The hidden cost of insurance distribution, Pg10

Key Highlights:

• In FY2025, the Indian life insurance industry paid ₹60,799 crore in commissions, marking an 18% surge compared to a 6.7% premium growth.
• Private insurers showed steeper commission escalation post-2022-23, contrasting with better cost discipline in public insurers.
• LIC's commission ratio decreased from 5.45% to 5.17%, while insurers using alternate channels saw ratios rise from 7.21% to 8.95%.
• The RBI has expressed concerns about the divergence between rising distribution costs and premium growth in its December 2025 Financial Stability Report.

Detailed Insights:

• The divergence between public and private insurers is due to channel composition and the share of single-premium versus non-single-premium business.
• Bancassurance, brokers, and insurance marketing firms have increased bargaining power, leading to commission inflation due to insurers' high switching costs.
• The shift to the Expenses of Management (EOM) framework in 2023-24 aimed to encourage managerial autonomy but resulted in expenses surfacing as commissions.
• A significant portion of commissions accrues to corporate intermediaries, particularly banks and insurance marketing firms, highlighting a market-structure issue.
• Rebalancing commissions toward renewal income, joint oversight of bancassurance by the RBI and IRDAI, and focusing on outcomes like retention and service satisfaction are potential solutions.
• Declining insurance penetration, from 4% to 3.7% of GDP in FY2024, underscores the need to contain acquisition costs for sustainable growth.

Key Concepts Involved:

• Bancassurance: Selling insurance products through banks' distribution channels.
• Expenses of Management (EOM): Framework for managing expenses in the insurance sector.
• Insurance Penetration: The level of insurance coverage within a population or economy, often measured as a percentage of GDP.