High Distribution Costs Undermine Indian Insurance Product Value

Mumbai – Mounting commissions and escalating operating expenses are increasingly diminishing the worth of insurance products in India, potentially offsetting the positive effects of recent GST reform efforts on retail policies. Experts are flagging significant concerns across various insurance segments, including credit-linked life, non-linked savings, motor third-party, and retail health.

Eroding Customer Returns

Avinash Singh, an analyst at Emkay Global, highlighted that the cost of operating an insurance company remains a critical issue. "Insurance distribution cost cannot be determined based on insurers' and distributors' view of their cost structure and profitability goals," Singh stated. He emphasized that distribution and operational costs must be benchmarked against the actual value delivered to the customer, whether through protection offered or savings returns. This is particularly evident in retail health insurance, where high payouts for acquiring new customers persist. Experts argue that renewal commissions must be substantially reduced to prevent premiums from climbing excessively as policyholders age.

Regulatory Challenges and Stagnant Growth

The government's decision to waive GST on retail insurance policies from the third quarter of FY26, a key component of broader consumption tax reforms, faces headwinds. Concerns also extend to credit-linked life insurance, often bundled into group single-premium products with steep, hard-to-trace commissions. Last financial year, over a dozen insurance companies surpassed their prescribed expense limits after the sector regulator removed product-specific commission caps for an overall expense management limit.

Non-linked savings plans are steadily losing their appeal. High operational costs are eating into returns, rendering them less competitive against alternative fixed-income investments. For mandatory, tariff-based motor third-party insurance, substantial commissions have fueled demands for fixed facilitation fees.

These issues arise as life insurance volumes have stagnated. The number of new individual life policies issued, and the total policies in force, have remained largely flat for a decade between FY15 and FY25. In stark contrast, Emkay Global reported that commission costs and operating expenses have grown at a compounded annual rate of approximately 9.4%.

Industry-Wide Expense Pressures

At an industry level, total operating costs, including commissions, are estimated to represent about 4% of assets under management for private life insurers. Analysts deem these levels uncomfortably high. Even Life Insurance Corporation of India (LIC) faces high costs due to its substantial group business share and lower new business contribution. Retail general and health insurance distribution expenses also remain elevated.

Analysts point to substantial payouts on traditional life insurance products. First-year commissions on participating and non-participating regular premium policies can reach as high as 60-70%. While headline commission caps were around 35-40% until FY23, insurers frequently compensated distributors through alternative structures.

The impact on customers is evident regardless of commission structuring. Most traditional life policies function more as savings vehicles than pure protection products, primarily invested in fixed income. Consequently, products burdened by heavy acquisition and operating costs yield diminished net returns. Despite earlier regulatory interventions aimed at curbing expenses, the disparity between industry growth and cost efficiency persists. Commissions remain central to regulatory debate, prompting the formation of a committee to examine insurance companies' distribution costs.