Life insurers cut agents' slice to give customers the full GST pie

Commission payouts reduced by 18% as insurers pass GST cut benefits to customers

To ensure that the entire benefit of the goods and services tax (GST) exemption on insurance policies purchased by individuals is passed on to consumers without any change in product pricing, life insurers will reduce distributor commissions on new policies as well as renewals, they have conveyed to the Insurance Regulatory and Development Authority of India (Irdai).

 

According to the decision communicated to the regulator through the Life Insurance Council, companies will offset the impact of the removal of input tax credit (ITC) due to the zero GST levy on insurance premiums, by slashing distributor commissions to the extent of the GST cut i.e., 18 per cent, sources aware of the development said.

 

The revised commission structure for distributors will take effect from October 1, sources said. Letters have already been sent to agency channels, and discussions are underway with banks on the matter.

 

With the change in commissions, companies and distributors will both bear the impact of the removal of input tax credit (ITC), estimated to be worth around ₹15,000 crore. On their part, companies will not re-price products, so that the GST cut is fully transferred to consumers. However, they are expected to tweak their product mix to mitigate the impact on their margins, the sources noted.

 

Life insurers have also requested the Council to form a committee to examine the possibility of reintroducing a cap on distributor commissions.

 

This is similar to the system that was in place before the present Expense of Management (EoM) guidelines were introduced allowing companies flexibility to set commissions based on their cost structure, the sources said.

 

“We will pass on the entire benefit of the GST cut to customers. The removal of ITC has a significant impact on the sector, so we have decided to reduce distributor commissions to the extent of the GST cut. A letter has also been sent to the DFS secretary on this matter. In addition, we have requested the setting up of a committee to examine the capping of commissions,” a source said.

 

“The letter was sent to Irdai and DFS regarding reduction in distribution structures after the GST changes. Some of the companies have also started sending out letters to distribution partners regarding 18 per cent reduction in commission rates. There is a certain level of unanimity among the insurers paying higher level commissions”, said another source.

 

Meanwhile, non-life insurers have also started cutting distributor commissions on retail health insurance policies. ICICI Lombard General Insurance, Care Health Insurance, and Aditya Birla Health Insurance have already reduced their commission payouts, and others are expected to follow suit soon.

 

Last month, the GST Council announced a complete exemption from GST for all individual life insurance policies — including term, unit-linked, and endowment policies — as well as their reinsurance. The move is aimed at making insurance more affordable and widen coverage across the country. Similarly, all individual health insurance policies — including family floater and senior citizen plans — and their reinsurance have also been exempted to boost penetration.

 

While the insurance industry had sought some leeway from the finance ministry on ITC, the Centre clarified that while reinsurance services would be exempt, ITC on other inputs or services will not be available for individual health and life insurance products, since these have been exempted from GST.

 

Initially, insurers had planned to pass on the benefit of the GST cut to consumers in the short term, while adjusting product pricing later to offset the impact of ITC removal and protect their margins. However, they have now decided against revising product prices and will instead share the cost of ITC removal with distributors, ensuring that consumers ultimately benefit.