance and has direct policy relevance.