Context:

• India’s life insurance industry paid ₹60,799 crore in commissions in FY2025, with payouts rising 18% year-on-year, far exceeding the 6.7% growth in premiums.
• This widening gap means distribution costs are increasing nearly three times faster than the business itself. The RBI flagged this divergence in its Financial Stability Report (December 2025).
• While public insurers have maintained relatively better cost discipline, several private insurers have seen sharper commission escalation since 2022–23.
• For policyholders, this trend translates into significant long-term value erosion, driven not by misconduct but by structural imbalances in bargaining power within certain distribution channels.
• This article highlights the hidden structural costs embedded in India’s life insurance distribution system, where commission payouts are rising far faster than premium growth.

Public–Private Divide in Life Insurance Commissions

• Widening Cost Gap in FY2025
  • FY2025 data reveal a clear structural divergence between public and private life insurers.
  • The Life Insurance Corporation of India (LIC) reduced its commission ratio from 5.45% to 5.17%, despite modest premium growth of 2.8%.
  • In contrast, private insurers relying on alternate channels—such as bancassurance and brokers—saw commission ratios jump from 7.21% to 8.95%, a 174-basis-point increase.
    • Bancassurance is a partnership where banks sell insurance products (life, health, general) to their existing customers.
  • Private commission payouts surged 38.8%, reaching ₹35,491 crore.
• Channel Composition Drives Cost Behaviour
  • The divergence—amounting to over 200 basis points—is largely explained by:
    • Distribution channel mix (agency vs bancassurance/brokers)
    • Share of single-premium business
  • Agency-driven models, like LIC’s, show greater cost discipline. Insurers dependent on alternate channels exhibit escalating commission expenses.
  • This reflects structural causation rather than coincidence.
• Bargaining Power and Market Dynamics
  • The root cause lies in distribution power concentration.
  • Twenty-six life insurers compete for partnerships with banks controlling over 4 lakh branches.
  • Banks can switch insurer partnerships or adjust product placement easily, while insurers face high costs in building alternative distribution networks.
  • This imbalance concentrates pricing power with intermediaries, driving commission inflation.
• Regulatory Context and Competitive Incentives
  • Earlier, the Insurance Regulatory and Development Authority of India (IRDAI) imposed strict product-wise commission caps.
  • Under those limits, competitive pressures shifted into indirect incentives—marketing fees, training support, or infrastructure arrangements.
  • The issue is not necessarily regulatory non-compliance, but the predictable outcome of competition interacting with concentrated distribution power.

Unchanged Economics Behind Rising Insurance Commissions

• EOM Framework: Transparency Without Structural Change
  • The 2023–24 shift to the Expenses of Management (EOM) framework aimed to enhance autonomy and efficiency.
  • While it improved transparency by surfacing previously embedded costs as commissions, the underlying distribution economics remain unchanged.
  • Institutions with bargaining power have simply become more assertive in demanding higher payouts.
• Not an Agent Problem, but a Market Structure Issue
  • Blaming individual agents is misplaced. After deductions, agents retain only 35–40% of headline commissions.
  • The larger share—around ₹26,000 crore in FY2025—flows to corporate intermediaries such as banks and insurance marketing firms that control large customer networks.
  • This reflects a concentration of distribution power, not misconduct at the agent level.
• Limitations of Common Policy Fixes
  • Several proposed remedies fall short:
    • Clawbacks may discourage distribution by creating cash flow uncertainty.
    • Commission disclosure offers limited consumer benefit and may push transactions into informal rebates.
    • Open architecture models could weaken insurer incentives to invest in training and service, as seen in parts of the mutual fund industry post-2012.
• Core Challenge: Incentive Design and Bargaining Power
  • The problem cannot be solved through accounting changes or disclosure alone.
  • It stems from incentive structures and concentrated bargaining power within distribution channels, requiring deeper structural reform rather than surface-level adjustments.

A Way Out: Reforming Insurance Distribution Economics

• Shift Toward Renewal-Based Incentives
  • A sustainable solution lies in reducing extreme front-loaded commissions and strengthening renewal income.
  • Linking payouts to persistency, servicing quality, and long-term policy retention would align distributor incentives with customer outcomes rather than short-term sales.
• Stronger Regulatory Coordination
  • Effective oversight of bancassurance requires joint supervision by the RBI and IRDAI, focusing not only on expense ratios but also on:
    • Policy persistency
    • Customer complaints
    • Servicing standards
    • Commission structures
  • EOM limits must account for channel realities while keeping acquisition costs within reasonable bounds.
• Outcome-Oriented Regulation
  • Regulation should shift from process compliance to measurable outcomes such as:
    • Retention rates
    • Claims experience
    • Service satisfaction
  • This would better protect policyholder value.
• Why It Matters for Insurance Penetration?
  • Insurance penetration has fallen from 4% to 3.7% of GDP in FY2024.
  • If distribution costs keep rising faster than customer value, insurance may lose relevance for middle-income households.