How could revised distributor commissions improve policyholder returns?
“As cost of doing business reduces, customer returns can go up. Also, if commissions are staggered, there will be significant reduction in instigated complaints of mis-selling after the first year. This will reduce insurers’ cost, with capital demand also reducing,” a life insurance official said on condition of anonymity.
The Insurance Regulatory and Development Authority of India (Irdai) is also considering releasing guidelines on the revised commission structures.
What prompted regulatory scrutiny on insurance distribution practices?
The developments come in the wake of the Reserve Bank of India’s (RBI’s) observations on mis-selling of insurance and mutual fund products via banking channels. The central bank last week proposed banning incentives paid to bank staffers by third parties such as insurance companies and mutual fund houses for selling their products and services. It has also proposed that banks must ensure their user interfaces do not deploy “dark patterns” to lure customers. The RBI proposed that a bank must not bundle the sale of any third-party product with any of its own products. In case the sale of a bank’s product is contingent on the purchase of a third-party product, customers should be given the option to buy the same product from any other provider.
Recently, the life insurance industry, represented by a select group of insurance chiefs, met Irdai Chairman Ajay Seth and proposed several measures to improve customer experience. These include changes in distributor commissions and steps to reduce insurers’ operational costs so that the value proposition for policyholders improves.
What changes has the industry proposed on commission payouts?
The industry has recommended that a portion of the front-loaded commissions paid to distributors in the first year of a policy sale be deferred and paid out over three to five years. This would lower initial acquisition costs and could ease the premium burden on policyholders, sources said.
In addition, the industry is considering ways to control fixed costs and bring the operating expense-to-sales ratio to optimal levels. It is working on measures to sharpen and strengthen the value proposition for customers, sources added.
Why are life insurers facing pressure over high acquisition costs?
The proposals come amid intense scrutiny from multiple quarters — including the government, Irdai, the RBI, and the Economic Survey, which is guided by the Chief Economic Adviser to the Union government — over the industry’s high acquisition costs, which are making insurance unaffordable for many.
Currently, under the expense of management (EoM) norms, life insurers are required to operate within an overall EoM limit rather than product-specific limits. These limits are prescribed as a percentage of premiums, with different thresholds for first-year and renewal premiums, and vary depending on the insurer’s size and stage of operations. As a result, life insurers have the flexibility to set product-wise commissions as long as they remain within the overall EoM limits.
Critics have said that higher commission structures paid by insurers have nudged their acquisition costs higher, placing a burden on customers in the form of higher premiums. Despite the recent rationalisation in the Goods and Services Tax (GST) rate on insurance premiums for individual life and health insurance by the Union government to make insurance affordable from 18 per cent to zero, distributor payouts remain elevated.
In its recent Financial Stability Report, the RBI said that high distribution costs are restraining expansion of insurance coverage, which impacts affordability and leads to divergence between insurance density and penetration.
It also highlighted the increase in commission pay-outs of private sector life insurers, particularly surging from 2022-23 onwards, indicating business acquisition at higher marginal cost and an aggressive cost-growth dynamic.
Separately, the Survey pointed out that the industry’s high-cost model poses a risk to insurers’ core financial strength. It said escalating acquisition costs are a structural constraint on the sector’s evolution — limiting inclusion, eroding consumer value, and threatening long-term stability. Reducing overall costs and distribution outgo is therefore essential to improve affordability, tap the “missing middle”, and reverse the decline in insurance penetration.
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