Source: BS
Why in News?
Life insurance companies have proposed changes to commission structures to the Insurance Regulatory and Development Authority of India (IRDAI), including deferring a portion of frontloaded distributor commissions to reduce policy costs and improve customer value.
Who Proposed
- Life insurance industry representatives
- Through discussions with IRDAI Chairman Ajay Seth
- Recommendations reviewed by a committee under the Life Insurance Council
Key Proposal
1. Deferment of Frontloaded Commissions
- Currently, large commissions are paid to distributors in the first year of policy sale.
- Proposal: pay a portion of these commissions over 3–5 years instead of upfront.
Objective:
- Reduce initial acquisition costs.
- Lower premium burden on policyholders.
- Improve long-term customer value.
2. Cost Optimisation Measures
- Reduce fixed operational expenses.
- Improve operating expense-to-sales ratio.
- Strengthen value proposition for policyholders.
3. Possible Commission Caps
- Consider capping commissions or restructuring payouts.
- Ensure distributors remain incentivised (“skin in the game”) while controlling costs.
Reason for Reform
High Acquisition Costs
- Insurance sector facing scrutiny from:
- Government
- IRDAI
- RBI
- Economic Survey
High distributor commissions are:
- Increasing operational expenses.
- Making insurance less affordable.
Expense of Management (EoM) Norms
- Insurers must operate within overall EoM limits (percentage of premiums).
- Flexibility to set product-wise commissions within overall cap.
- Separate limits for:
- First-year premium
- Renewal premium
