Life insurance firms propose deferment of frontloaded commissions

Industry players meet Irdai chief; upfront payouts may be deferred to reduce acquisition costs

The life insurance industry, represented by a select group of insurance chiefs, met Ajay Seth, chairman of the Insurance Regulatory and Development Authority of India (Irdai), last week 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, sources aware of the development said. 

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-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. 

The proposals come amid intense scrutiny from multiple quarters — including the government, the regulator Irdai, the Reserve Bank of India, and the Economic Survey — over the industry’s high acquisition costs, which are making insurance unaffordable for many. 

To take stock of the situation, life insurance companies had formed a committee under the Life Insurance Council to review the commission structure in the sector. The committee recommended capping distributor commissions or deferring payouts to ease acquisition costs without undermining distributor viability, while ensuring they retain sufficient skin in the game. 

Last week, industry heads met the Irdai chairman and submitted their recommendations. 

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. 

Latest Irdai data show that the life insurance industry reported gross expenses of management of ₹1.38 trillion in 2024-25 (FY25), compared with ₹1.4 trillion in 2023-24 (FY24). Meanwhile, the commission expense ratio — measured as total commission as a percentage of total premium — rose to 6.86 per cent in FY25 from 6.21 per cent in FY24, driven by higher commission expense ratios among private life insurers. 

While the commission expense ratio of private life insurers increased to 8.94 per cent in FY25 from 7.22 per cent in FY24, the ratio for Life Insurance Corporation of India fell to 5.18 per cent from 5.46 per cent. 

In recent months, scrutiny has intensified over the high commission structures paid by insurers, which have pushed acquisition costs higher and translated into higher premiums for customers. Recently, Department of Financial Services Secretary M Nagaraju said changes to insurance commission structures are under consideration.

 

The Reserve Bank of India’s Financial Stability Report also flagged high distribution costs as a constraint on the expansion of insurance coverage, affecting affordability and contributing to a divergence between insurance density and penetration. It further observed that commission growth in the non-life sector has markedly outpaced other operating expenses. For the life insurance sector, the report said front-loaded acquisition costs limit the extent to which scale efficiencies are passed on to policyholders.

 

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.