Considering tweaks in insurance commission structure: DFS secretary

The government is considering changes to insurance commission structures to lower acquisition costs and improve affordability, DFS Secretary M Nagaraju said

Changes in the commission structure for distributors in insurance, such as banks, non-banks, corporate agents, individual agents, and insurance aggregators, are being considered at regulatory and policy levels, said M Nagaraju, secretary, Department of Financial Services, Ministry of Finance, on Friday on the sidelines of an event in Mumbai.

 

Insurance recently came under scrutiny for its high acquisition costs, driven by elevated distributor payouts. This has happened even as the central government, to make insurance affordable, has rationalised goods and services tax (GST) on insurance premiums for individual life and health insurance from 18 per cent to zero.

 

Despite this, high distributor payouts are keeping premiums elevated, which is among the many reasons why insurance penetration has not been much in India. The government and the insurance regulator have given the call “Insurance for All” by 2047.

 

A committee formed under the Life Insurance Council to review the commission structure in life insurance has recommended capping distributor commissions or deferring them to ease acquisition costs.

 

At present insurers are free to set product-wise commissions as long as they remain within the overall expenses of management.

 

The Reserve Bank of India’s (RBI’s) recent “Financial Stability Report” said high distribution costs were restraining the expansion of insurance coverage, which affects affordability and leads to a divergence between insurance density and penetration. 

 

It stressed commission growth in the non-life sector had outpaced other operating expenses. For life insurance, frontloaded acquisition costs are limited to the extent to which scale efficiencies are passed on to policyholders. 

 

The RBI highlighted increase in commission payouts of private life insurers surging particularly from 2022-23, indicating business acquisition at higher marginal costs and an aggressive cost-growth dynamic with private non-life insurers, whereby, their commission expenses have escalated sharply.

 

This points to a high-cost distribution-led growth strategy.

 

Separately, speaking on the role of artificial intelligence (AI) in banking, Nagaraju said AI was collecting and processing data from all possible modes, executing repetitive tasks like undocumented processing, collaborating with sources and optimising processes, and catalysing financial inclusion.

 

However, when it comes to responsible banking and promoting affordable access to banking, AI and AI models are yet to take decisive steps, he said. 

 

Additionally, Nagaraju said there was a wide gap in credit for micro, small, and medium enterprises (MSMEs) and also agriculture. There is a need for policy reforms to address this.

 

According to him, MSMEs contribute 30 per cent to India’s gross domestic product (GDP) and almost 44 per cent to exports. However, there is a significant credit gap of around ₹30 trillion for the sector, according to estimates.

 

“When we look at the agriculture sector, 86 per cent of farmers in India are small and marginal and 20 per cent are still dependent on non-institutional credit. This wide credit gap calls for overarching policy reforms, requiring the involvement of all stakeholders,” he said, adding that the government had taken the required steps to bridge this gap.

 

For India to become a $30 trillion economy by 2047, banking must expand to around $39 trillion from the present $2.2 trillion and credit to the private non-financial sector is expected to be around 130 per cent of GDP from 26 per cent now. 

 

“The role of AI would be vital in scaling up and improvising existing tech platforms and in sharing the ecosystem of the financial sector,” Nagaraju said.