Why in the News?

India’s life insurance industry paid ₹60,799 crore in commissions in FY2025, yet premium growth stood at only 6.7% while commission payouts increased by 18%. This divergence signals a structural imbalance between distribution costs and value creation. The Life Insurance Corporation (LIC) reduced its commission ratio from 5.45% to 5.17% despite premium growth of 2.8%, whereas private insurers increased commission ratios sharply to 7.21%-8.95%, leading to a 38.8% surge in commission payouts to ₹35,491 crore. Insurance penetration declined from 4% of GDP in FY2020 to 3.7% in FY2024. The issue marks a shift from episodic compliance concerns to a structural distribution faultline affecting financial stability and consumer welfare.

Public-Private Structure of India’s Insurance Sector

1. Life Insurance Composition: LIC, the sole public-sector life insurer, contributes 57.07% of total new business premiums (FY2024-25). The sector comprises 27 life insurers, including 26 private companies.
2. General (Non-Life) Market Distribution: Private insurers hold approximately 64-66% market share, while Public Sector General Insurance Companies (PSGICs) account for 31-32%. The industry includes 34 non-life insurers, 6 public and 28 private (including standalone health and specialised insurers).
3. Health Segment Significance: Health insurance constitutes 41.42% of gross direct premiums in FY2024-25, emerging as the largest non-life segment. Public sector general insurers’ premiums increased from ₹80,000 crore (2019) to approximately ₹1.06 lakh crore (early 2025).

What Is the Structural Difference Between Public and Private Insurers?

1. Channel Composition: LIC derives 95% of business from agency channels, enabling tighter commission control.
   1. Agency channels are individual agents appointed by an insurance company to sell its policies directly to customers.
2. Commission Ratio Reduction: LIC reduced commission ratio from 5.45% to 5.17% despite 2.8% premium growth.
3. Alternate Channel Dependence: Private insurers rely heavily on bancassurance, brokers, and marketing firms.
   1. Bancassurance is a distribution model where banks sell insurance products to their existing customers.
4. Sharp Commission Escalation: Private commission ratios rose from 7.21% to 8.95% (174 basis points increase).
5. Commission Outgo Surge: Private insurer commission payouts increased 38.8% to ₹35,491 crore from ₹25,564 crore.

Why Does Distribution Cost Escalation Reflect Structural Market Imbalance?

1. Bargaining Concentration: Twenty-six life insurers compete for access to banks operating over 4,00,000 branches, strengthening distributor leverage.
2. High Switching Power: Banks and brokers control infrastructure and customer base, increasing negotiation power over insurers.
3. Channel Dependence: Greater reliance on alternate channels directly increases commission payouts.
4. Incentive Distortion: Competitive pressures push insurers to offer higher commissions to secure partnerships.
5. Persistent Pattern: Rising commission ratios despite regulatory changes indicate systemic, not temporary, escalation.

How Effective Have Regulatory Reforms Been?

1. Product-Wise Caps: IRDAI introduced product-level commission ceilings to contain rising distribution payouts.
2. Expense of Management (EOM) Consolidation: The regulatory framework later shifted to a unified Expense of Management structure, embedding commissions within overall expense limits.
3. Competitive Structuring: Marketing tie-ups, infrastructure arrangements, and distribution negotiations limited the restraining effect of reforms.
4. Structural Persistence: Commission escalation continued despite regulatory redesign, indicating unchanged bargaining asymmetry.

What Changed in Expense of Management (EOM) Norms?

1. Unified EOM Framework: 2023-24 reform merged management, acquisition, and commission expenses.
2. Embedded Leverage: Commission expenses remained embedded within overall expense limits.
3. Institutional Assertiveness: Institutions with bargaining power demanded higher payouts.
4. Agent Retention Share: Agents retain approximately 35-40% of headline commissions after overrides and deductions.
5. Concentration of Gains: Nearly ₹26,000 crore in FY2025 accrued to corporate intermediaries and large marketing firms.

What Are the Consumer and Macroeconomic Implications?

1. Limited Consumer Benefit: High distribution costs do not proportionately enhance policyholder value.
2. Low Visibility Incentives: Informal rebates push transactions outside regulatory transparency.
3. Penetration Decline: Insurance penetration declined from 4% (FY2020) to 3.7% (FY2024).
4. Middle-Income Impact: High costs restrict sustainable inclusion for middle-income households.
5. Financial Stability Concern: RBI flagged distribution cost sustainability concerns in the Financial Stability Report (December 2025).

What Policy Correction Is Proposed?

1. Outcome-Based Regulation: Focus on retention, service quality, and claim settlement ratios.
2. Joint Oversight: IRDAI and RBI coordination on bancassurance governance.
3. Commission Rebalancing: Shift from upfront commissions toward renewal-based income streams.
4. Incentive Redesign: Align commissions with persistence and servicing metrics.
5. Rational Cost Containment: Ensure sustainable penetration expansion.

Conclusion

Rising distribution costs signal a structural imbalance in India’s insurance ecosystem rather than a temporary market distortion. Regulatory recalibration under the amended IRDAI framework must prioritise cost efficiency, persistence-based incentives, and balanced public-private participation. Sustainable insurance penetration depends on correcting bargaining asymmetries while safeguarding financial stability and consumer interest.

PYQ Relevance

[UPSC 2013] The product diversification of financial institutions and insurance companies, resulting in overlapping of products and services strengthens the case for the merger of the two regulatory agencies, namely SEBI and IRDA. Justify.

Linkage: Recent amendments to the Insurance Regulatory and Development Authority Act have renewed focus on insurance sector reforms, making regulatory architecture and governance in insurance a high-priority area for GS II and GS III. The article’s discussion on distribution costs and bargaining asymmetry highlights why regulatory design under the revised IRDAI framework remains central to sectoral stability.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now