If Insurance Commissions Fall, Will Your Premium Fall Too?

The Insurance Regulatory and Development Authority of India (Irdai) has proposed tighter limits on distributor commissions and insurers’ expenses. It wants to address a widening gap between premium growth and what insurers pay to sell policies. According to the consultation paper, distributor payouts in general insurance rose 82 per cent between FY23 and FY25, against premium growth of about 24–26 per cent.

Does that mean a life, health or motor policy will cost less? The proposals are yet to be finalised, and a lower commission does not automatically produce a lower premium.

Says Indraneel Chatterjee, COO and co-founder, InsuranceDekho: "We support Irdai's intent to lower distribution costs and protect policyholders, and lower costs could, over time, benefit customers. Whether that shows up in premiums, and how quickly, is less straightforward. In motor third-party, pricing is fixed today, so a change in commission would not by itself change what the customer pays. However in some of the other categories, it would possibly translate to lower premiums - although it may not be in the same proportion."

As the Irdai paper suggests, typically the acquisition cost for the insurer is in the range of 25-30 per cent. This varies by product, ticket size and channels so we would not put a single number on it. However, at a very high level, one can say that a sales person might be able to convert one out of 10 customers they meet in Life, one out of five in health and one out of three customers for motor whose policies are ready for renewals. So the cost has to be juxtaposed against the effort of selling the product.

Why Premiums May Not Fall Immediately

“This is not certain, and it is unlikely that the impact would be immediate. Insurance premiums depend on various factors beyond commissions, such as claims history, risk assessment, reinsurance, operating costs, regulatory obligations, and pricing policy,” says Arun Ramamurthy, co-founder, Staywell.health.

Insurers have to pay claims and meet other costs alongside commissions. Savings on distribution could therefore be used elsewhere in the business. The effect may also differ across life, health and motor insurance, which have different risks and ways of selling policies.

There is no single percentage of the premium that goes towards acquiring a customer. Ramamurthy says the cost depends on the product and the channel through which it is sold. Selling a life policy can require a different amount of work from selling health or motor cover. A broad industry figure would tell a buyer little about the cost built into a particular policy.

What Buyers Should Watch

Lower commissions could change the economics for agents who help customers after a sale. Some assist with renewals, policy changes, or claims, though insurers have their own service and claims responsibilities.

“It may affect the economics of specific distribution systems, especially when distributors provide ample post-sale service. Nevertheless, customer service and claim processing are not solely determined by distributor commissions,” says Ramamurthy.

For policyholders, in theory, the proposed reforms mean insurance that costs less & is easier to understand. "However in practical terms, we could possibly see all distributors abdicating beyond the top 30 cities and concentrating on large cities. This could create a large coverage gap. The same problem is likely to come towards all low ticket size insurance products including two-wheeler Insurance and that can increase the insurers two-wheeler pool which is 60 per cent currently even further. In all of these categories, the expectation seems to be for these customers to go direct to the insurers. However, our current experience with direct models of insurers does not give us any confidence of such a situation emerging," says Chatterjee.

"There also is a possibility that customers will find lesser claims related support from their brokers and would solely be dependent on insurers decisions. There will be no one to represent the customers in such a situation," adds Chatterjee.

So while there is no doubt about the authority’s intent, we need to be able to think more holistically about the possible impact of these proposals.

FAQs

1. Will lower commissions make insurance premiums cheaper?
Possibly, but there is no guarantee. Premiums also depend on claims, risk and other costs, and Irdai’s proposals have yet to be finalised.

2. Will motor third-party premiums fall if commissions are cut?
A commission cut would not, by itself, change what customers pay for motor third-party cover, where pricing is fixed.

3. Could lower commissions affect service after purchase?
They could make it harder for some distributors to provide help with renewals and claims. Insurers would still be responsible for servicing policies and processing claims.