Distribution Cost For Life Insurers Likely To increase From April 1, Consumers may benefit

The distribution costs of life insurance companies are likely to increase as the IRDAI (Payment of Commission) Regulations, 2023, comes into effect from April 1. The Insurance Regulatory and Development Authority of India has removed the existing cap on commission payments under the new norms. Now the commission can be decided by the board of the insurers and it should be within the overall limit on expenses of management (EoM).

This move of the insurance regulator may increase the distribution cost for insurance companies as the intermediaries may now ask for a higher commission for insurance products. Higher commission payouts may result in a significant increase in distribution costs for life insurers that are not bank-promoted, while this effect is likely to be less severe for those who have tied up with banks.

Since commission payments in various business sectors will no longer be capped, intermediary agencies may now request higher payouts as commissions for product distribution. Insurance companies will bargain, but overall distribution cost may go up.

“Banks, which are promoters or shareholders of insurance companies, will realise the importance of value creation, which will always be substantially more than what will be the commission trade-off. As a result, the impact on such insurance companies might be lesser,” a senior official of a life insurance company was quoted as saying by the Financial Express.

In order to obtain market share in the highly competitive insurance sector, insurance companies may need to pay higher commissions to agents and intermediaries who push new products and increase market penetration. Further, a situation like a commission war can be brought up, particularly by unlisted players who are more concerned with getting market share and establishing a presence in the industry than demonstrating profitability, according to experts.

Earlier, different insurance categories had different commission limits and it was difficult for insurance companies to rationalise their cost. The revised norms will provide more flexibility to insurers, which may lead to better cost management. According to insurance experts, the new IRDAI regulation opens up the opportunity for insurers to offer better products and more customer centric operation. The insurance companies may also come up with new product distribution models, which could lead to higher insurance penetration. In such a scenario, the customers may benefit from cost rationalisation and better product offerings.

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