Insurers explore deferred commission model in first big move to reduce costs

Life and general insurers are initiating efforts to reduce high distribution and commission costs, with the life insurance industry evaluating a shift away from traditional front-loaded commissions, sources told CNBC-TV18. A nine-member committee of senior industry executives and distribution experts has been formed to explore ways to lower distribution and commission costs, and held its inaugural meeting this week, sources said.

The move comes as the Insurance Regulatory and Development Authority

of India (IRDAI) has stepped up pressure on insurers to rein in expenses and make insurance products more economical. The regulator has intensified engagement with both life and general insurance companies on reducing distribution and commission costs, according to people aware of the matter.

Life insurance industry eyes deferred commission model: Sources

Members of the committee have unanimously recommended moving towards a deferred commission structure that spreads payouts over the early years of a policy instead of concentrating a large share upfront. For instance, for a 20-year term policy, the first-year commission could be reduced to around 8% of the premium, split over five years and payable only if the policy is renewed annually - replacing the conventional 40% first-year commission with small annual payouts. The committee is expected to finalise its recommendations and submit a detailed proposal to IRDAI by December 18, and will meet again next week to firm up the framework.

General & health insurers under scanner on costs

Meanwhile, IRDAI has intensified scrutiny of general and health insurers’ distribution expenses and overall management costs. The regulator has asked these companies to submit five years of data on distribution costs and expenses of management (EoM) to assess trends and identify areas for optimisation. Current regulations cap EoM at 30% of gross written premium for general insurers and 35% for standalone health insurers. Some industry players have proposed lowering these limits by 5-10% for insurers with more than five years in operation as part of broader cost-reduction efforts.