The disproportionate growth in commission volumes as compared to the growth in premiums is what the detailed study brings out. In life insurance, corporate agents’ total remuneration, including rewards, incentives and other payments besides base commission, grew by 125 per cent as compared to 28 per cent growth in premiums for the period FY23 to FY25. For general insurance, premiums through brokers rose 37 per cent, while commission rose 173 per cent.
Commission economics…
As per the paper, individual agents earned 27 per cent on average and 34 per cent at the highest, the same average as banks. On total premium, which includes renewals, agents averaged 8 per cent against 10 per cent for banks. Thus, the individual agent is among the least expensive channels in life insurance. The paper observes that remuneration is driven more by competition for distribution relationships than by distribution effort.
In general insurance too individual agent is the least expensive channel narrowly ahead of brokers, while banks with just 5 per cent of the premium receive higher commission. Access to customers and influence, and not effort, appear to drive the commissions of the costly channels in general insurance too.
The lesson of 2023 is that the distributors’ pay dictates the way products are sold. The proposed commission grid reduces the individual agents’ commissions in life insurance and on motor and health renewal businesses too. But the agent is the wrong place to look for the savings. The paper rightly recognises that agents tied to one insurer should earn more than distributors who can sell for many, and proposes 25 per cent for agents against 20 per cent for entities such as banks on long-term policies. The difference in effort is far larger than this gap suggests. A relook and a meaningful increase in the cap for individual agents would be a welcome step.
Incentivising new markets…
The present distribution architecture tends to favour readily accessible urban and salaried customers over the creation of customers in underserved markets. The additional commissions proposed for business from small towns and rural areas are welcome. Another enhancement could be that agents get an extra 10 per cent incentive for insuring new customers who have no existing life insurance policy. This will encourage them to find new customers rather than sell additional policies to existing ones.
Segregation of expenses
What counts as commission also needs proper segregation. It should include cash rewards from sales campaigns and competitions. However, social security benefits such as gratuity, group term life and health cover for self-employed agents should be excluded from the cap. Long-service rewards, sustained performance benefits and shared office costs should be treated as operating expenses. To prevent misuse, these expenses must be disclosed separately and verified through the cost audit proposed by IRDAI.
The paper proposes raising agents’ minimum qualification from Class 10 to Class 12, which could limit rural recruitment. Many potential agents lack Class 12 qualifications. While existing agents get a distance-education option, new entrants do not. Instead, higher pass marks in the qualifying examination could ensure agent quality without restricting entry.
A fee, not a bid
Distributors selling policies from multiple insurers should charge customers a transparent fee at the point of sale. This could reduce competition among insurers to pay higher commissions for shelf space. The paper notes that banks consider commissions when choosing insurers. It also questions whether the sector is ready for a fee-based model. Fees must remain affordable for first-time and rural buyers. The change should be gradual to avoid disruption. A lesson from SEBI’s sudden abolition of mutual fund entry loads in 2009 could be a good reference.
Measures for good market conduct are welcome. Linking commissions to effort, policy complexity, renewals and customer retention can promote better market practices. Higher limits for closed architecture are also welcome. However, clawbacks for mis-selling and cancelled policies need careful handling. Extending them to lapsed policies could unfairly penalise agents when customers face genuine financial difficulties. This may disrupt agents’ income and push them towards other income sources.
Cost vs Coverage in Health Insurance
There should also be a clear distinction between the retail and commercial parts of the business as broker expertise is an asset when it comes to complex risks. Press reports state that the General Insurance Council is considering a mandatory 10 per cent co-payment on retail health claims, capped at Rs 5 lakh per claim. The council has declined to comment and the paper does not contain any such proposal. If adopted, the co-payment will reduce insurer costs, and policyholders will gain should the insurers pass on the savings by way of a reduced premium. The paper’s own finding shows why this is a condition: standalone health insurers have largely channelled underwriting margins into commissions and operating expenses rather than lower premiums. Behaviourally, there is a possibility of buyers opting for lower covers or delaying hospital admissions fearing cash outflows.
India’s insurance story will ultimately be written by agents who ask the uncomfortable question and waits for a yes that may take half a dozen visits. The framework thus needs to be refined thoughtfully, to encourage good conduct among the life, general and health agents. That is how the country can reach Insurance for All by 2047.
