The Insurance Regulatory and Development Authority of India (IRDAI) has proposed tighter limits on commissions paid to insurance agents, brokers, banks and other distribution partners. The move could reduce insurers’ distribution expenses, but it also raises an important question for policyholders: will those savings result in cheaper insurance, or will insurers retain more of the savings as profit?
According to The Daily Brief by Zerodha, the impact is unlikely to be straightforward. IRDAI’s proposed framework seeks to bring back product-specific commission limits and tighten the overall Expenses of Management (EOM) applicable to insurers.
The proposals come after distribution payouts increased substantially faster than the premiums generated through some channels.
Why Is IRDAI Proposing Commission Caps?
Data highlighted by Zerodha shows a significant difference between premium growth and distributor remuneration between FY23 and FY25.
In the life insurance corporate-agent channel, premiums increased by 28%, while distributor remuneration climbed 125%. In general insurance broking, premiums grew 37%, compared with a 173% rise in distribution remuneration.
This means distribution payouts increased roughly four to five times faster than premiums in the channels covered by the analysis.
At the same time, the number of individual life insurance policies remained broadly stagnant during the period examined by IRDAI.
The regulator’s concern is that insurers are committing an increasing amount of money to distribution without seeing a comparable expansion in the number of people covered by insurance.
What Could Happen If Commissions Are Reduced?
For insurers, commissions form part of the cost of acquiring customers, while for agents, brokers, banks and other distributors they represent an important source of income.
IRDAI’s proposed limits would vary depending on the insurance product and distribution channel. One example is individual term insurance, where first-year commissions currently average 51%, with some cases reaching as high as 81%.
For multi-year pure-term policies, the proposed first-year commission limit is 25% for banks and brokers and 30% for agents.
If the proposed caps are implemented, distributors could receive lower payouts on some products. They may respond by cutting customer-acquisition expenses, increasing automation or giving greater attention to products that continue to provide comparatively attractive remuneration.
Banks and NBFCs could also experience a reduction in insurance-related fee income. Digital insurance platforms and other intermediaries may likewise need to reassess their existing distribution and sales models.
Will Lower Commissions Make Insurance Cheaper?
The effect on policyholders remains uncertain.
Lower commissions would reduce the amount insurers spend on acquiring customers. This could leave insurers with more value from each policy. The Daily Brief, citing Jefferies estimates, notes that a 10% reduction in customer-acquisition costs could potentially increase life insurers’ value of new business by 5% to 15%.
However, lower distribution expenses do not automatically mean that insurance premiums will fall.
Insurers could choose to retain some of the savings, which could improve profitability. Premium pricing will also continue to depend on factors such as claims costs, competition, product design and existing margins.
There could also be an impact on insurance sales. If lower commissions make certain products less attractive for distributors, some agents and other intermediaries may reduce their focus on those policies. This could particularly affect products where customers require more assistance before making a purchase.
What Could the Commission Overhaul Mean?
The proposed changes could reduce insurers’ customer-acquisition costs while putting pressure on the income earned by distributors. Banks, brokers, agents, NBFCs and digital insurance platforms could all be affected differently depending on the products they sell and the commission structures eventually approved.
For insurers, lower distribution expenses could improve margins and the value generated from new business. For customers, however, the outcome will depend on whether any savings are reflected in premiums, improved services or are retained within the industry’s cost and profit structure.
As the proposals are still under consideration, the final impact will depend on the rules ultimately introduced by IRDAI.
Disclaimer
This article is based on the proposed IRDAI commission framework and information cited by The Daily Brief by Zerodha. The proposals may change before final rules are issued. Any potential impact on insurance premiums, insurer profitability, distributor income or policyholder benefits should therefore not be treated as certain. Readers should refer to official IRDAI notifications and their insurance provider for the latest information.