Rising Distribution Costs Erode Value of Insurance Products Despite Tax Reforms
Rising distribution costs and commissions are significantly eroding the value of insurance products across multiple segments, potentially offsetting benefits from the GST waiver on retail policies. Commission costs have grown at 9.4% annually while policy volumes remained flat over the past decade, with operating costs reaching 4% of assets under management for private insurers. Regulatory authorities have formed a committee to address distribution cost concerns as the industry struggles to balance distributor compensation with customer value.
*this image is generated using AI for illustrative purposes only.
Insurance industry experts are raising alarm over mounting distribution costs that threaten to undermine the value proposition of insurance products across multiple segments. Despite the government's decision to waive goods and services tax (GST) on retail insurance policies from Q3 FY26, rising commissions and operational expenses continue to erode product value for customers.
Key Problem Areas
Market analysts have identified several segments where high costs are particularly problematic:
- Credit-linked life policies with steep commissions bundled into group single-premium products
- Non-linked insurance products losing competitiveness due to cost structures
- Motor third-party insurance facing commission-related challenges despite being mandatory
- Retail health policies struggling with high customer acquisition costs
Industry Cost Structure Analysis
The financial impact of rising costs has become increasingly evident across the insurance sector. Avinash Singh, analyst at Emkay Global, emphasized that distribution costs should be determined based on customer value rather than insurers' profitability goals.
| Metric | Details |
|---|---|
| Industry Cost Growth Rate | 9.4% CAGR |
| Operating Costs (Private Insurers) | 4% of assets under management |
| Policy Volume Growth | Flat for past decade (FY15-FY25) |
| First-year Commission Rates | 60-70% on participating policies |
Regulatory Response and Market Dynamics
More than a dozen insurance companies exceeded their prescribed expense limits in the previous financial year after the sector regulator removed product-specific commission caps and introduced an overall expense management cap. The regulatory changes have highlighted the persistent challenge of balancing distribution costs with customer value.
| Product Type | Key Challenge |
|---|---|
| Retail Health Insurance | High customer acquisition payouts |
| Non-linked Savings Plans | Reduced competitiveness vs fixed-income options |
| Motor Third-party | Calls for fixed facilitation fees |
| Traditional Life Policies | Heavy acquisition costs affecting returns |
Growth Stagnation Concerns
The insurance industry faces a challenging paradox where costs continue rising while growth remains elusive. The number of new individual life policies issued and policies in force has remained largely unchanged over the decade between FY15 and FY25. This stagnation occurs despite commission costs and operating expenses growing at approximately 9.4% annually.
Even Life Insurance Corporation of India faces high costs relative to its large share of group business and lower contribution from new business. Traditional life insurance products, which function primarily as savings vehicles invested in fixed income, are particularly vulnerable to cost pressures that directly impact net returns for policyholders.
Regulatory Oversight and Future Measures
The regulatory landscape is evolving in response to these cost concerns. Until FY23, headline commission caps stood at around 35-40%, though insurers often found alternative compensation structures. The council has now formed a committee specifically to examine distribution costs of insurance companies, following expressions of concern from both IRDAI and RBI regarding high insurer expenses.
The industry continues to grapple with finding the right balance between adequate distributor compensation and maintaining product value for customers, with regulatory discussions ongoing about potential solutions to rein in excessive costs while supporting sustainable growth.
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