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Regulatory Review on Distributor Payouts
The Department of Financial Services (DFS) is actively considering changes to the commission structure for insurance distributors. Secretary M. Nagaraju confirmed this on Friday in Mumbai, stating that the regulatory and policy level is examining reforms for entities including banks, non-banks, corporate agents, and individual agents. This move signals a significant effort to reshape how intermediaries are compensated.
Pressures on Insurance Affordability
The insurance sector faces scrutiny over high acquisition costs, largely driven by elevated distributor payouts. Despite the government's rationalization of GST on premiums for individual life and health insurance to zero, these high payouts are keeping insurance prices elevated. This is a primary reason why insurance penetration in India, the ultimate goal of 'Insurance for All' by 2047, remains sluggish.
RBI Highlights Rising Costs
The Reserve Bank of India's Financial Stability Report recently pointed to high distribution costs as a major restraint on expanding insurance coverage. The report noted commissions in the non-life sector have significantly outpaced other operating expenses. For private sector life insurers, commission payouts have surged since 2022-23, indicating business acquisition at higher marginal costs. Private non-life insurers also show an aggressive, distribution-led growth strategy with sharply escalated commission expenses.
Committee Recommendations and Broader Context
Separately, a committee formed under the Life Insurance Council has recommended capping or deferring distributor commissions to ease acquisition costs. Currently, insurers have flexibility in setting product-specific commissions within overall limits. Nagaraju also touched upon the significant credit gap in MSME and agriculture sectors, estimated at ₹30 trillion, and the vital role of technology and AI in bridging these gaps and expanding the banking sector towards India's $30 trillion economic target by 2047.