DFS Questions Insurers on High Commission Payouts to Distributors
High commissions paid by insurers to their distributors is ultimately borne by policyholders making health, motor and life insurance costlier for them.
Mumbai: The Department of Financial Services (DFS) has written to both the Life Insurance Council and the General Insurance Council seeking details on the commission payouts made by companies to their distributors and as to why these elevated payouts have not resulted in premium growth, and an increase in the number of lives covered.
According to the Insurance Regulatory and Development Authority of India (IRDAI) Annual Report FY25, insurance companies (life, non-life and health) have paid more than Rs one lakh crore as commissions during the year even as the number of policies issued and lives covered fell during the year.
High commissions paid by insurers to their distributors is ultimately borne by policyholders making health, motor and life insurance costlier for them.
According to sources, the letter from DFS was sent to the Councils (association of insurance companies) two weeks ago. Insurance companies will have to provide detailed explanations regarding their commission strategies and the impact on business metrics.
Commission expenses and operating expenses constitute a major part of the total expenses. During 2024-25, life insurers paid a total amount of Rs 60,800 crore as commission, a rise of 18 per cent (total premium growth 6.73 per cent) compared to the previous year.
On the other hand, non-life, pure health and specialized insurers paid total Rs 47,266 crore as commissions, a decline of 19 per cent compared to Rs 39601 crore paid in 2023-2024.
The number of lives covered under health insurance in 2024-2025 fell by 1.36 per cent to 5806 lakh lives while the total number of health insurance policies issued fell 1.26 per cent to 2.65 crore policies. The gross premium in health insurance grew 9 per cent to Rs 1.17 lakh crore.
Huge commission payouts have also resulted in several companies breaching the regulatory limits on operational expenses. The IRDAI (Expenses of Management, including Commission, of Insurers) Regulations, 2024 prescribe the allowable limits of expenses of management taking into account, inter alia, the type and nature of product, premium paying term and duration of insurance business.
During the year 2024-25, out of 25 life insurers in operation, 17 were compliant with the aforementioned regulations. Eight life insurers had exceeded the limits of expenses on an overall basis in Par/Non-Par (including Linked) business.
The life insurance industry reported gross expenses of management of Rs 1.38 lakh crore during 2024-25, which was 15.60 percent of total gross premium.
