Whalesbook
Commission Costs Squeeze India's Insurers
India's general insurance industry is facing a significant challenge where rising commission costs are outpacing premium growth. The sector relies heavily on intermediaries, with about 80% of business coming from agents, brokers, and bancassurance. To access customers, insurers pay substantial commissions. Since the revised Expense of Management (EOM) framework in 2023, these commission expenses have grown faster than premiums for both private and public insurers.
This situation pushes insurers to offer lower-margin products like group and crop insurance to manage overall expenses. Funds are then redirected to pay higher commissions for retail products such as motor and health insurance. Consequently, combined ratios, which measure underwriting profitability, consistently stay above 100%. This indicates ongoing underwriting losses, estimated at around 13% of net written premium. Insurers are therefore heavily dependent on income from their investments, which accounts for about 21% of net written premium. Regulators like the Reserve Bank of India and IRDAI have expressed concerns that this expensive distribution model limits insurance penetration and affordability.
Customer Relationships Hampered by Intermediary Dominance
A major drawback of the intermediary-led model is the lack of direct customer ownership. Intermediaries handle customer acquisition, renewals, and communication. This means insurers face continuous, acquisition-like costs for existing policyholders, reducing efficiency. The model prevents insurers from building customer lifetime value and leads to recurring acquisition expenses at every renewal. Much of the so-called "new business" is actually existing business being reacquired from rivals. This cycle of churn-driven growth means insurers gain little from previous customer acquisition efforts, as renewals remain costly with fresh commissions and acquisition-like expenses.
Globally, direct-to-consumer (D2C) models, used by companies like Progressive and GEICO, offer significant efficiency improvements by cutting distribution costs and boosting retention. While Indian customers are starting to show interest in direct channels, especially among digitally savvy urban populations who value transparency and convenience, a full transition is expected to take time. This is due to the complexity of insurance products and the ongoing need for advisors for service and claims support. The IRDAI is encouraging digital interactions and direct customer relationships through regulatory changes.
Structural Weaknesses and Regulatory Focus
The industry's structural dependence on intermediaries and high commission payouts represent a significant concern for the Indian general insurance sector. Combined ratios consistently above 100% point to a fundamental problem with underwriting losses, which are largely hidden by investment income. This reliance also raises worries about mis-selling, as large initial commissions can tempt distributors to prioritize sales over customer suitability, eroding trust. The Economic Survey for FY 2025-26 highlighted high acquisition and administrative expenses as a structural issue hindering insurance penetration despite steady premium growth.
Several non-life insurers have exceeded their Expense of Management (EOM) limits, requiring regulatory leniency. The IRDAI's updated EOM framework, effective April 1, 2023, offers flexibility but caps expenses at 30% of gross written premium for general insurers. Public sector insurers face particular difficulties due to high fixed costs like salaries and benefits, straining their EOM limits and putting them at a disadvantage against private sector companies. The IRDAI noted that private sector insurers pay higher commissions, with private general insurers paying about 19% of their premium as commission in FY24-25, compared to roughly 10% for PSU general insurers. This higher commission structure, especially for new business, adds to overall costs and affects affordability.
Shifting Towards Direct Distribution for Future Growth
The Indian insurance market is poised for substantial growth, with projections estimating a market size of US$221.9 billion in 2026 and US$361.0 billion by 2033, fueled by rising incomes and increasing digital adoption. However, achieving sustainable profitability will require a strategic adjustment of distribution methods. The IRDAI's emphasis on digital engagement and direct customer ownership, along with the global success of D2C models, points to a future where insurers can lower acquisition costs, improve customer retention, and boost underwriting efficiency. A gradual but determined move towards direct-to-consumer channels, supported by technological advancements and clear product offerings, will be key to managing cost pressures and achieving long-term, sustainable growth.