Life and general insurance companies are taking steps to reduce high distribution and commission expenses. According to sources cited by CNBC-TV18, the life insurance industry is planning to move away from the current front-loaded commission system.
To work on this change, a nine-member committee has been formed, consisting of senior industry executives and distribution partners. The committee held its first meeting earlier this week.
The main goal of this committee is to find ways to lower distribution and commission costs.
This effort comes as the insurance regulator, IRDA, is putting pressure on insurance companies to cut expenses and make insurance products more affordable.
Sources say that IRDA has already started discussions with both life and general insurance companies on this issue.
Shift Towards a Deferred Commission Model
Life insurance companies, including LIC, are considering adopting a deferred commission model. Members of the committee unanimously supported this approach.
Under this model, commissions would not be paid largely in the first year. Instead, they would be spread over several years.
For example, in a 20-year term insurance policy, the total first-year commission could be around 8% of the premium. This amount would be divided over five years and paid only if the policy is renewed each year.
This would replace the current system, where agents receive around 40% commission in the first year itself. The committee plans to meet again next week to finalize its recommendations and submit a detailed proposal to IRDA by December 18.
Tighter Oversight of General and Health Insurance Costs
IRDA has also increased monitoring of distribution and management costs in general and health insurance companies. The regulator has asked companies to share data from the past five years to study cost trends and find ways to reduce expenses.
At present, regulations allow general insurance companies to spend up to 30% of their gross written premium on management costs, while standalone health insurance companies can spend up to 35%.
Some industry experts have suggested that these limits should be reduced by 5–10% for companies that have been operating for more than five years.
