Currently, under the expense of management (EoM) guidelines, life insurers must operate within an overall EoM limit rather than product-specific caps. The limit is prescribed as a percentage of premiums, with different thresholds for first-year and renewal premiums, and varies depending on the insurer’s size and stage of operations. As a result, life insurers are free to set product-wise commissions as long as they remain within the overall EoM limits.
The sector has faced heightened scrutiny in recent months, as high commission structures have pushed up acquisition costs, placing a burden on customers in the form of higher premiums.
“The committee formed by life insurers has suggested to the Insurance Regulatory and Development Authority of India (Irdai) introducing a staggered commission system, where payments will be tied to premium collections, or introducing a cap on commissions to reduce acquisition costs. We hope to see some regulations on this by April," an industry source said.
In its recent Financial Stability Report (FSR), the Reserve Bank of India (RBI) flagged that a major concern is the persistence of a high expense structure, particularly acquisition costs.
“Premium growth has been increasingly driven by high-cost, distribution-led strategies rather than operating efficiency,” the RBI said, adding that in the life sector, frontloaded acquisition costs limit the extent to which scale efficiencies are passed on to policyholders.
The RBI also highlighted that high expense structures are constraining meaningful expansion of coverage in the insurance sector.
“With high distribution costs embedded in pricing, affordability is reduced, leading to a divergence between insurance density and penetration. Growth largely reflects higher spending by existing policyholders rather than a broadening of the insured base,” it said.
According to the FSR report, public life insurers show a strong focus on expense management and potentially lower acquisition costs, underlined by a flat commission structure despite growing premiums. In contrast, private life insurers have seen a steep rise in commission payouts, particularly from 2022-23 onwards, indicating business acquisition at a higher marginal cost.
In his first public address, Ajay Seth, chairman of Irdai, also flagged the issue of high distributor commissions. Seth said: “The matter that requires the closest attention is distribution. We have to go from a high-cost structure to a moderate-cost structure while maintaining good service. In life insurance, 20 per cent of the risk pool is the cost of procuring and managing it, and a significant part of that is not actually the risk pool — it includes a lot of savings. For context, any financial sector that has a cost of savings sees the risk pool at 20 per cent. For non-life insurance, it is 30 per cent. Commissions to corporate agents vary widely: the largest life insurer after Life Insurance Corporation of India spends 4 per cent of its premiums on them, while the second largest spends 17 per cent, even though both get 50 per cent of their business from this channel.”
 "Life Insurance Council, Insurance")